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Reforms to Poland’s Kodeks Spółek Handlowych [KSH – the Commercial Companies Code] have recently been tabled by the corporate supervision commission of the Ministry of State Assets. They were made available for public consultation between August 5th and September 19th, following which the bill is to receive the approval of the council of ministers in the autumn before being put before the Sejm – the Polish senate.

“The bill should completely resolve the current issues with the commercial law. Its purpose is to create a secure, modern legal framework, which will allow decisions to be made in line with the common strategy pursued by several companies from the same commercial group. We are also strengthening the position of companies’ supervisory boards and regulating the disclosure of information – in the light of recent scandals such as the GetBack affair, where the supervisory board claimed it had had no knowledge of certain events,” claims Janusz Kowalski, a deputy minister in the Ministry of State Assets and the government spokesperson to the Treasury.

The new bill is divided into two main parts. One section is designed to add holding company law to the Polish statute book (otherwise known as the group company law) in order to regulate commercial companies, while the other is intended to strengthen the oversight powers of supervisory boards over listed companies. The reforms also include a range of measures that are generally aimed at improving company operations and strengthening certain regulations in the KSH that have generated problems for many years due to the lack of clarity when it comes to their interpretation.

The holding company law

A holding company law has never existed up until now in Poland. Its introduction is intended to regulate the operations of those groups that operate in Poland as a set of subsidiaries of holding companies with a single strategy and a single set of economic goals. The amendments recognise that the leading company in a group may order a subsidiary to perform certain activities in pursuit of their common strategy. Under the current act passed in 2000, the regulations governing holding companies were limited to article 7 of the KSH, which is now to be repealed by the new bill. This article only governed holding companies that had drawn up a contract with their subsidiaries to allow the subsidiary to be managed directly or to allow the mother company to directly appropriate a portion of the subsidiary’s profits. But article 7 never took into account the legal issues that arose from the actual dominance a holding company would naturally command over its subsidiaries.

The proposed amendments to the KSH are to regulate groups that are in effect holdings, because such commercial groups have become quite common in Poland, while holdings governed by contract are now rare. The latter will also be covered by the new law because holding companies that govern by contract will now also have to fulfil the legal definition of a holding company in practice. In short, a contract will not be required to establish a holding company; however, it will be necessary for a subsidiary, if it is a limited liability company, to draw up a contract to show that it is following a shared economic strategy and for a subsidiary registered as a public company to do the same in its statutes. It’s also important to note that the amendments broaden the definition of a dominant company within a group so that it can be applied to cooperatives, foundations, associations with commercial activities, investment funds and even single-person companies.

Improving corporate governance

The second crucial proposed reform concerns corporate governance. In particular, the bill lays down precisely how long management and supervisory board members may serve. It also sets out what information the management is obliged to hand over to the supervisory board on a regular basis.

“The bill is intended to break through the walls of asymmetrical information that often stand between managers and the supervisory board. This has an important practical purpose: when something happens and the question of why the supervisory board didn’t intervene is raised, its members often say that they didn’t do anything because they knew nothing about the problem. Now the supervisory board will have an effective instrument giving them more complete information about the company, because under article 380 (1) of the KSH the management board will be obliged to present specific information to the supervisory board without additional requests. As a result, the supervisory board will have adequate knowledge of the company’s circumstances for its needs, including information about investments, human resources as well as transactions and other events that might affect the operations of the company,” explains Radosław Kwaśnicki, the managing partner of the RKKW Kwaśnicki, Wróbel i Partnerzy law firm and the chairman of the supervisory body advising the government on the new law

The bill in general represents a change in thinking about supervisory boards, an evolution in how this body is perceived, from one that purely serves an oversight role to one that is an equal partner of the management board with access to information and effective supervisory powers. The supervisory board will now be able to choose and hire outside companies without consulting the management board.

One important new requirement for the management is to seek the approval of the supervisory board before it signs a contract with its mother company, a subsidiary or another company from the group whenever, as laid out in article 384 (1) for public companies or for limited companies, the value of the deal exceeds by 10 pct the figure set out in the company statutes by its shareholders or in its contract with the holding company. The KSH does admittedly recognise the loyalty managers hold for their company in both the spirit of the law and in its interpretation, but this aspect of corporate governance has only been regulated when it comes to non-competition clauses, conflicts of interest and removing members from the management board. The purpose of the amendments is to make it possible to hold managers to account – even for having failed to fulfil their professional duties with due care and attention. Occasionally situations can occur whereby a member of the management or supervisory board has apparently carried out their obligations with due care and attention, but by doing so nonetheless damages the company. For this reason it has been proposed that what is known as a business judgement rule should be introduced into Polish law, whereby actions are judged by what most business people would consider to be reasonable behaviour.

The KSH came into effect in 2000 and since then many areas of it have been left unamended. Over this period the Polish economy has undergone many changes and is clearly very different to how it was twenty years ago.

Group think

Jakub Sobotkowski, an attorney and partner at Dentons

The draft introduces a new concept: a ‘group of companies’ – i.e. those that implement a common business strategy (the common interest of the group of companies). This is intended to enable the management of particular group companies with a view to pursuing the interests of the whole group (e.g. in the case of measures such as cash-pooling solutions, sureties and guarantees, as well as the activities of operating companies constituting so-called ‘cost centres’). A parent company will also gain the right to issue binding instructions concerning the management of the subsidiary’s affairs, based on the interest of the group (subject to the obligation to redress possible damage suffered by the subsidiary). Moreover, the draft enshrined the liability of the parent company for the effects of issuing a binding instruction. We assume that the proposed changes will need to be reflected to some degree in the formal aspects of investors’ and institutional developers’ activities (within the framework of corporate governance).

Real estate will benefit

Katarzyna Sulimierska, a legal advisor at Hogan Lovells

For the real estate sector, the introduction in its current form of holding companies into Polish law can only be seen as beneficial. In Poland, most real estate is owned by a specific company. Investors that act as the leading company of a group often have large portfolios of such SPV companies. Up until now managers were supposed only to act in the interest of their particular subsidiary, but this was not necessarily the same as the interests of the group. As a result, if the managers of a subsidiary followed the orders of the leading company in a group when such orders might not have been to the advantage of their own company but made economic sense for the group as a whole, they ran the risk of being held accountable for not furthering the interests of their own companies. However, a refusal to follow such orders might have resulted in failing to implement the business strategy of the whole corporate group. You could therefore have said that Polish corporate law recognises and takes into account the interest of a single specific company but not the interests of an entire group.