Amendment of the Code of commercial companies in 2022

On April, 4th 2022 the President signed the Law on the Amendment of the Law – Code of Commercial Companies and other laws of February, 9th 2022. The major part of the new provisions will enter into force 6 months after their publication.

The changes mainly concern two areas: holding law (company law) and corporate governance. 

In view of the scale of the changes, only some of the changes introduced by the amendment are dealt with in the following text.

HOLDING LAW (COMPANY LAW)

With regard to holding (company) law, the following provisions on key issues are worth mentioning.

A definition of the term “group of companies” has been introduced, whereby a parent company and a subsidiary are guided not only by the interests of the company but also by the interests of the group of companies. The aim of the scheme is to ensure uniform management of subsidiaries in order to pursue a common interest and a common economic strategy within the group of companies.

Membership of a group of companies is subject to a majority of 3⁄4 of the votes cast for the decision on membership. Furthermore, the wording of Art. 21(1) § 3 KSH requires that the activities of a particular company within a group of companies be disclosed in the register.

One of the most important provisions is whether a parent company can give binding instructions to the subsidiary. The members of the board of directors of a subsidiary shall not be liable for any damage caused to the company by complying with such instructions.

A binding order, although in the interests of a group of undertakings, may often involve the occurrence or risk of harm to the subsidiary. For this reason, the proposed amendments lay down detailed rules on the liability of the parent company for damage caused by the execution of a binding instruction, both vis-à-vis the subsidiary or its shareholders and vis-à-vis its creditors.

From the wording of Art. 21(1) § 1 KSH, the self-interest of the companies appears to take precedence. This provision prohibits being guided by the interests of a group of undertakings if this would disadvantage the creditors or minority shareholders of the subsidiary.

Another key problem of holding law – the parent company’s access to the subsidiary’s books and documents – has also been addressed. Art. 21(6) § 1 KSH allows access to the books and documents of the subsidiary at any time and to request information at any time. The supervisory board of the parent company was granted the right of access.

Another notable approach for the group is that shareholders or minority shareholders of a subsidiary holding no more than 10% of the share capital can be compulsorily bought back through a sell-out and squeeze-out procedure. At the same time, the possibility of requiring a compulsory sell-out was limited to once a year. This is a new solution which aims, on the one hand, to strengthen the position of the parent company (squeeze out) and, on the other hand, to protect minority shareholders (sell out).

In addition, the law repeals the dead Article 7 of the KSH.

The fundamental problem with this change is that public companies and also real groups of companies, i. e. those that do not choose to apply the procedure for formally setting up a holding company provided for in the new legislation, will be excluded from this regulation.

CORPORATE GOVERNANCE 

The amendment provides for enhanced supervision of supervisory boards by requiring the Board of Directors to provide detailed information to the Supervisory Board It grants the Supervisory Board the right to use an independent consultant (at the company’s expense) and to obtain information directly from the company’s employees.

On the other hand, the Supervisory Board is obliged to prepare and submit an annual activity report.

The amendment provides for the exclusion of liability of members of the company's governing bodies for damage caused to the company as a result of a decision which, in time, turned out to be wrong but was made within the bounds of reasonable business risk. In this context, the actions of the members of the bodies are to be evaluated taking into account when and how decisions were made, and not only by the effects of such decisions. This is the so-called Business Judgement Rule regulated with respect to a limited liability company in Article 293 § 3 and with respect to a joint stock company in Article 483 § 3 of the new Code of Commercial Companies.