The M&A market in 2020 was affected by the COVID-19 pandemic. However, despite uncertainty and intermittent lockdowns of the economy, there were more M&A deals than last year, with a few of them being exceptionally high value and it seems that the trend will continue this year. Nevertheless, transactions are sometimes taking longer to complete, in part due to the lack of face-to-face negotiations, but also because registration and administrative proceedings have been slowed down by COVID-19 restrictions and, in some cases, because additional regulatory approvals need to be obtained.
The average value of transactions in Poland continues to grow (by around one third compared to last year), and Poland remains a leading M&A market in the CEE region, with high degrees of fragmentation in many sectors, making them ripe for consolidation. In the first quarter of 2020, private equity funds experienced a slow-down, however, activity increased significantly in last two quarters of 2020, with that pace expected to continue in the upcoming months.
State-owned entities have also been active on the M&A market in 2020, including transactions performed with support from the Polish Development Fund (PFR) and various deals closed by PKN Orlen.
Due to the COVID-19 pandemic, the GDP of Poland decreased by around 2.8% in 2020, which was not a bad result compared to most other European countries. The impact of the pandemic was buffered by, among other things, domestic consumption and exports, as well as factors which have underpinned Polish economic growth for some time, including the stable banking system and a well-regulated financial services sector, combined with a well-educated workforce.
There were no major disruptions, significant changes in deal terms, nor unexpected difficulties in obtaining debt finance and, surprisingly, the overall number of transactions grew and the value of some transactions broke records, with the total value reaching EUR11 billion. Also, the renewable energy market has continued its resurgence, with many transactions both in wind and photovoltaic.
Over recent years, there has been a greater push by sellers to limit their liability for warranty breaches, with the expectation that buyers will seek warranty and indemnity insurance to provide the necessary protection, especially as regards higher monetary limits and longer claim periods, even if the cost of such insurance is chipped off the purchase price. However, insurance is not always the ideal solution, especially given that many insurers have an extensive list of standard topics which they will not cover.
The sectors which experienced significant activity included TMT, energy, insurance, financial services and fintech, as well as packaging manufacturing. Some of the notable transactions in these sectors included:
Of course, not all sectors have fared so well during the COVID-19 pandemic, especially the entertainment, culture, fitness, and hotel industries.
The Polish M&A market is dominated by negotiated acquisitions of shares. There are also some asset deals, including pre-pack acquisitions out of bankruptcy. Under Polish law, there is a distinction between acquisitions of assets and liabilities which comprise an “enterprise” or “organised part of an enterprise”, being an organised set of tangible and intangible assets used for a functionally and financially independent business, and acquisitions of assets which fall short of an “organised part of an enterprise”, with each type of transaction usually requiring different kinds of corporate approval, and having different consequences for the seller and the buyer in terms of tax and exposure to pre-transfer liabilities.
There are also acquisitions of shares in listed entities, with indirect acquisitions of such shares bearing some similarities to negotiated acquisitions of shares in terms of process and flexibility of terms. However, in the event that the acquisition invokes the tender offer rules, it is highly regulated.
The primary regulators are the Polish Office of Competition and Consumer Protection (POOCP) and the Polish Financial Supervisory Authority (PFSA).
The POOCP is responsible for merger clearances. The key requirements relating to merger clearances are described in 2.4 Antitrust Regulations. Recently, due to the COVID-19 pandemic, the POOCP was also entrusted with a new prerogative regarding foreign investment control (for further details, see 2.3 Restrictions on Foreign Investments and 2.6 National Security Review).
The PFSA must be notified by both the seller and the buyer about intended transactions involving controlling or other sizeable interests in targets in the financial services sector, notably banks, national payment institutions, insurance companies and investment fund managers. The PFSA is entitled to object to the transaction within a statutory period of time, usually 60 business days from receipt of the complete notification together with the required information and documents.
The PFSA determines whether additional information or documents are needed and, as such, can affect the timetable in practice. A purchase which is made before receiving a statement of no objection from the PFSA (or, in the absence of such a statement, the lapse of the time period for making an objection) results in the loss of the buyer’s voting rights and may also result in forced disposal of shares, with failure to do so being subject to fines or revocation of target’s permits to conduct activity. The PFSA is also the regulatory body with primary responsibility for supervision of tender offers.
Poland is generally open to foreign investment. Nevertheless, the COVID-19 pandemic saw the introduction of laws significantly expanding the state’s control over M&A transactions in some strategic sectors of the economy including, among others, the electricity, gas, medical and pharmaceutical, and food processing sectors (as described in 2.6 National Security Review).
Certain transactions involving the direct or indirect acquisition of real estate may require the consent of the Minister for Internal Affairs. However, with the exception of agricultural and forest land, neither a direct transfer of real estate, or a sale of shares in a Polish entity which holds real estate, requires the prior consent of the Minister for Internal Affairs if the acquiror is incorporated in a European Economic Area country.
The rules for direct or indirect acquisition of agricultural and forest land are stricter. In particular, the law limits the direct or indirect acquisition of agricultural land to natural persons who have relevant farming qualifications and who will actually use it for agricultural purposes. To that end, the National Support Centre for Agriculture has a pre-emptive right over shares in companies which own or hold in perpetual usufruct at least five hectares of agricultural land.
