Two, three, or maybe ten years? | In Principle

The statute of limitations on M&A claims

One of the key elements of mergers and acquisitions is determining the boundaries (in value as well as time) of the parties’ liability. Obviously, the nature and subject matter of the liability will vary. While in the case of the buyer the source of liability is the duty to pay the agreed price, in the case of the seller liability primarily involves defects in the subject of the transaction and compliance with representations and warranties made in the agreement.

If a share sale agreement does not provide for liability in the nature of a guarantee, the time frames for liability will be governed by the statute of limitations.

The regulations generally provide for three types of limitations periods:

• 10 years where there is no specific regulation (Civil Code Art. 118)
• 3 years, more specifically for claims connected with economic activity (Civil Code Art. 118)
• 2 years for, among others, claims arising out of a sale made within the scope of the seller’s enterprise (Civil Code Art. 554).

Under Civil Code Art. 119, these statutory limitations periods may not be shortened or extended by the parties. This means that the length of the limitations period is essentially independent of the intent of the parties.

In light of commercial practice—where share deals are generally made between companies—it is vital to determine which of these limitations periods applies to the parties’ mutual claims arising out the share sale agreement.

First the wording of Civil Code Art. 554 should be considered and it should be determined whether the sale of shares is made within the scope of the seller’s enterprise.

The Supreme Court of Poland has taken the view (judgments of 2 December 2010, Case No. I CSK 10/10, and 23 October 2013, Case No. IV CSK 151/13) that the fact of holding shares in commercial companies or buying and selling of shares generally does not constitute the subject of the business of the shareholders (the buyers and sellers of the shares) if trading in the shares results from exercise of their property rights arising out of the corporate relationship. Thus while the sale of shares may be regarded as a sale within the scope of the enterprise as referred to in Civil Code Art. 554 (Supreme Court judgment of 19 November 2004, Case No. II CK 175/04), in practice it will not always be treated as such a sale. The key is to determine whether in the specific case the sale of shares is made within the scope of the seller’s enterprise (and is thus subject to Civil Code Art. 554) or not (and thus is covered by general rules) (Supreme Court judgment of 29 February 1996, Case No. III CZP 13/96).

For example, if the subject of the business actually conducted by the seller is trading in shares, it is clear that Civil Code Art. 554 will apply to a sale of shares by the seller. The situation would be different if the seller conducts other business and, for example, as part of an internal reorganisation decides to sell a minority stake of shares in a company involved in a business different from that of the seller. In the latter case, depending on the specific circumstances, it may be assumed that the sale of shares will not fall within Civil Code Art. 554.

Second, it is necessary to examine whether the claim by a party to the sale agreement is “connected with the conduct of economic activity” (as indicated by Civil Code Art. 118).

The concept of actions connected with the conduct of economic activity is interpreted in the case law to mean actions taken with the aim of directly or indirectly realising tasks falling within the subject of the business of the given entity (e.g. Supreme Court resolution of 25 November 2011, Case No. III CZP 67/11). This does not mean that every act by an entity conducting economic activity (including any acquisition or sale of shares) should be classified as connected with the economic activity conducted by the entity (resolution of 7-judge panel of the Supreme Court of 14 May 1998, Case No. III CZP 12/98). As the Supreme Court has held (resolution of 11 June 1992, Case No. III CZP 64/92), actions by an economic entity fall within the scope of its economic activity when there is an ordinary, functional connection with the economic activity—particularly if they are taken with the purpose of realising tasks connected with the subject of the entity’s activity.

Therefore, if for example the seller sells shares it holds in a subsidiary through which it has conducted some part of its economic activity, it would appear justified to find that there was a connection between the share sale agreement and the economic activity conducted by the seller.

In summary:

• The two-year limitations period set forth in Civil Code Art. 554 applies only to claims by the seller conducting a sale as part of its enterprise.
• The three-year limitations period set forth in Civil Code Art. 118 may apply to either a seller (other than one falling under Art. 554) or a buyer, when the share sale agreement is connected with the economic activity conducted by the given party.
• The 10-year limitations period referred to in Art. 118 is applicable to either party of the sale agreement if the agreement is not connected with the economic activity of the party.

Thus the issue of the statute of limitations for claims held by the parties to a share sale agreement depends on the relationship between conclusion of the agreement and the subject of the economic activity conducted by the party.

It follows that the limitations period for claims arising out of one contractual relationship (the share sale agreement) may be different for each of the respective parties. Given this state of affairs, some commentators have quite reasonably called for repeal of Civil Code Art. 554.

Maciej Szewczyk, Mergers & Acquisitions Practice, Wardyński & Partners