Share transactions and Ministry of the Interior permits | In Principle

When acquiring shares in a Polish company for a foreign buyer, it must always be examined whether a permit from the Minister of the Interior is required because real estate in Poland is involved. Sometimes a permit is required to acquire even a single share.

When Poland joined the European Union in 2004, the number of transactions in which it was necessary to obtain a permit from the minister of internal affairs for acquisition of shares in a Polish company fell sharply because the Acquisition of Real Estate by Foreigners Act of 24 March 1920 was amended, in Art. 8(2), to provide that a permit is no longer required for acquisition of shares in a Polish company by foreigners who are citizens or enterprises from member states of the European Economic Area or the Swiss Confederation.

But this issue is still vitally important in the case of transactions in which the acquirers are entities based outside the EEA or Switzerland. Under Art. 3e of the act, acquisition or taking up of shares in a commercial company with its registered office in Poland, or any transaction involving such shares, requires a permit if as a result a company which is the owner or perpetual usufructuary of real estate in Poland becomes a “controlled company.” Art. 3e(2) in turn provides that acquisition or taking up of shares in a Polish company which is the owner or perpetual usufructuary of real estate in Poland requires a permit from the minister of internal affairs if the company is already a controlled company but the shares are acquired or taken up by a foreigner that is not already a shareholder of the company.

This regulation generates a lot of controversy. It is important to review a few fundamental principles for conducting the analysis to determine whether it is necessary to seek a permit from the minister of internal affairs.

Controlled company

First it should be determined whether as a result of the transaction the Polish company whose shares are being acquired will become a company controlled by a foreigner. There is no direct definition of a controlled company, so the reference to Art. 1(3) in connection with Art. 1(2)(4) of the Acquisition of Real Estate by Foreigners Act should be consulted. For purposes of the act, a foreigner is:

1. A natural person without Polish citizenship
2. A legal person with its registered office abroad
3. A partnership (without legal personality) of persons listed in point 1 or 2 with its registered office abroad, established under foreign law, or
4. A legal person or commercial company without legal personality with its registered office in Poland which is controlled directly or indirectly by persons or partnerships referred to in point 1, 2 or 3.

In the case of a commercial company, it is regarded as a controlled company if a foreigner or foreigners directly or indirectly hold more than 50% of the votes at the shareholders’ meeting or the general assembly of shareholders (including also as a pledgee or usufructor or on the basis of arrangements with other persons), or holds a dominant position within the meaning of Art. 4 §1(4)(b), (c) or (e) of the Commercial Companies Code.

Thus the definition of a “dominant position” in the Commercial Companies Code must also be consulted. A commercial company is a dominant company if:

1. It is entitled to appoint or dismiss a majority of the members of the management board of another capital company (i.e. limited-liability company or joint-stock company) (subsidiary) or cooperative (dependent cooperative), including on the basis of arrangements with other persons
2. It is entitled to appoint or dismiss a majority of the members of the supervisory board of another capital company (subsidiary) or cooperative (dependent cooperative), including on the basis of arrangements with other persons, or
3. It directly or indirectly holds a majority of the votes in a dependent personal company (i.e. partnership) or the general meeting of a dependent cooperative, including on the basis of arrangements with other persons.

It should be determined whether as a result of the transaction foreigners will directly or indirectly hold over 50% of the votes at the shareholders’ meeting or general meeting of the acquired company. Significantly, apart from the shares being acquired during the transaction, other shares in the company that are currently held by foreigners should also be counted; the overall stake of shares held by foreigners should be calculated. For example, an American investor intends to acquire 40% of the shares, and a current shareholder is a foreigner—even from the EEA—holding 12%. Therefore, as a result of the planned transaction, the company whose shares are being acquired will become a company controlled by foreigners and it will be necessary to obtain a permit from the Minister of the Interior.

Indirect holding of shares in a company

Another issue is determining the indirect holdings of shares in the company. It may happen that a current shareholder is an entity with its registered office in Poland which is controlled by a foreigner. In that case, it should also be found that the shares held by that company should be counted toward the total number of shares held by foreigners. Significantly, the act does not include any limitations on the scope in which the capital structure of the shareholders should be examined. Reading the act literally, one would conclude that the examination must be conducted on multiple levels. In our view, the examination of whether a shareholder of the company whose shares are being acquired is a foreigner should address only the situation in which the shareholder is in fact a company controlled by a foreigner, and not an instance where the foreigner in that company holds, for example, 40% of the votes at the shareholders’ meeting. But there is disagreement among lawyers on this issue.

In the case of foreign-controlled companies that are owners of real estate in Poland, it is necessary to obtain a permit from the Minister of the Interior for a foreigner from outside the EEA (or Switzerland) to acquire even a single share, if the foreigner is not already a shareholder of the company. It is difficult to see any purpose in this rule, as the transaction does not result in a change in the entity that controls the Polish company.

It should be noted that until 27 April 2004, when Art. 3e of the act was amended, the examination applied only to companies that were owners or perpetual usufructuaries of real estate in Poland, as confirmed by the Supreme Administrative Court (judgment of 24 September 2001, OPS 10/01, ONSA 2002/1 item 10). This changed following the amendment, because now in the case of holding structures it must be determined whether any of the subsidiaries hold real estate in Poland.

Consider the following example. A foreigner from outside the EEA acquires a controlling stake of shares in company X, which does not hold real estate in Poland. Company X controls the majority of shares in company Y, which also does not hold real estate in Poland, but company Y holds a majority stake in company Z, which is the perpetual usufructuary of real estate in Poland. In that case it will be necessary to obtain a permit from the Minister of the Interior to acquire shares in company X, even though it is not the direct owner of real estate in Poland.

The situation becomes further complicated considering that a company is also considered to be controlled by a foreigner if the controlling company has the right to appoint a majority of the members of the management board or supervisory board. Thus in a situation where the acquirer does not acquire a majority of the shares, but pursuant to an agreement with the other shareholders will be entitled to appoint a majority of the members of the management board, the company becomes a foreign-controlled company as a result of that agreement.

Acquisition of shares without a permit is invalid

Finally it should be stressed that the sanction for acquiring shares without a permit is the absolute invalidity of the transaction, which cannot subsequently be cured. However, the act does not specify the sanction for violation of the act where a foreigner obtains control over a company as a result of some other action (e.g. via a pledge agreement, an agreement with other shareholders on the right to exercise votes at the shareholders’ meeting or appoint a majority of the management board, or redemption of shares). It may be recognised that in such case Art. 58 of the Civil Code will apply, providing for the invalidity of a transaction that is inconsistent with regulations of law.

For these reasons, due diligence in share deals where the acquirer is a foreigner from outside the EEA (or Switzerland) must be comprehensive and include an analysis of the capital structure of the entire holding group, not just the company whose shares are to be acquired.

Sylwia Moreu-Żak, legal adviser, Real Estate & Construction Practice, Wardyński & Partners