Interest of the company in the group of companies

The assessment of the current rules on the interests of the company in the capital group needs to be taken into account two aspects – whether current legislation allows entrepreneurs to manage the group efficiently and whether these regulations adequately protect individuals third.

Act of 15 September 2000 - Commercial Companies Code[1] does not provide management instruments for the holding or protect external entities potentially at risk of the existence and activities of a group of companies. Under the applicable law, members of company boards are obliged to act solely in the interests of the company they manage.

The author points out in the following study why it would be desirable to introduce a new legal concept to k.s.h. – “the interest of the group”.

1. Introduction

To consider the interest of a company participating in a group of companies in Polish commercial law[2] requires a look at the issue from the perspective of the different categories of interests in each capital group.

These are the interests of the parent company (mother company), the interests of the subsidiary (daughter company), the interests of the group of companies (as a whole), the interests of the shareholders of the participating company and the interests of the creditors of the participating company in the group of companies.[3].

Today, many economic organisations operate in the form of capital groups that implement a common economic strategy. This group works like one the company, although using a number of related but legally distinct components for this purpose.

The essence of a group of companies consists of its organisation, which uses a company (in principle) with a limited liability of its shareholders. This enables primarily rational risk management.

Furthermore, it provides the parent company, which has an active influence on the activities of the subsidiaries, with the same protection as the passive investor, and double protection to the shareholders of the parent company.

However, in most leading legal systems, the regulation of issues related to the functioning of capital groups is low and limited to the prevention of pathological phenomena[4].

2. Polish company group law

Models for the regulation of group law can be divided into two types. first model is a comprehensive regulation and exhaustive, and second is a residual and leaving room for interpretation of practice and jurisprudence[5].

first the model was applied by the German legislature, introducing a special regulation, which is corporate law (Konzernrecht). In the system of French, Swiss and common law law law, second a model that introduces solutions relating only to pathological phenomena, e.g. abuse of the legal form of the company.

The issue was also attempted to be regulated at the level of EU law, but the work has not been completed and the project itself has not even obtained the status of an official draft of the Council of the European Communities[6].

The Polish legislature applied a model of residual company law[7]. It is primarily reflected in the limitation to the definition of the relationship of dependency and dominance (Article 4(1)(4lit).

a-f Act of 15 September 2000 - Commercial Companies Code[8] – hereafter (k.s.h.), establishing an obligation to inform about the relationship of dominance and sanctions for failure to fulfil that obligation (Article 6 (k.s.h.) and the designation of the framework for the holding contracts concerned (Article 7(1) k.s.h.).

Article 4(1)(4) k.s.h. defines the dominance ratio and dependency ratio. It also defines relationship relationships. In this way, the issue of holding links has been regulated. Under that provision, the parent company is a commercial company where:

(a) has a direct or indirect majority at the meeting of shareholders or at a general meeting, including as a pledge or user, or on the board of another capital company (subsidiary), also on the basis of agreements with other persons, or

(b) is entitled to appoint or dismiss a majority of the members of the board of directors of another capital company (subsidiary) or cooperative (subsidiary), also on the basis of agreements with other persons, or

(c) is entitled to appoint or dismiss a majority of the members of the supervisory board of another capital company (subsidiary) or cooperative (subsidiary), also on the basis of agreements with other persons, or

(d) its members represent more than half of the members of the board of directors of another capital company (subsidiary) or cooperative (subsidiary), or

(e) it has a direct or indirect majority of the votes in the subsidiary's personal company or in the general meeting of the subsidiary, including on the basis of agreements with other persons, or

(f) has a decisive influence on the activities of a subsidiary or subsidiary, in particular on the basis of contracts defined under Article 7 k.s.h. In the margins it is worth pointing out that holding structures also specify the Act with 29 September 1994 on accounting9(hereinafter: u.o.r.). Article 3(1)(37) u.o.r. defines the parent undertaking as being a commercial company or a state company controlling a subsidiary, in particular:

