Discharge of Management Board Members After an M&A Transaction – Does It Really Release Them from Liability?

Discharge of Management Board Members After an M&A Transaction – Does It Really Release Them from Liability?

The granting of discharge (Polish: absolutorium) to members of the management board is frequently perceived as an endorsement of the manner in which the company's affairs have been conducted and as a signal that the managers may "sleep soundly". Under the Polish Commercial Companies Code (Kodeks spółek handlowych, hereinafter the "CCC") and in the case law of the Polish courts, however, discharge does not entail an automatic and complete release from liability – particularly in the context of complex M&A transactions and subsequent disputes between the new owners and the former members of the company's governing bodies. An M&A transaction (from the English mergers and acquisitions) denotes the merger and acquisition of businesses. It encompasses processes involving the combination of two undertakings into one, the purchase of part or all of the shares in another company, or changes in its ownership structure.

What Is Discharge and What Function Does It Serve in a Company?

Discharge is a resolution by which the shareholders' meeting of a limited liability company or the general meeting of shareholders of a joint-stock company assesses the performance of duties by the members of the company's governing bodies in a given financial year. Its function is primarily one of accounting and control: it confirms that the company's owners have familiarised themselves with the management report on the company's activities and with the decisions taken and – as a rule – accept the manner in which the company's affairs have been conducted.

Discharge and the Liability of Management Board Members – Two Principal Approaches

Two fundamental approaches to the effects of discharge on the liability of management board members towards the company have developed in legal scholarship and in practice.

The first position treats discharge as a purely internal act of a corporate nature – an expression of a positive assessment of the management board's activities which, in itself, does not bar the company from subsequently pursuing claims for damages. From this perspective, a discharge resolution produces no effect analogous to a release from debt, nor does it constitute an undertaking by the company not to sue a member of the management board.
The second and more widely represented position holds that the granting of discharge as a rule precludes the company from pursuing claims in respect of acts of which the shareholders were aware at the time the resolution was adopted. On this view, discharge is treated as a specific form of waiver of the pursuit of claims (pactum de non petendo) with respect to known and accepted actions of the management board.
Significantly, both approaches converge on the proposition that discharge cannot exclude liability in an unlimited manner, irrespective of the state of the shareholders' knowledge and of the nature of the breaches concerned.

The Relevance of the Shareholders' Knowledge – When Does Discharge Actually Afford Protection?

The courts and legal scholarship emphasise that the protective effect of discharge is confined to those acts of a management board member of which the shareholders' meeting was aware at the time the resolution was adopted and which it was genuinely in a position to assess. Where the resolution was adopted on the basis of incomplete, unreliable or outright misleading information, there can be no question of an informed waiver by the company of the pursuit of claims.

The case law of the Polish Supreme Court underscores that:

discharge does not extend to acts of which the shareholders had no knowledge at the time the resolution was adopted (e.g. concealed conduct not reflected in the reports, or the suppression of material information concerning risks or conflicts of interest);
a discharge resolution may be challenged where it was adopted on the basis of unreliable, incomplete or distorted data.
In practice, this means that a member of the management board may not invoke discharge as a protective shield where he or she has contributed to distorting the picture of the company's situation, concealed risks, or presented information to the shareholders in a misleading manner.

Liability of Management Board Members and the Business Judgment Rule (Article 293 § 3 CCC)

The framework of discharge is complemented by the so-called business judgment rule, expressed in Article 293 § 3 CCC (and, correspondingly, in Article 483 § 3 CCC in respect of joint-stock companies). Under this rule, a member of the management board does not breach the duty of due care where he or she acts loyally towards the company, within the limits of justified business risk, and on the basis of adequate information, analyses and opinions.

This rule shifts the emphasis from the outcome of the decision taken to the manner in which it was taken – the assessment of the management board's conduct should take into account the moment at which the decision was made, the information then available, and the rationality of the strategy adopted, rather than merely the adverse economic effect established ex post. Accordingly, even in the absence of discharge, a member of the management board may mount a defence by demonstrating that he or she acted with due business prudence and within the limits of permissible business risk.

Discharge Outside the Annual Reporting Cycle – M&A Transaction Practice

The Commercial Companies Code refers expressis verbis to discharge in the context of ordinary shareholders' meetings (ordinary general meetings), at which the financial statements and the management report on the company's activities are approved. In transactional practice, however – particularly in M&A transactions involving a change of control over the company and a replacement of the management board – a need arises to grant discharge outside the standard annual cycle.

Transaction documentation frequently provides for discharge resolutions to be adopted prior to closing or immediately following completion of the transaction, so as to "cut off" the liability of the incumbent management board members for the period preceding the change of ownership. The authors of the article in Dziennik Gazeta Prawna under review rightly note that there is, as a rule, no obstacle to granting such "transactional" discharge outside the annual reporting cycle, although the scope of its protective effect may give rise to doubts in practice.

"Transactional" Discharge and Claims of the Company's New Owners

In M&A transactions, discharge granted directly in connection with the acquisition of a company frequently forms part of a broader settlement between the seller and the buyer. The new investor may have an interest in structuring the relationship in such a way that potential claims relating to past conduct of the management board are allocated between the seller, the former members of the governing bodies and the company itself in a predictable and contractually regulated manner.

