‘Kiss of Death’ – hostile takeover attempt using restructuring proceedings

In the insolvency and restructuring law community, the problem of the lack of adequate instruments to ensure the financing of entities against which restructuring proceedings have been opened is very often discussed. An entire conference was even devoted to this issue: “Restructuring Law as part of the New Opportunity – Opportunities and Problems of Financing Companies in Restructuring”, which was organised at the Ministry of Development[1].

So far, however, the issue that restructuring proceedings are used by investors for hostile takeover of the restructured company (the debtor’s assets) has not been addressed in the public space. In this post, I would like to, describe a case in which I am the attorney of an entity that is defending itself against such a hostile takeover.

Partnership A (“Debtor“) in the timber industry fell into financial difficulties and, back in 2016, restructuring proceedings were opened against it. However, the proceedings did not result in an arrangement and were discontinued.
Taking advantage of the coercive position of the Debtor’s partners, Partnership B (“Investor“), of which Ms Monika is the President, led the spouses of the Debtor’s partners (Ms Krystyna and Ms Anna) to sign an investment agreement in 2017, many provisions of which are invalid due to the provisions being contrary to mandatory provisions of law. The agreement provided, inter alia, that.

• Ms Krystyna will acquire 51 shares in Company C (“Ltd. Company “) from the Investor, and Ms Anna will acquire 30 shares in the Ltd. Company, while the remaining shares in the Ltd. Company will remain in the possession of the Investor, of which Ms Monika is the President;
• Ms Krystyna and Ms Anna will appoint the President of the Management Board in the Limited Liability Company, while the Investor will appoint the Vice President of the Management Board in the Limited Liability Company;
• Ms Krystyna and Ms Anna will appoint one proxy in the Limited Liability Company and the Investor will appoint a second proxy (this was Ms Monika) and neither party will revoke the proxy appointed by the other party to the agreement;
• The parties agreed that the limited liability company may be represented by one member of the Management Board acting jointly with a proxy, whereby the President of the Management Board indicated by Ms Krystyna and Ms Anna (this was the spouse of one of them, who is also a shareholder of the Debtor) and the proxy indicated by them may not make declarations of intent on behalf of the limited liability company unless the Investor consents to this in writing;
• for any breach of the provisions of the Investment Agreement, Ms Krystyna and Ms Anna were to pay jointly and severally to the Investor a contractual penalty of PLN 1,000,000 for each breach of the Agreement;
• at the same time, in order to perform their obligations under the Agreement, Ms Krystyna and Ms Anna established a registered pledge on the shares in the limited liability company in favour of the Investor, who was to be entitled to take over the object of the pledge by submitting a declaration on taking over the object of the pledge;
• any amendments to the Articles of Association require a resolution of the Shareholders adopted unanimously by all shareholders of the Limited Liability Company.

Two weeks after the conclusion of the agreement, the limited liability company entered into a framework woodworking agreement with the Debtor and on that day the limited liability company placed the first order with the Debtor. In essence, therefore, the investment agreement, together with other actions, led to the fact that Mrs Christina and Mrs Anna, together with their husbands, were to provide customers with woodworking for the limited liability company, into which the funds for the orders, which were then carried out by the Debtor anyway, would flow.

The cooperation was bad from the very beginning. However, in an effort to cooperate, the Debtor filed a renewed request for sanctioning, naming the person indicated by Ms Monika as the administrator. This application was granted and the Restructuring Court appointed this administrator. At the same time:

• some of the funds received from the Debtor’s contractors which flowed into the Ltd. and funds from loans Ms. Monika did not allocate to the Debtor’s purchase of new raw material, which caused, among other things, a slowdown in production and the imposition of contractual penalties on the Debtor due to the Debtor’s failure to receive the appropriate amount of raw material that the Debtor had committed to receive in the won tender;
• The President of the Board of Directors of the Ltd. and also a shareholder of the Debtor, Ms. Monica, together with the Vice President of the Board of Directors of her choice, denied access to the full documentation of the Ltd;
• Ms Monika ordered the President of the Management Board of the limited liability company to sign “blind” the financial statements of the limited liability company, despite the lack of access to the full documentation. She made further transfers from the limited liability company to the Debtor conditional on the signing of the financial statements;
• Finally, Ms Monika blackmailed Ms Krystyna and Ms Anna that if the CEO of the limited liability company indicated by them did not resign then she would not make further payments to the Debtor.

