The Holding Law – Amendment to the Commercial Companies Code
On 4 April 2022, the President signed an act amending the Code of Commercial Companies and some other acts (“Amendment”). It implements some essential, if not revolutionary, changes to the Code of Commercial Companies. It introduces the law governing corporate groups (known as “the holding law”) to provide for relations between the parent company and its subsidiaries. Moreover, the act provides for new rights and obligations of governing bodies in capital companies, in particular supervisory boards, and resolves certain practical problems of the companies law, such as the duration of the term of office of members of such bodies.
In view of the broad scope of the matter, presented below are the assumptions underlying the holding law, while the other changes will be described in a separate text.
Introduction of the structure of a group of companies
The new regulations provide for the possibility to set up the so-called “group of companies”. The group is defined as: “the parent company and a subsidiary or subsidiaries which are capital companies, which follow a common strategy to achieve a common interest (the group interest) in line with a resolution on participation in the group, which justifies the parent company’s common management over the subsidiary or subsidiaries”. Participation in a group of companies is voluntary. All it requires is for the subsidiary’s shareholder meeting or general meeting to adopt a resolution on participation in the group and recording the fact of participation in the group by the parent company and by subsidiaries in the Register of Entrepreneurs of the National Court Register (KRS). If the parent company is established abroad, it is only the subsidiaries that need to record their participation.
Binding instructions
Management by the parent company consists of the right to give binding instructions to subsidiaries in respect of managing the corporate affairs. The instructions are given in a written or electronic form and indicate:
- the expected conduct of the subsidiary;
- the interest of the group to be served by the instruction;
- the expected benefits or damage to the subsidiary involved from performance of the instruction, and the anticipated manner of its performance;
- the time for redress of the damage to the subsidiary (if any).
Performance or refusal to perform a binding instruction by the subsidiary will require a prior resolution of its management board and notification of the parent. The right of refusal to carry out a binding instruction can be exercised in a situation where the instruction would result in insolvency or a threat of insolvency if executed. Additionally, subsidiaries which are not single-member companies may refuse to execute a binding instruction if there is a reasonable concern that the instruction contradicts the interests of the company and will cause damage impossible to be repaired within two years of its occurrence.
Liability for performance of binding instructions
Generally, members of governing bodies in subsidiaries are not liable for damage caused to the subsidiary in connection with performance of a binding instruction. Members of the governing bodies can refer to the fact that the damage was caused by action or omission in the interest of the group of companies.
With respect to the parent, it will be liable for binding instructions at three levels:
- to the subsidiary,
- to shareholders or partners of the subsidiary,
- to creditors of the subsidiary.
Firstly, the parent is liable to the subsidiaries for damage caused as a result of executing its binding instructions, unless it is not at fault. The liability is limited if the subsidiary is a one-member company (has one member or shareholder). In this case, the parent is liable for damage only if execution of the instruction resulted in insolvency of the subsidiary.
Secondly, if the value of a share of the subsidiary is reduced as a result of execution of a binding instruction, and, on the date of issuance of the binding instruction, the parent held, either directly or indirectly, majority of votes which enabled it to adopt a resolution on participation in the group of companies and on amendment of the articles (or memorandum) of the subsidiary, it is liable to the shareholders for such reduction of the share value.
Thirdly, the parent is liable for commitments incurred by the subsidiary towards its creditors, if the enforcement from the subsidiary proves insufficient, unless the parent company is not at fault or the damage caused by the creditors did not arise as a result performing a binding instruction by the company.
Squeeze out
The new regulations provide for the right of the subsidiary to demand that the parent company which holds 90% of shares in the subsidiary purchase shares from shareholders representing no more than 10% of the subsidiary’s equity, (the right to squeeze-out). The right is exercised in the same way as the squeeze out provided for in Art. 418 of the Code of Commercial Companies. The share buying price is determined by an expert elected by the general meeting or shareholders meeting, and if no expert is selected – by an expert indicated by the registry court. Attention should be paid to the fact that so far the squeeze-out applied to joint-stock companies only. The right established under Art. 2111 of the Code of Commercial Companies will apply to all types of capital companies.
Reviewing documents of subsidiaries
The parent can view the books and documents of the subsidiary and request information concerning the company at any time. If the subsidiary fails to perform the obligations, the parent can apply to the registry court for obliging the management board of the subsidiary to provide access to its books and documents or to provide the requested information.
The right of access to the books, documents and information will also be exercisable by the supervisory board of the parent company, which, in addition to supervising the operations of the company, will be responsible for overseeing the achievement of the group’s interest by the subsidiary.
Auditing the operations of a group of companies
Minority shareholders of a subsidiary participating in a group of companies, representing at least 10% of the company’s share capital, can apply to the registry court for appointment of an auditing firm to audit the accounting records and operations of the group of companies. Following the audit, the auditor will prepare an audit report which should be sent through the court to the management board and the supervisory board of the subsidiary and the parent. The costs of the audit are incurred by the requester, but if inaccuracies are identified during the audit, the requester will be entitled to demand reimbursement of the costs.
New directors’ report
The management board of a subsidiary participating in a group of companies has a new reporting obligation – to prepare a report on contractual links with the parent company during the last financial year, and to present the report to the shareholder meeting or general meeting. It should include in particular the binding instructions issued by the parent. The report can be included in the directors’ report on operations of the company or in the financial statements for the financial year concerned.
Final comments
The following companies may be subsidiaries in a group of companies:
- public-law companies,
- companies in liquidation, which commenced division of their assets,
- companies in bankruptcy,
- companies subject to financial market supervision (e.g. banks, insurance companies, payment institutions).
The regulations also provide that, apart from subsidiaries, groups of companies may also consist of associated enterprises within the meaning of Art. 4 §1(5) of the Code of Commercial Companies (in which another company holds at least 20% of votes at the general meeting or shareholders meeting), if the articles or memorandum of the associated enterprise provide for such a possibility.
If you are interested in participating in a group of companies or want more information about the amendment, you are welcome to contact us.
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