What is the business judgment rule in a simple joint stock company?

On 1 July 2021, an amendment to the Commercial Companies Code came into force, introducing a new type of company - the simple joint-stock company (SJSC). As at 12 December 2021, there were already 351 SJSC registered in Poland. Apart from innovations concerning the lack of share capital, creation of a specific, as for Polish conditions, body - the board of directors, the rules of responsibility of management board members were also amended. SJSC will soon become kind of "testing grounds" for D&O liability, and new judgments are likely to emerge.

The institution of D&O liability protects the interests of shareholders and creditors against negligent actions of management board members

Legislator extends D&O liability in SJSC

Liability may be excluded if the manager, while maintaining loyalty to the company, acts within the limits of justified economic risk

Article 300¹²⁵ of the Code of Commercial Companies presents the view that every economic decision is connected with incurring certain risks and losses.

What is the point of D&O liability rules

Partners usually manage the day-to-day affairs in partnerships on their own and they must take into account the fact that in case of the entity's insolvency they bear unlimited liability. On the other hand, shareholders are usually excluded from managing day-to-day affairs in companies, entrusting this function to management board members.

A fairly common lack of personal involvement of shareholders in the day-to-day affairs of a legal entity (especially in big companies) causes problem so-called "information asymmetry". Management board members, who should act in the interest of shareholders, have an "information advantage" over shareholders and may behave disloyally towards them.

One of the most important reasons justifying the existence of D&O liability provisions is to protect the interests of creditors. In case of the partnership creditors can satisfy their interests by filing a claim against partners. However, in the company creditors can usually count only on the assets of the legal entity, which will not always be sufficient to cover their losses.

How does D&O liability in SJSC differ from other companies

It should be noted that, in contrast to the provisions governing the liability of management board in a limited liability company (Article 293 of the Commercial Companies Code) and the joint-stock company (Article 483), Article 300¹²⁵ extends the D&O liability.

In case of SJSC, we no longer have to deal with the question, whether a management board member has breached the law; instead, we have a situation in which he is liable for damage that results from failure to exercise due care or perform his duties, including failure to act in a loyal manner towards the company, unless he is not at fault.

In the current situation, it doesn't really matter what is the source of a breach of these duties. Nevertheless, such extended liability may be excluded if the manager, while maintaining loyalty to the company, acts within the limits of a justified economic risk, including on the basis of information, analyses and opinions that should be taken into account under the circumstances in making a careful assessment.

Business judgment rule - an attempt to adjust the rules of liability to the realities of business

By introducing new liability rules, the legislature is trying to demonstrate an understanding that sometimes business is unpredictable. An action that seemed to be very profitable for the company at the time the manager made the decision may cause large losses. In such a situation, a good manager should assess the risks, act conscientiously and loyally, and take into account all the information, analyses and opinions available at the time.

In today's reality, most managers of both limited liability companies and joint stock companies quite often use, among other things, written legal advice. In this situation, it is more difficult to prove that a manager is at fault in causing damage to the company. On the other hand, in case of SJSC, this is explicitly indicated by the legislator. In this way, the legislator says that the board member must carefully assess the business risk.

The business judgment rule brings to the fore the correctness of the business decision-making process. If this process was correct, the manager may not be held liable even though his decision has made a loss to the company. Underlying this principle is the view that that every economic decision is connected with incurring certain risks and losses. How the business judgment rule will work in our reality - time will tell.