The newly planned changes to the Code of Commercial Companies aim to introduce comprehensive regulation of capital groups (“New Concern Law”) in the Polish legal system. It should be welcomed as desirable modernisation of an already 20 year old Code. It responds to the growing potential of Poland as a domicile for international business, where global players locate increasingly complex corporate structures. Thus the amendment rightfully follows transformation of Poland’s business landscape and focuses on addressing its real needs.
The new rules are to be introduced in the existing Code of Commercial Companies. Its foundation was laid by the Commercial Code from 1934, which regardless of its pre-war origin, became an important legal platform for transforming the Polish economy into a free market system in the 1990s. The 1934 Code was heavily modelled on the German Commercial Law, and the reform in year 2000 introducing the Code of Commercial Companies was in a way too, since German law provided for separate laws for limited liability companies, joint-stock companies, and partnership limited by shares, which was not known in Poland before. Therefore the closest point of reference for Polish commercial law, the greatest inspiration is to be found in German legislation in this field of law.
The proposed regulations are not free of controversy and have already raised numerous questions among lawyers. These need to be resolved before the law is passed. So perhaps it is useful to compare some of the solutions adapted in the provisions of the German Concern Law, which is regulated in a number of legal acts—in particular in the German Limited Liability Company Act (GmbHG) and the German Stock Corporation Act (AktG)—with the newly proposed regulations of the New Concern Law.
The issues below are only to illustrate certain discussed points of the new regulation, so this article does not claim to comprehensively discuss all details of the proposed New Concern Law.
The creation of a concern is the most central point of the planned legislation. As per drafted changes, it will be a group of companies (holding) requiring two basic preconditions. Firstly, it is the obligation of the dominating and subordinated company to notify the creation of a group of companies to the business register (KRS), and secondly - the determination of the so-called “interest of a group of companies”. Such interest needs to be regulated in the statutes or articles of association of the daughter companies. The term is described quite generally and vaguely in the New Concern Law as “joint business strategy”. The question arises as to how comprehensive and detailed such “joint strategy” should be? The precise description of this term might be important, as it will decide on the potential liability of management board members towards the company acting in the “interest of the group of companies”, as well as on resolving the potential conflict of interests between the daughter and parent company. In the legal terms it cannot be worded as an empty slogan. On the other hand – since the files of the business register (KRS) are public, a very specific and comprehensive determination of the joint business strategy of group of companies may compromise secrets of such companies to competitors.
Such interpretation issues do not exist under the German Concern Law. The statutory law defines the emergence of the holding group, where the decisive factor is the concept of "uniform management" (“einheitliche Leitung”) by a parent company. In other words, a holding group exists whenever a controlling company and one or more dependent companies are combined under the uniform management of the controlling company.
Binding instruction of the parent company
At this stage (as there are already proposed further amendments of the below regulation) for ensuring control in a group of companies, the New Concern Law entitles the parent company to give direct, binding orders to its daughter companies participating in the holding. This is envisaged as quite a powerful tool, e.g. in the case of a 100% subsidiary such order cannot be refused. With other daughter companies (where the parent company has <75% shareholding), refusal may be justified only when the daughter company proves that while complying with the order it may reasonably predict that it will suffer losses that cannot be rectified by the parent company within two years and such circumstances may threaten the existence of the company. Such binding orders may be given only if they are justified by the said “interest of group companies”. The intriguing question arises, what will happen if the parent and the daughter company interpret differently compliance (or lack of it) of the order with the “interest of group companies”? Especially when there will be a conflict of group interest with the interest of the daughter company. The situation becomes even murkier for the managers, as the management board of the parent company will need to manoeuvre between the interest of the group of companies, and the interest of the parent company, which are not necessarily always the same. Practice will tell if the binding instruction will be the effective tool for companies’ group management, or an on-going cause for legal controversies.
Under the German Concern Law the issue of binding instruction is regulated quite simply. Firstly, it is handled differently in a limited liability company and joint-stock company. In the first case the management board is obliged to act upon the resolutions of shareholders, as a rule, regardless of whether or not it is in the interest of the company (so-called “binding instruction of the shareholders – “verbindliche Weisung der Gesellschafter”). But the right to issue instructions ends if the subsidiary is threatened with insolvency. On the other hand members of the management board of a joint-stock company are free in their dealings and are not obliged to act upon any instructions, unless the joint-stock company is governed by another enterprise. Thus the board of a joint-stock company is monitored by the supervisory board, which is mandatory for a joint-stock company under German law.
