Corporate / M&A

Poland: New Formalities When Selling Shares

The latest Supreme Court’s (SC) judgment increased the number of formalities when selling shares in LLCs. According to the judgement, it may be necessary to put original share purchase agreements on registry files. Given this, parties to transactions are trying to find ways to keep sensitive terms of share purchase agreements confidential.

Formalities related to a share transfer

Trans­fers of share required cer­tain for­mal­i­ties. Many of them are only tech­ni­cal, but some may influ­ence the trans­ac­tion­al prac­tice.

In Poland, each time shares of an LLC are trans­ferred, the man­age­ment board sub­mits a new list of share­hold­ers to a rel­e­vant reg­istry court with­in sev­en days from when the share pur­chase agree­ment was con­clud­ed. Fail­ure to do this results in a fine, which may be repeat­ed­ly imposed by the reg­istry court, and also in a refusal to list the new share­hold­er in the reg­is­ter.

Courts want more

In prac­tice, how­ev­er, besides a list of share­hold­ers, some reg­istry courts require a share pur­chase agree­ment, or oth­er doc­u­ment con­sti­tut­ing the grounds for the share trans­fer, to be attached to an appli­ca­tion on change of a share­hold­er. Courts relied on a gen­er­al legal pro­vi­sion, which enabled them to demand addi­tion­al doc­u­ments, if they had doubts about the legal grounds for an entry in a reg­is­ter. Courts also argued that they are oblig­ed to deter­mine whether a trans­ac­tion was con­clud­ed in accor­dance with applic­a­ble laws.

This prac­tice was severe­ly crit­i­cised by legal prac­ti­tion­ers and schol­ars. They argued that share pur­chase agree­ments are con­fi­den­tial doc­u­ments that con­tain sen­si­tive infor­ma­tion. They should there­fore not be pro­vid­ed to pub­licly acces­si­ble reg­istry files. They also claimed that oth­er pro­vi­sions clear­ly indi­cate which doc­u­ments should be attached to an appli­ca­tion on a change of a share­hold­er, and that a share pur­chase agree­ment (or equiv­a­lent share trans­fer doc­u­ments) is not among them.

More­over, the require­ment to pro­vide doc­u­ments to the court clear­ly omits the fact that the doc­u­ments that con­sti­tute grounds for the trans­fer of shares are often for­eign, includ­ing cor­po­rate ones, and that the Pol­ish courts are not in the posi­tion to eval­u­ate their legal sig­nif­i­cance or the valid­i­ty of the trans­ac­tion. The oblig­a­tion to ver­i­fy the legal effec­tive­ness of the share trans­fer lies first with the share­hold­ers noti­fy­ing the trans­fer to the com­pa­ny, and then with the man­age­ment board. The court mere­ly records the cur­rent sta­tus based on the request from the man­age­ment of the com­pa­ny, which is in charge of estab­lish­ing the true legal sta­tus.

The SC’s decision

This issue has been recent­ly decid­ed by an SC judge­ment dat­ed 6 June 2012. The SC held that reg­istry courts were enti­tled to request those share pur­chase agree­ments that entailed changes in share­hold­ers hold­ing of at least 10% of the share cap­i­tal, if there were doubts as to the grounds for mak­ing a cer­tain entry in a reg­is­ter. In the judge­ment, the SC has under­lined that it is cru­cial to keep the reg­istry court’s autho­ri­sa­tion to request addi­tion­al doc­u­ments and to strength­en a pre­sump­tion of truth­ful­ness of entries.

In prac­tice, this means that a share pur­chase agree­ment should be attached to each appli­ca­tion for enter­ing a change among share­hold­ers hold­ing of at least 10% of the share cap­i­tal in an LLC if the change has been caused by a trans­fer of shares on the basis of a share pur­chase agree­ment.

Conclusions

From a per­spec­tive of poten­tial par­ties to share pur­chase agree­ments, two dif­fer­ent approach­es should be con­sid­ered. For small or inter­com­pa­ny trans­ac­tions, terms of which can be dis­closed in pub­lic reg­istry files, the only effect of the SC’s deci­sion would be an addi­tion­al copy of the share pur­chase agree­ment with sig­na­tures cer­ti­fied by a notary pub­lic.

For trans­ac­tions of a greater val­ue, which often con­tain sen­si­tive infor­ma­tion, it is rec­om­mend­ed that either an appro­pri­ate excerpt from a share pur­chase agree­ment or an addi­tion­al exec­u­tive agree­ment be pre­pared. The lat­ter con­firms only trans­fer of shares, par­ties to the trans­ac­tion and a price. In this case, all con­fi­den­tial trans­ac­tion­al details remain in a sep­a­rate doc­u­ment, con­sti­tut­ing in fact a share pur­chase agree­ment. This doc­u­ment, how­ev­er, should not be attached to an appli­ca­tion to a reg­istry court.

In prac­tise, the SC’s deci­sion dat­ed 6 June 2012 has two main con­se­quences. First, the need to attach a share pur­chase agree­ment increas­es the for­mal­i­ties con­nect­ed with a reg­is­tra­tion of share­hold­ers that hold at least 10% of the share cap­i­tal. Sec­ond, the costs of these trans­ac­tions are high­er due to a neces­si­ty to obtain an addi­tion­al copy (or extract) of the share pur­chase agree­ment, or even pre­pare a sep­a­rate exec­u­tive share pur­chase agree­ment or trans­fer agree­ment.

In prac­tice, for more sig­nif­i­cant trans­ac­tion, a sep­a­rate trans­fer or “exec­u­tive” agree­ment appears to be the favourable option, since it allows the par­ties to keep the essen­tial ele­ments of the trans­ac­tion away from the light of the pub­lic reg­is­ter.

The Supreme Court held that registry courts were entitled to request those share purchase agreements that entailed changes in shareholders holding of at least 10% of the share capital, if there were doubts as to the grounds for making a certain entry in a register.