This is the second part of the series of posts related to the subject of the amendment of the Act – the Code of Commercial Companies.
In this section, I address the issue of binding instructions by a parent company to its subsidiaries.
I would like to remind you that as of 13 October 2022, the Act of 9 February 2022 amending the Act – Commercial Companies Code and certain other acts will enter into force. This is one of the biggest amendments to the said Act, which will strongly affect the functioning of capital companies, i.e. limited liability companies, simple joint-stock companies and joint-stock companies.
Relationship between the parent company and the subsidiary
The parent company may give binding instructions to the subsidiary. This is done, inter alia, through the board of directors of the parent company. Issuing a binding instruction is the right and not the obligation of the parent company.
Binding instructions shall apply to the conduct of the affairs of a subsidiary, insofar as this is justified by the interests of the group of companies. The instructions shall be given in writing or electronically under pain of nullity.
The regulations govern the minimum content that must be included in the order, viz:
(1) the parent company’s expectation of the subsidiary’s behavior in connection with the execution of a binding order;
(2) the interest of the group of companies that justifies the subsidiary’s execution of a binding order;
3) the expected benefits or damages to the subsidiary that will result from the execution of the binding order, if any;
4) the envisaged manner and timing of compensation to the subsidiary for the damage suffered as a result of complying with the binding order.
Implementation of a binding instruction by a subsidiary which belongs to a group of companies shall require the adoption of an appropriate resolution by the board of directors. Following the adoption of a resolution to execute a binding instruction or a resolution to refuse to execute a binding instruction, the subsidiary shall inform the parent company.
The passing of a resolution by a subsidiary as to refusal to comply with a binding order has been significantly restricted. The provision, however, provides for an obligation to pass such a resolution when the negative conditions for obeying such a direction are met. Thus, it is not merely the power of the subsidiary but its duty when such circumstances arise.
A subsidiary company participating in a group of companies shall adopt a resolution refusing to comply with a binding order if its compliance would lead to the insolvency or threat of insolvency of that company.
In addition, it should be pointed out that a subsidiary company that participates in a group of companies that is not a sole proprietorship may adopt a resolution to refuse to comply with a binding order if there is a reasonable fear that it is contrary to the interests of that company and will cause damage to it that will not be remedied by the parent company or another subsidiary company within the group of companies within a period of two years
The articles of association or articles of association of a subsidiary participating in a group of companies may provide for additional grounds for refusal to comply with a binding instruction.
Liability of a member of the management board, supervisory board, auditing committee and liquidator of a subsidiary company
A very important issue is that a member of the management board, supervisory board, auditing committee and liquidator of a subsidiary will not be liable for damage caused by the execution of a binding instruction.
The issuance of binding instructions does not preclude the parent company from issuing „informal” binding instructions either, but the subsidiary, managers of such companies or supervisors do not then benefit from the legal protection introduced by the amendment in question.
Right of access to information concerning subsidiaries
The parent company will be able to inspect the subsidiary’s books and documents at any time and will have the right to request information from the subsidiary that takes into account specific provisions.
If the subsidiary is unwilling to provide the books and documents requested by the parent company, then the parent company will be able to file an application with the registry court to oblige the subsidiary’s management board to provide it with the books and documents or to provide relevant information.
The parent company will exercise constant supervision over the subsidiary’s pursuit of the interests of the group of companies.
Forced buy-back of shares
The general meeting of shareholders or the general meeting of a subsidiary may adopt a resolution concerning the compulsory buyout of shares of shareholders who represent not more than 10% of the share capital by the parent company which directly represents at least 90% of the share capital.
The articles of association or articles of association of a subsidiary may provide that the right referred to above shall be vested in the parent company which directly or indirectly represents in a subsidiary participating in the group of companies less than 90% of the share capital of such company but not less than 75% of that capital.
Liability of a parent company towards its subsidiary
Where the execution of a binding order has caused damage to a subsidiary and such damage has not been remedied within the period specified in the binding order, then the liability shall fall on the parent company unless it is not at fault.
In the case of damage caused to a wholly owned subsidiary, it is the parent company that is liable only if the execution of a binding instruction led to its insolvency.
These provisions were introduced in order to reflect the duty of loyalty that a parent company should have towards a subsidiary operating in the same group when issuing binding instructions.
In case of damage caused by the parent company, it is the subsidiary company that has the option to bring an action for damages within a YEAR from the date of expiry of the time limit specified in the binding order.
A parent company which, on the date on which a binding instruction is issued to a subsidiary which is a member of a group of companies, holds a majority of the votes, whether directly or indirectly, enabling it to adopt a resolution concerning the participation in the group of companies and an amendment to the articles of association or the statutes of that subsidiary, shall be liable to a shareholder of that subsidiary for a reduction in the value of the shareholding to which that shareholder is entitled if the reduction was the consequence of the execution by the subsidiary of a binding instruction.
Majority ownership presumed that the parent company represents directly or indirectly in the subsidiary at least 75 % of the share capital.
A claim for the remedy of a loss related to the decrease in the value of a share shall be barred with the lapse of three years from the date when the shareholder became aware of the loss, and with the lapse of five years from the date when the event which caused the loss occurred.
However, such a claim may be extinguished if the parent company has fully repaired the damage caused to the subsidiary.
Rights of creditors of group companies
When enforcement against a subsidiary that is part of a group of companies takes place and is unsuccessful, the parent company is liable for the damage caused to the creditor of the subsidiary. The only case of exemption from this liability is the absence of fault or if the damage did not arise as a result of the subsidiary’s compliance with a binding instruction.
Damage is the amount of the unsatisfied claim against the subsidiary.
Creditors also have the opportunity to review the report of the subsidiaries for the most recent fiscal year, which includes, among other things, information on binding orders issued to the subsidiary.
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