Exercise of share rights by the acquirer of registered shares
22.09.2011
corporate
Can the buyer of registered shares fully exercise all share rights immediately upon acquisition of the shares?
An interesting but frequently overlooked issue under the Polish Commercial Companies Code is determining the time when the acquirer of registered shares in a non-public joint-stock company obtains full rights under the shares.
Under Commercial Companies Code Art. 343 §1, in dealings with the company, the holder of bearer shares is regarded as being the shareholder, or, with respect to registered shares, the person entered in the share ledger as the owner.
The code specifies the procedure for making entries in the share ledger in the case of acquisition of registered shares. Under Art. 341, the acquirer of registered shares must apply to the management board to enter the acquirer in the share ledger, enclosing documents justifying the entry. Upon receipt of the application, the management board is required to notify the interested parties of the planned entry in the ledger, giving them two weeks to assert any objections they may have to the entry.
Any objection must be made in writing, and timely filing of an objection prevents entry of the acquirer in the share ledger until the matter is decided by the court.
If an entry is made in the share ledger in violation of these requirements, the entry is defective. This means that the entry may be challenged by anyone with standing to do so (specifically former shareholders and new shareholders), and members of the management board who violated the requirements may also be held responsible.
There are also issues arising under Art. 406 §1 of the code, which provides that the holder of registered shares has the right to participate in the general meeting of shareholders if the holder was entered in the share ledger at least one week prior to the meeting.
On the surface, three conclusions may apparently be drawn from the literal wording of these regulations:
First, the acquirer of registered shares is not regarded by the company as the shareholder immediately upon acquisition of the shares or notification of the company—regardless of whether the person has acquired a tiny stake in the company or has bought 100% of the shares—and thus the acquirer may not fully exercise the rights to the acquired shares (e.g. voting at the general meeting).
Second, at least two weeks must pass between the time the company is notified of acquisition of the shares and making of the relevant entry in the share ledger, and thus the company’s recognition of the acquirer as the owner of the shares.
Third, the acquirer of registered shares may exercise full rights to the shares by voting at the general meeting only if the acquirer was entered in the share ledger at least one week before the meeting is held.
If these conclusions were accepted, it would mean that even an acquirer of 100% of the registered shares in a company could obtain real influence over the company’s affairs only three weeks, at the earliest, after acquiring the shares (i.e. two weeks from notice to the company of acquisition of the shares until entry in the share ledger, plus one week from entry in the share ledger until the date of the general meeting).
But these conclusions, based on a literal reading of Commercial Companies Code Art. 341 and Art. 406, cannot be squared with the conclusions drawn from an interpretation guided principally by the purpose of the regulations.
The Polish Supreme Court pointed to this aspect of the issue indirectly in its judgment dated 4 December 2009 (Case No. III CSK 85/09, published at OSNC 2010/7-8/113), in which the court stated that the entry in the share ledger is only significant for evidencing the holder’s entitlement. In the court’s opinion, if a person participating in the general meeting of shareholders is substantively entitled to participate but has not been entered in the share ledger pursuant to Art. 406 §1, that should not entail negative consequences for anyone. The Supreme Court took a similar view under the old Commercial Code in its judgment dated 11 March 1949 (Case No. Wa.C. 292/48, published at LexPolonica No. 323664), stating that Commercial Code Art. 399 was intended only to maintain order and help properly determine who is entitled to participate in the general meeting.
So, when acquiring registered shares, is it actually possible to obtain real influence over the affairs of the company earlier than suggested by the periods discussed above?
It appears—at least in the case of acquisition of 100% of the shares—that the answer to this question may be “yes”, provided that certain steps are taken to relax the formal requirements and shorten the process provided for in the Commercial Companies Code.
In order to reduce the possible risk connected with allegations that the acquirer of the shares has violated Art. 341 of the code, the former shareholders represent 100% of the capital (regardless of the number of shares sold) and the acquirer should jointly:
- make the notice required by law, specifically Art. 341 of the code, and Art. 6 as well if the acquirer obtains a dominant position in the company (with respect to one another and with respect to the company);
- apply to the management board to make the entry in the share ledger (on the basis of Art. 341 §2); and also
- waive the right to object to the entry in the share ledger under Art. 341 §4.
The arguments in favour of the permissibility of this procedure are as follows:
First, these actions are made by shareholders representing 100% of the capital as well as by the acquirer of the shares. Thus it may be assumed that if there are no other entitled persons for purposes of Art. 341 (and the group of entitled persons is rather narrow, including owners of the shares and, potentially, persons holding a lien on the shares or usufruct of the shares), apart from such persons there is no one else who should be notified or who would have any rights connected with sale of the shares.
Second, by taking these steps, each of the entitled persons takes a relevant position on the matter, i.e. waives the right to object to entry of the acquirer in the share ledger. It may thus be assumed that all actions required by law will be properly taken.
Third, each of the shareholders takes the required action before the end of the periods indicated by the procedures set forth in the code. It is irrelevant in this respect that the periods have not yet begun to run.
It may reasonably be argued that the purpose of the regulations requiring the management board to provide notice of the planned changes in the share ledger and to wait a week after entry of the new shareholder in the ledger is to assure adequate protection of persons whose legal interests could be harmed as a result of making an entry that is contrary to the factual or legal status.
If each of the persons indicated above participates in taking these steps, it should be accepted that they thus acknowledge the fact of taking these steps. It would be hard to imagine a persuasive counterargument that the interests of these persons could suffer as a result of making the entry in the share ledger.
Moreover, if the company has only one shareholder, reference should be made to Art. 303 §1 of the code, which provides that in a single-shareholder company the sole shareholder exercises all of the rights of the general meeting. A functional interpretation of this provision indicates that in a single-shareholder company, the sole shareholder exercises the rights of the general meeting but does replace the general meeting. It may thus be argued that whether or not the obligations set forth in Art. 406 §1 are performed, the sole shareholder may exercise the rights of the general meeting pursuant to Art. 303 §1.
It must be borne in mind that any legal procedure serves specific purposes, and is not an end in itself, to be complied with even if the purpose it was designed to serve has already been achieved. There is thus no need to notify the shareholders separately of facts which they have already definitively taken a position on. Thus sending notices to specific shareholders as referred to in Art. 341 §4, as with preventing the sole shareholder from acting before the end of the period referred to in Art. 406 §1, would be nothing but a gratuitous formality.
The solution presented above appears well-grounded. It is also supported by some legal scholars, and is reflected in the cases cited. Nonetheless, each case must be reviewed individually, and clearly the risk that a specific court might rely solely on a literal reading of the Commercial Companies Code or the provisions of the company’s internal regulations (such as the company statute) cannot be ruled out entirely.
Dr Jarosław Grykiel and Maciej Szewczyk, Corporate Law practice, Wardyński & Partners
