Mergers of companies: How to simplify the process by arranging the capital structure | In Principle

Usually, a merger of companies in Poland requires a number of legal steps and preparation of extensive documentation. This can make mergers complicated and costly, in particular if companies with different shareholding structures are involved. But in some cases the regulations allow the parties to simplify the procedure by excluding certain obligations—if certain conditions are met regarding the capital structure of the companies.

Simplified merger under prior law

Before 15 September 2023, the law allowed (as it still allows) a few simplifications of the merger process.

If the acquiring company (other than a public company) holds shares with an aggregate nominal value of not less than 90% of the share capital of the company being acquired:

• It is not necessary to pass a merger resolution—the rationale is that adoption of such a resolution requires a three-fourths majority of votes, representing at least half of the share capital, and since the acquirer holds at least 90% of the shares in the target, the result of voting on such a resolution is obvious
• The management boards of the merging companies do not have to prepare a written report justifying the merger (otherwise, the consent of all shareholders of the merging companies would be required)
• The draft terms of merger do not need to be examined by an auditor (otherwise, the consent of all shareholders of the merging companies would be required).

If the acquirer acquires a wholly owned subsidiary, it can take advantage of all the foregoing simplifications, and also does not have to include in the draft terms of merger:

• Information on the exchange ratio of shares in the target for shares of the acquirer or newly formed company, or the amount of cash contributions, if any
• The rules for issuing shares in the acquirer
• The date from which the shares entitle the holder to participate in the profit of the acquirer.

Further simplifications introduced by new provisions

The amendment to the Commercial Companies Code in Poland effective 15 September 2023 regarding corporate merger procedures introduced a new regulation governing the situation where one shareholder directly or indirectly holds all the shares in both the acquirer and the target or targets. This allows for further streamlining (in addition to the rules discussed above) where the merging companies belong to the same capital group or groups.

The newly added Art. 515¹ provides that the merger may be carried out without granting shares in the acquirer:

• When one shareholder directly or indirectly holds all the shares in the merging companies, or
• When all shareholders of the merging companies hold shares in the same proportion in all merging companies (in particular, this will be the case when entities belonging to different capital groups hold shares in companies as a result of engaging in various types of joint ventures).

The allocation of shares is unnecessary in such a situation, as the capital structure of the acquiring company will be consistent with the shareholding structure of the merging companies.

What if the structure of the companies does not meet the conditions for this new procedure?

In such cases, one option is to carry out the merger procedure in the standard way. But to make the task easier and significantly reduce the set of documents and steps in the merger process (which will cut the time and expense of the merger process), the capital structure of the merging companies can be adjusted to meet the conditions beforehand. Although this restructuring will require some additional steps before starting the merger procedure itself, it may nonetheless prove simpler and more efficient overall.

The capital structure of the companies to be merged can be reshaped through a series of transactions in the shares of the merging companies, so that ultimately the structure meets the conditions listed above, making the merger eligible for the simplified procedure.

Depending on the initial structure, this could take place, for example, through a transfer of shares between the shareholders of the merging companies. In addition to the need to comply with the form prescribed for this type of agreement in the case of a limited-liability company (sp. z o.o.) and, in the case of a joint-stock company (SA), entering the changes in the shareholders’ register, the share transfer agreement may be concluded in a simple form and contain only the basic provisions necessary to make the transfer effective. Thus the cost and timing of drafting and signing the transfer agreement may prove much more advantageous for the entities involved in the merger than starting it without taking such prior steps.

The final capital structure of the merging companies, and therefore also the scope of possible simplifications, largely lies within the discretion of the shareholders of the merging entities. Therefore, in the case of structures that do not allow the use of a simplified procedure, it is definitely worth considering whether it is possible to adjust them accordingly by implementing the solutions described above. Appropriately managing the merger process can make the process cheaper but also more efficient for the entities involved, while facilitating changes in the shareholding structures of the merging companies.

Thus, by way of example:

• If the shares in the merging companies are held by entities that do not belong to the same capital group, but the proportions of the shareholdings in the companies are not identical, “equalisation” of the shareholding levels in the companies may be considered so that the companies can take advantage of the simplifications provided for such a structure
• If the merging entities belong to the same group, but there is no level in the group at which the shares of the entities involved would be owned (even indirectly) by a single shareholder, the structure can be reorganised so that, at any of the ownership levels, all the shares in the merging companies are held by a single entity
• If the plan for the merger is that a shareholder of the target will not become a shareholder of the acquirer, that person’s shares in the target may be transferred prior to the merger
• If the companies belong to the same group, the shares of the targets can be transferred to the acquirer to obtain a structure in which the widest range of available simplifications can be applied.

While a general principle under Polish law is that restructuring activities should be tax-neutral, this principle is limited in the case of a subsequent reorganisation process in which the company participates. A merger or demerger will not be tax-neutral for a shareholder who acquired shares in the company being acquired or demerged through a merger, demerger or exchange of shares, and then, in a subsequent merger or demerger involving that company, acquires shares of the acquiring or newly formed company. Therefore, the measures aimed at simplifying the structure before the merger should always be analysed also in terms of their tax impact.

As shown by the examples mentioned above, there is considerable leeway in arranging the capital structure of the merging companies prior to conducting the merger. Thus, particularly in the case of complex mergers, this is certainly an option that can be considered to facilitate the reorganisation within the capital group.

Łukasz Śliwiński, attorney-at-law, Monika Lutomirska, adwokat, M&A and Corporate practice, Wardyński & Partners