Selected Issues Of Polish Company Law

Selected Issues Of Polish Company Law Presented by: Dr. Ledwoń Date: 9 May 2024 Selected, Current Issues Of Polish Company Law - 1) Long-term effects and assessment of the amendment to the CCC, which entered into force on October 13, 2022 the largest amendment to the Commercial Companies Code in 20 years, with a key regulation of the holding law and modification of corporate governance, - 2) Operation of a simple joint-stock company, a new form of capital company, which can be established from July 1, 2021, - 3) Amendment to the Commercial Companies Code, effective from September 15, 2023, which, as a result of the implementation of EU regulations, introduced many important solutions in the field of mergers, divisions and transformations of companies. The Most Extensive Amendment To The CCC in 20 years - The Amendment Act introduced a number of mechanisms that improve the current functioning of companies, as well as increasing the security of economic transactions and managers of subsidiaries - holding law. - Amending Act grants supervisory boards of capital companies a number of additional powers to exercise real control over the entire spectrum of activities. - Additionally, the legislator decided to solve problems that have generated legal risks in basic areas for many years, such as the issue of determining the exact duration of mandate of a member of the management board and supervisory board. - The amendment also brought changes to the rules of responsibility of management board members (business judgment rule). Holding Law - The provisions on groups of companies, introduced by the Act of 9 February 2022 Amending the Act Code of Commercial Partnerships and Companies and Certain Other Acts (Articles 21(1) -21(16) of the Code), constitute one of the most far-reaching changes to the CCC since it was enacted. - The main point of the Amendment to the CCC was the introduction of the law of groups of companies into the Polish legal system - They concern a matter of key importance from the perspective of the functioning of companies, in view of the widespread participation of companies in groups, as well as the capital and economic connections between group members. - The amendment created this concept in order to recognize the actual company the economic control that the parent company exercises over its subsidiaries. This is done by enabling the parent company giving instructions to its subsidiaries. - As a result, in case carrying out such orders, responsibility of the management boards of subsidiaries is limited, while the parent company's liability is correspondingly larger. This concept comes from the German concept (Konzernrecht). However, the way it has been introduced into Polish law and it seems to be more complicated to use in practice, especially in scope of issuing binding instructions to a subsidiary. - In addition, the parent entity will be liable for damages to the subsidiary for damage that was caused by the subsidiary's execution of a binding order and which was not repaired within the period specified in such an order. Additionally, it will also be liable towards the subsidiary's creditors. - The group company law also introduces, inter alia: • The right of the parent company to review the books and documents of the subsidiary at any time and to request information from it, • A new obligation for the supervisory board of the parent company to supervise the implementation of the interests of the group of companies by the subsidiary; this obligation may be excluded contractually or statutorily, • The obligation for the subsidiary's management board to prepare an annual report on contractual relations with the parent company and binding, • The right of minority shareholders representing at least 10% of the share capital to request a special audit to examine the accounting and operations of the group of companies, • The right of minority shareholders representing less than 10% of the share capital to request compulsory repurchase of their shares by the parent company, which directly or indirectly represents at least 90% of the share capital of the subsidiary, • The right of the parent company representing at least 90% of the share capital of the subsidiary to adopt a resolution on the compulsory purchase of partners or minority shareholders of the subsidiary, - Participation in a group is disclosed in the National Court Register, and the application of the provisions is possible only after the disclosure of an appropriate note. - The provisions of the law on groups of companies relating to subsidiaries do not apply to a public company, a company in liquidation and a company that is an entity subject to financial market supervision. - The parent company's liability for issuing a binding order may vary depending on the entity to which it applies. This may be a liability towards: • Subsidiary liability based on fault, determined taking into account the duty of loyalty, • Creditors of a subsidiary liability arises in the event of ineffective enforcement against the subsidiary in the event of damage to creditors in connection with the execution of a binding order by the subsidiary, • Minority shareholders of a subsidiary liability concerns the liability arising as a result of the subsidiary's execution of a binding order, as a result of which the value of the company's shares was reduced. - The new regulation of holding law has both its supporters and staunch opponents. - Legal community points to a number of problems resulting from the introduced changes. - First of all, the marginalization of the role of the management boards of subsidiaries and the blurring of responsibility for damage caused to the company in connection with the introduction of the institution of a binding order. The disadvantages are the formal requirements, e.g. binding instructions must be issued in writing or electronically, under pain of nullity, must be justified and contain other elements, and in addition, the management board of the subsidiary must also adopt a resolution on its implementation. - Supporters emphasize primarily the increase in transparency and comfort of operation of the management boards of subsidiaries, which will not be liable for any damage caused to the company as a result of the execution of a binding order. Holding Law – Problems - This structure may be useful in the following circumstances: • Where the group is subject to a financing arrangement, which requires intergroup guarantees and safeguards, and members must join as obligors to the loans available to the parent company; and • Where there is a desire to impose rules, policies and practices in a uniform manner for the entire group, even if it is not in the best interests of each group member. Supervisory Boards Of Capital Companies - The second most important point is the reform of corporate governance, which involves the introduction of new duties and powers of the supervisory board (and non-executive directors in the case of a simple joint-stock company). These changes cover every type of capital company. The most important include: • Enabling the use of the services of an independent advisor  A new institution appears an advisor to the supervisory board result of a resolution of the supervisory board specifying the purpose of appointing the advisor. In the case of a limited liability company, the possibility of using an advisor will only appear if the company agreement indicates such a possibility. The advisor may be responsible for preparing analyzes and opinions on topics relating to operations or assets. The Company must provide full access to information, and in the event of obstructing the advisor's work, sanctions are provided for, including a fine