Potential damage to the daughter company
Currently, the Code of Commercial Companies does not provide any particular legal basis for members of the management board of a daughter company to accept instructions from the dominating company. Both companies are legally seen as independent legal entities. In particular, if such an instruction were in the interest of the dominating company or group of companies, but would lead to damage to the daughter company, this would even be unacceptable. Such conduct would be regarded as disloyal behaviour versus the company and would create a justified reason for dismissal of a member of the management board, and even grounds for personal liability. The New Concern Law introduces provisions under which such damage would be tolerated. This would occur, if it was caused by a binding instruction of the dominating company given in the companies’ group interest, but on condition that such damage would be rectifiable by the dominating company within 2 years of the circumstance causing the damage. The regulation uses the term “damage”, which includes not only actual loss, but lost profit. How this should work in practice? Let us imagine that a parent company gives an instruction to a producing daughter company to cancel all contracts with its suppliers and sign a framework agreement with a newly created supply company belonging to the holding, which other suppliers would regard as an hostile act. What if the new supply company occurs to fail in achieving any of its business objectives and the project is cancelled by the holding? Would then compensation of the daughter company’s lost profits for two years be sufficient rectification of damage? What about reputation and the network which the daughter companies built up over the years, which may be irreplaceable for years to come? Issues such as that will certainly need to be resolved somehow – possibly thought through again by the authors of the upcoming legislation.
The German Concern Law does not contain such regulations at all. As I said before, the only addressees of the shareholders’ binding instructions in a limited liability company are the members of the management board. So it is a matter of internal dealings between the management board and the (daughter) company. This regulation is limited only by any instructions, which are null and void by law or can be legally challenged.
Liability of management board members
One particular issue of concern is the liability of members of the management board. According to current jurisprudence, such liability occurs not only when a member of company’s management board violates her/his duties under the Code of Commercial Companies or statutes, but also if s/he exceeded the business risks allowed (and therefore broke the law). Thus, members of the management board need to show particular care when taking business decisions on behalf of the company. But what if such decisions were dictated by the majority shareholder? What will be then the consequences? Under the New Concern Law, for the execution of a binding order the members of the management board shall be released from liability under the Code of the Commercial Companies, as well as criminal liability related to it under Article 296 of the Penal Code. As an exception, it is still the responsibility of the management board to timely file any requisite bankruptcy petition.
Again, the German Concern Law regulates this point in a much simpler way. It releases any member of the management board from liability, if the managing director follows a binding instruction from the shareholders (e.g. the parent company) when carrying out his/her activities.
Protection of minority shareholders
The last important issue concerning relationships within a holding group are the rights of minority shareholders. Under the German Concern Law there is no particular protection for minority shareholders in a concern structure. The only way to secure the position of minority shareholders is through protective provisions provided for in the statutes of the daughter company, or otherwise exit from the company. Should the statutes of the company be silent about minority protection, then if there is reason to fear that the subsidiary will carry out instructions to the shareholder’s own disadvantage, the unprotected minority shareholder only has the option of leaving the company in return for compensation (“Kündigung des Gesellschaftsvertrages gegen Abfindung”). On the other hand the New Concern Law proposes various statutory protection for certain groups of minority shareholders, depending on their shareholding. The proposed thresholds are 25% and 10%. If a shareholder owns more than 25% of shares in the company controlled by the dominating entity, the controlled company may refuse to act in accordance with binding instruction given by the dominating company. This would be permitted if execution of the instruction would harm the controlled company’s interest, leading to damage to it which cannot be rectified within 2 years and where such conduct would pose a threat to the company’s existence. Provided that the minority shareholder holds less than 25% of shares, then refusal towards a binding instruction would only be permitted if acting upon binding instruction would thereaten or cause insolvency of the daughter company. The dominating company in such case is also responsible for the damage occurred due to the insolvency caused by the implementation of the binding order. Finally, shareholders representing less than 10% of the share capital, which e.g. cannot agree with company policies dictated by the majority shareholder, are entitled to demand from such shareholder acquisition of its shares in order to exit the controlled company.
The work on the new law is still ongoing. The New Concern Law will certainly be a subject of much and further discussion before we see its final wording. On the one hand it brings awaited legal mechanisms to govern holding structures not regulated elsewhere, on the other the new regulations are sometimes too detailed and thus unclear and complicated in themselves, leaving space for legal discussions and various interpretations at the very start. In the much larger and more complex economy of our Western neighbours, respective solution of the concern law seem to follow much simpler and clearer rules. The Polish legislators of the 1930s did not hesitate to look for inspiration in German commercial law when creating the Commercial Code. Perhaps, there is still time to act in the same spirit now before passing the New Concern Law.