On 13 October 2022, the Act amending the Commercial Companies Code and certain other acts (“Act”) will come into force. Companies, especially those operating under a management agreement between a parent company and a subsidiary, will have to reorganise their structures to some extent in order to comply with the new regulations.
What are the most significant changes introduced by the Act?
- New regulations governing holding companies
- A definition of a “group of companies” consisting of a parent company and its subsidiaries
- Mechanisms to enable parent companies to exercise uniform management over their subsidiaries
- The Business Judgment Rule to assess management and supervisory board activities
- New supervisory board tools to enable more effective corporate governance
Regulations governing holding companies
The legislator has indicated that the primary purpose of the Act is to regulate holding company law (group company law, conglomerate law), i.e. to define the relationship between a parent company and its subsidiaries, taking into account the interests of creditors, members of the bodies and minority shareholders of a subsidiary.
Interest of a group of companies
The Act introduces a definition of a “group of companies” consisting of a parent company and its subsidiaries. Companies belonging to a “group of companies” are to follow a common business strategy, respecting the interests of the group of companies.
Mechanisms will also be introduced to enable parent companies to exercise uniform management over the company or its subsidiaries.
Parent companies will be allowed to issue binding instructions to their subsidiaries, and refusing to follow these instructions will only be possible in certain cases.
In addition, parent companies will be liable to their subsidiaries in damages (based on the principle of fault) for damage brought about by the subsidiary complying with a binding instruction if the damage is not remedied within the time limit specified in such an instruction. Parent companies will also be liable to creditors of a subsidiary in certain cases.
The formation of a group of companies will require a resolution on participation in that group to be adopted and the group of companies to then be registered with the National Court Register. In this respect, it may also be necessary to amend the company articles of association to clarify the relations in the group of companies to the most precise extent possible.
New tools for supervisory boards
The amendments also introduce new tools enabling supervisory boards to exercise more effective corporate governance.
The most important changes include
- The obligation of the management board to provide certain information to the supervisory board on its own initiative without further request (applicable to joint-stock companies)
- The right to select an advisor to the supervisory board
- The obligation to obtain approval for the conclusion of a transaction of significant value with a parent company, a subsidiary or a related company
- Wider possibilities to request information and documents from i.a. management board members and employees
- Extended obligations of reporting to shareholders (annual supervisory board reports to be submitted for the previous financial year)
New regulations for management board members
On 13 October 2022, new regulations concerning company management board members will also come into force.
One of the changes will be the extension of the catalogue of offences, as provided for in Article 18 § 2 of the Commercial Companies Code, the commission of which will make it impossible for the offender to perform functions in company bodies.
The amendments will also uniformly and comprehensively regulate the obligation to keep minutes of resolutions of company management and supervisory boards, including their content. The amendments will clarify i.a. the moment of expiry of a mandate in connection with the expiry of the term of office of members of company bodies.
Business Judgement Rule
Another major change is also the introduction of the Business Judgment Rule allowing company bodies – management and supervisory boards – to avoid liability for damage caused to the company as a result of erroneous decisions, provided that these were taken within the boundaries of legitimate business risk and based on information adequate to the circumstances.
Accordingly, the activities of the bodies will be assessed not only through the prism of performance, but also taking into account the correctness of the decision-making process. In this context, professional reports or legal opinions may become even more important.
Controversies and questions surrounding the new Act
The Act has caused some controversy, especially when regarding the new regulations governing holding companies.
Legal practitioners point to a number of potential problems ahead, such as:
- Significant deterioration in the status of minority shareholders
- Marginalisation of the role of management boards of subsidiaries
- Dilution of liability for damage caused to a company by introducing the institution of binding instructions
Legal commentators also point out that, after the Act enters into force, there may be some differentiation of the status of shareholders in groups of companies, depending on the manner in which the group was formed.
In other words, three types of groups of companies can be distinguished: groups covered by the new regulations, those not covered by the Act, and contractual groups of companies.
As a consequence, this will reinforce the doubts as to the legal status of shareholders.
How do we help company management and supervisory boards?
We analyse the upcoming changes to the Commercial Companies Code and the related risks and problems on an ongoing basis, and propose specific solutions to make it easier for business owners to adapt their structures to the new regulations.
We are ready to assist you with all activities aimed at implementing the amended regulations, and to answer all your questions in this respect.
Do you have any questions or need support? Contact the authors