Contributed By Wolf Theiss
In line with many other jurisdictions, the Polish M&A market has suffered from the COVID-19 pandemic in terms of both the number of M&A deals and the value of M&A transactions in the first half of 2020 compared to 2019. Several notable M&A transactions took place in the banking and finance sector and the TMT sector, as part of the long-term strategy of investors.
M&A activity is expected in the technology and the banking and finance sectors in 2020. Due to the COVID-19 pandemic, in June 2020 the Polish government introduced limitations on foreign direct investments to protect certain sectors that are considered crucial to public welfare and security from foreign acquisition. Given these tightened restrictions for acquisitions of companies active in crucial areas, it is not likely there will be high levels of M&A activity in 2020 in the following sectors:
Legal developments in the last year in Poland were not specifically tailored to influence PE funds, but rather pertained to all commercial companies. The changes introduced focused mostly on facilitating day-to-day operations and adhering to the European guideline to introduce more transparency into companies’ shareholding structures.
Facilitations in Corporate Governance Matters
The Polish government introduced legislation enabling all Polish companies to hold virtual or hybrid meetings of their management and supervisory boards as a result of the COVID-19 outbreak. In particular, the adoption of circular resolutions by management and supervisory boards enables all shareholders in Polish companies to participate electronically in shareholders' meetings and supervisory board meetings. The new rules have had a positive impact on the digitalisation of M&A processes in general and on private equity transactions, and enable the parties to substitute physical meetings with new technologies.
Dematerialisation of Shares
On 1 January 2021, new legislation will enter into force requiring all joint-stock companies and limited joint-stock partnerships in Poland to perform an obligatory dematerialisation of their shares – ie, share certificates in paper forms will be replaced with electronic records of shares. Shares in these companies will be recorded in an electronic shareholder register or in a securities depository, whereby only persons recorded therein will be considered as shareholders of the relevant company. For private equity entities, the dematerialisation of shares and the existence of an obligatory shareholder register disclosing all shareholders will mean more transparency and less anonymity with respect to the identify of shareholder(s) in these companies.
The primary regulators that are or may be relevant to private equity funds and transactions are the Office of Competition and Consumer Protection (Urząd Ochrony Konkurencji i Konsumenta) and the Council of Ministers.
Generally, there are no specific regulations that specifically address or discriminate against private equity transactions. However, certain areas impose restrictions, depending on the identity of the buyer.
Polish Foreign Direct Investments
Foreign direct investments in Poland are covered by the Act of 24 July 2015 on the Control of Certain Investments ("the Act"), which provides the rules and procedures for the control of certain investments resulting in the acquisition or achievement of a significant participation in or the acquisition of a dominant position over entities operating in strategic sectors. Pursuant to the Act, a buyer is required to notify the Prime Minister or the Minister of Energy when it acquires shares and/or reaches a significant participation or dominance threshold in a strategic company.
Acquisition of Real Estate
Foreign buyers are subject to restrictions with respect to the direct or indirect acquisition of real estate in Poland. Such transactions require a permit issued by the Ministry of Interior and Administration, without which the transaction is deemed null and void.
Merger control is carried out by the Polish Office of Competition and Consumer Protection. The authorities must be notified of a concentration of businesses in the following cases:
A concentration of businesses does not need to be notified to the authorities, if, inter alia:
A decision of the authorities either granting or not granting consent to the concentration is usually issued within one month of the notification.
Due diligence is usually conducted in a virtual data room maintained by the seller. The due diligence process usually takes from two to six weeks, after which a red-flag report is prepared. The level of due diligence is often limited to a monetary threshold, which is determined based on the size of the transaction. If a monetary threshold is applied, certain agreements or disputes with a value lower than the threshold are not analysed during the due diligence process.