(a) having a direct or indirect majority of the total number of votes in the subsidiary body, including on the basis of agreements with other voting rights exercised in accordance with the wishes of the parent undertaking, or

(b) being a shareholder of a subsidiary and entitled to direct the financial and operational policy of that subsidiary in an independent manner, or by its appointed persons or units on the basis of an agreement concluded with other rightholders, having a majority of the total number of votes in the governing body under the statutes or articles of association, including the parent undertaking, or

(c) being a shareholder of a subsidiary and entitled to appoint and dismiss most of the members of the governing, supervising or administering bodies of that subsidiary, or

(d) which is a shareholder of a subsidiary whose more than half of the composition of the governing, supervising or administering bodies in the preceding financial year, during the current financial year and until the financial statements for the current financial year are drawn up are persons appointed to carry out those functions as a result of the exercise by the parent undertaking of voting rights in the bodies of that subsidiary, unless another entity or person has the right in relation to that subsidiary referred to in point (a),c or e, or

(e) being a shareholder of a subsidiary and entitled to manage the financial and operational policy of that subsidiary, on the basis of an agreement concluded with that subsidiary or a statute or contract of that subsidiary. The concept of parent company and duly dependent is also regulated by the Law of 16 February 2007 on competition and consumer protection[10] (go on.o.k.k.). As stated under Article 4(3) an established law is considered to be a dominant entrepreneur by an entrepreneur who has control over another entrepreneur. In turn the concept of acquisition of control was defined in Article 4(4) Competition and consumer protection laws and should be understood as any form of direct or indirect acquisition by an entrepreneur of rights which, either separately or jointly, taking into account all legal or factual circumstances, enable the decisive influence to be exercised on another entrepreneur or entrepreneur. Such powers shall in particular constitute:

• (a) having a direct or indirect majority at a meeting of shareholders or at a general meeting, including as a pledge or user, or on the board of directors of another trader (subsidiary), also on the basis of agreements with other persons;
• (b) the power to appoint or dismiss a majority of the members of the management or supervisory board of another entrepreneur (subsidiary), also on the basis of agreements with other persons;
• (c) members of its board or supervisory board representing more than half of the members of the board of directors of another entrepreneur (subsidiary);
• (d) having a direct or indirect majority in a subsidiary's personal partnership or in a general meeting of the subsidiary's cooperative, including on the basis of agreements with other persons,
• (e) the right to all or part of the property of another trader (subsidiary);

(f) a contract providing for the management or transfer of profits by another entrepreneur (subsidiary)[11].

Article 6 k.s.h. creates an obligation on the part of the parent company to notify the subsidiary of the origin of the dominance ratio.

That obligation shall be subject to a two-week period starting on the date of the formation of that relationship, subject to suspension of the exercise of voting rights from shares or shares of the parent company representing more than 33% the share capital of the subsidiary.

The notification of the subsidiary may take any form and shall be effective once the addressee (subsidiary) has been notified in such a way that he can become acquainted with its content. With regard to the form of the notification, it is always necessary to prove that the parent company has notified the subsidiary (e.g.

confirmation of receipt of the letter, confirmation of receipt of the fax). It is possible to make a notification in electronic form, which becomes effective once it has been introduced into the electronic communication in a way that has enabled the addressee to understand its content (Article 61(2) k.c.

in conjunction with Article 2 (k.s.h.)[12]. A resolution of a meeting of shareholders or a general meeting, taken in breach of the above obligation, shall be invalid unless it meets the quorum and majority of the votes without taking into account the invalid votes.

section 4-5 This provision refers to the rights of shareholders, members of the board of directors, supervisory board of the capital company (i.e. without a review committee in the Polish limited liability company.) who have the right to request information from the company on the existing relationship of dominance or dependence.

In addition to providing information on the existence of dominance or dependence, it may be requested to disclose the number of shares or votes (a limited company) as well as the number of shares or votes (a limited company) held by the parent company in the subsidiary.

