Changes to the Commercial Companies Code – New solutions in domestic and cross-border company reorganisation procedures

On 22 August this year, the President of the Republic of Poland signed the Act of 16 August 2023 amending the Commercial Companies Code and certain other acts, the purpose of which is to implement into the Polish legal system:

• Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border transformations, mergers and divisions of companies;
• Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, in relation to the exchange of information on disqualifications from serving as a member of the management body or a director within the framework of the system of integration of trade registers of Member States.

The amendment also serves to implement the judgment of the CJEU in the case of Polbud Wykonawstwo sp. z o.o. in liquidation (C-106/16), in which the CJEU stated that the freedom of establishment under Article 49 TFEU includes the possibility for companies to transfer their registered office from one Member State to another without having to be wound up.

The amendments cover both domestic and cross-border transformation procedures. The inclusion of changes to domestic procedures in the amendment is intended to avoid reverse discrimination against Polish entities participating in domestic company transformation processes compared to entities participating in similar processes at cross-border level.

Below are a few words about the most important changes.

STATUS OF A LIMITED JOINT-STOCK PARTNERSHIP

With the entry into force of the new provisions, a limited joint-stock partnership will gain full capacity to divide and merge. This means that from now on, a limited joint-stock partnership will be able to be the acquiring company or a newly formed company in a merger, and the divided company in a division.

Under the existing regulations, a partnership, and therefore also a limited joint-stock partnership, could not be either an acquiring company or a newly established company, which limited the participation of such companies in transformation processes. This rule was related to the existence of personal ties between the partners. However, a limited joint-stock partnership is characterised by numerous capital elements, including in particular the existence of share rights in the form of shares, which eliminates any potential problem in terms of reorganisation procedures related to the transition from a share structure (in the case of capital companies) to a non-share structure (in the case of partnerships).

Therefore, as of 15 September this year, a limited joint-stock partnership will be an exception to the above rule concerning partnerships and will have full merger and division capacity.

Although this is not a frequently chosen form of business activity, it continues to function in commercial transactions and has been included in the new reorganisation regulations.

A limited joint-stock partnership, as a partnership with capital elements, may prove to be an attractive form for implementing ESOP or MSOP incentive programmes, which are a form of remuneration and an incentive for the best employees.

It should be noted that the change applies to both domestic and cross-border reorganisation processes.

NEW SIMPLIFIED MERGER PROCEDURE – MERGER BY ACQUISITION

The amendment provides for a new type of company merger, which may be carried out under a simplified procedure provided for in the Commercial Companies Code, where:

• all shares in the merging companies are directly or indirectly held by a single shareholder; or
• the shareholders of the merging companies hold shares in the same proportions in all merging companies.

The new type of merger will therefore enable the emission-free merger of ‘sister companies’, which is a change of significant practical value. It is difficult to justify the need to issue shares in a situation where the merging companies are single-member companies in which the same entity is the sole shareholder. The need to increase the share capital and issue new share rights is not justified in such a case, as the shareholding structure does not change.

The simplified merger procedure currently in force may be applied:

• to companies in which the acquiring company holds shares with a total nominal value of not less than 90% of the share capital of the acquired company, but not comprising its entire capital;
• in the event of the acquisition by the acquiring company of its sole shareholder company;
• in relation to limited liability companies whose shareholders are exclusively natural persons, not exceeding ten persons in all merging companies.

In view of the above, the addition to the above list of simplified mergers of companies in which the shares are held by a single shareholder or by several shareholders who hold shares in the same proportions in all the merging companies is a response to the needs of trade.

Under the new provisions, such companies will not be required to fulfil obligations such as:

• determining the exchange ratio of shares in the acquired company/merging companies for shares in the acquiring company/newly formed company and the amount of any additional payments, determining the rules for allocating shares in the acquiring company/the newly formed company, determining the date from which the shares will entitle their holders to participate in the profits of the acquiring company/acquired company – which is a consequence of waiving the obligation to increase the share capital and create new share rights;
• submitting the merger plan to an expert for review of its correctness and reliability;
• preparation by the management board of the acquired company of a report justifying the merger, its legal basis and economic justification;
• adoption by the acquired company of a resolution on the merger.

NEW TYPE OF DIVISION – DIVISION BY SPIN-OFF

Division by spin-off is a significant novelty in the Polish company division procedure, as it will enable the acquisition of shares in the acquiring or newly established company or companies by the divided company, rather than by the shareholders of the divided company, as is the case in other types of division.

Thus, as a result of division by spin-off, the divided company will become a shareholder of the acquiring or newly established company, and a subsidiary will be created.

The effects of such a division will be similar to those of a contribution of an organised part of an enterprise, taking into account the unquestionable advantages of division, including, in particular, legal succession.

It should be noted that, until now, the effect of a division by spin-off could only be achieved through a spin-off contribution, i.e. the separation of part of the assets of a given company and the transfer of those assets to another company as a contribution to cover the increased share capital (contribution). However, this form of asset separation has disadvantages, including in particular those resulting from the lack of legal succession. The new division procedure, on the other hand, ensures legal succession, which will significantly simplify such processes, providing greater legal certainty and therefore may prove to be an attractive alternative to the asset deal transactions currently carried out.

Importantly, this solution will apply to both domestic and cross-border transformation processes, although in the case of cross-border divisions, the transfer may only be made to an existing company.

DIVISION IN CROSS-BORDER PROCEDURES

The amendment introduces the possibility of dividing companies in cross-border procedures, as a result of which capital companies and limited joint-stock partnerships (in connection with obtaining full divisibility and transformability) will be able to be divided on the basis of the general provisions of the Commercial Companies Code concerning the division of companies.

