Draft corporate group law in Poland – a revolutionary legislative initiative
Dr Joanna Schubel
Domanski Zakrzewski Palinka (DZP), Warsaw
In Polish law, there are at present no regulations on corporate groups. There is, admittedly, a sparce regulation on group contracts. This regulation is, however, so watered down that it is rarely used in practice as a basis for concluding such group contracts. To date, no case law has been developed to correct breaches within a group either.
This means that there is currently no clear legal basis in Polish law for binding instructions being issued in a group. Neither does a parent company have the power to demand that a subsidiary provide the information needed for decisions to be made concerning the entire group. In practice, however, such instructions are often issued, and information is sent to head office. Subsidiaries’ directors are then exposed to the risk of liability for activities that harm the company’s interests.
Consequently, a committee of experts set up in the Polish government prepared and published a draft of a new corporate group law in July 2020. The aim of the regulation indicated by the draft authors is to improve the management of groups, especially wholly owned subsidiaries, and to protect subsidiaries’ minority shareholders and creditors.
The draft is based on an original concept that has not yet been tested in other legislations. It can be placed somewhere between the French solutions based on the so-called Rozenblum doctrine and the German Konzernrecht.
The draft legalises the issuing of binding instructions to subsidiaries by the parent company in order to pursue the group’s common interests. This type of authorisation exists in German corporate group law, but only based on a group contract. However, in the Polish draft, group contracts are to be replaced by appropriate rules in subsidiaries’ articles of association and this is where it can be indicated that each group company is to be guided by the common interests of the group. Such a provision in the articles of association will, among other things, entitle the parent company to issue instructions.
Moreover, as regards the group management model, the draft proposes differing management rules depending on whether a company is wholly owned. Wholly owned subsidiaries will not be able to refuse to carry out the parent company's instructions even if they may lead to the company’s insolvency. It means that in such groups the interests of the subsidiaries are to be entirely subordinated to the interests of the group. However, companies that have minority shareholders will be able to refuse to follow instructions if either:
• they would expose the company to insolvency (this applies to companies 75 per cent owned); or
• there are concerns that they will cause damage to the company that will not be repaired within two years (this applies to companies in which the parent company holds more than 50 per cent of the subsidiary’s capital). This solution clearly alludes to the French Rozenblum doctrine.
At the same time, the process of issuing binding instructions has been highly formalised. All instructions from the parent company must be approved by the subsidiary’s board of directors in the form of a resolution. The resolution must also provide a detailed rationale of why an instruction should be implemented. The question arises as to whether this formalisation of the instruction issuing process conflicts with the aim of the regulation, which is to facilitate group management. At the same time, the regulation requires a subsidiary’s management board to be guided by the interests of the group on its own initiative too, without receiving instructions in advance. It seems, therefore, that, based on this requirement, in practice, company groups will shrink from the formal process of accepting binding instructions.
The other main goal of the regulation is to protect subsidiaries’ minority shareholders and creditors. The chosen solutions in this respect are controversial. The draft provides for, among other things, the parent company’s liability for damages. Critics of the new regulation argue that protection requiring the parent company to be sued for damages will be illusory. Consequently, in practice, there is a risk that transferring assets from subsidiaries to the parent company will become legal without any limitation. The draft also gives minority shareholders the right to demand that their shares be bought by the parent company (sell-out rights). However, this right is to apply only if the parent company holds at least 90 per cent of the shares in the subsidiary. It means that this solution will not protect minority shareholders holding, for example, 20 per cent of shares from their companies being continuously drained of assets.
September 2020 saw the end of public consultations on the draft, which were attended by many organisations of Polish businesses. According to the summary provided by the expert committee, the draft was received generally positively by the market. The expert committee hopes that the draft may still be discussed by the Polish parliament in the autumn.
The proposed regulation is a legislative experiment. The future will show whether it will help to efficiently manage corporate groups in Poland or whether it will be rather abused in order to strip subsidiaries of their assets.