In practice, however, "transactional" discharge will not always be treated by the courts as an objective, independent assessment of the management board's activities – it may be perceived as an element of a broader transactional compromise in which part of the risk has been "quietly" shifted onto the new buyer. Consequently:

the protection afforded by such a resolution will depend on whether the shareholders (including the new owner) in fact had a complete and reliable picture of the company's situation;
should material irregularities of which the meeting was not informed come to light after the transaction, discharge will not bar the pursuit of claims against members of the management board or – in certain configurations – against the seller.
Contractual Reinforcement of Discharge: Pactum de Non Petendo, Indemnity Clauses, Liability Caps

Managers and sellers alert to these risks seek to reinforce, by contractual means, the protection that discharge is intended to confer. In M&A negotiation practice – as the article aptly describes – the following mechanisms are encountered, among others:

undertakings by the buyer not to pursue claims against the former members of the management board (whether directly or indirectly, e.g. by procuring that the company refrain from bringing actions);
undertakings by the buyer to procure, following closing, that the company waive specified claims against the former managers;
indemnity clauses under which the seller assumes specified risks, subject however to monetary caps, time limits and prohibitions on double recovery.
Even such mechanisms, however, cannot result in a complete exclusion of liability – any "contractual" limitation of liability for criminal offences or for torts grossly contrary to the law would be absolutely inadmissible. Contractual extension of the effects of discharge therefore requires a highly cautious balancing exercise, taking into account, among other things, the provisions governing the liability in damages of members of the company's governing bodies, criminal liability, and liability towards the company's creditors.

Discharge Does Not Exclude Liability Towards Creditors and Third Parties

A significant – and frequently underestimated – consequence is that discharge pertains primarily to the relationship between the company and the members of its governing bodies. The granting of discharge does not affect liability towards the company's creditors or towards third parties to whom a member of the management board may have caused damage by conduct contrary to the law or to the company's articles of association, in particular under the regime of liability for the company's obligations (e.g. in the event of insolvency).

Even where the company – as a result of discharge and the accompanying contractual clauses – refrains from asserting claims against former members of the management board, this does not deprive creditors of the ability to pursue their rights within the limits conferred upon them by statute. From the perspective of the new owners and of the company's management board, the "history" inherited from one's predecessors cannot, therefore, always be safely "cut off" by a discharge resolution.

Critical Assessment: The Risks of Abusing Discharge in M&A Transactions

The article in Dziennik Gazeta Prawna under review rightly emphasises that discharge does not constitute an automatic immunity for members of the management board and that its effectiveness depends on the scope of the information disclosed prior to the adoption of the resolution. From the standpoint of transactional practice, however, it is worth drawing attention to several further risks that may materialise where "transactional" discharge is applied expansively.

First, there is a genuine risk that discharge granted in direct connection with a transaction will be treated as part of a "package" in which the incumbent members of the management board obtain protection in exchange for specified concessions on the part of the seller, which may hamper the subsequent identification of the true scope of the company's intention to waive its claims. Second, excessive reliance on discharge and on pactum de non petendo clauses may weaken the compliance culture and corporate governance standards – shifting, in practice, the burden of risk from those responsible for the decisions onto the new owners and the company's creditors.

Practical Conclusions – How to Rely on Discharge Prudently

From the perspective of management board members, investors and shareholders, the key considerations are the informed use of the institution of discharge and a realistic assessment of the scope of its protective effects. Discharge:

may, in certain circumstances, limit the liability of a management board member towards the company, provided that the resolution was adopted in conditions of full and reliable information;
does not constitute a guarantee of "complete impunity", particularly where material irregularities of which the meeting was unaware subsequently come to light;
does not exclude liability for criminal offences, nor liability towards the company's creditors and other third parties.
In M&A transactions, "transactional" discharge should be regarded as one element of a broader protective architecture – alongside negotiated contractual clauses, indemnity mechanisms, liability caps and carefully conducted due diligence. Deploying these instruments in a manner consistent with the provisions of the Commercial Companies Code and with current case law makes it possible, on the one hand, to manage managers' risk rationally and, on the other, not to deprive the company and its creditors of effective means of protection against the consequences of improper managerial decisions.

FAQ

Does discharge release a management board member from liability towards the company?
Not automatically. Its protective effect covers only those acts of which the shareholders were aware, and which they were able genuinely to assess, at the time the resolution was adopted.

Can a discharge resolution be challenged?
Yes. A resolution adopted on the basis of unreliable, incomplete or distorted data may be challenged, and a board member who has concealed material risks may not invoke it.

Does discharge protect against claims by the company's creditors?
No. Discharge governs the relationship between the company and the members of its governing bodies; it does not affect statutory liability towards creditors or other third parties.

Can discharge be granted outside the annual reporting cycle in an M&A transaction?
As a rule, yes. There is no obstacle to adopting "transactional" discharge resolutions before or immediately after closing, although the scope of their protective effect may be contested.