One of the ways to reduce business costs in a corporate group may be to combine multiple entities into a single entity—a merger. Although all types of companies and partnerships can take part in a merger, the regulations regarding mergers involving partnerships are sometimes unclear, and mistakes during the merger process can result in the court’s refusal to register the merger.
Permissibility of merger
The Commercial Companies Code allows commercial entities to merge. Such a merger can be carried out as:
- A merger by acquisition, meaning a transfer of all the assets of the acquired entity to the acquiring entity in exchange for shares of the acquiring entity issued to the partners or shareholders of the acquired entity
- A merger by formation of a new company, resulting in creation of a company to which the assets of all merging entities are transferred, in exchange for shares issued to the shareholders of the newly formed company.
Both companies (“capital” entities—spółki kapitałowe) and partnerships (“personal” entities—spółki osobowe) can participate in a merger. And this can be done in a variety of configurations, including with a significant number of merged entities. However, a partnership cannot under any circumstances be the acquirer or newly formed entity. Additionally, it is inadmissible to merge with an entity in liquidation which has begun to divide its assets, or an entity in bankruptcy.
As a result of a merger, universal succession to rights and obligations occurs, so that, as a rule, the acquiring company or the newly formed company, as of the merger date, enters into all the rights and obligations of the acquired entity or the entities merging by formation of a new company. However, to some extent, this rule may be limited with regard to decisions, permits, relief or concessions, when such a limitation is provided for in those instruments or in the law.
This means that either the acquired entity or the entities merging by formation of a new company are dissolved without liquidation proceedings, as of the date the merger is entered in the relevant register.
We write more extensively about general aspects of mergers in our guide to M&A transactions. In this article, we will focus on mergers involving partnerships.
Elements of the merger process
Mergers involving partnerships are regulated in a separate chapter of the Commercial Companies Code, which might suggest that the provisions concerning them are comprehensive. Nothing could be further from the truth. The parliament has not given this set of provisions a standalone character, but often uses the legislative technique of incorporation by cross-reference for application as relevant of the provisions in the section on mergers involving companies. Application of other norms “as relevant” can potentially raise doubts, and erroneous application (or non-application) of a provision may result in the court’s refusal to register the merger.
First of all, as in the merger of companies, in principle, the first step of the merger process is preparation of a written merger plan, which must be agreed upon between the merging entities. As an exception, preparation of a written merger plan may be waived if partnerships merge by forming a new company, unless the newly formed company is to be a joint-stock company or one of the merging entities is a joint-stock limited partnership.
If a merger plan is required, it should stipulate at least:
- The type, business name and seat of each of the merging entities, the method of merger, and, in the case of a merger by formation of a new company, also the type, business name and seat of the new company
- The number and value of shares of the acquiring company or newly formed company issued to the partners of the merging partnership, as well as any surcharges
- The date from which the shares issued to the partners of the merging partnership entitle them to participate in the profit of the acquiring company or newly formed company
- Special benefits for the partners of the merging partnership, as well as other persons participating in the merger, if any.
The merger plan for a merger involving partnerships, as with mergers involving companies, must be accompanied by:
- Drafts of the merger resolutions
- Draft amendments to the articles of association of the acquiring company, or draft articles of association of the newly formed company
- A valuation of the assets of the acquired entities or the entities merging by formation of a new company, as of a specific date in the month preceding the filing of the request for announcement of the merger plan
- An accounting statement prepared for the purposes of the merger as of the date referred to in item 3, using the same methods and in the same layout as the last annual balance sheet.
Notification of the merger plan
The merger plan and attachments must be filed with the registry court proper to each of the merging entities. In the case of companies, the management board is responsible for the notification, while in the case of partnerships, the notification is made by the partners vested with the right to manage the affairs of the partnership (or in the case of a professional partnership in which a management board has been appointed, the management board alone).
Interestingly, the law literally refers only to an obligation to file the merger plan, without requiring attachments to be submitted, which has generated disputes among legal commentators.
For practical reasons, filing the attachments along with the merger plan with the court should be considered the safer option. This suggests that they should be submitted not only in cases where the entire merger plan is to be audited. In this respect, it should be noted that the Commercial Companies Code adopts as a rule that the merger plan must be audited for correctness and reliability only if the acquiring company or the newly formed company is a joint-stock company or if one of the merging entities is a joint-stock limited partnership. In other cases, the merger plan is subject to audit only if requested by at least one of the shareholders or partners of any of the merging entities.
The code does not specify the deadline by which the merger plan must be filed with the registry court. Therefore, it should be assumed that it is sufficient to comply with the general deadline of seven days from the date of the event justifying the entry, in accordance with the National Court Register Act, i.e. seven days from signing the merger plan.
