Will the simple stock company become the most popular corporate form in Poland?
In the current legal system, the regulations on types of companies, their bodies and manner of functioning, liability for the company’s obligations, and protection of creditors, derive in basically unaltered form from the Commercial Code of 1934. The 1990s saw the introduction of modern regulation of the capital market in Poland. The following decades led to adoption of the Commercial Companies Code, gradual harmonisation of corporate law with EU law, and introduction of regulations allowing the use of digital technology in the establishment of limited-liability companies and certain aspects of their functioning.
In the course of these changes, regulations have been broadened and new forms of partnerships have been added to the Polish legal system. However, at no stage has there been any significant revision of the basic principles of operation of companies, including the creation of any new type of company beyond the limited-liability company and joint-stock company.
2020 will significantly change this situation.
On 19 July 2019, the Polish Parliament adopted an act introducing the simple stock company (prosta spółka akcyjna—PSA), amending the Commercial Companies Code in this respect. It will take effect on 1 March 2020.
According to data from Statistics Poland, at the end of 2018 there were nearly 489,000 commercial companies and partnerships of all types in Poland, including over 402,000 limited-liability companies and 10,000 joint-stock companies. At this stage, the Parliament has deliberately decided not to interfere in the rules of operation of existing types of companies, as the introduction of new, significantly modernised provisions would risk destabilising entities operating according to standards set over the decades the existing rules have been in force.
The simple stock company was created as a vehicle for investing in innovative activity and new technologies, providing the flexibility necessary to use electronic communications and other ICT tools at every stage of the company’s operation. However, it may easily turn out that in the near future, a significant proportion of all new companies may be set up as simple stock companies, and many existing companies will be converted into simple stock companies.
So what are the advantages of a PSA?
PSA assets, shareholders’ rights and creditor protection
A simple stock company will have share capital from shareholders’ contributions in an amount as little as PLN 1. Contrary to the previous rules, the subject of in-kind contribution to a PSA could be a non-transferable right with property value or performance of work.
These rules will allow the status of shareholder to be granted to persons bringing exclusively knowledge and skills to the company, or property rights that cannot be sold. No such leeway has been provided for either of the existing forms of companies, as the Parliament has relied on the paradigm of creating the power of companies solely on the basis of the salable value of the assets contributed to the company by its shareholders. But changes taking place in the economy demonstrate that the knowledge and abilities of the company’s founders and managers may be commercialised and contribute to the company’s substance just as well as transferable property rights or cash in the current model for functioning of companies. Meanwhile, the protection granted to shareholders of companies against liability for the company’s obligations is unavailable to partners of partnerships without creating complex structures involving the creation of a group of companies consisting of both a partnership and at least one company.
In relation to the change in the approach to contributions to the company, a simple stock company can have share capital formed solely from in-kind contributions, i.e. with salable value for the company. As the company will be able to accept other contributions too, and issue shares for them, all shares in a PSA will be of the same nature and will not have a nominal value. As a result, contributions incapable of being made in kind will not be recognised as forming the substance of the share capital, and the amount of share capital will not be correlated with the total number of shares as in the other types of companies.
No less important, the amount of share capital will not be specified in the articles of association, and in certain cases it will not be necessary to follow the provisions on amendment of the articles of association when changing the amount of share capital. It will be possible to make contributions to the share capital within three years from formation of the company. Only non-cash contributions to share capital will be subject to the regime obliging shareholders to supplement their contributions if the fair value proves to be lower than the value at which the contributions were made. It will be permissible to distribute amounts accumulated in the company’s share capital to shareholders as dividends after registration of a change in the share capital.
The procedure for notifying creditors of a share capital reduction will be applied only if payments from the share capital would reduce the share capital below 5% of the company’s total liabilities as set out in the approved financial report for the last financial year. The interests of the company’s creditors will be protected by the company being prohibited from making any distributions to shareholders which could lead to the company losing its ability, under normal circumstances, to meet its due and payable cash obligations within six months of the date of the payment. Similarly, there will be an obligation to inject share capital to cover future losses of the company, by at least 8% of the annual profit until the share capital reaches at least 5% of the company’s total liabilities under the most recent annual financial statement. These rules will create a new regime for protection of the rights of creditors of a simple stock company, including the regime for protection of the company’s equity. As is currently the case with limited-liability companies, the management board members or directors of a PSA will be liable for the company’s obligations only if they do not file a timely bankruptcy petition for the company.
The right to dividends and any preference for shares can be shaped without restrictions as to the rules of profit distribution and the scope of preference imposed by law, unlike the rules applicable to other companies. The same applies to the possibility of freely shaping the shareholders’ individual rights. In addition, unlike in the rules governing limited-liability companies, it will be possible to waive voting rights in respect of preferred dividend shares in a PSA.
The far-reaching freedom to shape the legal relations within a simple stock company, as well as the freedom to structure the company’s bodies (see below), can be used to flexibly adjust the company’s corporate governance to its current situation, regardless of the company’s business. This flexibility will be an important advantage of the PSA as a vehicle for all investments of a structured nature.
Issuance of shares and trading in PSA shares
One of the basic advantages of a simple stock company is the ease of issuing new shares and disposing of shares.
