Restrictions on trading in shares under the Agricultural System Act | In Principle

Before any transfer of shares in companies, it is essential to analyse the transaction in the context of the restrictions on share trading under the Agricultural System Act. If any of the subsidiaries holds an agricultural property (of at least five hectares), it may be necessary to notify the National Support Centre for Agriculture. Failure to notify the transaction will invalidate the transaction.

In Poland, restrictions are in place on both direct and indirect trading in agricultural property. In principle, acquisition of such a property (with an area of not less than one hectare) requires approval from the National Support Centre for Agriculture (KOWR), as we discuss in the article “Proceedings before the National Support Centre for Agriculture: Obtaining approval for acquisition of agricultural property.” KOWR also has a pre-emption right or the right to purchase shares of companies that are the owner or perpetual usufructuary of agricultural property (with an area of not less than five hectares).

The criteria for evaluating transactions under the restrictions of the Agricultural System Act were tightened as of 5 October 2023. It is now necessary to examine not only whether agricultural property is held by the company whose shares are being transferred, but also by its subsidiaries.

From an investor’s perspective, this is crucial information, as in the course of legal due diligence there is a need to examine the entire capital structure of the company and analyse the legal nature of the real estate held by subsidiaries. Significantly, failure to exercise due care in this respect may result in invalidity of the transaction, and the invalidity cannot be cured. The only remedy is to repeat the entire transaction, which entails many hard-to-predict consequences, especially tax consequences. And sometimes the transaction cannot be repeated because one of the parties no longer exists.

What M&A transactions are subject to restrictions?

Primarily, the restrictions apply to:

• Contracts for transfer of shares in a company that owns agricultural property of at least five hectares
• Contracts for transfer of shares in a dominant company that owns shares in a company that is the owner of agricultural property of at least five hectares.

In addition to transfer agreements, other transactions involving shares in companies are also subject to restrictions, in particular:

• Gifts
• Swaps
• In-kind exchanges
• Increase in the share capital of a company
• Merger or demerger of a company.

Exemptions

An exception is the transfer of shares in companies whose shares are admitted to organised trading (within the meaning of the Trading in Financial Instruments Act), transfer of shares to a family member, and transfer of shares for the purpose of redemption. Currently, there are also no restrictions on the conversion of companies.

What is a “dominant company”?

At this point, it is important to clarify what exactly is a “dominant company” (aka a “parent company”). The Agricultural System Act carries over the definition from the Commercial Companies Code, according to which a company is dominant over another company when:

• It holds a majority of votes at the shareholders’ meeting or general meeting or on the management board of the subsidiary
• It has the power to appoint/remove a majority of the members of the subsidiary’s management or supervisory board
• The dominant company’s management board members constitute more than half of the members of the subsidiary’s management board, or
• It exerts decisive influence over the activities of the subsidiary, in particular as a result of an agreement between the dominant company and the subsidiary providing for management of the subsidiary or upstreaming of the subsidiary’s profits.

Thus, instead of bright-line criteria for assessing whether one company is dominant over another, the law refers to exerting decisive influence over the subsidiary, which may generate doubts in interpretation.

The law also does not specify whether only direct dominance counts, or also indirect dominance. Thus a situation cannot be ruled out where the right to acquire shares will be vested in KOWR in a case of indirect dominance, where the company whose shares are the immediate subject of the transaction (the “grandparent” company), in addition to being the parent company, directly holds shares in a subsidiary of the parent company (the “grandchild” company) that holds legal title to agricultural property. Even owning a 5% stake would suffice. Therefore, in some cases, before completing the transaction, it is necessary to examine the entire corporate structure of the company whose shares are being transferred, as well as the legal status of the properties of all the companies in the structure.

The procedure for entering into an transfer agreement or other type of transaction

For a transfer, it is necessary to conclude the transfer contract on the condition that KOWR does not exercise its pre-emptive right within two months from the date of notification.

For other transactions, in principle the transaction must first be carried out, and subsequently the right to acquire shares must be notified to KOWR.

In both cases, a number of documents must be enclosed with the notice to KOWR to be effective. The notice must be sent to KOWR immediately after conclusion of the agreement or performance of other relevant act. Otherwise, it may be deemed ineffective. The notice is made not by a company that is a party to the transaction, but by the management board of the company whose shares are the subject of the transaction. Thus it is the responsibility of that company’s management board to complete the required attachments.

Do the restrictions apply to foreign parents?

The Agricultural System Act does not directly answer this question. Nevertheless, the restrictions do not seem to apply here. First of all, the act refers to the definition of a dominant company under the Polish Commercial Companies Code, pursuant to which a dominant company holding the shares may be a limited-liability company (spółka z ograniczoną odpowiedzialnością) or a joint-stock company (spółka akcyjna)—i.e. Polish corporate forms.

It is understood that the concept of a dominant company within the meaning of the Commercial Companies Code extends to foreign companies only in exceptional cases. But most often, the concept of a dominant company covers only companies established under Polish law, since the commands and prohibitions stated in the Commercial Companies Code are expressly addressed to them. Additionally, acquiring or losing the status or a shareholder, and rights and obligations pertaining to this status, are governed by the laws of the country where the legal entity is established. For these reasons, it should be recognised that the transfer of shares of companies established in another country but holding agricultural property in Poland is not subject to the restrictions of the Agricultural System Act.

The powers of the National Support Centre for Agriculture

To exercise its pre-emptive right or the right to purchase shares, KOWR may inspect the company’s books and records and demand disclosure of information not included in the books and records. Additionally, KOWR may challenge the transfer price for shares set in the transfer agreement when, in its opinion, the price grossly deviates from the market value. This poses a major risk to the parties, as the price set during the parties’ negotiations may be successfully challenged in court.

Conclusion

Observation of the practice shows that the National Support Centre for Agriculture extremely rarely exercises its pre-emptive right or right to purchase shares in these transactions. But the sanction for carrying out a transaction in disregard of KOWR’s authority is extreme: absolute nullity of the transaction.

Sylwia Moreu-Żak, attorney-at-law, Aleksandra Szczepińska, Real Estate practice, Wardyński & Partners