Important changes of polish law concerning holdings

Poland makes important changes to Holding Companies Law 

Poland has recently introduced important changes concerning holdings through an amendment to the Polish Commercial Companies Code that came into force in October 2022 and introduced detailed provisions on binding instructions from parent companies, with implications for the liability of parent and subsidiary companies, as well as their board members. The amendments also introduced new provisions that enhance the role of the supervisory boards of parent companies. 

Giving instructions, at least informal ones, was common practice in groups of companies in Poland. However, until October 2022, Polish law was silent on whether such instructions were allowed as well as on other relevant aspects of such instructions.

What are the new prerequisites for a parent company’s instruction to be binding on its subsidiary in Poland?

The most important prerequisite is that both the Polish subsidiary (or subsidiaries) and the parent company must declare that they are a group of companies. The fact of establishing and/or joining a group should also be revealed in the official Polish register of companies. (If the parent company is located abroad, notification in the register of the Polish subsidiary’s participation in a group of companies is sufficient). This should also be preceded by a resolution of the subsidiary’s shareholders on joining the group of companies. This resolution should be adopted by a three-quarter majority vote and should also indicate the dominant parent company. 

There are further requirements concerning the parent company’s instructions. The parent company’s instruction should be issued in written form (i.e. on paper or electronically). Otherwise, the instruction is invalid. Additionally, the written instruction should specify the action required from the subsidiary and the interest of the group of companies related to the instruction, as well as expected gains or losses. The instruction should also specify the way and the date that damage resulting from the execution of the binding instruction will be compensated to the subsidiary. The management board of the subsidiary must also adopt a resolution mirroring the instruction from the parent company. 

Can the management board of the subsidiary refuse to obey the instruction from the parent company under the new provisions?

As a rule, the instruction is binding. However, there are exceptions. The subsidiary’s board should refuse to follow the parent company’s instruction if its execution will result in the subsidiary becoming insolvent or create the threat of insolvency. The management board of a non-wholly owned subsidiary should also refuse to obey the instruction if it finds that the instruction is contrary to the interests of the entire group and that there is also a risk that the damage, which might result would not be compensated within two years (from the occurrence of the act or omission causing this damage). As a corollary of this obligation to follow parent instructions, the board members of the subsidiary are released from liability for damage resulting from its execution.

The other side of the coin: liability

The dominant (i.e. parent) company could be liable under certain conditions towards a non-wholly owned subsidiary for damage caused by carrying out the instruction. If the parent is the sole shareholder, this company would be liable towards the subsidiary for such damage only if the latter company became bankrupt as a result of performing the instruction. The parent company could also be liable under certain conditions towards the subsidiary’s shareholders for a decrease in the value of the shares of the subsidiary resulting from executing the binding instruction.

Forming a group of companies can have further implications for the dominant parent company. The parent company issuing the instruction may also be liable towards creditors of the subsidiary if enforcement of a claim against the subsidiary is ineffective, unless the parent is not guilty or the damage was not caused by the parent’s binding instruction. This is an exception to the general principle according to which the parent company and subsidiary company are separate legal entities and are not liable for the debts of the other. 

Holding Companies Law in Poland: a useful tool or a headache?

Time will tell whether the amendments are a good solution for businesses in Poland. To establish (and register) the formal group in Poland is a question that does not have a simple answer for every corporation. However, it is certain that groups that have or plan to have subsidiaries in Poland will face additional challenges.

In particular, for groups opting in by forming the group, relatively complex and formal requirements concerning parent instructions might slow down decision-making processes. Therefore, some may doubt whether this is an attractive proposition to businesses, especially in today’s dramatically fast-changing and unpredictable economic environment. In this context, the new rules could be particularly challenging for those corporations, which prefer more involvement from the top in the management of operations below. These newly enacted provisions could also create a conflict between the board members of the parent and subsidiary companies or even their respective legal, compliance and financial teams. 

One can also imagine practical problems. One issue is how specific the instruction (and the mirror resolution of the subsidiary’s board) should be when it comes to its required reasoning. Another issue is how to assess the risk of damage, which may or may not result from a given instruction and document this assessment, such as in the case of a loan or bond issuance by the parent company, for which the subsidiary’s assets would be needed as security. 

One may even wonder if the amendment, in its current formulation, was necessary. Even well before this recent amendment there had been cases where Polish courts exempted the liability of board members who acted in the interest of the entire group of companies and/or followed instructions from the parent company. Some might argue that leaving these issues to the courts to be decided on a case-by-case basis would provide more flexibility and would prove to be a better approach. 

Whatever the assessment of the new rules on groups of companies, this legislative change cannot be ignored and parent companies will have to develop an appropriate and tailored approach.