Objectives of the holding law
The definition of a “group of companies” adopted in the holding law is based on the relationship of dominance and dependence between companies that pursue a common commercial strategy. This means that it will be crucial to have such a common commercial strategy, based on the “interest of the group of companies”. The legislation does not specify what is meant by these terms, does not indicate the form and rules that would govern the adoption of such a common strategy or the definition of the group’s interest.
To date, companies operating within the Polish territory could only be guided in their activities by their commercial interests, and the company’s management board was liable for any losses incurred by the company due to decision-making process based on the parent company’s commercial strategy. The holding law allows companies to act in accordance with the group’s interests and guidelines and removes the management board’s civil liability for such actions. The changes are therefore addressed to companies that are part of complex corporate structures.
How groups of companies are formed
Groups of companies may only be formed by companies (which includes: private limited companies (spółka z ograniczoną odpowiedzialnością), simple private limited companies (prosta spółka akcyjna) and private limited companies (spółka akcyjna)). To this end, the general meeting of the subsidiary needs to adopt a resolution (by a ¾ majority of votes) stating that it wishes to participate in the group of companies (the procedure for passing resolutions under Article 227 § 2 of the Commercial Code, i.e. without holding a general meeting, may not be used). The resolution needs to identify the parent company.
Once the resolution has been adopted, it will be necessary to notify participation in the group of companies to the National Court Register. This obligation applies to both the subsidiary and the parent company. However, if the parent company is based outside Poland, participation in the group needs only be disclosed in the register of the subsidiary.
From the moment the dominance relationship is disclosed in the National Court Register, the subsidiary’s management board will have the right to be guided by the interests of the group of companies, while the parent company will be then entitled to give binding instructions to the subsidiary. It is from this point onwards that the members of the subsidiary’s management board, supervisory board and audit committees stop bearing civil liability for losses incurred as a result of following a binding instruction.
Group’s strategy: tools
The main tool that is used to “implement” the group’s strategy in the operations of subsidiaries is the binding instructions of the parent company. Such a binding instruction must be justified by the interests of the group of companies. The competence to issue binding instructions is vested in the bodies authorised to represent the parent company (as stated in its representation rules). Binding instructions may only be given in writing or electronically, otherwise they are null and void.
Such an instruction must indicate:
- the conduct that the parent company expects of the subsidiary in connection with implementing the binding instruction;
- the group’s interest that justifies the need to give the binding instruction;
- the anticipated benefits/losses of the subsidiary as a result of following the instruction;
- the anticipated manner and timing of remedying the loss suffered by the subsidiary in the wake of complying with the instruction.
Executing (or refusing to execute) such a binding instruction requires a prior resolution of the subsidiary’s management board. A single-member subsidiary adopts a resolution refusing to execute a binding instruction only if executing such an instruction would lead to the insolvency or threat of insolvency of that company. Other types of subsidiaries adopt such a resolution to refuse to execute a binding instruction if there is a reasonable fear that it is contrary to the interests of the company and will cause harm to it, where such harm will not be remedied by the parent company or another subsidiary participating in the in the group of companies within a period of two years, counting from the date on which the event causing the loss occurs.
It must also be borne in mind that the articles of association of the subsidiary may provide for additional grounds allowing the subsidiary to refuse to execute a binding instruction.
Liability
A member of the management board, the supervisory board, the audit committee and the liquidator of the subsidiary company does not have civil liability for any losses caused by implementing a binding instruction and may rely on an act or omission to act in the specific interest of the group of companies.
This means that it is the parent company that is liable towards the subsidiary for any losses that have been caused by implementing the binding instruction and that have not been remedied within the indicated time frame (unless the parent company is not at fault). In the case of loss caused to a single-member subsidiary, the parent company is only liable if the implementation of such a binding instruction led to the subsidiary becoming insolvent. However, it must be emphasised that this exemption will only apply if the binding instruction was given in accordance with the formal requirements, the binding instruction was executed after the resolution to execute it was adopted and in line with the binding instruction.
Other important changes
Other important solutions offered by the holding law include the fact that the management board of the subsidiary will now be obligated to draw up a report on the contractual relations with the parent company for the last financial year (the report is to contain in particular a list of the binding instructions given) and present it to the general meeting for approval. This report may form a part of the report on the company’s activities drawn up by the management board.
The holding law will also introduce new rules for compulsory redemption and buyback of shares in a subsidiary. Following the amendments, the general meeting will be entitled to adopt a resolution on the compulsory buyback of shares held by the shareholders representing not more than 10% of the share capital to be effected by the parent company, which directly represents at least 90% of the share capital. These rules may be modified in the subsidiary’s articles of association – the threshold of 90% of share capital may be lowered to 75%, and the possibility of redemption may also be granted to a parent company, which participates in the share capital of the subsidiary indirectly.
Also, a minority shareholder representing no more than 10 % of the share capital in a subsidiary may request that a resolution on the compulsory redemption of that shareholder’s shares by the parent company be included in the agenda of the general meeting of the parent company, which directly, indirectly or through agreements with other persons, represents at least 90 % of the share capital in the subsidiary participating in the group of companies.
The take-away message
- Holding law, which applies both to contractual holding companies and to de facto holding companies, came into force on 13 October 2022. The solutions contained in the law are not mandatory in nature;
- where a group of companies has been established, the parent company is entitled to give binding instructions, while the management board may claim acting in the interest of the group and may be exempted from civil liability in certain cases. The powers of the parent company’s supervisory board over its subsidiaries and the rules for compulsory share buyback will also be expanded.
At the moment, it is difficult to say how the solutions proposed by the holding law will work in practice. However, we cannot forget the fact that, due to the considerable degree of formalisation of the processes envisaged in the law, the changes introduced seem to be somewhat controversial. Doubts also arise with regard to penal and fiscal penal liability, which may arise in some cases despite the fact that a binding instruction was implemented, as the holding law does not explicitly provide for an exemption in this regard.
Should you wish to find out more, our team is at your disposal.