When the management board does not function properly | In Principle

The Commercial Companies Code provides an extensive set of rules governing internal controls in Polish companies, from the general rules for conducting and controlling the company’s affairs by the management board to oversight of the management board’s actions.

The body specifically responsible for the activity of any company in Poland is its management board. Under Art. 201 of the Commercial Companies Code, the manage­ment board conducts the affairs of the company and represents the company, and this authority extends to matters before courts and elsewhere (Art. 204 §1). Conduct­ing the affairs of the company includes more specifically taking organisational and commercial decisions within the company.

Because management board members may be held liable for the obligations of the company (Art. 299 §1), including obligations arising from improper acts by employees, manage­ment board members can and indeed should take up internal investigations to clarify suspected irregularities which have been discovered by the management board or brought to its attention. To this end, the manage­ment board may enter into a coopera­tion agreement with external advisers—lawyers, forensic accountants and IT specialists. Such measures are designed to minimise potential further costs arising out of the identified irregularities and to restore the company to proper order.

But sometimes the management board decides not to conduct the appropriate inter­nal controls despite evident improprieties in the company. One reason for this can be that the internal irregularities at the company are due to actions not only by staff, but by management board members themselves. Although persons appointed to this position are usually professional managers and enjoy the trust of the company’s shareholders or supervisory board which appointed them, it may turn out that they are not properly performing their duties, are exposing the company to losses, or are acting in a manner that is objectively improper or of doubtful integrity.

In such situations, pursuant to the relevant provisions of the Commercial Companies Code, the persons authorised to conduct internal procedures at the company are the shareholders or the supervisory board.

Inspection of company operations by shareholders or supervisory board

Under Commercial Companies Code Art. 212 §1, every shareholder of a limited-liability company has the right of inspection. To this end, the shareholder, alone or accompanied by a person appointed by the shareholder, may at any time review the company’s books and records, prepare a balance sheet for the shareholder’s own use, or demand explana­tions from the management board. The shareholder may retain an external adviser of its choice for this purpose.

A shareholder may exercise the right of inspection personally or together with an authorised person, which means that it is not permissible for an inspection to be conducted only by an authorised person without the participation of the shareholder. The scope of the right of inspection as defined in Art. 212 §1 is very broad. More specifically, the share­holder may demand any explanations from the management board, and review the company’s documents, including financial reports prepared by the company and other financial documents. The shareholder (alone or with an authorised expert) may also use the books and records to draw up a balance sheet for the shareholder’s own use.

Nonetheless, under Art. 212 §2 manage­ment can sometimes refuse to provide explanations to the shareholder or deny the shareholder access to the company’s books and records. A necessary condition for refusal is a justified concern that data and information concerning the company may be used for a purpose con­trary to the interests of the company, exposing the company to a potential loss. Such concern might for example arise from the fact that the shareholder is directly or indirectly involved in activity competitive with the company, which clearly could result in exposure of trade secrets to a competitor. The management board may also refuse to provide explanations or access to documents if continual requests of this kind by the shareholder disrupt the work of the company, or if the shareholder is an adversary of the company in litigation, and thus providing information to the shareholder could unfavourably impact the company’s litigating position in the dispute with the shareholder.

If the shareholder is refused access to the company’s books and records, the simplest solution would be to remove the unco­operative member or members of the management board. But this solution cannot always be achieved, particularly when dismissal of management board members requires the consent of other shareholders. In that situation, under Art. 212 §§ 3 and 4, the shareholder may request that the matter be decided by a resolution of shareholders. The resolution should be adopted within one month after the request is made. If the request for a resolution is denied, the share­holder may apply to the registry court for an order requiring the management board to provide the shareholder explanations or access to the company’s books and records. The application must be filed within 7 days after the shareholder is notified of adoption of the shareholder resolution, or 7 days after the end of the one-month period if no resolu­tion is adopted during that time.

The right of inspection by shareholders of a limited-liability company may be limited or excluded by the articles of association if a supervisory board is appointed (Commercial Companies Code Art. 213 §3). Whether or not the shareholders’ right of inspection is limited or excluded, ongoing supervision over the activity of the company is the right and obligation of the supervisory board. For this reason, the supervisory board bears respon­sibility for supervision and control. Thus under Art. 219 §§ 4 and 5, in order to perform its duties the supervisory board may examine any of the company’s documents, demand reports and explanations from the management board and employees, and review the state of the company’s assets. Any member of the supervisory board may exer­cise the right of supervision independently unless other provided by the articles of association. Unlike in the case of share­holders, the management board may not deny members of the supervisory board the right to conduct inspections, and therefore it is recognised that the shareholders’ right of inspection is more of a right only to obtain information about the company, and only the supervisory board is vested with a full right of inspection. The supervisory board exercise its rights with the assistance of external experts.

It should also be pointed out that upon request of one or more shareholders repre­senting at least one-tenth of the share capital, after calling on the management board to provide a statement the supervisory board may appoint an entity authorised to review the financial reports for the purpose of examining the company’s accounting and operations (Commercial Companies Code Art. 223). This provision provides share­holders (particularly minority share­holders) an additional opportunity to exercise effective oversight of the company’s operations.

Pursuant to Commercial Companies Code Art. 382 §4, the supervisory board of a joint-stock company enjoys the same entitlements as the supervisory board of a limited-liability company. However, in a joint-stock company the shareholders do not enjoy a full individual right of inspection, but at most partial rights such as the right to review the ledger of minutes and resolutions of the general meeting, the share ledger, the list of share­holders, and informational documents prior to the annual general meeting. Denial of specific rights of inspection to shareholders in a joint-stock company is designed to protect the activity of the management board, particularly in companies with a large number of shareholders, who could effectively frus­trate the operations of the management board by filing constant requests for inspection.

Oversight of the supervisory board

Pursuant to Commercial Companies Code Art. 219 §3, the supervisory board is required to submit an annual report to the shareholders’ meeting on the results of its review of the financial reports and the management board’s report on the business of the company. Through separate bylaws or relevant provisions in the articles of associa­tion, other duties, including reporting obliga­tions, may be imposed on members of the supervisory board. Then the correctness of their performance of these duties may be monitored using external experts. It should be pointed out, however, that the persons appointed to the supervisory board should be highly trustworthy. If their behaviour appears to be objectively improper or raises doubts as to their integrity, as a rule the only solution for the shareholders is to immediately replace some or all of the members of the super­visory board. Subsequently, the actions of the dismissed members of the supervisory board can be examined and the findings potentially used in judicial proceedings against them.

Summary

The management board, the supervisory board and the shareholders of a company may exercise rights of supervision and inspec­tion vested in them by the Commercial Companies Code. These entitlements may prove particularly valuable in situations where the actions of employees or other company authorities raise objective doubts as to their correctness or integrity. In exercising these entitlements, they may cooperate with external experts such as lawyers, forensic accountants and IT specialists.

Łukasz Śliwiński, Corporate and M&A Practice, Wardyński & Partners