In private equity transactions it is typical to focus on the following key areas:
In Poland, vendor due diligence or a fact book has been a common feature for private equity sellers. The seller usually prepares an information memorandum, conducts a vendor due diligence and often prepares a legal fact book (instead of a vendor due diligence report), which will be shared with the bidders in the data room. Advisers usually require non-reliance from bidders on any vendor due diligence reports. Reliance is given to buy-side diligence reports, with the reservation that it is given to documentation that was provided by the seller and reviewed in the data room.
Most acquisitions by private equity funds in Poland are made by private treaty sale and purchase agreement. In medium and large transactions, the parties usually start the transaction by signing a framework or conditional agreement that stipulates the conditions precedent required for the signing of the final agreement. After the fulfilment of the conditions precedent, the final agreement signed at closing effectively transfers ownership.
Terms of the acquisition do not differ between a privately negotiated transaction and an auction sale although, in practice, auction sales with multiple potential buyers are closed in a shorter period of time, due to fewer negotiation rounds and tighter timeframes often being required by the seller.
In a transaction with a private equity-backed buyer, the private equity entity behind the buyer is often involved in the negotiations of the acquisition or sale documentation. The final agreement whereby the buyer acquires the target is usually signed solely by the buyer and the seller. Involvement of the private equity entity is then reflected in additional documentation, such as the amendment of the articles of association, or the management and supervisory board by-laws.
The method of financing private equity deals depends in particular on the structure of the deal, the tax environment, the industry of the target, the deal volume and the reputation of the relevant private equity fund on the market. Private equity deals in Poland are usually financed by bank loans and, to a lesser extent, by funds from a private equity-backed buyer. It is common for smaller acquisitions to be financed via shareholder loans.
Sellers seek certainty of funds from private equity-backed buyers by way of guarantees and security packages, such as:
In most private equity deals, the private equity fund holds a majority stake in the target. A minority stake is usually held by a shelf group company of the PE fund. PE funds holding minority stakes in targets are not very common, although such structures have been seen in targets with regulated revenue streams.
Deals involving a consortium of private equity sponsors or the co-investment by other investors alongside the private equity fund are not common in Poland. Deals involving a multiple investor structure are common where targets are acquired on a global level, but the predominant target sizes in Poland are medium and small.
Generally, the use of locked-box mechanisms and completion accounts is approximately equal. Nevertheless, in recent years the preference for a locked-box mechanism has increased in the Polish market, especially among private equity funds. The combination of a locked-box mechanism or completion accounts with earn-outs is rarely seen in private equity-driven transactions. The level of protection provided by the private equity fund in relation to various consideration structures does not differ substantially compared to that provided by strategic investors. A locked-box mechanism is customarily combined with anti-leakage provisions on a euro-for-euro indemnification basis, ordinary course of business covenants, and a dispute resolution mechanism with respect to disputes over the leakage amount. Moreover, the use of a warranty insurance policy is common in M&A transactions involving private equity investors. Such insurance, aiming to cover losses suffered by the policyholder in the case of a successful claim for breach of certain representations by the seller, is usually implemented by the private equity buyer (who can deduct the cost of the insurance from the purchase price). However, an increasing number of private equity sellers use warranty insurance policies, in order to limit buyer recourse against them.
As the value of leakage may be difficult to identify or quantify, buyers may consider imposing interest charged on a non-permitted leakage. Nevertheless, it is rare for such clauses to make it into the final agreement.
Although locked-box transactions are, overall, less likely to end in a legal dispute than completion accounts transactions (typically, disputes related to the locked-box mechanism come down to disagreement over whether or not leakage has occurred), it is common to see a dispute resolution mechanism in place for both structures. While there are substantial differences between both structures, the dispute resolution mechanism is usually similar: firstly, the parties decide to refer their dispute to an independent expert, and an expert view is only required once proceedings become final and the parties are still in disagreement, in the context of a formal arbitration proceeding.