PSA shares will not have any material form. They can be sold and encumbered in document form, although such transactions must be registered in order to be valid. The document form for legal transactions was introduced into the Polish legal system in 2016 and is well-suited to making declarations of intent using any information carriers and means of communication other than a written document. All this makes the document form well suited for making declarations of intent using digital data recording. Consequently, PSA shares can be sold and encumbered by declarations of intent recorded and transmitted remotely using electronic means of communication, without the need to issue a share document, and even without (as required in the case of limited-liability companies) notarisation of the parties’ signatures. The disposal of shares in a PSA will be effective from the time the relevant entries are made in the share register.
It will be possible for one person to set up a simple stock company by concluding the company’s articles of association in the form of a notarial deed or using model articles available in the S24 ICT system, after the articles of association have been signed with qualified electronic signatures or trusted signatures. Only if a PSA is formed on the basis of in-kind contributions will the articles of association have to be made in the form of a notarial deed, although the value of in-kind contributions themselves will not be verified by an auditor.
It will be possible to increase the share capital of a simple stock company under the existing provisions of the articles of association, without having to amend the articles of association and without any legal restrictions as to the maximum amount or timing of such an increase in the share capital. Since document form is reserved for the submission of declarations of intent of the company and the shareholder concerning the subscription of shares, the issue of new shares also will be possible using only electronic means of communication.
For the security of commerce, issuance and trading in PSA shares will be subject to entry in the share register, which the company will be obliged to entrust either to a notary public or to an entity authorised to maintain securities accounts. It will be possible to keep the register of shareholders in electronic form, including in a dispersed and decentralised database. The obligation to entrust the register of shareholders to a third party is certainly a far-reaching practical constraint on PSA operation. However, it is likely that most banks will offer this service along with maintaining the company’s bank account. In that case, the restriction will not be onerous.
In line with these legal principles, PSA shares will be dematerialised under simplified rules, in significant aspects analogous to dematerialisation of shares in public companies, but without the participation of the National Depository for Securities. Share trading and registration of shareholder rights will be possible via internet or using blockchain technology. However, PSA shares will not be admitted to organised trading. Nothing will prevent a company from permitting its newly issued to be taken up via internet, provided that the offering of the company’s shares does not constitute a public offering. Offers by shareholders to sell their shares may also be made in a similar manner. Basically, the same will apply to cases where capital market rules allow an offering to be made without the need for preparation of a prospectus or an information memorandum.
PSA bodies, conversion of other companies into a PSA, and liquidation of the company
Appointment of a supervisory board in a PSA will be optional, and a single-member management board will be permissible. The articles of association may also provide for a board of executive and non-executive directors, in place of the management board and supervisory board. Thus, PSA authorities may be structured in accordance with the monistic model of corporate governance widespread in Anglo-Saxon legal systems, as well as in China, France, India and Russia. Regardless of the structure of the bodies, the shareholders of a simple stock company will be able to exercise a right of personal control on the basis of principles currently used in limited-liability companies. Meetings of all PSA bodies may be held using electronic communications.
A simple stock company can be established not only by formation of a new company in accordance with Commercial Companies Code, but also by transforming an existing company into a PSA under the previously known conversion procedure.
Liquidation of a PSA can take place in a simplified form, without reducing the company’s assets to cash and paying off its liabilities, if at least one shareholder, with the consent of the registry court, takes over the company’s assets and assumes its liabilities.
Predictions about the popularity of the PSA
The simple stock company is at least as well adapted as the limited-liability company to all types of business operations, if not better. The PSA has the advantages inherent to other companies, but with reduced formality of the rules for functioning of company bodies. The rules for PSA operation are sufficiently flexible and well adapted to the dynamics and rules of communication in the digital economy. The regulations concerning the disposal of a PSA’s assets offer a successful compromise between the rights of creditors, the interests of shareholders, and efficient management of the company’s assets and finances.
The protection of equity in limited-liability companies has long been in need of thorough reform, and the new rules for PSAs seem to provide more effective tools to protect against possible abuses by the company’s managers or majority shareholders. At the same time, the PSA provisions clarify rules that have given rise to problems of interpretation in the practice of functioning of companies.
It seems that the only factors that may limit the popularity of the simple stock company in commerce at the initial stage of operation of the amended provisions of the Commercial Companies Code will be the force of habit in following the existing forms of companies, and the need to hire a qualified third party to maintain the PSA’s register of shareholders. Naturally, along with the development of new habits and the market’s adjustment to the existence of a new type of company, both of these restrictions will fade over time, giving rise to broad use of this form of company. It seems likely that the advantages of the simple stock company will prove beneficial for any type of activity requiring the formation of a company, except for companies introducing their shares into public trading and other companies which, due to industry regulations or the scale of their activity and shareholding structure, must operate under restrictions appropriate for public companies.
As a postscript, it should be pointed out that in recent days, the Sejm’s Justice Committee supported proposed MP amendments to a government bill to amend the Civil Procedure Code. One of the consequences of the amendments may be to postpone the effective date of the PSA provisions until 1 March 2021, so that they enter into force at the same time as provisions on electronic registry proceedings. This change drew an unfavourable response from the Ministry of Development, which had authored the PSA provisions. It thus remains to be seen whether this new form of company will be available from March of this year.
Krzysztof Libiszewski, attorney-at-law, M&A and Corporate practice, Wardyński & Partners
