Management control in a limited liability company: Risk protection mechanisms and the liability of the management board

Conducting business in a limited liability company (sp. z o.o.) requires appropriate oversight of the actions of the members of the management board. Under the Commercial Companies Code, the management board members have broad powers to conduct business and represent the company. Although such an arrangement is necessary for the smooth operation of the company, it does come at the risk of abusive or erroneous decisions that may jeopardise the financial condition and reputation of the company.

Control mechanisms in the articles of association

In order to mitigate the risks arising from the actions or omissions of management board members, it is worth considering additional control mechanisms in the articles of association. Examples include:

1. Requirement to obtain consent for key decisions:
   The management board may be required to obtain the approval of a supervisory authority (e.g. a supervisory board) or the shareholders before making decisions concerning significant areas of the company’s business.
2. Limits on the value of transactions:
   The articles of association may specify a maximum value of transactions that the management board may enter into without additional approval from shareholders or the supervisory board.
3. Procedures for related party transactions:
   Detailed reasons and approval of any related party agreements or the granting of additional benefits, such as bonuses, to management board members may be required.
4. Reporting on the state of the company’s business:
   Management board members can be required to submit regular reports on the financial situation, ongoing projects or business risks, which will allow shareholders and supervisory authorities to better monitor the company’s activities.

The management board regulations – a tool to promote transparency

The management board regulations are an additional document that can set out controls put in place in the articles of association. It should include:

• the principles of decision-making by the management board;
• the specific responsibilities of management board members;
• procedures for reporting and obtaining approval of actions; and
• sanctions for the non-fulfilment of duties.

With management board regulations, the board members are motivated to make transparent and informed decisions. Such a document can also be helpful in conflict situations, especially when management board decisions are challenged by shareholders or supervisory bodies.

Civil liability of management board members

Regardless of any control mechanisms in place, management board members may be liable under civil law to the company for damage caused. The condition for liability is that the following prerequisites are met jointly:

1. the unlawfulness of an act or omission of a management board member.
2. the fault of the management board member, including wilful misconduct or gross negligence.
3. the occurrence of damage on the part of the company.
4. an adequate causal link between the management board member’s action and the damage caused.

This liability is an important means of protecting the interests of the company, complementing the optional control mechanisms.

A comprehensive approach to protecting the company’s interests

The combined use of control mechanisms, such as provisions in the articles of association or management board regulations, together with the civil liability of management board members, effectively minimises the risk of damage to the company’s assets.

The introduction of such solutions increases the transparency of the management board’s operations and builds trust among shareholders and stakeholders. Thoughtful protection against dishonest decisions by management board members is not only a legal obligation, but also a key element of a company’s long-term risk-management strategy.