The situation of the secured creditor after taking title to pledged shares
When a creditor enforces its registered pledge by taking title to pledged shares, it’s just the start. To effectively take control of the company and satisfy its claim by selling the shares or assets, the creditor must take a series of legal and factual steps. It’s not always easy.
One of the main advantages of a registered pledge on shares is the creditor’s ability to satisfy its secured claims against the pledged asset outside of execution proceedings. Legally, the most commonly used option in this respect is for the creditor to take title to the pledged shares.
I won’t go into the procedure as such here—it is the subject of numerous publications. I will assume that the creditor has effectively and without legal hindrances taken title of the shares, enforcing the pledge, and become the legal owner of the company. Nor will I discuss the search for a buyer for the acquired shares. Instead, I will address several practical issues connected with effective assumption of control over the company by the pledgee. In my view, the legal literature doesn’t devote much attention to these practical issues, but focuses on satisfaction of the creditor outside of execution proceedings, and related matters.
This article largely derives from the author’s own practical experiences conducting the assumption of title to pledged shares by the secured creditor.
Entry in the National Court Register
The first major challenge for the pledgee is changing the company’s management board and registered office. As the new shareholder, the pledgee should adopt the appropriate resolutions as soon as possible to change the management board—removing the current board members and appointing new members chosen by the pledgee.
Resolutions recalling and appointing board members are effective upon adoption, but in practice many persons dealing with the company will have concerns about cooperating with board members not disclosed in the National Court Register (KRS). Thus it is in the pledgee’s own interest to enter itself in the KRS as soon as possible as the shareholder, along with the change in registered office and board composition.
Assuming that they are adopted in compliance with the law and procedures, corporate resolutions enjoy a presumption of validity. To set them aside, it is necessary to initiate litigation, potentially seeking a finding:
- Confirming that the resolution is invalid
- Vacating the resolution, or
- Determining under Art. 189 of the Civil Procedure Code that the resolution is non-existent.
Without delving into these types of claims in detail, it should only be pointed out here that filing such claims might be a defensive move by the former board members or the former shareholder against whom the claim secured by the pledge on the shares was satisfied outside of execution proceedings by taking title to the shares. When the creditor enforces the pledge of the shares, it should always be prepared in advance for such defensive manoeuvres, and create a procedurally effective litigation strategy to counter them.
Regulatory duties
Once the pledgee has taken the appropriate corporate changes in the management board, the registered office, and, if desired, the articles of association, there are still some strictly regulatory matters to address. Sometimes taking control over a company requires approval from the president of the Office of Competition and Consumer Protection, for antitrust reasons. This is a complex area which we won’t explore here, but the pledgee must bear this in mind, verify with its legal advisers whether the size and turnover of the company require notification of the competition authority, and if necessary obtain the relevant approval.
The next formal aspect is the duty to disclose the beneficial owner of the shares in the Central Register of Beneficial Owners, on the part of the pledgee who has taken title to the shares. Entry of this information, and the procedure for updating the register, is fairly straightforward and can be done entirely online. Nonetheless, it is essential to determine in due time who qualifies as the beneficial owner within the pledgee’s corporate structure. This can be a problem sometimes, particularly in the case of foreign creditors held by various types of trusts or by loan funds with a complex, multilevel corporate structure.
The pledgee should also formally notify the company’s management board of attainment of a dominant position in the company. The sanction for failing to comply with this obligation is depriving the shareholder of its voting rights.
Access to the company’s accounting and financial records
This is where the biggest practical and logistical challenge in the whole process arises. Assuming control over a company by enforcing rights under a pledge, and appointing the creditor’s own management board, in practice means it is necessary to begin actual management of the company, that is, to perform reporting, tax and accounting obligations. To do this requires access to the complete and historical financial and accounting records. It should be borne in mind also that the management board members appointed by the creditor will bear full responsibility for the company’s tax and accounting matters, along with the risk of secondary personal liability. The manner of taking control over the company, and lack of access to historical data, will not in any measure, even partially, relieve the management board members of that responsibility.
Access to the full range of documentation is also vital if the pledgee takes control over a special-purpose-vehicle company that owns a project asset, such as real estate. In that situation, through enforcement of its pledge on the shares, the creditor intends de facto to control the process of selling the asset, satisfying its claim out of the proceeds. In the course of sale of an asset such as real estate, typically detailed due diligence is conducted. To effectively carry out such an examination, the buyer will require access to a variety of documents, including historical ones, e.g. all types of administrative decisions such as building permit, occupancy permit, environmental decisions and the like. Hence it is essential to take proper control of the company’s documentation. It is also a good practice for the creditor to conduct vendor’s due diligence with the aid of professional legal advisers. The resulting report will outline systematically the creditor’s knowledge of the company, its assets, and material legal risks, and also simplify and expedite the sale negotiations with prospective buyers.
This raises the question of how to take control of the company’s documents when the prior management board and shareholder refuse to cooperate, or take a hostile attitude, or, which also sometimes occurs, there is no contact with the former management board. It should first be determined who holds the relevant documents, and where. Very often companies use outside accounting firms to maintain their accounts. Such external professionals are required to cooperate with the new owners and turn over the documentation to the current management board disclosed in the National Court Register.
If the documentation is in the possession of the former management board, and the board members for whatever reason refuse to turn it over to the new board, the new board may have to apply to the court for an order requiring the old board to turn over the documents. The dismissed board should relinquish the documentation, which belongs to the company. But such litigation can be lengthy, and in the meantime the lack of documentation can cause real problems in current running of the company.
Obtaining access to the company’s bank accounts
It might seem that accessing the company’s bank accounts is simple and should not pose major problems for the new management board. In principle, the bank maintaining the accounts, relying on the KRS data, should grant access to the new management board and remove access by the dismissed management board members. The new board, representing the company, should be able to make full use of the corporate banking system.
But in practice, due to anti-money-laundering regulations, the bank may require examination of the new beneficial owner of the company in connection with the change in control.
In this examination, commonly referred to as the “know your customer” (KYC) procedure, the bank may demand a range of documents and information in order to identify and analyse the beneficial owner. Unfortunately, banks often do not regard the entry in the Central Register of Beneficial Owners alone as sufficient. Thus the creditor, as the new entity controlling the company, must be prepared to provide a range of corporate and registration documents, sometimes notarised and affixed with an apostille clause and accompanied with a sworn Polish translation. In practice, KYC procedures are lengthy, burdensome and formalistic. Unfortunately, in practice access to the accounts may be blocked until the new owner has successfully passed the KYC process. If the KYC result is negative, AML risks are identified, or the bank finds it cannot clearly identify the beneficial owner, in the worst case the bank may even close the company’s accounts.
In summary, effectively taking over the shares of a company in exercise of the creditor’s rights under a registered pledge—which in itself can be difficult and time-consuming despite the apparently simple and clear regulations—is often just the first step toward satisfaction of the creditor’s claim. To complete the enforcement process, the creditor typically must conduct a sale of the shares of the acquired company or certain assets of the company, such as real estate. During the interim period, the creditor must manage the company. To conduct this process properly, a number of legal and factual steps are required, which often take a great input of effort and funds. For effective enforcement, it is vital for the creditor to be aware of all these aspects of the process and properly prepare in advance.
Mateusz Tusznio, adwokat, restructuring adviser, Banking & Project Finance practice, Wardyński & Partners