This right includes more than its voting rights as a pledgeor or a user, and also on the basis of agreements with other persons. The shareholders of the company from the O.O. and the joint stock company and members of the bodies, i.e.

the management and supervisory board, are entitled to a claim for information on relations between the parent and subsidiary cooperatives. This provision shows that only partners, shareholders and members of the bodies of a capital company have these rights. Article 6(4) k.s.h.

is an example of the so-called rights of minority shareholders[13]. This notification obligation shall apply in the event of a change in relations; also when the dominance ratio has ceased. In that case, the former parent company should carry out appropriate notification activities.

At this point it should also be pointed out that the provision Article 6 k.s.h. imposes on the shareholder an information obligation, the failure of which entails an ex-legew sanction of suspension of the exercise of voting rights from shares. This obligation does not constitute a voluntary commitment but is similar to public law standards designed to protect the interests of the company[14].

On the other hand, Article 7 k.s.h. introduces certain obligations in the event of conclusion two types of contracts: management and profit transfer agreements of the subsidiary.

That obligation shall consist in the filing of an extract from the contract of the subsidiary of an extract containing provisions which specify the scope of the liability of the parent company for the damage caused to the subsidiary by default or improper performance of the contract and the liability of the parent company for the obligations of the subsidiary to its creditors.

The disclosure shall also be made that the contract does not regulate or exclude the liability of the parent company in question Under section 1.

By contrast, the failure to make a notification within the time limits three weeks from the date of conclusion of the contract, the provisions limiting or excluding the liability of the parent company to the subsidiary or its creditors shall be invalid.

It therefore appears that the board of directors of the subsidiary and the parent may be interested in making an appropriate declaration. The management of the parent company may be interested in the notification, as this will relieve the company of liability.

In the event of failure to notify a provision excluding or limiting liability to creditors of a subsidiary, the provisions shall be void. The other provisions of the agreement remain valid. Invalidity only applies to provisions covered by the notification obligation[15].

In the doctrine it is often pointed out that the regulation of Polish law of groups of companies boils down to its one Article– Article 7 k.s.h.16. The representatives of the doctrine argue that the regulation of group law is not adapted to the needs of the current economic turnover[17]. The natural pursuit of diversification of activities and the spread of risks arising from business activities should be seen positively.

It should also be noted that the institution of a capital company should be seen by the prism of its functionality, not by pathologies related to it.[18].

However, the Polish legislature allows the liability of the parent company for damage caused to the subsidiary and the liability of the parent company for obligations of the subsidiary towards its creditors to be contractually shaped[19].

The possibility of contractually shaping relations between companies in a group of companies is used to conduct a common economic strategy. For example, managing cash resources is extremely important for the entire holding. The net positive cash position of the group as a whole comprises both surplus companies and loss-making companies.

The rational management of the resources of a group of companies leads to a number of benefits, such as reducing financial costs by using internal sources of finance or obtaining better interest rates on investments or loans than could be achieved by individual companies operating separately.

Due to the fact that companies in a group of companies have property distinctness, different solutions are being used today, which require the cooperation of the holding companies.

These solutions arise from the needs of the group of companies themselves, not necessarily from the needs of the participating company, which raises a question as to the interest of the company in the group of companies.[20].

It should be pointed out that the essential basis for the existence of a separate interest of the company is its separate legal personality and its own assets[21]. The economic (business) integrity of the group of companies therefore undermines one from the basic principles of company law, which is the civil legal separation of companies. Company autonomy leads to paralysis of the concept of economic perception of the capital group as one economic organism.

The conclusion that the focus on the company’s interests excludes the interest of the parent company is unacceptable as it ignores economic realities.

The interpretation adopted in the Supreme Court ruling also speaks for this[22], in which it was pointed out that the fulfilment of the general formula, which is the interest of the company, requires taking into account the intentions and behaviour of all groups of shareholders, taking into account the common objective to which the partners have undertaken to pursue by joining the company.

