The institution of a binding order of the parent company. Does the subsidiary have the possibility to refuse to comply with it?

1. The existence of a relationship of subordination between companies

The regulation concerning binding instructions applies only to companies that are in a relationship of dependence on a parent company, which in turn is determined by the existence of at least one of the relationships referred to in Article 4 § 1(4) of the Commercial Companies Code.

2. Adoption of a resolution on participation in a group of companies and disclosure thereof in the National Court Register

The shareholders’ meeting/general meeting of the subsidiary must adopt a resolution on participation in a group of companies in the manner appropriate to the type of company in question (limited liability company (sp. z o.o.) and public limited company (P.S.A.) – no specific form of resolution required; joint-stock company (S.A.) – minutes drawn up by a notary). Adoption of the above resolution requires a qualified majority (3/4 of the votes). The content of the resolution should include, as a minimum:

1. a statement of consent to join the group of companies,
2. a definition of the companies’ joint strategy for the pursuit of the “common interest”, and
3. an indication of the entity acting as the parent company within the newly formed group of companies.

The resolution is not required to specify the other subsidiaries participating in the group. Furthermore, the participation of the parent company and the subsidiaries in the group of companies must be disclosed in the National Court Register – an application to this effect should be submitted by the company within 7 days of the date of the resolution.

A binding instruction must be issued in writing or electronically, on pain of nullity, by the body representing the parent company. The content of the binding instruction must include the following mandatory elements:

1. the conduct of the subsidiary expected by the parent company in connection with the execution of the binding instruction – specified as precisely as possible,
2. the interest of the group of companies which is to justify the subsidiary’s execution of the binding instruction,
3. the expected benefits or losses to the subsidiary resulting from the execution of the binding instruction – where applicable – and
4. the anticipated manner and timeframe for compensating the subsidiary for any loss incurred as a result of carrying out the binding instruction.

Even after a binding instruction has been issued to the subsidiary, the parent company retains the right to revoke it, which may entail:

• an obligation to reimburse the subsidiary for expenses incurred by it in carrying out the binding instruction, or
• an obligation to compensate the subsidiary for any loss it has suffered as a result of carrying out the binding instruction up to the point of its revocation.

Subsidiary – transmission of a binding instruction

The issuance of a binding instruction and its transmission to the subsidiary does not automatically impose an obligation on the subsidiary to carry it out. The management board of the subsidiary must adopt a resolution to carry out the binding instruction, unless there are grounds for refusing to carry it out under Article 214 of the Commercial Companies Code.

The first ground for refusing to comply with a binding instruction is mandatory, i.e. it cannot be modified in the articles of association or the memorandum of association and applies to every type of subsidiary – including single-member subsidiaries. It relates to a situation where compliance with the binding instruction would lead to the insolvency or the threat of insolvency of the subsidiary.

Both the concept of insolvency and the risk of insolvency are statutory terms. ‘Insolvency’, pursuant to Article 11 of the Bankruptcy Law, is the loss of the ability to meet due financial obligations or a situation in which the value of financial obligations exceeds the value of the assets belonging to the subsidiary, and this state persists for a period exceeding 24 months. By contrast, “threat of insolvency”, pursuant to Article 6(3) of the Restructuring Law, refers to the economic situation of a subsidiary which indicates that it may become insolvent in the near future.

The second condition applies exclusively to subsidiaries that are not single-member companies and relates to the simultaneous existence of a reasonable concern:

• a conflict between the execution of a binding instruction and the interests of the subsidiary, and
• the infliction of damage on the subsidiary which will not be remedied by the parent company or another subsidiary within the group within a period of two years from the date on which the event causing the damage occurs.

The above condition is discretionary in nature, which means that its scope may be modified in the agreement or the company’s articles of association – for example, by shortening or extending the time limit for remedying the damage suffered by the subsidiary.

A resolution refusing to comply with a binding instruction should include a statement of reasons indicating that one of the above-mentioned conditions has arisen. The subsidiary is obliged to inform the parent company of the fact that a resolution has been passed regarding compliance with or refusal to comply with a binding instruction. The provisions of the Commercial Companies Code do not specify how this information is to be communicated; therefore, it is recommended that at least a written record be kept. This will allow for subsequent proof that the subsidiary has fulfilled its duty to provide information.

The subsidiary and refusal to comply with a binding instruction from the parent company

Finally, it is worth noting that, pursuant to Article 214(3) of the Commercial Companies Code, additional grounds for refusing to comply with a binding instruction may be specified by the company in its articles of association or memorandum of association. In such a situation, the company is not obliged to follow a formal procedure for refusing to comply with a binding instruction (by adopting an appropriate resolution).

The effective inclusion in the articles of association or statutes of additional grounds for refusing to comply with a binding instruction entails an obligation on the part of the parent company to repurchase the shares of the partners or shareholders of the subsidiary who have not consented to such a change. A request for the repurchase of shares must be submitted within two days of the conclusion of the shareholders’ meeting/general meeting of the subsidiary. As regards those absent from the meeting, they have:

• one month from the date of the conclusion of the shareholders’ meeting (applies to shareholders) or
• one month from the date of the announcement of the resolution amending the subsidiary’s articles of association (applies to shareholders).

Partners or shareholders who have not submitted a request within the above-mentioned time limits are deemed to have consented to such an amendment.

If you are interested in subsidiaries and would like further information on this subject, or if you require legal advice on another matter, please contact HWW Hewelt Wojnowski Lindner i Wspólnicy.