Business judgment rule that is the rules of liability of management board and supervisory board members for business decisions. What is a manager liable for after the amendment of the Commercial Companies Code of 13 October 2022?

The amendment to the Commercial Companies Code, which came into force on 13 October 2022, codified the business judgment rule. The business judgment rule determines in which situations members of management boards and supervisory boards of capital companies are not liable for the consequences of decisions they have made which, in hindsight, turned out to be wrong.

To date, the scope of liability of officers of capital companies for business decisions has been very limited in practice. As a rule, the courts assumed that a member of the management board or supervisory board was obliged to compensate the damage caused to the company only if his actions breached a legal norm or the company’s statute (articles of association). The effect of this line of judgments was that managers were not liable for decisions which, although not in breach of the law, were taken in a negligent manner.

Liability for damages of members of the management and supervisory boards of a limited liability company and joint-stock company towards the company (Articles 293 § 1 and 483 § 1 of the Commercial Companies Code)

The liability for damages of members of management boards and supervisory boards of limited liability companies and joint-stock companies is regulated in Articles 293 § 1 and 483 § 1 of the Commercial Companies Code, respectively. Pursuant to Article 483 § 1 of the Commercial Companies Code, “A member of the management board, supervisory board and liquidator is liable to the company for damage caused by an act or omission contrary to the law or the provisions of the company’s statute, unless he is not at fault“. Article 293 § 1 of the Commercial Companies Code contains an analogous provision. The premises for the liability of members of management and supervisory boards of limited liability companies and joint-stock companies are:

• unlawful conduct of an officer,
• inflicting damage on the company,
• cause and effect relationship between the unlawful conduct and the damage,
• the possibility of attributing fault to the officer.

In the context of liability of capital companies bodies members for business decisions, the premise of illegality of the officer’s conduct is of the greatest importance. This is because the interpretation of this premise determines the scope of managers’ liability under Articles 293 § 1 and 483 § 1 of the Commercial Companies Code. Therefore, before analyzing the business judgment rule as an institution protecting against excessive liability, it is worth taking a closer look at the meaning of the premise of illegality.

What is a management board member (supervisory board member) of a capital company responsible for?

Crucial for the liability of the members of the bodies of a limited liability company and a joint-stock company is the determination of what behavior type is considered unlawful, that is, for which acts and omissions is the manager liable for. As has already been mentioned, the prevailing line of judgments to date has been that only acts contrary to a specific legal norm or a regulation of the company’s statute (articles of association) should be deemed unlawful within the meaning of Articles 293 § 1 and 483 § 1 of the Commercial Companies Code (such as, inter alia, the judgment of the Supreme Court of 9 February 2006, V CSK 128/05, the judgment of the Supreme Court of 26 April 2019, V CSK 102/18). Such a view resulted in the lack of liability of management and supervisory board members for managerial activities, including business decisions, as long as these decisions did not breach a specific legal norm. Whereas, as a consequence of the codification of the business judgment rule in Articles 293 § 3 and 483 § 3 of the Commercial Companies Code, the aforementioned line of judgments should be considered outdated. The second view, which will probably soon find expression in judgments of common courts and the Supreme Court, is that members of management and supervisory boards are liable for negligent performance of their duties, including failure to fulfil their duties of care and loyalty. Representatives of the doctrine, recognizing the correctness of the second position, by no means believe that members of management and supervisory boards should be held liable whenever the company suffers damage as a result of a decision taken. On the contrary – they consider that managers are liable to pay damages to the company not when the decision in hindsight turned out to be wrong because a business risk materialized, but when the manner in which the decision was handled was negligent or disloyal. Protecting company managers from excessive liability is served by the principle of business judgement.

What is the principle of business judgement rule?

The business judgment rule is an institution that originated in United States law. The United States courts created it to protect corporate directors from excessive liability. It is reasonably claimed that excessive liability of managers leads to their aversion to risk. Meanwhile, risk is an immanent part of doing business, and it is in the interest of company shareholders and the capital market for business entities to take risky decisions. The business judgement rule is intended to provide a safe harbour for managers who have made a business decision in a diligent and loyal manner, but as a result of the economic risk materializing, the company under their management has suffered damage. The premise of the United States business judgment rule is that if the conduct of a corporation’s directors meets certain minimum requirements, the court cannot assess the substantive content of the decision. Under such circumstances, the court is obliged to find that the directors are not liable for the damage suffered by the company. The business judgment rule has been introduced into many legal systems of European Union countries. In 2022, the Polish legislator also decided to codify it.

How does the business judgment rule protect the members of the management and supervisory boards of a limited liability company and a joint-stock company? The premises of the business judgement rule under Articles 293 § 3 and 483 § 3 of the Commercial Companies Code.

Pursuant to Article 483 § 3 of the Commercial Companies Code, “A member of the management board, supervisory board and liquidator does not breach the duty to exercise due care arising from the professional nature of their activities if, acting in a loyal manner towards the company, they acts within the limits of reasonable economic risk, including on the basis of information, analyses and opinions that should be taken into account under the circumstances when exercising due care.” Article 293 § 3 of the Commercial Companies Code contains an analogous regulation.

The effect of applying the business judgement principle is to conclude that the member of the management board or supervisory board has properly fulfilled his duties and is therefore not liable for damages as referred to in Articles 293 § 1 and 483 § 1 of the Commercial Companies Code.

The premises of the business judgment rule are:

1. making a business decision,
2. the legality of the decision taken,
3. the officer’s loyal conduct towards the company,
4. acting within the limits of reasonable economic risk, including acting on the basis of information, analyses and opinions that should have been taken into account under the circumstances in making a careful assessment.

The first two premises are not explicitly expressed in the wording of Articles 293 § 3 and 483 § 3 of the Commercial Companies Code, but their validity is unanimously accepted by representatives of the doctrine. The business judgment rule does not protect passive managers, but only those who actively seek to act for the good of the company. The business judgment rule will also not apply if the content of the decision violated a legal norm. The order to comply with the law is absolute.

Loyalty in the case of members of the management and supervisory boards of capital companies means that they are guided by the interests of the company and not by their own interests or those of third parties. When considering whether a manager has complied with the duty of loyalty, the question is whether that person, when making decisions, took into account only the interests of the company.

The most difficult premise to apply, and the one that will raise the most doubts in practice, is acting within the limits of a reasonable economic risk. In assessing whether this condition is met, one should first of all examine what the decision-making process was like, including:

• what data has been collected,
• whether an expert was consulted if necessary,
• whether officers have analyzed the information gathered,
• whether the body members have supervised the performance of the decision.

The codification of the business judgement rule may lead to a balance between protecting the company against managerial abuse and ensuring that members of capital companies’ bodies are free to make decisions. The previous understanding of the premise of illegality under Articles 293 § 1 and 483 § 1 of the Commercial Companies Code led to mandataries not being held liable for managerial activities. This state of affairs has changed, so it is worth bearing in mind the premise of liability of members of bodies for damage caused to the company and the premise of the safe harbor of the business judgment rule for managers.