In a merger involving partnerships, announcement of the merger plan in Monitor Sądowy i Gospodarczy is not required (unlike in the case of a merger of companies).
However, the lack of an express provision or cross-reference regarding the duty to publish an announcement in MSiG may raise further questions. For example, it is undeniable that a merger of two limited-liability companies will require announcement of the merger plan. But then, if any partnership were additionally involved in the same merger, the announcement would, it seems, no longer be required. In light of this inconsistency in the drafting of the code, it should be found that there is no legal basis for announcing a merger plan involving a partnership. But for the sake of caution, announcement of the merger plan would by no means be a mistake.
Report justifying the merger
As mentioned above, unlike in the case of the merger procedure for companies, an audit of the merger plan is not required by default for mergers involving partnerships (except for mergers involving joint-stock companies and joint-stock limited partnerships). By contrast, in the case of a merger of companies, by default, the merger plan is subject to audit, but this may be waived if all shareholders of each of the merging companies consent.
It is different in the case of the written justification for the merger. In mergers involving partnerships, it is always required to prepare such a report, justifying the merger and indicating the legal basis for it, as well as outlining the economic basis for the merger and the subsequent ratio of shareholding. The law allows this element to be waived in the merger of companies (as long as all shareholders agree), but in the case of mergers involving partnerships preparation of a justification is mandatory. There is no cross-reference to the provision for companies, and the possibility of applying the regulations on companies in this regard by analogy is controversial. A practical approach dictates that a written justification for the merger should be prepared in this case, out of a concern that the registry court might otherwise refuse to register the merger.
Notification of partners
The next stage of the merger process is to notify the partners (wspólnicy) not handling the company’s affairs about the intention to merge. The notification should be sent twice. The first notification must be sent no later than six weeks before the scheduled adoption of the merger resolution. Thereafter, the second notification should be sent at an interval of not less than two weeks after sending the first notification. It is debatable whether these deadlines apply only to notification of partners in a partnership (in Polish, wspólnicy) or they should also apply to notification of shareholders of limited-liability companies (also referred to in Polish as wspólnicy). However, it seems reasonable to consider that the concept of a partner not managing the partnership’s affairs should be understood broadly and, as a result, a common deadline should be adopted for all entities involved in a merger (including both partnerships and companies).
The notifications must specify the place and date where the partners or shareholders may review the merger documents. The partners or shareholders also have the right to demand that copies of merger documents be made available to them at the premises of the company or partnership. However, physical access to documents may be waived if the entity involved in the merger makes the designated documents available to the public or provides partners or shareholders with access via its website to the documents, enabling them to be printed out.
Partners (or shareholders) not managing the entity’s affairs may request an audit of the merger plan within seven days of receipt of notification of the intended merger. In such a case, new notifications of the intended merger will have to be drafted to allow for the time needed for audit of the merger plan and sharing the auditor’s opinion with the partners (or shareholders).
Adoption of merger resolutions
Finally, for an effective merger of companies or partnerships, a merger resolution must be adopted by the shareholders’ meeting or general meeting in the case of companies or the partners in the case of partnerships. The resolutions must be adopted in the form of a notarial deed.
Immediately prior to the adoption of the merger resolution, the partners or shareholders must be orally presented with the essential elements of the merger plan, the management board report and the auditor’s opinion, as well as any material changes in assets and liabilities occurring between the date of the merger plan and the date of the resolution.
The management board of a company and the partners in charge of the affairs of a partnership will then file the adopted resolutions with the relevant registry courts. The merger becomes effective as of the date of entry of the relevant information in the commercial register of the National Court Register for the seat of the acquiring or newly formed company. That date is then defined as the merger date.
The final step of the merger procedure is announcement of the merger, which as a rule is done through publication in Monitor Sądowy i Gospodarczy. However, this step does not have any impact on the effectiveness of the merger already carried out in accordance with the rules discussed above.
A merger of companies or partnerships can be a good way to reduce operating costs and streamline management. It can further important economic goals such as optimisation of sales, accounting or logistics costs. Consolidation of the capital of the merging entities into one strong business entity can also facilitate operating on a larger scale, raising the credibility of the entity in the eyes of counterparties and providing greater opportunities to obtain financing from potential investors or lenders.
However, as part of the merger procedure involving partnerships, there are a number of elements that require attention, to ensure that the entire process goes as smoothly as possible and ends with registration of the merger by the court.
Jan Kaźmierczak, Adam Strzelecki, M&A and Corporate practice, Wardyński & Partners