However, it should be emphasised that under the cross-border division procedure, the assets of the divided company may only be transferred to a newly established company or companies, and not to an existing company.

The effect of a cross-border division will be the transfer of all or part of the assets of the divided company to a new company or foreign companies, while maintaining the legal existence of the Polish company (in the case of a transfer of part of the assets) or losing the legal existence of the Polish company (in the case of a transfer of all assets).

The introduction of such a solution will undoubtedly facilitate the expansion of domestic entities’ activities into foreign markets under uniform procedures in Member States.

TRANSFORMATION IN CROSS-BORDER PROCEDURES

The amendment will also enable the conversion of capital companies and limited joint-stock partnerships into one of the companies operating in EU Member States or EEA countries and having their registered office/head office/main establishment in the EU or an EEA country.

The list of companies into which Polish capital companies and limited joint-stock partnerships may be transformed is set out in Annex II to Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017.

For example, a Polish limited liability company may be transformed into a French société anonyme.

It should be noted that Annex II does not cover the simple joint-stock company referred to in Article 3001 et seq. of the Commercial Companies Code.

PROTECTION OF CREDITORS / SHAREHOLDERS / EMPLOYEES OF COMPANIES

The amendment also provides for mechanisms to protect the interests of creditors, minority shareholders and employees of companies involved in reorganisation processes.

For example, creditors will have the right, within one month of the disclosure or making available of the division/transformation plan, to request the establishment of security for claims that were not due at the time of disclosure or making available of the plan, if they can prove that the satisfaction of these claims is threatened by the division/transformation. The shareholder concerned should therefore prove that the planned operation adversely affects the chances of satisfying claims against the company undergoing transformation.

If the divided/transformed company, which is obliged to do so in accordance with the allocation of liabilities in the cross-border division plan, fails to satisfy the creditor’s claim, the other companies shall be jointly and severally liable together with the company to which the liability has been allocated.

In turn, shareholders will be entitled to repurchase their shares in certain situations. In such a situation, a shareholder will be entitled to receive a repurchase price corresponding to the fair value of the shares held. The repurchase price will also be subject to an expert appraisal. Furthermore, a shareholder will have the right to challenge the repurchase price and claim additional cash compensation, but bringing such an action will not suspend either the repurchase or the registration of the division/transformation.

In addition, creditors, shareholders and employees will have the right to submit comments on the transformation plans.

CONTROL OF REORGANISATION PROCESSES

Cross-border reorganisation processes will be subject to control by the registry court, which will issue a certificate of compliance with Polish law for a given reorganisation procedure after obtaining the opinion of the competent tax authority, based on the provisions of the Tax Ordinance Act of 29 August 1997.

In accordance with the adopted amendments, the registry court will forward the request for an opinion on the cross-border transformation to the Head of the National Tax Administration, who shall, within one month, issue an opinion on the legality of the operation or, if it considers that the process does not meet the required criteria, refuse to issue it.

Then, within 3 months of receiving the request, the registry court will issue a certificate of compliance with Polish law for the reorganisation procedure and enter a note about the cross-border operation in the register.

Both the Head of the National Revenue Administration and the registry court will be entitled to extend the deadline for issuing an opinion or a certificate to three months.

POSSIBILITY OF TRANSFERRING THE REGISTERED OFFICE ABROAD

Furthermore, it is worth noting that the amendment takes into account the conclusions of the judgment of the Court of Justice of the European Union of 25 October 2017, case no. C-106/16, according to which national provisions which make the transfer of the registered office of a company established under the law of one Member State to the territory of another Member State for the purpose of transforming it into a company under the law of that other State subject to the liquidation of the first company are not compatible with the principle of freedom of establishment.

This is because liquidation may hinder or even prevent the cross-border conversion of a company.

In light of the above, the latest amendment clarifies the provisions of the Commercial Companies Code relating to the reasons for the dissolution of a limited liability company and a joint-stock company, stating:

• in Article 270(2) of the Commercial Companies Code that: ‘The dissolution of a company shall be effected by: a resolution of the shareholders to dissolve the company or to transfer its registered office abroad, confirmed by a notarial deed, unless the transfer of the registered office is to another Member State of the European Union or a country party to the Agreement on the European Economic Area and the law of that country so permits’;
• Article 459(2) of the Commercial Companies Code states that: ‘The dissolution of a company is caused by: a resolution of the general meeting to dissolve the company or to transfer its registered office abroad, unless the transfer of the registered office is to another Member State of the European Union or a country party to the Agreement on the European Economic Area and the law of that country so permits’.

The consequence of the above change will be the possibility of freely choosing the legal jurisdiction within the European Union or the EEA.

The new provisions introduce many significant changes both in the area of domestic and cross-border transformations and constitute an important step in the process of market harmonisation, giving entrepreneurs wider opportunities to operate on foreign markets.

It should be noted that, in accordance with the transitional provision, the existing rules will continue to apply to merger, division or transformation proceedings if, before the date of entry into force of the amendment (i.e. before 15 September 2023), a plan for a merger, cross-border merger, division or transformation has been submitted to the competent registry court.

In view of the above, it is worth considering the possibilities offered by the new provisions of the Commercial Companies Code when planning transformation processes. Entrepreneurs planning to reorganise their businesses should pay particular attention to the broader possibilities associated with the extension of the merger and division capacity of a limited joint-stock partnership, as well as to the legal consequences of a new type of division – division by spin-off.

The amendment to the Commercial Companies Code, which will enter into force this Friday, significantly expands the range of possibilities for transformations, both domestically and across borders.

Author: trainee attorney Katarzyna Gelo