Limiting the rules of representation of a company 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 the professional qualifications of a candidate, but also the trust shareholders place in the candidate. By law, each management board member (director) may represent the company. Shareholders usually want to protect a company against abuse of this right or against the negative consequences of its performance. One of the ways of solving this challenge is to introduce the value-based rules of representation.

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 only with suppliers and another to conclude agreements only with customers.

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; instead, 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 the 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.