of PLN 20,000-50,000 (EUR 4,622.47 - EUR 11,556.17). Importantly, the advisor's work costs are covered by the company. A New Dimension Of Corporate Governance - Until the amendment, the regulations in force under the Commercial Companies Code placed emphasis on retroactive model of supervisory boards. - Among the duties directly designated by law in particular, assessments were made based on reports on the company's activities or its financial statements, as well as was focused on verification their compliance with books and documents. - However, it is difficult to ask about circumstances of which one unaware. is - Additionally, sourcing is an important element of learning about the processes taking place in the organization from people directly involved in their implementation. - The most important change is the obligation of the management board to provide specific information to the supervisory board on its own initiative, in particular information about management board resolutions and their subject matter, the company's situation, transactions and other events that may significantly affect the entity's financial situation. - Crisis situations occurring in many companies over the years the Commercial Companies Code has been in force are proof of the need to activate supervisory boards and transforming their work model into a more prospective one. - In the light of the new regulations, the supervisory board is also able to request specific materials not only towards from management board and its employees, but also from proxies and persons performing duties on behalf of the company on a regular basis, based on a contract for specific work, a contract of mandate or another similar contract. - To illustrate these relationship, the question was asked: • When should the supervisory board have a chance to discuss with the management board the optimal course of action in the event of termination of a key contract - when it learns about it after a few months while verifying the completeness of the annual financial statements or when it becomes aware of them immediately after the company receives the appropriate declaration from the contractor? - A reporting obligation for the supervisory board has been introduced. - The supervisory board is obliged to prepare and present an annual report of the supervisory board to the shareholders' meeting. The minimum content of such a report has been specified only in the case of joint-stock companies. Other types of companies can adapt the content of such report to their needs and shareholders' expectations. - The information that must be included in the report of the supervisory board of a jointstock company is: • Assessment of compliance with the books, documents and the actual state of annual financial statements, • Assessment of the management board's proposals regarding the distribution of profit or coverage of losses, • Assessment of the company's situation, with emphasis on internal control and risk management, • Assessment of the management board's implementation of information obligations, • Assessment of the manner in which information, documents, reports or explanations are prepared or submitted to the supervisory board by the management board. • Information on the total remuneration due from the company for research commissioned to advisors of the supervisory board. Extended Scope Of Information - Joint-Stock Company - The management board is obliged, without additional request, to provide the supervisory board with information at each meeting of the supervisory board: • Resolutions of the management board and their subject matter; • The company's situation, including its assets, as well as significant circumstances related to the management of the company's affairs, in particular in the operational, investment and HR areas; • Progress in implementing the designated directions of development of the company's activities, at which should indicate deviations from previously determined directions, providing justification for the derogations; - Immediately after certain events or circumstances occur: • Transactions and other events or circumstances that have a material impactor may affect the financial situation of the company, including its profitability or liquidity; • Changes in the information previously provided to the supervisory board, if any significantly affect or may affect the company's situation. - The statute may exclude or limit the above-mentioned obligation shareholders can ultimately decide what corporate governance model is optimal. Supervisory Board Committees - In relation to limited liability companies and joint-stock companies, it is provided that the supervisory board may establish an ad hoc or permanent committee to perform specific supervisory activities, which will be entitled to obtain information about the company and request appropriate documents or explanations (Art. 219 § 4 and Art. 382 § 4). - However, it was decided on this occasion explicitly that the establishment of the committee, regardless of the scope of the entrusted tasks, does not release members of the supervisory board from responsibility for exercising supervision of the company. Business Judgment Rule - The use of the so-called Business Judgment Rule has been extended. This institution, known to a simple joint-stock company, is introduced in relation to a limited liability company and a joint-stock company. - It is intended to exclude the liability of a member of the management board, supervisory board or liquidator (and, in the case of a limited liability company, also a member of the audit committee) for damage caused to the company as a result of decisions of its bodies which prove to be inappropriate if they were they are undertaken within the limits of reasonable business risk. Simple Joint-Stock Company - From July 1, 2021, a new capital company may be established a simple joint-stock company. Currently, there are about 2,000 simple joint-stock companies are registered in the National Court Register. For comparison – there are about 500.000 of limited liability companies. - What industries do they operate in? • Almost every fourth companies created indicated the "information and communication" section, so it conducts activities related to, for example, telecommunications or software and IT services. 20% of the established companies "professional, scientific and technical activities", which includes areas such as legal, accounting and bookkeeping activities or activities related to scientific research and development work. - The advantage of a simple joint-stock company is the possibility of acquiring shares in exchange for cash or non-cash contributions. A non-cash contribution to cover shares may be any contribution of material value, in particular the provision of work or services. The described solution takes into account the specificity of startup companies. Changes Regarding The Provisions Regulating The Reorganization Processes Of Companies - On September 15, 2023, changes to the provisions of the CCC regarding company reorganization processes (mergers, divisions, transformations) entered into force. The changes are aimed at implementing EU directives (Directive No. 2019/2121 and Directive No. 2019/1115) in the field of cross-border reorganizations, but regardless of the above, they also introduce a number of changes regarding domestic processes. - Changes apply to Polish capital companies and limited joint-stock partnerships. • New reorganization processes • Cross-border division and cross-border transformation The amendment introduces two new cross-border reorganization processes into the Polish legal system cross-border division and cross-border transformation. So far, only a cross-border merger was possible,