In the meantime:

• The Debtor’s manager, identified by Ms Monica, “accidentally” paid an electricity bill to the wrong account, leading to the suspension of the Debtor’s electricity supply and a halt in production;
• Ms Monica required Company D, which was affiliated with the Debtor, to take out a security transfer on Company D’s woodworking items in order to continue working together;
• Ms. Monika held discussions with the Debtor’s counterparties aimed at the continuation of the cooperation with the counterparties solely by Ms. Monika based on the assets and businesses of Companies A and D but already without Ms. Krystyna and Ms. Anna and their husbands partners of the Debtor.

In view of the above actions, the President of the limited liability company and at the same time a partner of the Debtor revoked the power of attorney for Ms Monika due to lack of trust. Referring to the investment agreement, Ms Monika, acting on behalf of the Investor, summoned Ms Krystyna and Ms Anna to pay PLN 1,000,000 as a contractual penalty for revoking the power of attorney. After the deadline expired without effect, the Investor, on behalf of which Ms Monika was acting, attempted to take over Ms Krystyna and Ms Anna’s 81 shares by means of a declaration of pledge. Subsequently, the Investor, claiming to hold 100% of the shares in the limited liability company, dismissed the existing Management Board of the limited liability company and appointed Ms Monika as President of the Management Board of the limited liability company. Ms Monika filed an application with the KRS to change the Management Board of the limited liability company.

In the first instance, the Debtor’s partners applied to the Restructuring Court for a change of administrator. They attached to the application the consents of two of the Debtor’s creditors holding more than 30% of the total claims. In addition, these creditors – who saw that “something was wrong” – were public entities, i.e. the Tax Office and ZUS. The restructuring court changed the Debtor’s administrator to an administrator appointed by the Debtor’s shareholders.

Subsequently, Ms Krystyna and Ms Anna, of whom I am the proxy, indicating that they hold more than 50% of the share capital in the limited-liability company, filed a statement of claim and an application to secure the claim for the sole shareholder – the Investor from the limited-liability company. The District Court in Warsaw granted security to Ms Krystyna and Ms Anna consisting in suspending the Investor from exercising his shareholding rights in the Ltd. In its reasoning, the SO indicated:

“In the present case, there can be no doubt that the investment agreement has been structured in a very unfavourable way for the claimants. Certain provisions set out therein raise serious doubts as to their validity. These provisions include the provision concerning the representation of the claimants. It stipulates that the limited liability company may be represented by one member of the management board acting jointly with a proxy, whereby the member of the management board indicated by the claimants and the proxy indicated by them may not make declarations of will for the limited liability company unless the Investor consents to this in writing. De facto, therefore, the necessity to obtain the consent of the shareholder makes the possibility of the persons indicated in the KRS to represent the company independently illusory. At the same time, the agreement provides that for any breach of the provisions of the investment agreement, the claimants are to pay jointly and severally to the Investor a contractual penalty in the amount of PLN 1,000,000 for each breach of the agreement, while the contractual penalties concerned only the claimants, but not the Investor to any extent. Also unfavourable to the plaintiffs and inconsistent with Article 208(7) of the Code of Commercial Partnerships and Companies in conjunction with Article 109(7)(1) of the Civil Code is § 3(3) of the agreement, which states that the president of the management board indicated by the plaintiffs will not revoke the proxy granted to the proxy indicated by the Investor. In the court’s opinion, these provisions are contrary to the provisions of the law and violate good morals and principles of social co-existence“.

Invoking the security granted, Ms Krystyna and Ms Anna dismissed the existing Management Board, which had established a proxy. The registration court registered the change of the Board of Directors of the limited liability company and disclosed the proxy. In addition, the registry court discontinued the proceedings for the registration of Ms. Monika to the Company’s Board of Directors, which she had initiated herself due to the new Company’s Board of Directors’ withdrawal of Ms. Monika’s application for registration.

The fight is still ongoing and the final settlement is still to come. Nevertheless, the steps taken so far enable production by the Debtor who is in restructuring based on the support of the limited liability company. The above case study should also make entrepreneurs in a difficult situation realise that not every help offered by an investor is really help and may turn out to be a “kiss of death” in the future.
It is therefore worth reaching for professional legal advice even in the most difficult moments, as reaching for it earlier would prevent many unnecessary problems.

[1] http://nowefinansowanie.allerhand.pl/