Conditionality is typically limited to the legally mandatory minimum conditions. Although private equity parties prefer the signing and closing of a transaction to be simultaneous (in cases where there are no regulatory obligations to satisfy beforehand), more complex transactions are usually subject to closing conditions, which may include the following, among others
The fulfilment of the listed conditions must usually be made before signing.
"Hell or high water" undertakings require a buyer to take all action necessary to secure approval from competition authorities, and are rarely seen in private equity transactions in Poland. Buyers are more likely to agree on a prompt filing commitment, keeping the seller informed about the merger clearance process, and consulting with the seller when needed in order to co-operate with antitrust authorities.
Due to the limited conditionality of private equity transactions in Poland, it is rather uncommon to see a break fee provision in favour of the buyer in an acquisition agreement. The same applies to a reverse break fee in favour of the seller, in case the buyer, for example, breaches the agreement or is unable to consummate the transaction due to a lack of financing. There are no legal limits on such break fees, but they will be paid on a guarantee basis (świadczenie gwarancyjne). The courts may reduce the agreed break fees if the amount of such is considered to be unreasonably high considering the circumstances of the party obliged to pay and the particularities of the transaction.
Under Polish law, there is no typical distinction between signing and closing. An acquisition agreement can be either preliminary in nature (which may be referred to as "signing") and require the execution of a second final agreement transferring the shares or assets, or final in nature and subject only to the fulfilment of conditions precedent (which may be referred to as "closing"). In preliminary agreements, the parties may freely decide on the circumstances under which it is possible to terminate a transaction after "signing". Termination rights in private equity transactions are usually limited to the maximum extent possible. In addition to the mandatory termination rights (which cannot be excluded by the parties), such as fraud or lack of merger clearance, the parties may envisage termination rights in case of a breach of warranties or covenants in the period between signing and closing, or the occurrence of a material adverse change to the business (although they seldom do).
Allocation of risk is more straightforward in the locked-box structure, as the potential breaches are more transparent, and determination of the correct purchase price does not require an expensive audit investigation as may be the case with respect to closing accounts. Typically, it comes down to protection of the buyer between signing and closing by way of ordinary course of business provisions and no leakage provisions and covenants. The process starts with a due diligence exercise, and any identified risk is addressed as either a purchase price adjustment or an indemnity. Specific indemnification for matters such as pre-closing tax liabilities and employment-related liabilities is very common. Seller's indemnification obligations are subject to temporal and/or monetary limitations, if at all. For unknown risks, a representations and warranties regime is put into place. Provisions dealing with the consequences of breaches of representations and warranties typically provide for the limitation of the seller's liability – eg, de minimis (liability is excluded if certain damage amounts are not exceeded), thresholds/basket (claims may be excluded to the extent that the damages being suffered do not exceed in aggregate a certain agreed minimum), or cap (typically related to the amount of the purchase price). Furthermore, it is common for certain damages to be excluded, such as indirect losses or punitive damages.
As a clean exit is preferred in private equity deals, sellers seek to offer almost no representations and warranties. Typically, the private equity seller will provide limited warranties to a buyer on exit regarding legal organisation, solvency and financial standing, employment, material agreements, real property, key assets, litigation and compliance (please see 6.8 Allocation of Risk with respect to warranty and indemnities in private equity deals).
Full disclosure against the warranties is a common concept in private equity deals in Poland but its application depends largely on the specific circumstances, such as the business sector in which the target is operating (eg, in energy-related transactions, a full data room disclosure is widely accepted and a market standard).
Other protections usually included in the acquisition documentation are title hold-back (legal title transfers only upon the payment of a purchase price), escrow arrangements to secure claims under the agreement or transaction insurance products. Insurance products have only recently entered the Polish market, and have been used in high-volume transactions. Such insurance is increasingly used to cover the gap between the seller's interest in limiting its exposure and achieving a clean exit and the protection and recourse requirements of the buyer.