The determination of the interest of the company in a particular situation should take into account the entire factual and legal relationship in which the company operates[23]. The analysis of the interest of the company in concrete must not lead to automaticism.

The significance of the circumstances of the company's operation in a group of companies may be different. Since the objective for which companies operate and merge in a group of companies is generally an economic objective, it should be based on economic realities to determine the content of this interest.

The compact regulation of groups of companies causes that members of the bodies of subsidiaries often have a dilemma or pursue the interests of the parent or the interests of the subsidiary[24]. Among the representatives of the doctrine can be found various answers to such a question.

The view now prevails in the doctrine that the possibility of subordination of the management of the subsidiary to the parent should be excluded[25].

The relationship between the parent and the subsidiary shall be governed by the principle that the separate interest of the holding as a whole cannot be realised at the expense of the subsidiaries.[26].

On the other hand, are also of the view confirmed by the case-law that the members of the boards of companies belonging to the groups of companies, specifying the interests of the company, should take into account the interests of the group as a whole, in so far as the membership of that group is favourable for the company for a longer period[27].

Analysis of the position of the doctrine concerning the interest of the company in the group of interest of the group of companies leads to the conclusion that there are doctrines two mainstream.

first the current situation subordinates the interests of the subsidiary to the parent company or group of companies, and second determines the interest of the company as being autonomous from the group of companies.

The result of disagreements of doctrine was a time-honored situation for the legislative process when they were prepared two competitive government projects, in many places mutually contradictory[28].

Although in the end none of the projects entered into force[29], in a synthetic way, they summarise the achievements of the doctrine on the perception of the interest of the group of companies and the interest of the participating company and the interest of the group of companies in relation to the interest of minority shareholders and creditors of the subsidiary.

1. Interest ratio of the group of companies to the interest of the company (dominant and dependent)

first the above-mentioned projects were developed by the Civil Law Codification Commission (hereinafter KKPC) operating under the Minister of Justice. The project envisaged a concept of limited regulation of holding law.

second The project was prepared by the Ministry of Economy (hereinafter MG) and envisaged the introduction of a new chapter entitled ‘Group of Companies’. second The project therefore envisaged a concept similar to the full regulation of holding law.

Both projects agreed on the need to repeal Article 7 k.s.h.30 and as regards the need to distinguish the separate interest of the group of companies.

The KKPC project defined the group of companies as a parent company and a company or subsidiaries, which remained in organisational association and had a common economic interest (interest of the group of companies).

On the other hand, the MG project provided that the mother company defined a strategy for achieving the objective of grouping companies taking into account the interest of all the companies in grouping (interest of grouping companies)[31].

In view of the above definitions, it should be concluded that the interests of the group of companies should not be identified with the interests of the parent company[32]. However, in practice, the determination of the interest of the group of companies will be determined to the strongest extent by the interest of the parent company.

This leads to the determination of the interest of the capital group by the prism of two models of relations in the capital group. first The model is a colonial model in which the interest of the company will become an interest wholly subordinate to the interests of the parent company.

It may take an extreme form directed solely at the interests of the parent company, with the instrumental treatment of the subsidiary and thus the complete omission of the interests of creditors and shareholders of that company.

second The model is a model of balancing interests, according to which there is a genuine community of interests of companies participating in the group, designated and directed by the parent company in the interests of the whole group. Such a solution is intended to ensure long-term benefits for both the parent and the subsidiary.

This model does not exclude ‘consecration’ of the interests of the parent company to the interests of the subsidiary or the ‘consecration’ of the interests of the subsidiary to another subsidiary participating in the group controlled by the parent company.

However, in the long term, all members of the group should benefit from such action or omission[33].

The draft KKPC adopted assumptions consistent with the model of balance of interests.

