Corporate / M&A

Poland: Limitations of Directors’ Rights to Represent a Company – Practical Solutions

Limiting the director’s (management board member’s) right of individual representation is one way to secure the company against unauthorised actions on its behalf. How to do this properly?

Rules on representation of a limited liability / joint stock company

Deci­sions on appoint­ment to a man­age­ment board are dri­ven by not only pro­fes­sion­al qual­i­fi­ca­tions of a can­di­date but also share­hold­ers’ trust of the can­di­date. By law, each man­age­ment board mem­ber (direc­tor) may rep­re­sent the com­pa­ny, but share­hold­ers may want to lim­it this right.

Terms “right to rep­re­sent” and “rules of rep­re­sen­ta­tion”

The Pol­ish Com­pa­nies Code dis­tin­guish­es between two terms: the right to rep­re­sent a com­pa­ny and the rules/manner of a company’s rep­re­sen­ta­tion. Unfor­tu­nate­ly, these terms are com­mon­ly con­fused, even in judi­cial prac­tice.

The “right to rep­re­sent” a com­pa­ny is defined as a director’s (man­age­ment board member’s) pow­er to act in the name of the com­pa­ny, such as the pow­er to con­clude agree­ments on the company’s behalf. The “rules of rep­re­sen­ta­tion” indi­cate a way in which the right to rep­re­sent the com­pa­ny should be per­formed, such as how many direc­tors must sign an agree­ment in the name of the com­pa­ny.

Pro­hi­bi­tion on lim­it­ing the right to rep­re­sent a com­pa­ny   

Dis­tin­guish­ing between the above terms is impor­tant because Pol­ish law pro­hibits lim­it­ing the right to rep­re­sent a com­pa­ny but does not pro­hib­it lim­it­ing the rules of a company’s rep­re­sen­ta­tion. So the Arti­cles of Asso­ci­a­tion can­not state that a par­tic­u­lar direc­tor has a right to rep­re­sent the com­pa­ny in a par­tic­u­lar area of its activ­i­ty. For exam­ple, it is pro­hib­it­ed to autho­rise one of the direc­tors to con­clude agree­ments with sup­pli­ers only and the oth­er to con­clude agree­ments with cus­tomers only.

Value-based rules of representation

One of the most com­mon but con­tro­ver­sial ways of describ­ing the rules of rep­re­sen­ta­tion of a com­pa­ny is rep­re­sen­ta­tion depend­ing on the val­ue of a par­tic­u­lar act in law.

Arti­cles of Asso­ci­a­tion intro­duc­ing such rules of rep­re­sen­ta­tion usu­al­ly pro­vide that the com­pa­ny may be rep­re­sent­ed by each of the direc­tors indi­vid­u­al­ly when tak­ing on oblig­a­tions or dis­pos­ing of rights whose val­ue is below a cer­tain amount. To take on oblig­a­tions or dis­pose of rights of a val­ue above that thresh­old, the com­pa­ny must be rep­re­sent­ed by two (or more) direc­tors act­ing joint­ly.

Admis­si­bil­i­ty of val­ue-based rules of rep­re­sen­ta­tion 

A ques­tion of admis­si­bil­i­ty of the val­ue-based rules of rep­re­sen­ta­tion was con­tro­ver­sial both in the doc­trine and in the judi­cial prac­tice for quite a while. Although this issue still rais­es some doubts, the Supreme Court in recent judg­ments decid­ed that the Arti­cles of Asso­ci­a­tion can pro­vide for a val­ue-based rules of  rep­re­sen­ta­tion and that such rules should be revealed in the Reg­is­ter of Entre­pre­neurs (in Pol­ish: KRS).

But some of the reg­istry courts still refuse to enter the val­ue-based rules of rep­re­sen­ta­tion into the Reg­is­ter of Entre­pre­neurs, claim­ing that such pro­vi­sions vio­late the pro­hi­bi­tion of lim­it­ing the direc­tors’ rights to rep­re­sent the com­pa­ny. This argu­ment is, how­ev­er, based on a con­fu­sion of the terms “right to rep­re­sent” and “rules of rep­re­sen­ta­tion”. The rules of rep­re­sen­ta­tion depend­ing on the val­ue of an action do not lim­it the scope of affairs in which a par­tic­u­lar direc­tor is autho­rised to act in the name of the com­pa­ny; they only indi­cate in what man­ner a direc­tor should express the company’s will.

Practical solutions

Some of the reg­istry courts and rep­re­sen­ta­tives of the doc­trine claim that the val­ue-based rules of rep­re­sen­ta­tion may cause prob­lems in prac­tice and lead to sit­u­a­tions where a counter par­ty is con­fused as to a director’s right to act sole­ly or joint­ly.

To avoid unclear sit­u­a­tions, the word­ing of pro­vi­sions intro­duc­ing val­ue-based rules of rep­re­sen­ta­tion should be draft­ed care­ful­ly. It should reflect how to cal­cu­late the val­ue of con­tin­u­ous oblig­a­tions, such as lease agree­ments. The rules of rep­re­sen­ta­tion may set out that in such sit­u­a­tion, the annu­al amount of an oblig­a­tion or right should be con­sid­ered.

Fur­ther­more, the val­ue-based rules of rep­re­sen­ta­tion may also pro­vide for cal­cu­lat­ing legal acts in for­eign cur­ren­cies as well as includ­ing inter­est in the total val­ue of legal acts.

The Supreme Court in a recent judg­ment held that when it is not clear how the com­pa­ny should be rep­re­sent­ed in a par­tic­u­lar case, the gen­er­al rules of the Pol­ish Com­pa­nies Code should be applied. This means that in such a sit­u­a­tion, a com­pa­ny would be rep­re­sent­ed by two direc­tors act­ing joint­ly or one direc­tor act­ing joint­ly with a com­mer­cial proxy. This should encour­age par­ties to pay spe­cial atten­tion when draft­ing the Arti­cles of Asso­ci­a­tion.

To avoid confusion in practice, the wording of provisions introducing value-based rules of representation should be drafted carefully.

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schoenherr attorneys at law /