Litigation in connection with private equity transactions is not common in the Polish market. A standard market practice is to agree on an arbitration clause in the transaction documents. If litigation does arise, it mostly concerns consideration-related matters (earn-outs, completion accounts, leakage and its value, etc) and breaches of the seller’s warranties.
Despite the global trend, public-to-private transactions are not common in Poland. In public-to-private deals, private equity investors are supposed to comply with certain legal obligations – eg, relating to notification obligations. Additionally, mandatory offers apply in certain situations (mainly when thresholds of 33% or 66% are met). Therefore, legal requirements connected with such transactions make them very formalised and, as a consequence, quite unpopular on the market.
In Poland, anyone who reaches, exceeds, holds or falls below a threshold of 5%, 10%, 15%, 20%, 25%, 33%, 33.33%, 50%, 75% or 90% of the total number of votes in a public company is obliged to notify the Polish Financial Supervision Authority (PFSA) and the issuer of such, no later than within four business days of the day on which the relevant person learned about the change of the share in the total number of votes or, with due diligence, could have learned about it; in the case of a change resulting from the acquisition or transfer of the shares of a public company in a transaction concluded on a regulated market or in the alternative trading system, notification must occur no later than within six trading session days from the day of executing the transaction.
There are also further notification obligations, as follows:
Generally, the violation of filing obligations has the consequence that the shareholder may not exercise their voting rights attached to the shares.
Under Polish law, exceeding the thresholds of 33% or 66% of the total number of votes in a public company (directly or indirectly) is permitted exclusively as a result of a takeover offer (ie, an announcement of an invitation to subscribe for the sale or exchange of shares of this company in a number ensuring the holding of 66% or 100% of the total number of votes).
There are some exceptions to this general rule. For example, the rules specified above do not apply in the event of an acquisition of shares from the State Treasury as a result of an initial public offering, or when the shares are purchased from an entity that is a member of the same capital group or when the purchase is made in bankruptcy or execution proceedings.
The management board of the issuer is required to communicate the position concerning the announced takeover offer to the PFSA and the public, no later than two business days before the day when the acceptance of subscription orders commences.
A takeover offer shall be announced after the establishment of a security, the value of which is at least 100% of the value of those shares that are the object of the takeover offer. The establishment of security shall be documented by a certificate of a bank or another financial institution that provides the security or intermediates in providing it.
A takeover offer must be published via an entity carrying on brokerage activity in Poland, which is required to simultaneously notify the PFSA and the company operating the regulated market on which the relevant shares are listed of the intention to announce the takeover offer no later than 14 business days before the day when accepting subscription orders commences.
Cash consideration is the most common type of consideration in public takeovers in Poland. However, the bidder may also offer the exchange of shares of another company or other paperless transferrable securities carrying the voting rights in the company, for example, as an alternative consideration.
In general, the share price offered in the takeover offer to subscribe for the sale or exchange of shares may not be lower than the average market price for the period of six or three months (depending on the mandatory offer thresholds) preceding the announcement of the takeover offer, during which time these shares were traded on the basic market, or the average market price for a shorter period if the company shares were traded on the basic market for a shorter period. If it is impossible to determine the price in accordance with share trading value or to the extent restructuring or bankruptcy proceedings were opened, the price may not be lower than the fair value price for the shares.
If the average market price of such shares determined pursuant to the general rules specified above significantly deviates from the fair value of the shares due to specific circumstances (eg, as a result of a price agreed with respect to the pre-emptive rights), the issuer may request PFSA's consent to propose that the price does not meet the criteria referred to above in the takeover offer. The PFSA may grant the consent if the proposed price is not lower than the fair value of such shares, and if the announcement of such takeover offer does not infringe the reasonable interests of the shareholders.
Under Polish law, withdrawal from a takeover bid that has already been announced is prohibited, unless another entity announces an alternative takeover bid for the same shares after the announcement of the first bid. However, withdrawal from a takeover bid for all the remaining shares of that company is only permitted if another bidder announces an alternative takeover bid for all the remaining shares of the issuer at a price that is not lower than the price of the first bid.
