The Holding Law in practice: Do companies need to amend their articles of association?
The recent amendment to the Commercial Companies Code introduces a number of important changes for companies, especially companies operating within corporate groups. This raises the question of whether companies should adapt their corporate documents to reflect these changes.
Under the Holding Law, a set of changes to Poland’s Commercial Companies Code entering into force in October 2022, new regulations pertain to acting in the interest of a corporate group, binding instructions, rules for liability of a parent company to subsidiaries and their creditors, as well as protection of minority shareholders. Also, a number of changes are introduced in the operation of corporate bodies. In particular, the powers of supervisory boards are expanded. As the articles of association in companies often reiterate the provisions from the Commercial Companies Code, it is worth reviewing them and adjusting them to the new provisions if necessary. And a number of newly adopted statutory solutions provide for the possibility of different regulation of certain issues in the articles of association.
Holding Law—for formalised corporate groups
Before we answer the question to what extent a company’s articles of association should be amended in connection with adoption of the Holding Law, we should explore the reasons behind adoption of the new rules for the functioning of corporate groups.
Until now, corporate groups in Poland have shaped their relationships through specific, more or less formalised internal rules. However, problems have arisen when there are conflicts of interest between the parent company and the subsidiary, or more broadly between the interests of the corporate group and the individual interests of the subsidiary.
The Holding Law helps solve this type of dilemma. It indicates how to act in a situation where the interests of the group and the interests of the subsidiary are not necessarily aligned. There were calls for such regulations in Poland for a long time, due to globalisation of the economy and increasing interconnection of companies within corporate groups.
However, the adopted solutions will have practical application only if the parent company voluntarily creates a formalised corporate group. So, while continuing to give informal instructions to subsidiaries, existing structures in which the parent company does not wish to create a formal corporate group and apply the new rules will remain outside the scope of the Holding Law. This is a weakness of the amendment, and only the future will tell to what extent the Holding Law is applied in practice. The parliament decided to leave it up to companies to formalise their activities within the group, while the essence of Holding Law should be to regulate the liability of parent companies to subsidiaries and their creditors in any case where parent companies interfere, formally or informally, in the activities of subsidiaries, to the detriment of the subsidiaries.
Under the new provisions, to form a corporate group, it is necessary for the shareholders of the subsidiary (in practice, the parent company) to adopt a resolution by a three-fourths majority of votes on participation in a corporate group, indicating the parent company, and then the parent company and the subsidiary will disclose this in the commercial register. Therefore, merely joining a corporate group does not require any changes to the articles of association.
If the companies make such a decision, they need to pay attention to the regulations in the Holding Law providing for the possibility of introducing certain alternatives to the statutory solutions.
Supervising pursuit of the interests of a corporate group
Under the Holding Law, supervision over pursuit of the interests of a corporate group by a subsidiary participating in the group is exercised by the supervisory board of the parent company, unless the articles of association of the parent company or the subsidiary provide otherwise. Therefore, it is possible to delegate these powers to, for example, the management board of the parent company. If, on the other hand, the articles of association of the parent company do not provide for establishment of a supervisory board, which is possible in limited-liability companies, then the authority of the supervisory board to oversee pursuit of the interests of the corporate group is exercised by the management board of the parent company.
Additional grounds for refusing to comply with binding instructions
A subsidiary participating in a corporate group, other than a wholly-owned subsidiary, may refuse to comply with a binding instruction if there is a reasonable fear that it is contrary to the company’s interests and will cause it injury that will not be remedied by the parent company or another subsidiary participating in the corporate group within two years from occurrence of the event causing the injury, unless the articles of association provide otherwise.
The articles of association of a subsidiary participating in a corporate group may provide for additional grounds for refusing to comply with a binding instruction. However, the effectiveness of a resolution amending the subsidiary’s articles of association introducing additional grounds for refusing to carry out a binding instruction depends on the parent company buying out the shares of the subsidiary’s shareholders who do not agree to such a change.
Limiting the scope of auditor’s review of corporate group operations
An important practical matter worth regulating in the company’s articles of association is the scope of the audit that may be carried out by an expert at the request of the minority shareholders of a subsidiary participating in a corporate group.
Indeed, the regulations state that minority shareholders of a subsidiary participating in a corporate group representing at least 10% of the share capital may request the registry court to appoint an auditor to examine the accounts and operations of the corporate group. In other words, the minority shareholders may bring about appointment of an auditor to examine the accounts and operations not only of the subsidiary, but also of the entire group.
However, the law permits the subsidiary’s articles of association to limit the scope of such audit only to the particular subsidiary and its relations with other companies in the corporate group, i.e. to exclude from the scope of the audit the accounts and operations of the entire group.
Facilitating the squeezeout of minority shareholders
The shareholders of a subsidiary participating in a corporate group may adopt a resolution on squeezeout of shareholders representing no more than 10% of the share capital by the parent company directly representing at least 90% of the share capital (for more on squeezeout, see our article “Squeezeout and buyout under the new Holding Law”).
