The end of 2019 was a kind of a caesura in the legislative process of abandoning the physical document as a carrier of securities used to raise finance on capital markets. Bonds, investment certificates, mortgage bonds, shares and subscription warrants have either bid farewell, or will soon do so to the physical document as a carrier.
Although the regulations on the form in which such securities exist and are recorded have become much more similar, many differences will still exist due, either to the different basis for issuing them, or the way in which they are traded.
An attempt at providing order
Securities that are commonly traded on capital markets and which could be issued under the new regulations may be categorised into the following:
- securities admitted to organised trading, e.g. on a regulated market that must, therefore, be registered in a securities depository operated in accordance with the provisions of the Act on Trading in Financial Instruments of 29 July 2005 (“securities depository”). This category includes all securities such as shares, bonds and investment certificates that have been admitted to organised trading;
- securities not admitted to organised trading that must be registered in the depository of securities in accordance with the regulations governing their creation. This will include bonds, investment certificates issued by closed-end investment funds and certain mortgage bonds from the date of their registration in the securities depository;
- securities that are recorded in a register or in records kept by an entity authorised under the Act on Trading in Financial Instruments to maintain securities accounts. Using a certain generalisation, this category will include shares of joint-stock and limited joint-stock partnerships and subscription warrants issued by them and, only temporarily, bonds, investment certificates and mortgage bonds until the date of their registration in the securities depository.
Securities such as bonds, investment certificates issued by closed-end investment funds, and mortgage bonds that were issued before 1 July 2019, remain outside this proposed categorisation, and will be able to remain in their current form, i.e. in the form of a document or an entry in the records of those securities, and will not be considered in this article.
The first two categories of securities have common rules for their registration, trading and for identifying the holders of those securities. In their case, the key institution is a securities account maintained by an entity authorised to do so under the Act on Trading in Financial Instruments.
The transfer of rights under these securities requires their registration in a securities account maintained for the buyer. The entry is necessary for the person for whom the securities account is maintained to be able to be identified as the holder of the securities recorded there, receive benefits from them and exercise the rights incorporated in them.
In the case of bonds, investment certificates and mortgage bonds, regulations provide an interim form for their functioning and registration. Between the end of their issue when the rights under the security have been created and the date of their registration in the securities depository, they exist as an entry in a record held by the issuing agent, which is an investment firm authorised to maintain securities accounts, or a custodian bank. In that period, rights attached to such securities arise upon an entry being made in the record of holders of securities kept by the issuing agent and are vested in the persons stated in that record. Consequently, an agreement to sell such securities has the effect of transferring them when an entry is made in the record.
Register of shareholders
The securities registration system in the first two categories inspired the rules on registering and identifying holders of shares issued by joint-stock companies and limited joint-stock partnerships.
The key institution under the new rules for the functioning of shares in trading will be the register of shareholders maintained on behalf of their issuer. The entities entitled to maintain a register are those that are authorised to maintain securities accounts under the Act on Trading in Financial Instruments. This is a wider group than entities that may act as agents for issuing bonds or investment certificates, and it includes, at the very least, Krajowy Depozyt Papierów Wartościowych (Central Securities Depository of Poland).
An entry in the register of shareholders has constitutive nature, and without it, it will not be possible to invoke rights under the shares. This follows from the principle (adopted in similarity to the regulation for securities recorded in securities accounts) that an acquisition of shares, or establishment of a limited property right on shares, takes place, apart from in exceptional cases, at the time of the entry in the register of shareholders specifying the purchaser, pledgee or user of the shares.
The Commercial Companies Code allows companies to decide to register shares not in a register maintained by an investment firm or a custodian bank, but in a securities depository. The decision on selecting the entity to maintain the register of shareholders, or on registering shares in a securities depository is taken by a general meeting of shareholders of the company. However, shares of the same company cannot be registered in both the register of shareholders and the securities depository. The result of registering a non-public company’s shares in a securities depository is that their registration and trading will be governed by the rules on dematerialised securities.
A consequence of the adoption of the new rules for registering shares is a change in the definition of a public company. Currently, a public company is solely a company which has at least one share that has been admitted to trading on a regulated market or introduced to trading in the alternative trading system in Poland. On the other hand, the mere registration of the company’s shares in a securities depository does not make it a public company, which was the case previously. Public companies will have no choice in where to register shares and will have to register all shares, including those not admitted to trading on the regulated market, in the securities depository.
The legislature has also decided that the new provisions on shares entered in a register of shareholders should apply appropriately to subscription warrants, certificates of use, founding certificates and other titles of participation in the company’s income or assets. This will affect company employee incentive schemes, which are commonly used in the market, and which very often use the subscription warrants instrument.
The vast majority of the new provisions of the Commercial Companies Code relating to the change in the form of shares enter into force on 1 January 2021. On that day also, hitherto issued share documents will expire. Issuers must call on their shareholders several times to submit the documents to the company for future registration. This is very important because on 1 January 2021 share documents issued by the company will expire by operation of law and the entries in the register of shareholders will become legally valid. The company must make its first call by 30 June 2020.
The above changes should be viewed in a positive light. It would seem natural these days to use electronic form for recording securities, and the partial consolidation of the rules for registering securities and transferring rights and establishing limited property rights on them will be of help to the market. Obviously, the new rules may, initially, create additional administrative and legal burdens for some issuers, especially the smaller ones. In the case of smaller joint-stock companies, this concern may, for example, encourage them to consider changing their corporate legal form to one that is not subject to these rules.
Marcin Pietkiewicz, attorney-at-law, Financial Institutions & Capital Markets practice, Wardyński & Partners