At the same time, conditional bids are permitted. The bidder may state that the bid will take place only if the issuer concludes a specific agreement, for example, or if the company’s General Meeting or Supervisory Board adopts a certain resolution. Additionally, the takeover offer may be conditional upon reaching the minimum number of shares accepted by the bidders. Commonly, conditions in public bids are a result of legal requirements to apply for certain authorisations or clearances from public authorities – eg, when the takeover is subject to the approval of the competition authority (antitrust clearance).
A takeover offer cannot be conditional on the bidder obtaining financing under Polish law. As specified in 7.3 Mandatory Offer Thresholds, a takeover offer with respect to the sale or exchange of shares can be made after the establishment of a security at a value corresponding to at least 100% of the value of shares that are the object of the takeover offer.
Break fees are not regulated under Polish law; although they are not prohibited, they are neither common nor practicable in the Polish market.
If a bidder does not obtain 100% ownership of a target, it can execute a squeeze-out mechanism, which is regulated by the law.
The squeeze-out mechanism applies to a shareholder of a public company who has reached or exceeded 95% of the total number of votes in that company, either on its own or jointly with its subsidiaries or parent undertakings. In such case, such shareholder shall be entitled to demand that all other shareholders sell their shares, within three months of the date of achieving or exceeding the mentioned threshold (compulsory redemption).
The squeeze-out will be announced following the provision of collateral not lower than 100% of the value of the shares.
An equivalent to the squeeze-out is the request by a shareholder having 95% or more of the voting rights of a public company to redeem the shares held by another shareholder. The redemption shall be claimed within three months of the date on which the mentioned threshold has been reached or exceeded.
It used to be common to obtain irrevocable commitments from a principal shareholder of the target company by way of concluding an investment agreement or any other equivalent agreement in Poland. However, in the last few years, irrevocable commitments have become increasingly less common. The market is very seller-friendly, so principal shareholders do not wish to enter into any preliminary agreements that would risk the loss of a higher bid.
Hostile takeovers are not forbidden in Poland, but are not common. Private equity-backed buyers do not normally engage in hostile takeover offers.
In the case of hostile takeovers, the principle of neutrality applies, which means that, as a rule, the management board of the target company must not implement defensive measures, but it shall become neutral in relation to the bid. Moreover, the articles of association of a public company may stipulate that, in the course of a takeover offer to subscribe for the sale or exchange of all remaining shares of the issuer, the management board and the supervisory board of the issuer shall be obliged to obtain prior consent from the general meeting to undertake any defensive actions aimed at stopping or blocking the bid, for example.
Equity incentivisation of the management team is a common feature of private equity transactions in Poland, in order to ensure smooth operations of the target and the commitment of the management team following the acquisition.
The management team usually receives a stake in the operational target, as an incentive (usually up to 5% or 10% of the shareholding). Significant shareholding is usually granted to the management team, if a manager has held his position in the target for a long time and commits to holding such position following the acquisition for a longer period.
Management participation in Poland is usually structured as sweet equity, meaning the managers have the possibility to subscribe for shares in the operational target. Depending on the incentive plan and the importance of the position of the manager to the business, the shares may take the form of preference shares, which usually grant their holder preference with respect to:
A management shareholder is often required to sell his or her shares when leaving the company. To determine how the manager's shares will be valued upon exit, leaver provisions are usually included in the shareholders' agreement. Leaver provisions are typically divided into so-called ""good leaver" provisions and "bad leaver" provisions. The first are incentivising mechanisms, while the latter are mechanisms preventing managers from leaving the company before the investors' exit or non-performing.
When a manager leaves the company as a "good leaver", he or she can often sell his or her stake at a fair value or market value. The most common "good leaver" circumstances are:
If the manager departs the company as a "bad leaver", he or she will usually be required to sell his or her shares at a price (essentially) below the market value. Common "bad leaver" circumstances are:
Customary restrictive covenants agreed to by management shareholders are non-compete, non-solicitation and confidentiality covenants.