This is reflected in the provision contained in it as a general clause, which shows that taking into account the interest of the group of companies does not constitute a primary category over the interest of the company itself (both parent and subsidiary).

Furthermore, it strongly emphasises the ability of the parent company to follow the interests of the group of companies.

The position proposed in the draft KKPC was in line with international trends in the compromise between the elimination of the interest of the group of companies and the total elimination of the interest of the subsidiary in favour of the interest of the group of companies[34].

The MG project adopts assumptions consistent with the colonial model; defining the strategy for the grouping of companies by the mother company, taking into account the interest of all companies in the grouping. It was also assumed that the interest of the company involved in the grouping of the interested group would be subordinated.

Since this was to be determined by the parent company, in practice this would mean subjecting the interest of the subsidiary to the interest of the parent company.

In addition, the MG project provided for the possibility for the company's mother to issue binding orders to the daughter concerning the conduct of the company's affairs without granting her veto rights. This could simply lead to a situation where the interests of the subsidiary could be legally disregarded or even disregarded.

The MG project therefore identified the interest of the group of companies with the interest of the parent company[35].

1. Interest of the parent company in relation to the interest of the creditors of the subsidiary and to the interest of the minority shareholders of the subsidiary

In the previous considerations, the view is that only the interests of its shareholders can be determined by the company's interest and that the interests of the environment should be taken into account only within the limits of the interests of its shareholders.[36].

This is a consequence of the fact that the shareholder holding all the capital of the company autonomously determines what constitutes the interest of the subsidiary[37].

The two proposals presented, which are the result of differences of opinion of the doctrine, are not compatible with each other either as regards the need to take account of the interest of minority shareholders and creditors of the subsidiary.

The interests of these groups require protection because of the risks arising from the possibility for the parent company to issue binding orders to a subsidiary, whereas the execution of such orders would entail loss to that subsidiary.

The permanent depreciation of assets means, in the long term, limiting the possibility of satisfying the claims of its creditors. No regulation provides for statutory liability of the parent company to creditors of the subsidiary.

Similarly, in the case of minority shareholders of subsidiaries, where the impairment of the company's assets leads to a reduction in the value of the rights resulting from participation in the company, while the majority shareholder- parent company otherwise ensures the return of the contribution[38].

The KKPC project defined the interest of creditors of the subsidiary as one of the factors determining the interest of the subsidiary and the parent. The KKPC project took a negative account of this factor by indicating that the parent company or subsidiary should not undermine the legitimate interests of creditors.

This means that the company should only ensure that the interests of creditors are not affected, which is not the same as the obligation to take account of that interest.

Although the project required not only legitimate but not all interests of creditors, this provision would be sufficient (if the project entered into force) to consider the concept of accepting in exceptional cases the liability of the parent company for the obligations of the subsidiary vis-à-vis its creditors as valid under Polish company law.

The MG project did not address this issue, leaving regulation to the general principles resulting from Article 415(471)(556)(576) or regulations resulting from the Act of 23 February 2003 - Insolvency and resolution law[39].

However, these regulations protect the creditors of the subsidiary and the adoption of the MG project would create practical difficulties in finding a legal basis under Polish law to assign liability to the parent company in this case[40].

As in relation to the interest of creditors, the projects relate to the interest of minority shareholders. The KKPC project acknowledges the legitimate interest of minority shareholders of the subsidiary as one of the factors determining the interest of the subsidiary and the parent.

This factor has also been taken on the negative side and has the same consequences. In addition, KKPC provided for a regulation authorising minority investors of a subsidiary to require the court to appoint an entity entitled to audit the financial statements of a group of companies.

The MG project did not foresee any of the above but, unlike the KKPC project, provided for the regulation of the right to repurchase shares or shares of minority shareholders of subsidiaries. However, this regulation was to be limited only to the minority shareholders of the subsidiary who voted against joining the group of companies.

Consequently, the protection of minority shareholders provided for in the MG project refers only to the establishment and not to the operation of groups of companies[41].

