Breach of the principle of special representation of a company in a contract with a member of its management board

20 October 2023 | Knowledge, News

Alongside equity investments, an indispensable element of joint venture transactions is the conducting of a detailed legal due diligence. This will usually be commissioned by an investor or strategic partner to provide key information on the legal, financial and operational status of a company, the results of which can affect the subsequent course and success of the entire transaction, and even the long-term sustainability of a company.

Importance of the duty of special representation in the context of start-ups

When the founder of a start-up also is also a management board member, the duties of special representation become an issue of paramount importance and failure to comply with them can lead to legal complications, having a significant impact on the value of the company and its attractiveness to investors. In practice, the founders often create all kinds of intellectual property rights in the course of their cooperation and action in favour of the company, which require written form to be effectively transferred. Unfortunately, many contracts between a company and its management board members are signed without respecting the duty of special representation. As a result, it may turn out that a company subject to due diligence is not the owner of the key asset which was encouraging investors to invest in a particular venture, as the relevant contract was not validly concluded. It is precisely such situations that are identified during due diligence.

Risks and consequences of non-compliance: what you need to know

The Companies and Partnerships Code does not contain an express provision describing the consequences of breaching the principle of proper representation of a company in a contract with a management board member. Legal commentators and case law remain divided as to the sanction for breach of this principle. So far, two contradictory approaches have been adopted. The first, which provides for the sanction of ineffectiveness of a suspended act in law performed contrary to the rules of company representation set out in a contract with a management board member, i.e. conditional upon confirmation by a duly authorised body. The second, which advocates the sanction of absolute nullity of an act in law, i.e. declaring it null and void. As a consequence, the parties will be obliged to return everything they have given each other as part of the established cooperation.

Legal protection and risk management: how to guard against negative consequences

Before entering into a contract between a company and a management board member, it is worth considering who should enter into such a contract on behalf of the company, preferably by consulting an experienced lawyer. For example, in the case of a contract between a company and a member of its management board, who is the sole founder, there is no need for special representation. The company should be represented by the management board in accordance with the rules of representation set out in its articles of association or in accordance with the general rules of the Companies & Partnerships Code. However, in order to be valid, such a contract requires a special form, i.e. a notarial deed. In addition, each time such a deed is drawn up, the notary notifies a registry court via an ICT system.

Source: Rzeczpospolita

Date: 22.09.2023

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