An increase in the share capital of a limited-liability company without amending the articles of association is often used as a simpler, faster and, in theory, cheaper method of increasing the capital. But in practice, due to the ambiguous wording of the regulations, doubts may arise about this method of capital increase and the form of the documents required for its effective implementation. What should be kept in mind for a simplified share capital increase to be carried out correctly?
Increase in share capital without amending the articles of association
As referred to in Art. 257 §§ 1 and 3 of Poland’s Commercial Companies Code, an increase in the share capital of a limited-liability company without amending the articles of association (i.e. a simplified share capital increase) is permissible if the possibility of such a capital increase is expressly provided for in the articles of association.
Under the code, the articles of association must indicate, at a minimum:
- The maximum amount up to which the share capital may be increased without amending the articles of association, and
- The deadline by which such an increase can be made.
However, to avoid doubts and disputes during the capital increase procedure, it is worthwhile to provide in the articles of association, beyond the statutory minimum:
- Whether the capital increase involves creating new shares or increasing the nominal value of the existing shares, and
- What kind of contributions can be made to cover the increase.
Based on the same provision of the articles of association, the company’s share capital may be increased more than once, until the total simplified capital increases have exhausted the amount and time limit specified in the articles of association.
As in the case of a share capital increase requiring an amendment to the articles of association, a simplified share capital increase requires:
- Adoption of a resolution on the capital increase
- Submission by the shareholders of a declaration taking up the shares in the increased capital (unless the increase is made by increasing the value of the existing shares)
- Payment by shareholders of contributions to cover the new shares (or the increased value of existing shares)
- Entering the capital increase in the commercial register of the National Court Register.
In the simplified procedure for the increase of share capital, only existing shareholders of the company (Art. 257 §3) may make declarations on taking up shares, and thus this procedure cannot be linked with a new shareholder joining the company.
In principle, the resolution on capital increase and the shareholders’ declaration on taking up shares in a simplified capital increase do not require the form of a notarial deed, but can be drawn up in ordinary written form. However, it is important to remember that in the case of some single-member limited-liability companies, preparation of the shareholder’s declaration on taking up shares in ordinary written form will not be permitted.
Simple written form is not always enough
In the case of a single-member limited-liability company in which the sole shareholder is also the sole member of the management board, any transaction between the shareholder and the company requires the form of a notarial deed (Art. 210 §2).
Since the Commercial Companies Code does not specify the legal nature of a shareholder’s declaration on taking up shares, nor does it indicate to whom such a declaration should be made, and the legal literature has not developed a uniform view of this issue, doubts may arise as to whether the requirement of notarised form under Art. 210 §2 of the code applies to the declaration of the sole shareholder who is also the sole member of the management board. To resolve this, it is necessary to determine whether a shareholder’s declaration on taking up shares is a unilateral legal act, or is part of a contractual relationship between the shareholder and the company.
An answer is provided by the resolution of the Supreme Court of Poland of 25 November 2010 (case no. III CZP 84/10), holding that the effect of taking up of new shares by an existing shareholder is to increase the scope of his rights regarding the company, and therefore this should be regarded as having a contractual basis, similar to the basis for establishing the corporate relationship. Thus it should be assumed that a declaration of an existing shareholder on taking up shares in the company’s increased share capital is an element of the contractual relationship between the shareholder and the company.
In practice, this means that the declaration of the existing shareholder on acquiring shares in the increased share capital is a declaration of intent to be addressed to the person in relation to whom it has legal effects, i.e. the company. Given the contractual nature of the shareholder’s taking up of shares, it should be recognised that in the case of a simplified capital increase in a single-member limited-liability company in which the sole shareholder is also the sole member of the management board, a notary deed will be required for the shareholder’s declaration subscribing for the new shares. The notary will be required to notify the registry court of preparation of such a declaration.
No possibility to exclude or limit the pre-emptive right of existing shareholders
Due to the ambiguous wording of the code, two different positions developed in the case law and the legal literature over the years regarding the permissibility of excluding the pre-emptive right of existing shareholders to take up shares in a simplified share capital increase. The discrepancies presented in the practice of the courts (including the registry courts) caused significant practical difficulties in applying this mode of capital increase.
The doubts arising in this regard were resolved by the resolution of a seven-judge panel of the Supreme Court of 17 January 2013 (case no. III CZP 57/12), unequivocally holding that in the case of a share capital increase without amending the articles of association, the new shares may only be taken up by the company’s existing shareholders in proportion to their current shares. This method of taking up shares cannot be limited or excluded in the articles of association nor in a shareholders’ resolution.
In practice, this means that in the case of a simplified share capital increase, the shareholders may not by resolution exclude or limit pre-emptive rights to acquire newly created shares in proportion to their existing shares in the company.
This position of the Supreme Court has been criticised by commentators and practitioners. We agree with this criticism, and believe that the interpretation of the Commercial Companies Code regarding a simplified capital increase in a limited-liability company should rather move in the direction of making the procedure less formal and prioritising the intention of the company’s shareholders.
Despite different views regarding the interpretation of the code, it should be remembered that due to the existing Supreme Court resolution, any modifications to the pre-emptive right of existing shareholders to take up shares in the increased share capital without amending the articles of association may be considered ineffective and even risk annulment of the resolution on the share capital increase.
We should also point out that some commentators allow for the possibility of adopting a resolution to increase the share capital in a simplified manner by a body other than the shareholders’ meeting (e.g. the management board), provided that the authority of the body to adopt such a resolution is expressly covered by the articles of association. But this approach remains controversial, and its opponents point out that while the provisions on joint-stock companies grant similar authority to the management board in certain situations (a capital increase within the limits of the authorised capital), the lack of a corresponding statutory basis in the case of a limited-liability company should be seen as reserving the authority to increase the share capital exclusively to the shareholders, regardless of the mode of capital increase. We will devote a separate article to this issue.
Katarzyna Miszkiel, adwokat, Adam Pawlisz, adwokat, M&A and Corporate practice, Wardyński & Partners