Effective challenge to a validly registered increase in the share capital of a joint-stock company in the National Court Register

A non-public joint-stock company has been involved in a multi-pronged corporate dispute since 2013, consisting largely of disputed claims by both parties as to the composition of the company’s shareholders and its bodies. A group seeking a hostile takeover of the company claiming to be the company’s shareholders has been convening and holding fictitious general meetings appointing the company’s organs in order to subsequently apply for the registration of changes in the Register of Entrepreneurs of the National Court Register in order to strengthen its own legitimacy.

At one such meeting, resolutions were passed to increase the share capital to the exclusion of the pre-emptive rights of existing shareholders. The shares in the increased share capital were taken up by person A closely linked to one of the factions fighting for the company. The new share issue was covered by an in-kind contribution in the form of shares in the company, the nominal and book value of which differed significantly from that of the shares taken up, representing only a small fraction of them.

Subsequently, the same group repeated its action by usurping at a subsequent meeting the increase in share capital through the issue of new shares in a closed subscription addressed to person A. Both increases in share capital were disclosed in the Register of Entrepreneurs of the National Court Register, and the decisions to make the entries became final. As a result, the company’s capital no longer consisted of 9 million shares as before, but 38 million. This was to give the group in question control over a company worth several hundred million zlotys, regardless of any unfavourable outcome of disputes over the previously issued blocks of shares.

This state of affairs was disagreed with after several years by the company’s founding shareholder, whose voting and capital rights were depleted as a result of the dilution of the share capital. The shareholder filed an application for security in 2018 by prohibiting the exercise and disposal of rights from the shares described above. As justification for the application, he pointed to the risk that the shares were deemed to have been issued invalidly (and thus were themselves invalid) due to the subscription of the first issue described above for an in-kind contribution of less than the nominal value of the securities. The consequence of the invalidity of that issue was that the subsequent issue was invalid because, in such circumstances, the person taking up the shares did not become a shareholder and therefore could not take up the shares under the closed subscription.

The Regional Court of Warsaw fully shared the shareholder’s view, admitting that taking up shares below their nominal value results in their invalidity (Article 309 § 1 of the CCC). Thus, it is justified to grant security in the form of a prohibition on exercising rights from the shares and disposing of them. The Court of Appeal in Warsaw also agreed with the decision issued, upholding the decision to grant security. The main case is still pending, for the time being there is no judgment yet issued by the Court of First Instance.

This example shows that, even after several years, it is possible to successfully challenge a share capital increase, even one that has been validly entered in the KRS. A situation in which there is a disputed shareholding still occurs quite frequently, contrary to appearances. This is particularly true of non-public (often family-owned) companies established in the 1990s, when the share registers were not kept in quite the correct or detailed way in the early years of capitalism. An intensification of shareholder disputes is likely to occur when the amendment to the Companies Act concerning the shareholder register comes into full force. It is worth remembering that, after many years, shareholders are not deprived of the possibility to defend their cases, as the case described here perfectly demonstrates.

We have written about another dispute concerning the determination of invalidity of shares and obtaining similar relief on other grounds on sporykorporacyjne.com at the following link http://sporykorporacyjne.com/jak-ustalic-niewaznosc-akcji-w-spolce-akcyjnej/.