The concept of a group of companies is well-established and widely recognised in the market. A group of companies has neither legal personality nor legal capacity; under the Commercial Companies Code, it is not a separate legal entity. Legal personality is held separately by each member. The crux of the matter, however, is that alongside the interests of each participant, there arises a supra-individual interest – the interest of the group of companies. These interests often clash, causing conflicts, which may have a negative impact on subsidiaries and their creditors. These two factors – namely, the prevalence of operating within a group of companies and the need to protect subsidiaries and their creditors – guided the drafters in introducing the new provisions.
LEGAL DEFINITION OF A GROUP OF COMPANIES
Pursuant to Article 4(1)(51) of the Commercial Companies Code, a group of companies is defined as a parent company and one or more subsidiaries, which are capital companies, acting in accordance with a resolution on participation in the group of companies under a common strategy to pursue a common interest (the interest of the group of companies), justifying the parent company’s exercise of unified management over the subsidiary or subsidiaries.
Additional steps necessary for participation in a group of companies are:
- the adoption, by a three-quarters majority of votes at a meeting of shareholders or the general meeting of a subsidiary, of a resolution on participation in a group of companies, specifying the parent company
- disclosure of the fact that the company participates in a group of companies in the register by way of a note (Article 211(3) of the Commercial Companies Code).
THE INSTITUTION OF BINDING INSTRUCTIONS
Article 212 of the Commercial Companies Code regulates the issuance of binding instructions by the parent company. Binding instructions are a tool in the hands of the parent company for the purpose of pursuing the common interest within the group of companies and exercising effective control over the subsidiary or subsidiaries. To be valid, a binding instruction must be issued in writing or in electronic form. The provisions specify the minimum content of a binding instruction (the expected conduct under the instruction, an indication of the group’s interest justifying the subsidiary’s compliance with the binding instruction, the anticipated benefits or losses to the subsidiary resulting from compliance with the instruction, and the anticipated method and timeframe for compensating the subsidiary for any loss). The execution or refusal to execute a binding instruction requires the adoption of a resolution by the subsidiary’s management board.
The grounds for refusing to carry out a binding instruction can be divided into statutory and non-statutory grounds. Pursuant to Article 214(1) of the Commercial Companies Code, a subsidiary shall refuse to carry out a binding instruction if its execution would lead to the insolvency or a risk of insolvency of the subsidiary. There is also a specific ground for refusing to comply with a binding instruction for companies other than single-member companies, namely a conflict with the subsidiary’s interests and a concern that the parent company will fail to remedy the damage within the next two years.
Furthermore, the legislator grants the members of a group of companies the right to autonomously define additional grounds for refusing to comply with a binding instruction in the agreement or the articles of association of the subsidiary. The validity of adopting such additional grounds is subject to the obligation on the part of the parent company to repurchase the shares of those partners or shareholders of the subsidiary who do not agree to the change.
LIABILITY FOR DAMAGE CAUSED TO A SUBSIDIARY AS A RESULT OF THE EXECUTION OF A BINDING INSTRUCTION
Pursuant to Article 2112(1) of the Commercial Companies Code, a parent company is liable to a subsidiary within a group of companies for damage caused by the execution of a binding instruction and which has not been remedied within the time limit specified in the binding instruction, unless it is not at fault.
The scope of this liability is limited, in the case of a single-member subsidiary, to situations where the execution of a binding instruction has led to the subsidiary’s insolvency. Other types of subsidiaries are not subject to this limitation.
When assessing liability for damage caused by the execution of a binding instruction, the duty of loyalty towards the subsidiary at the time of issuing and executing the binding instruction is also taken into account. The legislator has not explained in any way how this duty of loyalty might manifest itself; perhaps it refers to acting within the bounds of normal economic risk or taking measures that are as least burdensome as possible for the subsidiary. This phrase will most likely be clarified by case law.
LIABILITY OF THE PARENT COMPANY FOR DAMAGE CAUSED TO THE PARTNERS/SHAREHOLDERS OF THE SUBSIDIARY AS A RESULT OF THE EXECUTION OF A BINDING INSTRUCTION
The conditions for this liability to arise are:
- The parent company holds a majority of votes sufficient to pass a resolution on participation in the group of companies and on amending the articles of association or the statutes of that subsidiary
- The situation described in point 1 exists at the time the binding instruction is issued
- The consequence of the subsidiary’s compliance with the binding instruction is a reduction in the value of the partner’s shareholding in the subsidiary
The loss in this situation will therefore be the reduction in the value of the partner’s share or the shareholder’s share. An action for damages is brought in the jurisdiction of the registered office of the subsidiary participating in the group of companies. No later than upon bringing such an action, the partner or shareholder shall call upon the parent company to compensate, within 30 days of receiving the demand, for the damage caused to the subsidiary by the execution of the binding instruction (Article 2113 § 3 of the Commercial Companies Code). Consequently, liability shall expire upon the repair of the damage caused to the subsidiary by the execution of a binding instruction.
The limitation period for claims by a partner/shareholder is 3 years from the date on which the partner/shareholder became aware of the damage, and in any event 5 years from the date on which the event causing the damage occurred (Article 2113(4)-(5) of the Commercial Companies Code).
LIABILITY OF THE PARENT COMPANY FOR DAMAGE CAUSED TO A CREDITOR OF A SUBSIDIARY COMPANY – SECTION 211****4 OF THE COMMERCIAL CODE
The grounds for such liability are as follows:
- the futility of enforcement proceedings against a subsidiary company within a group of companies
- damage and causal link (under these provisions, the legislator has introduced the presumption that the damage for which a creditor of the subsidiary may seek redress comprises the amount of the unsatisfied claim against that company)
- grounds for excluding liability: the parent company is not at fault or the damage did not arise as a result of the subsidiary carrying out a binding instruction
The draft regulation on group of companies was intended to be limited in scope, but as is readily apparent, the breadth and casuistic nature of the changes introduced contradict this assumption.
Frequently asked questions
What is a group of companies and does it have legal personality?
A group of companies consists of a dominant company and dependent capital companies that implement a common strategy. It is not a separate legal entity and does not have legal personality, which means that each participant retains its separate legal status.
What conditions must be met for a company to join a group of companies?
To join, a resolution of the shareholders’ meeting or general meeting of the dependent company is required, adopted by a majority of three-quarters of the votes. The fact of participation in the group must also be disclosed in the register through an appropriate notation.
In what form must a binding instruction be issued by the dominant company?
A binding instruction must be issued in written or electronic form, under penalty of invalidity. It must contain a specification of the expected behavior, indication of the group’s interest, anticipated benefits or damages, and the method of remedying any potential losses.
In what situations may a dependent company refuse to execute a binding instruction?
Refusal is mandatory if execution of the instruction would lead to insolvency of the dependent company. In the case of companies other than single-member companies, refusal is also possible if the instruction is contrary to the company’s interest and there is concern that the damage will not be remedied within two years.
Who is liable for damage caused to a dependent company as a result of executing a binding instruction?
The dominant company is liable for the damage, unless it bears no fault. In the case of a single-member dependent company, this liability is limited to situations where execution of the instruction led to its insolvency.
What are the rules for pursuing claims by shareholders of a dependent company?
Shareholders may demand remedy for damage resulting from a decrease in the value of their shares or stocks. The claim is time-barred after three years from learning about the damage, but no later than five years from the event; before filing a lawsuit, the dominant company must be called upon to remedy the damage.
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