The foregoing considerations remain purely doctrinal. Some of the representatives of the doctrine[42] It welcomed the draft KKPC and therefore advocated the concept of a limited regulation of holding law. Some 43 in favour of the MG project, i.e. a concept similar to the full regulation of holding law, in particular, in favour of subjecting the interest of the subsidiary to the interests of the group of companies.

Consequently, it should be assumed that when determining the content of the interest of a company belonging to a group of companies, account should be taken of the wide economic context of the company's capital ties.

The interest of the company should be taken forward in this case, which means that the benefits of both past and future, obtained directly and indirectly from belonging to the capital group must be taken into account.

The limits of the company's interest should be the damage to the assets of a company that is not offset even in the long term, which results in the company's legal basis and could lead to its insolvency[44].

The case law rarely deals with the issue of abstract treatment of the interests of the company.

The exception is the repeated and aforementioned Supreme Court judgment from 5 November 2009, which indicates that the interests of the commercial company are the result of all its groups of shareholders, determined taking into account the common objective described in the agreement or statutes of the company, which the partners have committed themselves to pursue.

The Supreme Court also indicated that there could not be a separate, independent interest of the company as a legal person, not taking into account the accident interest of all shareholders.

Since this is probably the only judgment which in an almost comprehensive way refers to the company's interest, it is often cited in the justifications of the judgments of the courts, including the Supreme Court.

An example is the judgment of the Court of Appeal in Warsaw with 4 December 2013, in the statement of reasons which the Court of First Instance states that ‘it is also unacceptable to identify the interest of a public limited liability company solely with the interest of a majority shareholder, as it cannot be considered that the defence of a minority shareholder is always motivated by the interest of the company or is undertaken in its objective interest.

The interests of the commercial company are the result of the interests of all groups of its shareholders, determined taking into account the common objective reserved in the contract or in the statutes of the company, which the partners have undertaken to pursue." There are no codes to consider that the interests of the company may also be determined by the interests of any group other than shareholders.[45].

The assessment of the current rules on the interests of the company in the capital group requires consideration two criteria, i.e. whether the current rules allow entrepreneurs to manage the group efficiently and whether these rules sufficiently protect individuals third.

In view of the criteria presented, it should be pointed out that k.s.h. does not provide management instruments for the holding or protect external entities potentially at risk of the existence and activity of a group of companies.

It should also be pointed out that, under the applicable law, members of the boards of companies are obliged to act solely in the interest of the company they manage. This obligation is subject to both civil sanctions (with Article 293i the following k.s.h. and 483 and next k.s.h.) which criminal (Article 296 k.k.).

The existing legislation, without exception, prohibits the members of the company's organs from taking action aimed at fulfilling the interests of the group and which may not benefit the company directly in the short term and will have a positive impact on the company's business environment and will therefore benefit the company itself.

This leads to a member of the corporate body cannot participate in the implementation of the management activities relating to the group as a whole and from second it must not act without the interest of the company, even if such action is generally to benefit the entire group.

The situation of creditors of the subsidiary and its minority shareholders should also be regarded as unfavourable in the light of the provisions in force. For both groups, a situation in which a company is involved in the implementation of a group policy in which legal instruments protecting their rights are not functioning is dangerous.

On the basis of the above considerations, it would be desirable to introduce the new legal concept, ‘the interest of the group’, into K.s.h. The correct understanding of this term has been developed in the previous case law, e.g. in the Supreme Court judgment already mentioned[46].

Therefore, the ‘interest of the group’ should be understood as a conglomerate of the interests of the companies in its composition, which would, in the future, benefit not only the companies themselves, but also minority shareholders and creditors of the companies in the capital group.

The introduction of a new statutory regulation addressing the functioning of a group of companies is important for the needs of economic trade.

This would allow the creation of instruments to enable companies to operate within the capital group and to provide effective protection measures for minority shareholders and creditors.

___________________________________________________________________________________