A new reality coming for Polish groups of companies

What is missing now?

Unlike some Western legal systems, Polish corporate law does not comprehensively regulate groups of companies, and existing provisions are residual, minimal and not very practical. The law only defines a dominant entity and its subsidiary, information obligations resulting from a dominant relationship, and registration duties connected with the management agreement concluded between a dominant entity and its subsidiary.

Currently there is a general prohibition on shareholders or the supervisory board issuing binding instructions to a company's management board. The law does not provide any exceptions to the obligation for the management board to act in the company's best interest, without prejudice to the interests of any third party. Violations result in civil or criminal liability of the management board, even if their decisions are determined by the interests of the capital group, not solely a subsidiary, for example in the case of beneficial financing for a whole group that partially and indirectly, sometimes in the long run, also affects a local subsidiary. The regulations also do not protect third parties, i.e. creditors or minority shareholders.

Proposed amendments

Firstly, the new regulations aim at facilitating the efficient management of a group of companies by a parent company. The draft bill defines a "group of companies" as a "qualified" relationship of domination and dependence between companies based on a common economic strategy that allows a parent company to exercise uniform management over its subsidiaries. Instead of only considering their own interests, companies should likewise be guided by the group's interests.

The major tool enabling effective management of a group of companies would be a binding order of a parent company addressed to its subsidiary, which a company could refuse to execute in certain circumstances only.

A parent company would be responsible for the effects of issuing a binding order executed by a subsidiary. The draft bill excludes civil and criminal liability of the management board of a subsidiary for acting in the interest of the group of companies when a subsidiary executed a binding order of a parent company. However, a parent company could rely on the so-called Business Judgement Rule (acting within the limits of justified economic risk), if a parent company proves that it is not at fault for causing damage to a subsidiary.

Moreover, a parent company would have a right to access information about its subsidiaries and a right to squeeze out the minority shareholders of a subsidiary, while the supervisory board of a parent company would exercise permanent supervision over its subsidiaries, but only insofar as this is in the interest of the whole group. The new law would also protect minority shareholders of a subsidiary by introducing the following instruments:

• obligation for a subsidiary to prepare a report on its relations with a parent company in the last financial year (including issued binding orders);
• right to demand that a registry court designate an entity entitled to audit financial statements to examine the accounting and activities of a group of companies; and
• right to buy out shares belonging to minority shareholders.

The proposed amendments will significantly strengthen the management of a group of companies, benefiting the whole group as well as each company within the group. After passing the legislative procedure, the draft bill will enter into force within three months of its announcement.

author: Weronika Kapica