However, the articles of association of the subsidiary may vest such right in the parent company which directly or indirectly represents less than 90%, but not less than 75%, of the subsidiary’s share capital. In practice, this means that it will be theoretically possible to squeeze out shareholders representing up to 25% of the share capital of a subsidiary.
But first the subsidiary’s articles of association must be amended accordingly. Here, the Holding Law states that the effectiveness of a resolution adopting such an amendment is conditioned on the parent company’s buyout of shares of the shareholders of the subsidiary who do not agree to such a change.
Application of the Holding Law to related companies
The Holding Law provisions on subsidiaries may be applied not only to controlled subsidiaries, but also, as relevant, to companies related to the parent company to a lesser degree, however, only if so provided by the articles of association of the related company. Therefore, a corporate group may also include a related company in which another company holds, directly or indirectly, at least 20% of the votes at the shareholders meeting or general meeting, or which directly holds at least 20% of the shares in another company, if this possibility is provided for in the articles of association of the related company.
Adviser to the supervisory board and related costs
As mentioned, the Holding Law introduces not only rules for operating within a corporate group, but also a number of changes in the operation of company bodies. One of the new solutions is the possibility for the supervisory board to appoint an adviser to examine, at the company’s expense, certain issues concerning the company’s operations or assets, or to prepare certain analyses and opinions. However, there are notable differences in appointment of such advisers in a limited-liability company and in a joint-stock company.
In a limited-liability company, a resolution of the supervisory board to have a certain matter relating to the company’s business or assets examined by an adviser to the supervisory board is possible if the articles of association so provide. In the contract between the company and the adviser to the supervisory board, the company is represented by the supervisory board. As a result, adequate provisions must first be included in the articles of association for the supervisory board to appoint an adviser.
However, in a joint-stock company (and by analogy in a simple stock company) a solution has been adopted whereby the supervisory board may adopt a resolution to have a certain issue concerning the company’s business or assets examined by an adviser to the supervisory board at the company’s expense, irrespective of the provisions of the articles of association in this respect. Also, an adviser to the supervisory board may be selected to prepare certain analyses and opinions. In the contract between the company and the adviser to the supervisory board, the company is represented by the supervisory board. Thus, in a joint-stock company, the supervisory board is empowered by law to appoint an adviser to the supervisory board and may enter into agreements with such advisers on behalf of the company.
However, the management board has a duty to provide the adviser to the supervisory board with access to documents as well as requested information.
In practice, as a result of such solutions, a risk of uncontrolled costs of performing such analyses on behalf of the supervisory board may arise. Therefore, the regulations provide that the company’s articles of association may exclude or limit the right of the supervisory board to enter into an agreement with an adviser to the supervisory board, in particular by authorising the general meeting to determine the maximum total cost of fees of all advisers to the supervisory board that the company may incur during the financial year.
It should be mentioned that with respect to the operation of supervisory boards, the regulations also provide for other areas in which a certain amount of discretion may be exercised through appropriate regulations in the companies’ articles of association.
Significant transactions between related companies
In joint-stock companies, conclusion of a transaction with a parent company, subsidiary or related company, the value of which, when aggregated with the value of transactions concluded with the same company during a financial year, exceeds 10% of the company’s total assets within the meaning of the accounting regulations based on the company’s last approved financial statement, requires the approval of the supervisory board, unless otherwise provided in the articles of association. In the case of transactions involving recurring consideration under a contract of indefinite duration, the transaction value is considered to be the sum of the consideration provided under the contract within the first three years of its term.
These requirements are not applicable to:
- Companies where at least one share is admitted to trading on a regulated market in accordance with the regulations on trading in financial instruments
- Companies participating in corporate groups.
In other companies, the articles of association may provide for different solutions in this respect, and may even exclude the need to obtain the approval of the supervisory board.
Summary
In this article, we have presented the most important regulations allowing for a certain degree of discretion in applying the new regulations. Time will tell to what extent the Holding Law will be used, although the need for appropriate solutions has undoubtedly existed for a long time.
It is worth citing an example from practice. Through internal instructions, a foreign parent company imposed its purchasing policy on its Polish subsidiary. The parent sought to achieve better conditions for itself through economies of scale, but this was disadvantageous for the Polish company for various reasons, mainly because it could obtain better prices on the local market. As a result, the members of the management board of the Polish company were concerned about potential liability for acting to the company’s detriment, as under Polish law they should be guided in their actions primarily by the interest of the company they manage. On the other hand, if they did not follow the instructions they received from the parent company, their jobs were in danger.
The Holding Law provides for solutions excluding, to a certain extent, the liability of members of the subsidiaries’ bodies for acting to the detriment of the company in connection with execution of binding instructions from the parent company, as well as allowing them, in certain cases, to refuse to execute a binding instruction from the parent company. But for these regulations to apply, a formal corporate group must first be established. Consequently, it is now time for companies functioning in informal corporate groups to decide whether they want to cement their relationships by creating a formal corporate group.
Dr Kinga Ziemnicka, attorney-at-law, M&A and Corporate practice, Wardyński & Partners
