Administrative permits and corporate transformations: How to ensure business continuity?
For companies participating in a reorganisation to continue pursuing their owners’ objectives, permits, licences or other administrative decisions necessary for operation must be secured. Proper preparation for this process requires not only knowledge of the regulations under which the administrative decisions are issued, but also the agencies’ procedural practice.
In the Polish legal system, permits issued under administrative law are wide-ranging, and cases involving them are decided by different levels of administration. Sometimes rulings are delegated to field offices, whose practice and interpretation of the regulations may be inconsistent. And administrative officials are not always comfortable navigating the corporate reorganisation provisions, which are outside their daily routine.
The general rule governing processes of merger or demerger is legal succession. But in Polish administrative law, universal succession is subject to limitations, under the Commercial Companies Code and special laws (e.g. environmental). A general principle of administrative law is that rights and obligations of an administrative nature are closely linked to the entity for which they were established.
As a rule, rights arising from administrative-law relations are non-transferable and non-hereditable, as the administrative-law relationship is specific. On one hand, it binds the individually designated addressee and, on the other, the public administrative body. Thus, in substantive administrative law, the rule is the impermissibility of legal succession, unless the transferability of rights arising from the administrative-law relationship is grounded in a specific provision of substantive law or in the administrative act issued pursuant to that provision.
Exceptions to this rule are provided for in the Commercial Companies Code, but they do not apply to all situations where a corporate merger or demerger takes place. Meanwhile, the rights arising from “non-transferable” administrative decisions may be crucial for the acquiring or newly formed company to be able to conduct its business. Awareness of these limitations allows the parties to plan the reorganisation and take steps to ensure that the activity can be continued. Taking into consideration the inconsistent approach of administrative bodies to transfer of such decisions, these steps need to be arranged accordingly (often down to the specific day).
Art. 494 of the Commercial Companies Code provides for universal succession in a merger, unless a decision or specific law provides otherwise. Analogous effects are provided for in the case of a demerger, where the rights and obligations under administrative acts connected with the assets of the demerged company allocated in the draft terms of demerger are transferred to the acquiring or newly formed company. In contrast, the Accounting Act provides for accounting for the effects of reorganisation and use of financial data of the acquired or divided company so they are properly reflected in the books of the surviving company.
Based on our experience, in light of the regulations governing decisions issued to an entity undergoing reorganisation, we can formulate conclusions helping identify the issues to be analysed in the initial phase of the reorganisation:
- Administrative-law succession applies only to permits, licences or exemptions granted after the effective date of the Commercial Companies Code (1 January 2001).
- There is no need for a specific provision allowing a decision or exemption to be transferred to the acquiring company. On the contrary, the code itself provides a basis for the acquiring or newly formed company to step into the shoes of the company being acquired or divided. In a specific case, it is the act or decision that must exclude application of the code.
- After the date of the merger or demerger, the acquiring or newly formed company must continue to meet the criteria for obtaining a given right, whether involving the entity (e.g. having a clean criminal record or existing in a certain legal form) or the subject matter (e.g. having appropriate assets or qualified personnel).
- The succession rules in the Commercial Companies Code cannot provide a basis for the allocation of rights and duties under administrative decisions among the companies involved in the split, in the event that both the company being split and another company participating in the split were to exercise them as a result of the split. Appropriate actions to obtain a new decision or other act for the company being acquired or the newly formed company, or to amend a decision or act issued in favour of the company being split, must be taken before the relevant administrative body. This makes it necessary to coordinate the date of the merger or demerger with the date on which the competent body grants or modifies the rights or duties in question.
Reorganisation and transfer of a decision on environmental conditions
With regard to the transfer of rights under a decision on environmental conditions, Art. 72a of the Polish Environmental Impact Assessment Act constitutes a specific law (lex specialis). Pursuant to this provision, the authority competent to issue a decision on environmental conditions is obliged, with the consent of the party to whom the decision was issued, to transfer the decision to another entity if it accepts the conditions stated in the decision.
The possibility of transferring a decision on environmental conditions (which has a preliminary character) is certainly an important response to market changes and the need to reorganise business entities. In the procedure for transferring a decision on environmental conditions, only two parties are involved, i.e. the rightholder under the decision and the party interested in assuming the rights. The entity seeking to assume the rights under an administrative ruling should submit a transfer request to the administrative authority issuing the substantive decision. The rights arising from a decision on environmental conditions are transferable, but only under the conditions stipulated by the act. This means that transfer of a decision on environmental conditions can only take place by way of an administrative decision. The holder must agree to transfer of the decision to another entity, and the entity to which the decision is to be transferred must absolutely accept all the terms and conditions arising from the decision.
However, practice shows that the transfer procedure is not as simple as a reading of the regulations might suggest. Administrative authorities interpret Art. 494 of the Commercial Companies Code in conjunction with Art. 72a of the Environmental Impact Assessment Act inconsistently. Moreover, a statement from the existing holder may not be sufficient, and sometimes is impossible to obtain, since the entity has already been “absorbed” by the newly formed or acquiring company, i.e. formally it no longer exists.
This lack of consistent treatment of the procedure for transferring environmental decisions can disrupt reorganisations, especially if multiple decisions are being transferred, issued by different authorities in different parts of the country—a dilemma we have faced more than once.
Transfer of a non-final decision, or a partial transfer, i.e. of only some conditions of the environmental decision, is also problematic. Most commentators seem to reject this possibility. To avoid complications and ensure business continuity, this issue should be examined in advance and planned for in the draft terms of reorganisation.
