From this article, you will learn:
- what the so-called holding law is?
- what changes the holdings, including foreign parent companies, will experience?
- what gives companies participation in the so-called group of companies and what the risks associated with it are?
13th October 2022 is the date of entry into force of the amendment to the Polish Code of Commercial Partnerships and Companies, which introduces the so-called holding law.
The new regulations are to regulate the legal situation of private limited companies (i.e. limited liability companies, simple joint-stock companies, and joint-stock companies) that operate within the corporate groups. The amendment also affects foreign parent companies.
The provisions of the new holding law, in particular, allow companies to follow a common economic strategy in order to pursue the interests of the corporate group, as long as it does not harm creditors or minority partners of the subsidiary. As is clear from the justification of the draft amendment – the parent companies are to be able to exercise uniform management over subsidiaries.
When will the new holding law apply?
According to the amendment, the existing holdings will be able to create the so-called group of companies. In order to create a group of companies, there needs to be:
- adoption by the assembly of partners (general meeting) of a subsidiary of a resolution on participation in a group of companies
- disclosure of the mention of participation in a group of companies in the National Court Register. If the parent company is established abroad, participation in the group of companies must be disclosed in the subsidiary register.
Only when both conditions are met, companies can refer to the regulations concerning the so-called groups of companies.
What does participation in the so-called group of companies do to the parent company?
Thanks to the new holding law, the parent company will be able to issue (to those subsidiaries that participate in the group of companies) the so-called binding instructions regarding the management of the company’s business. A subsidiary that is the addressee of a binding instruction will only be able to refuse to comply with that instruction in certain circumstances.
It seems that the legislator’s goal was to make it easier for the parent company to develop a common strategy – consistent for the entire holding. Meanwhile, taking into account a number of formal requirements that must be met by the so-called binding instruction (including, i.a., indication by the parent company in the binding instruction of the expected benefits of potential harm to the subsidiary and the expected method and date of repairing the damage to the subsidiary) – it seems that this instrument will not only facilitate, but even complicate the functioning of holding groups, as it is completely inconsistent with the current economic realities.
In addition, there is a doubt whether – against the background of the regulations on binding instruction – it will be permissible to use in the so-called groups of companies of other, less formalised forms of influencing subsidiaries by the parent company. Unfortunately, the regulations do not give an unambiguous answer to this question.
It is all the more surprising that such informal influence is actually the standard nowadays.
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New laws for parent companies
At the same time, the parent company will have the option of buying out shares (stocks) of minority partners (shareholders) in the subsidiary, including a limited liability company (the so-called squeeze-out). This is a novelty because until now the buyout was only possible in a situation where the subsidiary was a joint-stock company.
Pursuant to the new regulations, the assembly of partners (general meeting) of a subsidiary may adopt a resolution on the compulsory purchase of shares (stocks) of partners (shareholders) representing no more than 10% of the share capital by the parent company, which directly represents at least 90% of the share capital. In the company’s articles of association (statute), this threshold may be lowered to 75% of the share capital.
Under the regulations in question, the parent company also gains the right to full information about the subsidiary’s business and unlimited access to its books of accounts. In turn, the management board of a subsidiary (participating in a group of companies) is obliged to prepare a report on contractual relations (between this subsidiary and the parent company) for the period of the last financial year.
In that report, the management board of the subsidiary should indicate, in particular, binding instructions issued by the parent company.
What are the consequences for the subsidiary of the creation of the so-called group of companies?
From the point of view of subsidiaries participating in the so-called group of companies, one of the most important issues introduced by the new law will be limiting the liability of members of the subsidiary’s governing bodies. Pursuant to the amendment, members of the governing bodies of a subsidiary (participating in a group of companies) will not be liable for damage caused by the execution of a binding instruction, which was issued under the provisions of the Code of Commercial Partnerships and Companies to a given subsidiary.
It is worth noting, however, that the liability of members of governing bodies of parent companies is also limited – provided that they act in the interest of the group of companies. Such a structure of regulations may in practice significantly weaken the protection of the interests of the companies themselves, as well as their partners and creditors.
Nevertheless, the new regulations – in theory – are to provide subsidiaries participating in a group of companies with a certain scope of protection. Well, the parent company is to be liable to the subsidiary participating in the group of companies for damage caused by the execution of a binding instruction. Linking the liability of the parent company with the occurrence of damage on the part of the subsidiary means that this protection may, however, be illusory. The more so as the parent company will be able to avoid its liability if it proves that it acted without fault.
The protection of a subsidiary is even more limited if we are dealing with a single-member company. According to Art. 21 (12) § 2 of the Code of Commercial Partnerships and Companies, the parent company is liable for damage caused to a single-member subsidiary only if the execution of a binding instruction led to its insolvency.
Should subsidiaries be afraid of changes in the law?
Although the new regulations have not yet entered into force, their content already raises many controversies and reservations. There may be concerns whether the new regulations will create space for behaviour that will adversely affect not only the business relations of related entities, but also the protection of subsidiaries’ business secrets.
The issues presented above constitute only a part of the modifications introduced to the Code of Commercial Partnerships and Companies. Undoubtedly, however, these changes will have a significant impact on the practical functioning of companies belonging to corporate groups, including holding groups with the participation of foreign entities – especially if these companies decide to establish the so-called formal group of companies.