Conversion of a joint-stock company into a limited-liability company: Practical problems
Poland’s Commercial Companies Code allows for conversion of a joint-stock company (SA) into a limited-liability company (sp. z o.o.), but many formalities are required and not always clearly regulated. Mistakes at any stage of the process may result in the court refusing to register the conversion. In this article, we describe the stages of the process and selected practical issues that may arise.
Draft terms of conversion—practical tips
To convert a company, financial statements must first be prepared as of a specified date in the month preceding submission of the draft terms of conversion to the shareholders. Then, the management board of the joint-stock company should prepare the draft terms of conversion and appendices, i.e. draft resolution on conversion, draft articles of association of the converted company, and the financial statements.
According to the legal literature, the draft terms of conversion should be prepared by the entire management board. This requirement protects against any member of the management board being excluded from the process, but also obliges all board members to be involved in preparing the conversion proposal.
Although the draft terms of conversion are prepared by the entire management board, adoption does not necessarily require unanimity. The draft terms may be adopted either unanimously or by a majority vote, depending on the company’s rules for taking decisions outside the ordinary course of business (M. Rodzynkiewicz in A. Opalski (ed.), Commercial Companies Code, vol. IV, Merger, demerger and conversion of companies: Criminal provisions, commentary on Art. 491–633 (2016) (Art. 557)).
In principle, the draft terms of conversion are prepared in writing. In such a situation, it is sufficient for the document to contain the handwritten signatures of the members of the management board of the company (all or a majority, as the case may be). However, in the case of a joint-stock company with a sole shareholder, the draft terms of conversion should be prepared in the form of a notarial deed. In practice, in single-shareholder companies, the minutes of the meeting of the management board at which the resolution was passed adopting the draft terms of conversion, or the draft terms of conversion and annexes, are prepared in the form of a notarial deed.
The provisions do not require that the draft terms of conversion be examined by an auditor when converting a joint-stock company into a limited-liability company. (There is such an obligation in the reverse situation.)
Nor is there an obligation to publish the draft terms of conversion to allow a creditor to request security for its claims against the joint-stock company, even in the creditor has made a showing that satisfaction is threatened by the conversion. Pursuant to the Commercial Companies Code, the draft terms of conversion must be published only when converting into a simple stock company (PSA). But in practice, it has happened that in considering an application to register the conversion into a limited-liability company, the registry court has called on the applicant to provide statements from the management board that the draft terms of conversion were announced, or else the court will deny the entry. In such a case, it was sufficient to indicate in a letter to the court that the obligation to publish the draft terms of conversion did not apply to this type of conversion, and the lack of the requested statement of the management board could not result in denial of registration.
Notification of shareholders, adoption of resolution on conversion, and appointment of the authorities of the converted company
Once the draft terms of conversion have been prepared, the management board has to notify the shareholders twice of its intention to adopt a resolution on the company’s conversion. The first notice should be given no later than one month before the scheduled date of adoption of the resolution, and the second notice no less than two weeks after the date of the first notice. The notice should include the essential elements of the draft terms of conversion, as well as indicate how the shareholders can access the full contents of the draft terms and appendices.
Next, the shareholders should pass a resolution on the company’s conversion stating:
- The company’s new legal form (in this case, it will be a limited-liability company)
- The amount of share capital
- The scope of rights (if any) granted personally to shareholders of the converted company
- The names of the members of the management board of the converted company (the same as in the previous company, or other persons, without restrictions)
- Approval of the draft terms of conversion
- The proposed wording of the articles of association.
Adoption of such a resolution takes the place of adoption of articles of association of the converted company and appointment of its corporate authorities.
A resolution in the form of a notarial deed can be adopted at either an extraordinary general meeting or an ordinary (annual) general meeting. The latter solution saves time and costs associated with convening an additional meeting. Another argument in favour of the second option is the statutory requirement that a company must have approved financial statements for at least the last two financial years before conversion of the joint-stock company to a limited-liability company. The financial statements for the most recent financial year may be approved at the same meeting where the resolution to convert the company is adopted. Thus at one meeting, both obligations required for conversion can be fulfilled.
Conversion date and post-conversion activities
Once the shareholders have passed a resolution on conversion and all the necessary corporate documents have been assembled, all the members of the management board of the converted company (i.e. the limited-liability company, not the joint-stock company) should apply for entry of the company in the register. If the application is submitted by an attorney, the power of attorney must be signed by all members of the management board.
The conversion date is the date when the registry court enters the converted company in the register. At that moment, the company being converted (SA) becomes the converted company (sp. z o.o.). Therefore, it is not possible to firmly indicate a specific conversion date in the application, as this will depend on the action of the court. However, the practice shows that the courts will grant a request in the cover letter attached to the application for registration indicating the conversion date desired by the applicant, and that is when the court actually enters the new company in the register. At that time, the company being converted is also deleted by the court ex officio. In practice, the deletion often occurs a few days after the conversion itself.
After conversion from a joint-stock company to a limited-liability company, the company should remember to terminate the contract for maintaining the register of shareholders. This is because in its new legal form, the company will no longer have dematerialised shares in an SA (akcje), but shares in a sp. z o.o. (udziały). Therefore, the company will no longer have to bear the costs of maintaining the shareholder register. The details of the termination should be verified in the contract with the operator of the register. Most often, it is sufficient to submit a request for termination of the contract, along with a copy of the resolution on conversion and an excerpt from the National Court Register.
The next step is the issue of announcement on the conversion. The provisions do not specify whether announcement of entry of the converted company in the register is sufficient, or another, separate announcement of completion of the conversion process is necessary. The lack of an obligation to proceed with an additional announcement would allow the company to avoid the additional cost of placing an announcement in Monitor Sądowy i Gospodarczy. However, some commentators take the view that these two announcements are not equivalent, and as the obligation to announce the conversion is indicated in a separate provision of the Commercial Companies Code, it is necessary to publish a separate notice on completion of the registration process (M. Tofel in Commercial Companies Code: Commentary (8th ed. 2022), Art. 570)). Because there is no settled position on this matter, submitting an additional application is the safer and suggested solution. However, the code does not indicate the deadline for submitting such an application.
Conclusion
Conversion of a joint-stock company into a limited-liability company in Poland is a formal process, consisting of the steps outlined above, most of which are regulated by the Commercial Companies Code. However, practical legal issues arise in the course of the conversion procedure, which must be dealt with in a timely manner so that the whole activity is completed as smoothly as possible and ends in entry of the converted company in the register by the deadline indicated in the application.
Cyryl Jachimski, Wiktor Zborowski, adwokat, M&A and Corporate practice, Wardyński & Partners
