Establishment of a group of companies – formal requirements in accordance with the draft holding company law.

Establishment of a group of companies – formal requirements under the draft holding company law

Draft Act amending the Commercial Companies Code (CCC) and certain other acts of 20 July 2020 (Draft) provides for the possibility of establishing groups of companies. The proposed provisions are intended to regulate the relations between a parent company and its subsidiaries operating within a group of companies within the meaning of the Draft (Group of Companies) and between those companies and their creditors and minority shareholders.

A Group of Companies may be formed by a parent company and its subsidiaries. The Draft provides for tools enabling the parent company to manage the Group as a whole (binding instructions issued to subsidiaries and access to information). The Draft also provides for changes in the rules of liability of members of subsidiary bodies and provisions which, in certain cases, will allow a subsidiary to pursue claims against the parent company and creditors and shareholders of the subsidiary to pursue claims against the parent company.

In this article, we will present the provisions of the Draft dealing with the formation of a Group of Companies.

The Draft provides for two formal requirements for the formation of a Group of Companies:

• the introduction of a provision in the articles of association of a subsidiary company, according to which the company acts ‘in the interest of the Group’; and
• disclosure of participation in the Group of Companies in the register of entrepreneurs.
• Relationship of dominance and dependence

The first element necessary for the establishment of a Group of Companies is the existence of a relationship of dominance (dependence) between the companies – there must be at least one parent company and one subsidiary.

In this respect, the draft refers to the current definition of dominance contained in the Commercial Companies Code. A relationship of dominance may arise in several cases – in the case of shareholding dominance, personal dominance, so-called personal union, and in the case of so-called de facto dominance (exercising decisive influence). The reference to the classic definition does not seem controversial, although the other provisions of the Draft seem to focus exclusively on dominance based on shareholding in the share capital and ignore other forms of control over subsidiaries.

Amendment of the articles of association/statutes of a subsidiary

The affiliation of a subsidiary to a Group of Companies will be determined by its articles of association/statutes. The articles of association of the parent company will not need to be amended for this purpose.

Interestingly, the need to amend the articles of association of a subsidiary in order to establish a Group of Companies is only apparent from the proposed definition of a Group of Companies, according to which a Group of Companies is understood to mean a parent company and its subsidiary or subsidiaries, guided – in accordance with the articles of association or statutes of each subsidiary – a common economic strategy (the interests of the group of companies), enabling the parent company to exercise uniform management over the subsidiary or subsidiaries.

This definition also sets out the minimum content of the provision of the subsidiary's articles of association in this respect. This provision must indicate that the subsidiary ‘is guided by the common economic strategy of the Group of Companies’.

The provisions of the Draft do not provide for any specific solutions regarding the introduction of such an amendment to the articles of association of a subsidiary.

Therefore, the existing provisions on amendments to the articles of association or statutes will apply.

In the case of a limited liability company, pursuant to Article 246 § 1 of the Commercial Companies Code, resolutions concerning amendments to the articles of association are adopted by a two-thirds majority of votes. A resolution concerning a significant change in the company's business requires a three-quarters majority of votes. However, if a resolution to amend the articles of association increases the shareholders' benefits or reduces the share rights or rights granted personally to individual shareholders, it requires the consent of all shareholders concerned.

The draft does not determine the nature of a resolution to amend the articles of association in order to establish a Group of Companies.

It seems that a resolution introducing a provision whereby a subsidiary limited liability company will be guided in its activities by the interests of the Group of Companies does not constitute a significant change in the company's business. This change concerns the objectives and strategy of the company rather than its specific business and should not be interpreted in this way.

However, an in-depth analysis is required to determine whether such a change does not result in a reduction of the share rights of minority shareholders. At first glance, this change does not imply any restriction or exclusion of any rights to which a shareholder is entitled in connection with his or her shares. However, joining the Group of Companies results in a significant change in the position of the controlling shareholder and, consequently, of the minority shareholders.

In connection with the amendment to the articles of association regarding joining the Group of Companies, the controlling shareholder will obtain the right to issue instructions to the company's management board and extensive rights to control and access information. Although minority shareholders will not lose any of their rights, their role in the company will be effectively limited. In the case of companies in which the dominant shareholder holds at least 90% of the share capital, minority shareholders will additionally be exposed to the possibility of a compulsory buyout of their shares, while at the same time gaining the right to demand the repurchase of their shares.

Since it is assumed that the introduction of the possibility of compulsory or automatic redemption of shares requires the consent of all shareholders, it can be interpreted that, at least in those subsidiaries in which the parent company directly holds at least 90% of the share capital , a resolution to amend the articles of association introducing a provision resulting in the creation of a Group of Companies will require the consent of all shareholders.

Perhaps the best solution would be for the draft provisions to explicitly indicate the majority required to adopt a resolution to amend the articles of association, which results in the creation of or accession to a Group of Companies.

It also seems reasonable for the provisions of holding company law to specify the content of such an amendment in more detail.

It seems reasonable for an amendment to the articles of association of a subsidiary to clearly identify the Group of Companies by indicating the parent company. It is also worth considering specifying the name or designation of the Group of Companies in the articles of association. These requirements should be explicitly stated in the law.

The draft also fails to address whether the ‘common economic strategy’ that constitutes the interest of the Group of Companies should be defined in any way in the articles of association of a subsidiary, whether these articles should at least generally indicate the purpose of the joint activity of the companies or, in order to determine the content of this strategy – refer to other documents (e.g. a resolution of the parent company's management board approved by resolutions of the management boards of the subsidiaries).

It should be emphasised that the solutions proposed in the Draft are based on the pursuit of the ‘interest of the group’, which is defined as a ‘common economic strategy’, but nowhere in the Draft is it specified how anyone is to learn about and find out what this strategy is.

If the ‘interest of the group’ and the ‘common economic strategy’ are not to be equated with the ‘whims’ of the parent company, the Group of Companies should periodically produce such a document, adopted by the parent company with the participation of its subsidiaries (at least those other than single-member companies).

Disclosure of participation in the Group of Companies in the register of entrepreneurs

The second requirement necessary to create a ‘group of companies’ is to make an appropriate mention of participation in the Group of Companies in the register of entrepreneurs. Such a mention should be included in the register of both the parent company and the subsidiaries.

Without such disclosure, it will not be possible to apply the provisions relating to the functioning of the Group of Companies: the parent company will not be able to issue ‘binding’ instructions, and the managers of subsidiaries will not be able to ‘hide’ behind the interests of the Group of Companies in their actions.

According to the Draft, the reference to the company's participation in the Group of Companies should refer to a ‘designated group of companies’ and indicate the nature of this participation (parent company, subsidiary).

It seems that the content of such a reference should be based on the content of the subsidiary's articles of association, therefore it would be reasonable to introduce provisions to the Draft indicating how the Group of Companies should be ‘designated’ (e.g. by mandatory indication of the parent company).

The obligation to disclose the parent company may prove problematic. It may mean that the parent company must have its registered office in Poland, which means that structures comprising a foreign parent company and its subsidiary in Poland will not be able to take advantage of the solutions provided for in the Draft.

As can be seen, the proposed provisions on the creation of Groups of Companies are very brief. Many issues important for the future functioning of Groups of Companies remain unresolved. The draft also does not resolve whether a company (especially a parent company) may belong to more than one Group of Companies; it also completely omits the manner in which a company may exit a Group of Companies.

It is likely that some of these issues will be clarified during the ongoing legislative work, while others will form the basis for new disputes in legal doctrine.