Business Judgement Rule in Polish Commercial Companies Code – Opportunity or Necessity?
The amendment of the Commercial Companies Code (hereinafter “CCC”) to introduce holding law has already been discussed in our material Commercial Law Revolution in Poland – New Holding Law and Enhanced Corporate Oversight Mechanisms. However, as a continuation of this topic, we would like to touch upon one of its elements – the introduction into Polish commercial law of the measure of business judgment called “Business Judgement Rule” in assessing the actions of members of companies’ bodies.
Ratio Legis for Proposed Regulation
The draft amendment to the Polish CCC, developed by the Commission for Corporate Governance Reform appointed by the Minister of State Assets, has recently become a hotly debated issue in Poland. The draft amendment of 20 July 2020 introduces significant changes to Polish corporate law, with far-reaching consequences both in legal and business terms, for corporate entities operating on the market. It features nascent holding law as a response to the changing economic and business reality and constant transformations of business operations. Currently, Poland is one of the fastest developing countries in the EU and the economic leader among the CEE countries. What is more, Poland is becoming a place of choice for foreign investors pursuing business ventures with a global reach. The World Bank, in its global ranking “Doing Business”, sees Poland as having favourable, business-oriented legislation. However, in the wake of very dynamic changes accompanying the economy and the business environment, a change in the Polish commercial law has been proposed to regulate the relationships among groups of companies, thus heralding the new holding law. The proposal features, among others, the adoption of the Business Judgment Rule, indicated in Article 21(12) § 3 of the draft.
Business Judgement Rule Worldwide
The Business Judgement Rule is a case law-derived doctrine in corporate law whereby courts defer to the business judgment of corporate executives who are in charge of the main operations and decisions of bodies corporate. This approach is present in most common law jurisdictions, such as the US, Canada or England. However, one may also find it in such European countries like Spain, Germany, Austria and others. Looking at the State of Delaware, one ought to indicate that under the Delaware General Corporation Law, the business judgment rule is the offspring of the fundamental principle, codified in Del. Code Ann. tit. 8, § 141(a), that the business and the affairs of a Delaware corporation are managed by or under its board of directors. The consequent approach is that in executing their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation. The rationale for the rule is acknowledgement by courts that, in the inherently risky environment of business, boards of directors must be free to take risks without the constant fear of lawsuits affecting their judgment. There is an interesting example of the case, i.e. Dodge v. Ford Motor Co. In this case, the court adopted that courts of equity will not interfere in the management of the directors. This happens unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits, which it can, without detriment to its business, divide among its stockholders. Consequently, a refusal to do so would amount to such an abuse of discretion as would constitute a fraud, or breach of that good faith, which they are bound to exercise towards the stockholders.
Bernard S. Sharfman in 14 New York University Journal of Law and Business pointed out that without the Business Judgement Rule, the raw power of equity could conceivably require all challenged board decisions to undergo an entire fairness review. The rule is the tool used by a court to restrain itself from implementing such a review and should be perceived as a key factor for business decisions of the managerial members of the company.
Polish Legal Perspective
Coming back to the proposed amendment, the draft, which involves numerous changes to CCC regulations, seeks to introduce liability of a parent company in relation to a subsidiary, which carries out binding orders imposed on it by the parent company. The adopted model of liability is that of presumed fault liability expressed in Article 21(12) of the draft. However, in connection with Article 21(12)(3), the parent company will not be held liable if it acted within the limits of justified economic risk, including the basis of information, analyses and opinions, which should be taken into account under given circumstances when making a careful assessment.
The Business Judgement Rule doctrine introduced in the above-mentioned provision is, in a way, a response to the recently changing line of judicial decisions. The problem of assessing the liability of members of bodies is somehow related to the practice of applying criminal liability to such persons arising from Article 296 of the Criminal Code. The problem encountered by the courts consisted in a situation where a corporate officer or a supervisory body acted in a certain manner, within the scope of its mandate, and caused damage to the company, even though it did not directly violate a legal norm. In principle, the possibility of holding corporate officers liable was determined by a formal breach of a legal norm. However, at a later stage (e.g. the Supreme Court judgment of 24 July 2014, II CSK 627/13), such officers also began to be held liable in a situation where they failed to exercise due diligence resulting from the professional nature of their activities and derived from Articles 293§2 and 483§2 CCC. In response to this, the draft proposes to amend these articles in the CCC, which consists in repealing §2 and introducing §3 according to which a member of the management board, supervisory board, audit committee and liquidator does not breach the duty to exercise due diligence if “acts towards the company within the limits of reasonable economic risk, including on the basis of information, analyses and opinions which ought to be taken into account under given circumstances when making a careful assessment.” This duty of loyalty is no longer questioned, neither in case law nor in the doctrine, and is an inherent element adopted in many European countries.
Business Judgement Rule in Poland
The purpose of the proposed regulation is to provide defence to the board members whose actions, meeting certain criteria (including business judgment and the exercise of due diligence in their actions), cause damage to the company.
The solution adopted in the draft seems to be a desirable change, responding to the real needs of business entities and their governing bodies, which, in undertaking their day-to-day activities, are, in a way, exposed to business risk. Risk, which on the one hand is an inevitable element of business, and on the other hand is a factor owing to which companies can profit, introduces newer and better means and mechanisms in their operations and branch out. The introduction of a business assessment of a situation in the case of actions taken by corporate officers is a necessary element of corporate law because, according to the proposed regulation, members of the bodies who, in the performance of their duties, have shown diligence and loyalty and have decided to take a business risk, may count on legal protection in the event that it transpires, ex post facto, that their decision has caused damage to the company. Retroactive evaluation of management board actions, from the point of view of the consequences of management board decisions, does not correspond to the realities of conducting business, in which unforeseen situations often occur and “economic risk” is an inherent part of them. It is, therefore, necessary to adopt an approach according to which the assessment of management bodies’ actions should be examined at the moment a business decision is made and to take into account factors such as whether the procedure of making such a decision was correct, whether members of management bodies complied with a higher measure of due diligence resulting from the professional nature of their activities and whether their decisions complied with the duty of loyalty, which is also required of them.
Such an approach has a key impact on the functioning of business entities, but also constitutes an incentive to undertake such activities in general. The regulations adopted in corporate law must not contribute to inhibiting business decisions and to fear of liability. Despite their knowledge and experience, managers of economic entities are not able to foresee every possible consequence of their decisions, if only due to the fact that the business world experiences various changes at a very dynamic pace. For that reason, members of governing bodies should be provided with as much decision-making sovereignty as possible.
This post was written by Justyna Świnka.