23 mai 2022

To be or not to be a group of companies: Whether and how to make use of the amendment to the CCC introducing the so-called holding law in Poland.

  • In-depth analysis

On April 12, an amendment to the Code of Commercial Companies (“CCC”) was published in Poland, introducing in Title I a new Section IV “Group of companies”. This means that starting from October 13, 2022 Polish companies may choose to benefit from this new solution available under the law of commercial companies.

Choice is the operative word here. Companies can choose whether to belong or not to formalized group of companies defined by the CCC. Who makes this decision and what is the optimal choice – that is the question.

There has already been much debate during the legislative process, with even more debate and comment likely to follow when the regulation is implemented. Some questions arising in the course of analysis of the newly implemented provisions will remain unanswered and controversial. Leaving these issues aside for the while trying to be as practical as possible, let us consider the main arguments for and against entering into legal construction of a group of companies.

First of all, let us return to the question - who actually decides on the formation of a group of companies and on the inclusion of its individual members.

The founding document constituting a group of companies will be the resolution of the shareholders' meeting or the general meeting of a subsidiary, resolving on membership in a group of companies and indicating a dominant company within that group. Membership should then be disclosed by both companies (subsidiary and dominant) in the National Court Register.

It might be worth noting at this point what a dominant company means with respect to a subsidiary. Simplifying, a dominant company is a company which holds a majority of votes or shares at the shareholders' meeting (general meeting) of the subsidiary, has control over its bodies or otherwise exercises decisive influence over the subsidiary. With this in mind, the decision of a subsidiary to be a member of a group of companies will in fact be the decision of the dominant company, expressed in an appropriate resolution of the subsidiary’s governing body.

Before this decision is taken, it should be expected that the dominant company will conduct a detailed assessment of potential benefits and difficulties or even risks which may result from the formalization of relations within the group, based on the new provisions of the CCC.

Such assessment would be more justified knowing that holdings do have an alternative to regulate their structure and operations. Holdings have operated in Poland for a while now, using different types of legal solutions to ensure that their strategy, risks and liability are managed in a uniform, coordinated way across the group. This is done based largely on the so-called holding agreement and introduction of appropriate provisions to the articles of association (statutes) of subsidiaries.

With the legal solutions already available, what could encourage these holdings to search for alternatives? What would they be looking for in the new provisions that they were lacking to date?

For the purposes of this publication, we will focus on 2 issues which were often brought up by dominant companies in this context, that is:

  • lack of adequate access to information about the operations of subsidiaries and insight into their documentation;
  • insufficient legal tools to effectively enforce the ‘will’ of the group.

The right to request information on the subsidiary by its owners is significantly limited under the current provisions of the CCC. In the case of both, a limited liability company and a joint-stock company, the management board has the right to refuse to provide information to a shareholder, justifying the refusal by the interest of that company. This clearly contradicts the idea of prioritising the interest of the group over that of the individual subsidiary.

In addition, the scope of the information which can be requested, is also considerably limited. It applies in particular with respect to a joint-stock company, where a shareholder may request information only for the purpose of evaluating specific issues placed on the agenda of the general meeting.

Does the new regulation address these problems? It appears that it does, at least to some extent.

Article 21(6) of the CCC provides for the right of a dominant company to inspect the books and documents of a subsidiary being a member of a group of companies. The subsidiary may not refuse this right, even on the grounds of its justified interest.

The interesting part is that we are still talking about a dominant company as it is defined above. This means that a company formally indicated as dominant within a given group, even if not being a direct shareholder of the subsidiary, would also be granted the inspection powers.

The new regulation provides for an additional controlling right of the supervisory board of the dominant company. The dominant company will be entitled to act directly through this corporate body to exercise permanent supervision of the implementation of the group's strategy within the subsidiary.

Additionally, the relevant remedy for “insubordination” of specific shareholders are to be found in Article 21(11), which introduces a compulsory buy-out of minority shareholders by the dominant company. The way this right is structured is a complete novelty with respect to limited liability companies, but also in the context of joint-stock companies it offers certain facilitations.

All these changes have an unquestionable advantage - they do not require any amendments to the articles of association / statutes of the company for as long as the group is content with the standard benefits available under the CCC.

This is how things look from the perspective of the dominant company. However, it would be true to say that subsidiaries had higher hopes for the new capital groups regulations. It was particularly important for them to:

  • release their management boards from the liability of acting against the interest of the subsidiary when such an action was dictated by the dominant company;
  • prescribe the liability for pursuing the group's interest to the dominant company and obtain legal tools to seek remedies for damages arising at subsidiary level.

The new law for groups of companies goes some way towards protecting subsidiaries somehow “incapacitated” by binding instructions from their dominant companies.

Consequently, new regulations introduce a new structure of liability of the dominant company towards (1) the subsidiary itself, (2) minority shareholders of the subsidiary and (3) creditors of the subsidiary.

However, before the dominant companies can discharge this liability, some conditions must be met first. Namely, the management board of the subsidiary needs to correctly evaluate:

  • whether the instruction specifying the manner of expected behaviour received from the dominant company constitutes a binding instruction within the meaning of the amended provisions of the CCC (as it is difficult to speak of damage caused by a binding instruction if no binding instruction has in fact been given);
  • if the answer to the first question is positive – it should be further assessed with due diligence whether there are any statutory grounds for refusing to follow the binding instruction. If such grounds exist, refusal is obligatory. Where the subsidiary acted on the dominant company’s binding instructions but should have refrained from doing so in the first place, its management board members will not be released from liability.

Lastly, it should be underlined that, besides the aforementioned legal tools and solutions, there are other consequences with all their upsides and downsides significant from the perspective of the companies participating in a group of companies. Among those are:

  • unspecified criterion of group strategy, group interest and benefits obtained by the subsidiary in connection with membership in a group of companies;
  • public disclosure of information about the company actually exercising control over a company being a member of the group, which may also bring to the fore potentially other types of relationships than those arising from direct membership in a capital group;
  • insight into the accounting and operations of the whole group by the minority shareholders of a subsidiary.

All this should be carefully considered against the needs of the capital group. It would be a shame not to take advantage of the new regulation if, given the circumstances, doing so could actually have a potential to raise benefits. There are, however, many aspects which should be taken into consideration prior to final decision.

Another question that bears on whether to be a member of a capital group or not is how such group and its members will be perceived by external entities - contractors, investors, financial institutions? Will disclosure of group membership encourage the market to cooperate with the subsidiary or will it make the market more nervous and thus make it more difficult to conduct business with the subsidiary or group as a whole?

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