Declaration of acquisition of shares in a limited-liability company or an increase in the par value of the shares is not as simple as it seems
In the case of an increase in the share capital of a limited-liability company, a shareholder subscribing for new shares or an increased par value of existing shares must file a declaration on subscribing for the new shares or the increased par value. This applies to both an existing shareholder and a new shareholder just joining the company. But there are some uncertainties associated with this obligation.
Preparation of a declaration on subscribing for new shares or an increase in the par value of existing shares is necessary to register a share capital increase with the National Court Register. It is essential to maintain the proper form for the declaration, pursuant to Art. 258 §2 and 259 of the Polish Commercial Companies Code, i.e. the form of a notarial deed. Failure to comply with this form renders the declaration invalid and thus results in inability to increase the company’s share capital.
But the code provides for exceptions both as to the form of the statement (in some cases written form is sufficient, instead of a notarial deed) and as to the obligation to prepare the declaration itself (when the provisions explicitly or implicitly do not require a declaration on acquisition). In this article, we discuss some of these exceptions.
Form of declaration when increasing the capital without amending the articles of association
Art. 257 §3 of the Commercial Companies Code expressly provides that if the share capital is increased pursuant to the existing articles of association (allowing the share capital to be increased to a certain amount, within a certain time limit, without amending the articles of association), the declarations of the existing shareholders on acquisition of the new shares must be made in writing. This relaxes the requirement to use a notarial deed, in favour of written form, in a situation where an existing shareholder subscribes for new shares. But doubts arise as to the form of the declaration when a shareholder subscribes for an increase in the par value of existing shares.
Under the literal wording of Art. 257 §3 and 258 §2 of the code, existing shareholders are required to use the form of a notarial deed if they subscribe for an increase in the par value of shares. However, commentators argue that there is no functional justification to differentiate the form requirements in the two cases, i.e. mere written form in the case of subscribing for new shares and the form of a notarial deed in the case of increasing the par value of shares (A. Opalski (ed.), Commercial Companies Code, vol. IIB: Limited-liability company, Commentary Art. 227–300 (Warsaw 2018)).
The cross-reference in Art. 257 §3 to Art. 260 §2 of the code should also be noted, pursuant to which shareholders are entitled to new shares pro rata to their existing shares and do not require subscription. Some commentators interpret this cross-reference to mean that in the case of a capital increase based on the existing articles of association, by increasing the par value of the existing shares pro rata to the existing shareholders’ shares, a declaration on acquisition will not be required (Z. Jara (ed.), Commercial Companies Code: Commentary (3rd ed., Warsaw 2020)). The view that no declaration is necessary is not the prevailing view, however, and the author himself points out that there are numerous dissenting opinions in the legal literature. Thus, in that author’s opinion, from a practical and pragmatic point of view, it is advisable to file a written declaration in such a situation.
There are also opinions in the literature that in the absence of a different statutory regulation, in the event of an increase in the value of existing shares on the basis of the existing articles of association, a declaration in the form of a notarial deed should be submitted in accordance with the general rule stated in Art. 258 §2 (R. Pabis, “Amendment to the Commercial Companies Code, part 1,” Prawo Spółek 2004 no. 3, p. 15).
To sum up, due to doctrinal discrepancies, and in order to avoid doubts on the part of the court when registering an increase in share capital based on the existing articles of association, taking the form of an increase in the par value of existing shares, the declaration should be submitted in the form of a notarial deed.
Notably, the Supreme Court of Poland confirmed in a resolution of seven judges of 17 January 2013 (case no. III CZP 57/12) that an increase in share capital under the existing articles of association of a limited-liability company may be effected by increasing the par value of the existing shares or by issuing new shares, but the new shares in the increased capital may be subscribed for only by the existing shareholders pro rata to their existing shares. The court pointed out that the requirement of mere written form for declarations of existing shareholders subscribing for new shares is a special solution provided only for this method of increasing the share capital. In the opinion of the court, it is unjustified and too far-reaching to claim that the absence of specific provisions on increasing the par value of the existing shares as part of a share capital increase under the existing articles of association precludes the possibility of exercising this method of increasing the share capital. In this light, it should be concluded that in such a situation the declaration on subscribing for an increased share value should be made in the form of a notarial deed in accordance with the general rule in Art. 258 §2 of the Commercial Companies Code.
Merger of companies by acquisition combined with an increase in share capital: Is a declaration necessary?
One way of merging companies, especially limited-liability companies, is to transfer all the assets of the target company to another company in exchange for shares issued by the acquiring company to the shareholders of the target company (merger by acquisition). To issue shares in the acquirer to shareholders of the target, the merger is usually linked to an increase in the share capital of the acquirer.
But the Commercial Companies Code does not specify whether in the case of an increase in the share capital of the acquirer for purposes of a planned merger, the shareholders of the target should file a declaration on subscribing for new shares or subscribing for an increase in the par value of the existing shares in the acquirer. Art. 497 §1 states only that the provisions concerning formation of the acquiring company shall apply respectively to the merger of companies.
In the legal literature, most commentators assume that in such a situation the shareholders of the acquired company do not have to file a declaration, as the wording of Art. 497 §1 does not give grounds for application of the provisions on share capital increase. It is also pointed out that in the case of a merger, the shareholder’s participation in voting on the merger resolution fulfils the role of making such a declaration, and therefore the merger regulations constitute more specific laws in relation to the general regulations on share capital increases (S. Sołtysiński et al., Commercial Companies Code: Commentary, vol. 4 (3rd ed., Warsaw 2012)).
Despite the above position of the majority, the literature states that a practice has emerged in some registry courts of requiring a declaration from the shareholders of the target company pursuant to Art. 259 of the code, i.e. a declaration by the new shareholders on joining the acquirer and subscribing for shares with a specified par value, filed in the form of a notarial deed.
Therefore, when registering a merger by acquisition, the safest solution for the company is for shareholders of the acquired company to file a declaration on subscribing for new shares or subscribing for an increase in the par value of existing shares in the acquiring company, in the form of a notarial deed. However, if the company wants to avoid notarial costs associated with preparation of the declaration and accepts the risk of a possible court summons to remedy deficiencies at the stage of registration of the merger by filing an appropriate declaration, such declaration need not be prepared. The authors’ practice has shown that the lack of such a declaration has not prevented registration of companies’ mergers.
The form of the declaration determines the form of the power of attorney
If the client wishes to be represented by a proxy when dealing with the share capital increase, the form of filing the declaration carries over to the form of the power of attorney.
If the company’s share capital is increased on the basis of the existing articles of association by increasing the par value of the existing shares, then, given the disagreement in the literature, the declaration should be prepared in the form of a notarial deed. Consequently, the power of attorney should also be made in that form.
Also, in the case of an increase in a company’s share capital as a result of a merger by acquisition, the power of attorney should be in the form of a notarial deed, as some registry courts may request a declaration in the form of a notarial deed.
Even if, when registering a merger, the client decides not to submit a declaration (accepting the risk that the court will subpoena the client to make up the deficiency), we recommend signing a power of attorney in the form of a notarial deed, as then the attorney will be able to effectively make up the deficiency under the power of attorney and file the declaration with the court.
Wiktor Zborowski, Jolanta Prystupa, M&A and Corporate practice, Wardyński & Partners