The foregoing problems also occur in the case of companies’ mergers and demergers, as the Commercial Companies Code and specific laws in relation to the code often prove inadequate.
Reorganisations of energy companies and industrial customers
It should come as no surprise that the Energy Law contains provisions requiring interpretation when juxtaposed with the rules for companies’ mergers and demergers. Indeed, due to its importance to state security and ensuring the supply of utilities and fuel to consumers, energy is one of the most regulated areas of the economy.
The Energy Law provides for expiration of the licence due to deletion of the company holding the licence from the register. A literal interpretation of the law would result in expiration of the licence even upon conversion, as any reorganisation (with the exception of a demerger by split-up and spin-off) results in deletion of the company being taken over or converted from the register. However, a position has developed in the legal literature that excludes the application of this provision when the licensed activity is continued through succession (or in accordance with the principle of continuation under transformation).
But this does not mean that the issue of guaranteeing the continuity of licensed activities can be treated lightly. The Energy Law contains a whole catalogue of requirements necessary to obtain a licence, and the president of the Energy Regulatory Office has issued guidance in the form of “information packs” whose volume exceeds the length of this article many times over. This guidance is intended to help applicants submit the correct set of documents when applying for a licence. These requirements include:
- No criminal record for offences related to the business in question (harder than it might seem to demonstrate in the case of foreign entities)
- Possessing the necessary infrastructure (technical capabilities)
- Access to financial resources ensuring proper operations
- Guarantee of proper performance of the licensed activity.
The regulator may request clarifications to verify whether the acquiring or newly formed company meets the requirements for holding a particular licence. If this cannot be confirmed, the regulator may amend or revoke the licence.
On the other hand, with a demerger, the parties need to remember to contact the market regulator to determine the procedure for obtaining a new licence and amending the existing one, if after reorganisation the licensed business is to be continued by more than one company. While an existing licence may be amended sometime after the merger or demerger, a new licence should be issued on or immediately after that date. This means that it is necessary to prepare the application and collect the required documentation well in advance, so that the regulator can examine them and issue a licence in due time to guarantee the continuity of the licensed activity.
For obtaining and enjoying relief for industrial customers, the regulator has confirmed that in performing its obligations as an industrial customer and applying for industrial customer status in the following year, the acquiring company may use the financial data of the acquired company which had this status on the date of the merger. The application for relief for the following year may include the aggregated financial data of both companies for the purpose of demonstrating that the acquiring company meets the requirements for obtaining relief.
Reorganisations of food and healthcare entities
Entities operating in areas affecting consumers’ life and health are subject to particularly strict legal regulation. This is manifest in the need to obtain various types of permits, approvals and/or entries in registers maintained by regulators, and to maintain the validity of these administrative instruments for conducting uninterrupted operations in a given area. These are requirements arising from extensive sectoral regulations such as the Pharmaceutical Law, the Medical Devices Act, the Food and Nutrition Safety Act, as well as, for example, the Act on Prevention of Alcoholism. Fulfilment of these requirements is overseen by authorities such as the Office for Registration of Medicinal Products, Medical Devices and Biocidal Products, the Minister of Agriculture, the Minister of Environment, pharmaceutical and sanitary inspectorates, local offices of the state administration, and local government bodies.
Reorganisations have different models, and it is critical to tailor the reorganisation model not only to the tax environment (which is a common motivation for introducing changes in a group structure), but also to the regulatory environment of the specific industry. For example, in a merger, acquisition or reorganisation involving a supermarket chain, in the food industry it is important to remember that each store has a separate sanitary approval, and if the store sells alcoholic beverages, it must have three retail licences (depending on the strength of the products) to offer the full range of such products.
When it comes to demerging or merging companies, the following issues should be taken into account:
- Some permits are treated as inextricably linked to the holder and therefore are treated as non-transferable under law and practice. Examples include alcohol permits, as well as pharmacy permits (especially after this year’s “Pharmacies for Pharmacists” amendment, which is highly controversial and has been appealed to the European Commission).
- Even when dealing with permits that in principle are not non-transferable, in practice administrative bodies are reluctant to amend an administrative decision (the form in which all types of permits are issued) to designate a different holder.
Thus if as a result of the companies’ reorganisation, a regulated activity carried out by company X is taken over from a given date by company Y, the administrative bodies usually take the position that it is necessary to issue a new administrative decision to the new entity. Formally, this will involve revocation of the permit for X and issuance of a new permit to Y. Then it will be necessary to coordinate the reorganisation process so that all new permits are issued on the pre-scheduled date of implementation of the companies’ reorganisation.
So, when preparing a reorganisation process, it should be checked in advance whether and under what conditions given permits are transferable. If necessary, it is worth consulting the proposed approach to this process with the authority or authorities who issued the permits and oversee the regulated activities, and to allow a realistic amount of time for transferring the legally required permits or obtaining new ones (optimally at the preplanned implementation date of the companies’ reorganisation).
Conclusion
Only an extensive analysis of the factual and legal status of the planned reorganisation will allow it to be properly prepared, maintaining business continuity and minimising the costs. Involving specialists in various fields of law in the reorganisation process will ensure that the entire process runs smoothly, while reducing the risks associated with transfer of rights under administrative law.
Marek Dolatowski, adwokat, M&A and Corporate practice, Energy practice, Wardyński & Partners
Małgorzata Piekarska, adwokat, Environment practice, Wardyński & Partners
Joanna Krakowiak, attorney-at-law, Life Sciences & Healthcare practice, Wardyński & Partners