Non-compete clauses can be agreed for the period during the relationship with the company or for the period following the relationship with company. However, if a management shareholder is employed by the company under an employment contract, the non-compete covenant pertaining to him or her is governed by the Polish Labour Code (irrespective of a non-compete provision agreed between the parties). According to the Labour Code, after the employment is terminated, an employer introducing a non-compete clause is required to pay the restricted ex-employee compensation for not being able to perform competitive work, in the amount of at least 25% of the employee's salary. A non-compete clause can also be used during the employment relationship, although compensation is not mandatory in this case. Legal provisions do not foresee a time limit for non-compete obligations. If the manager was employed on a basis other than an employment contract, the provisions of the Labour Code will not apply.
The Polish Commercial Companies Code provides for a squeeze-out only with respect to shareholders of joint-stock companies. It does not provide for a squeeze-out of minority shareholders in limited liability companies, although the articles of association of the limited liability company may provide for the possibility to buy back the shares of the minority shareholder in certain situations. Typical minority protection for manager shareholders includes tag rights or shares with preference to voting rights.
The management can also enjoy veto rights, which are usually included in the articles of association of the company and establish a list of matters for which the passing of a resolution must include the vote of the manager or a given quorum or majority.
Private equity funds invest in two main types of companies in Poland: the limited liability company (LLC) and the joint-stock company (JSC).
Typically, private equity funds acquire full control over the target company. Moreover, some private equity funds decide to become a minority shareholder, especially when they invest in start-up companies (which is possible on the Polish market, irrespective of the maturity of the start-ups), but at the same time they have preference shares with special rights attached to them – eg, preference relating to the voting rights, or rights to dividends or to the manner of participation in the distribution of assets upon liquidation of the company.
The company’s articles of association may contain certain rights of a private equity fund shareholder. Such rights may relate in particular to the right to appoint and recall members of the management board and/or the supervisory board. Sometimes, the articles may grant personal rights to obtain certain benefits from the company, such as a right to use the company's machines or other assets – but such rights are not common with respect to private equity shareholders.
In many cases, it is not mandatory to install a supervisory board in an LLC. Therefore, each shareholder has an individual right of supervision over the company. In a JSC, it is mandatory to appoint a supervisory board.
It is very common for private equity shareholders to reserve certain key matters to be subject to their approval, including the following:
Generally, shareholders of an LLC or a JSC cannot be held liable for the obligations of the company. In practice, this means that the shareholders’ risk is limited to their share capital contributions.
However, there are two main exceptions where a shareholder might be indirectly liable for a company’s debts, as follows:
Private equity shareholders may impose compliance policies on larger portfolio companies. Introducing compliance policies is not common with respect to smaller companies.
The typical holding period for private equity transactions in Poland is between five and seven years.
The most common type of exit is a sale of the company (company’s shares) to financial investors, including other private equity funds. Sales to strategic investors are also possible. Exits via IPO are not common.
Drag rights are typical mechanisms in private equity transactions, and are often exercised to the extent the parties cannot agree jointly on an exit strategy. Such drag rights are typically introduced in shareholders’ agreements and often incorporated in the articles of association.
Drag rights can be unconditional, whereby they commonly refer to a specific lock-up period (ie, the drag right can be exercised after a specific period of time), and the drag threshold depends on the agreement between the parties on a case-by-case basis.
The same rule mentioned with respect to drag rights also applies to tag rights. There is no uniform practice regarding the exercise of tag rights by the shareholder. It depends on many factors, such as the current valuation of the company.
In Poland, exits by way of IPO are not common, and IPOs are generally rarer. However, if an IPO exit takes place, the lock-up periods of the private equity seller apply and relate to a certain portion of the shares and/or specific time limitations following the IPO (eg, from one to two years after the IPO).