Polish Update – The Importance of Analyzing Legal Title to Shares in the Acquisition of Polish Companies
Before the transaction, the buyer usually performs a legal examination of the company whose shares are to be traded (directly or indirectly, for example through the acquisition of shares in the parent company). When assessing the legal importance of examining the legal title to shares it should be kept in mind that in Polish law there are no general legal remedies that allow the buyer acting in good faith to acquire ownership of shares where the seller is not the owner of such shares. As a consequence, only a proper examination of the legal title to the shares will allow the investor to properly assess the situation (in particular the right of the seller to dispose of the shares) and to guard against possible adverse effects of irregularities in the acquisition of shares by the seller or his legal predecessors.
The vast majority of transactions on the Polish market (including some international transactions involving Polish companies) are “share deal” transactions, i.e., transactions which consist of the acquisition by the investor of share rights in a company belonging to the seller.
Before the transaction is signed, the buyer usually performs a legal audit of the company whose shares are to be traded directly or indirectly (for example through the acquisition of shares in the parent company). The scope of the legal audit covers many different areas, often dependent on the objects of the company. As more and more often we observe the practice of investors limiting the scope of the due diligence examination or even skipping this step in the transaction altogether, we haste to point out that there exist certain issues whose proper examination is always necessary in this type of transactions, and that it is in the best interests of the investor. One example is precisely the examination of the seller’s legal title to the shares. It consists of determining whether the seller (or the company that is acquired, in the case of more complex international transactions) has sufficient legal title to shares in the Polish company, and therefore whether the seller is their rightful owner.
When assessing the legal importance of examining the legal title to shares it should be kept in mind that in Polish law there are no general legal remedies that allow the buyer acting in good faith to acquire ownership of shares in a situation where the seller is not owner of such shares. A general principle applies in this respect according to which no one can transfer on another party more rights than he himself possesses. Thus, if the seller of the shares or any of his legal predecessors has not properly acquired the title to the shares (has not become their owner), then the buyer also cannot effectively acquire that title.
Contrary to the frequently repeated erroneous opinion, listing the given entity as a shareholder in a publicly accessible enterprise register kept by a Polish court will not protect the buyer acting in good faith in a way that, for example, a buyer of real estate is protected in connection with listing the seller in the land and mortgage register kept for that real estate. Polish law does not provide for a warranty of public credibility of enterprise registers in the meaning in which this concept operates in relation to land and mortgage registers. Besides, protective instruments contained in the rules governing entries in the enterprise register (including the inability to evoke certain facts by the entity listed in the register, the presumption of common knowledge of register entries and the presumption of veracity of data subject to entry in the enterprise register) have been settled rather vaguely and are the subject of controversy both in doctrine and in jurisprudence. For this reason alone, public enterprise registers cannot form the basis for the formulation of clear-cut conclusions in this area. In addition, as mentioned above, in the case of the acquisition of shares, Polish law does not provide for the so-called warranty of public credibility of enterprise registers modeled on the regulations governing land and mortgage registers.
The need for the presentation of the legal title to shares received in a correct manner from legal predecessors makes it so that only a thorough examination of the full “history” of the turnover of shares in a limited liability company, covering all transactions that involved those shares since the company’s foundation until their latest disposal, can give a complete picture of the legal title to shares in the company and answer the question whether (i) the seller is authorized to sell those shares or (ii) the divested company actually owns shares of the Polish company in its assets. Without such thorough examination of the legal title to shares, their buyer can never be sure if he had effectively acquired those shares from the seller (even if the seller has 100% interest in the company and is listed as the sole shareholder in the enterprise register). As the trend in the past few years has been for investors to limit the scope of the legal examination, it should be emphasized once again that is not enough to investigate the legal title to shares only in the given period (e.g., during the course of five years before the planned transaction). For if before that period certain irregularities have taken place (e.g., shares were transferred ineffectively), those irregularities will have an impact on the disposal of those shares at a later date.
It does not matter how long ago share sale irregularities occurred. In contrast to objects (movable or immovable), Polish law does not provide for the possibility of acquiring the ownership of shares in a limited liability company through acquisitive prescription. In practice there have been cases where an entity would act in the company as the sole shareholder for over a decade, when in fact it never successfully acquired the ownership of shares in that company since agreements under which those shares were acquired by its legal predecessors proved to be invalid.
In analyzing the issue of legal title to shares it should also be noted that there are many different conditions provided for in Polish law which can determine the invalidity of the acquisition of shares in a limited liability company. They relate both to the form required for an effective transfer of shares, consents required for such transfer (e.g., in the form of a resolution of the general meeting of shareholders or of the company supervisory board), or to general prohibitions on alienating or acquiring shares under certain circumstances. Some conditions are often very difficult to grasp. For example, the general prohibition on the acquisition of shares owned by limited liability companies also applies to the acquisition of shares in the parent company by a subsidiary (Art. 200 of the Commercial Companies Code). A violation of this prohibition invalidates the acquisition. It should be remembered that the relationship of dependency and domination is treated very broadly in Polish law and is by no means limited to share dependencies. For example, companies on the boards of which sit the same people are mutually dominant and dependent (in the absence of other links referred to in Art. 4.1.4 of the Commercial Companies Code).
In summing up our considerations it can be concluded that, in the absence in Polish law of relevant legal remedies allowing the acquisition of shares in a limited liability company from an unauthorized party by a buyer acting in good faith, only a proper examination of the legal title to the shares will allow the investor to properly assess the situation (in particular the right of the seller to dispose of the shares) and to guard against possible adverse effects of irregularities in the acquisition of shares by the seller or his legal predecessors. If the transaction concerns shares in a Polish limited liability company, simply dealing with the absence of the legal title or with its defectiveness by way of the seller’s representations and warranties or claims for damages available to the buyer is totally inadequate. These issues are certainly important to every investor planning to acquire shares in a Polish limited liability company and contemplating the need to conduct a legal examination.
Additional articles on the legal aspects of mergers and acquisitions in Poland can be found on our Transactions Portal.