A transaction will be invalid if it breaches the rules. For this reason, seeking confirmation that a target does not own any agricultural land is an important part of the due diligence exercise, especially given that many industrial companies in Poland hold some land formally classified as agricultural.
The merger control rules under the Polish anti-monopoly law apply if the transaction does not fall under the European Union merger rules set out in EU Merger Regulation No 139/2004.
The Polish merger control rules require notification of the acquisition of control if the combined turnover of the undertakings participating in the concentration in the financial year preceding the year of the transaction exceeds the equivalent of EUR1 billion worldwide or the equivalent of EUR50 million on the territory of Poland. However, a notification is not required if the turnover on the territory of Poland of the target undertaking or assets did not exceed the equivalent of EUR10 million in either of the two financial years preceding the transaction.
An acquisition of control can be regarded as taking place also in case of acquisition of a smaller stake where the factual circumstances make it tantamount to acquisition of control (eg, acquisition of a 30% or 40% stake in a listed company where there is significant fragmentation of votes among the other stakeholders). The expansive concept of control needs to be taken into account during stake-building.
A failure to notify may be subject to heavy fines eg, up to 10% of the turnover of the breaching entity (or, in theory, forced disposal, although such a measure has not yet been used). Fines may be also imposed on managers of such entity.
The POOCP has one month to consider a notification under phase I proceedings (for relatively simple matters), but such period can be extended for another four months for phase II proceedings (for less straightforward matters eg market studies are required or relevant markets are affected, horizontally or vertically, by the proposed concentration). In each case, the clock stops ticking while requests for further information remain unaddressed.
There are no specific labour law requirements that apply in the context of a share deal. An employer is generally obliged to inform and/or consult with works councils in respect of:
However, such obligations are only occasionally invoked in the context of M&A. Moreover, works councils can only express their opinion, but have no decisive powers and cannot block or delay a transaction.
Collective Bargaining Agreements and Asset Deals
More extensive obligations that can be triggered in case of an M&A transaction might arise under collective bargaining agreements or other collective understandings with employees which can be seen especially in larger targets where trade unions are active.
Conversely, an asset deal will often constitute a transfer of the whole or a part of a working establishment. In such case, the employees will automatically transfer to the buyer, with the employment terms and conditions unchanged. The trade unions or employees (if there are no trade unions) of both the buyer and the seller should be informed in writing about the planned transfer and its consequences at least 30 days before the expected transfer date.
Negotiations, Blocking and Terminations
If either the buyer or the seller intends to undertake any actions affecting the employment conditions of their employees, information about this must be included in the notification, and such party should commence negotiations with the trade unions (if any) with the aim to conclude an agreement in that regard within 30 days. Nevertheless, neither the trade unions nor employees can block the transfer. However, within two months following the transfer, a transferred employee may terminate their employment relationship with only seven days' prior notification.
In the event of partial transfer of a working establishment, the buyer and the seller shall bear joint and several responsibility for pre-transfer liabilities under the transferred employment relationships, while all such liabilities are shifted entirely to the buyer if the whole working establishment is transferred.
Polish law requires notification to the relevant Minister (depending on the sector) on the proposed acquisition of control over a “significant participation” (at least 20% of the votes) in a company operating in certain strategic business areas, but only if such company is included on a list published by the Council of Ministers. The relevant strategic business areas include the energy, oil and gas, chemicals, defence and telecommunications sectors. As of 1 January 2021, the list included thirteen companies. The threshold for notification is quite low, which needs to be taken into account during stake-building.
The law also allows the government to prevent transactions relating to certain critical infrastructure and systems, including energy, telecommunications, healthcare and transport infrastructure, financial systems, food and water supply systems, rescue services and facilities for production, storage or use of chemical and radioactive substances. However, the government can only intervene if the relevant target has been notified by the government that it is subject to the restrictions.
Interim COVID-19 Measures
Poland adopted an interim, COVID-19 related measure (in force until 24 July 2022, although there are already rumours about the government’s intention to extend this period) which expanded the state’s control over M&A transactions concerning public companies, entities holding assets listed as “critical infrastructure” and entities doing business in some strategic sectors of the economy. The new law imposes an obligation to notify, prior to consummation, certain planned transactions (ie, the direct or indirect acquisition of control or a “significant participation” by acquiring or crossing a 20% or 40% shareholding threshold) to the President of the POOCP, who may object to the transaction within 30 business days or, exceptionally, 120 calendar days in cases requiring review from a public security or public order perspective (moreover, the clock stops whenever the regulator seeks additional information).
An objection may be made for various reasons including a potential threat to public order, public security or public health in Poland. However, only those transactions where the purchaser (and/or its ultimate controlling entity) is from outside of the EU, the EEA and the OECD are potentially subject to the regime. Further, the new measure only applies if the target had turnover from Poland exceeding EUR10 million in either of the two preceding financial years.
An acquisition made in breach of the new measures shall be invalid, and may give rise to severe financial penalties, and potentially penal consequences.
There were three precedent-setting court decisions issued in the last three years.
On 6 February 2019, the Appellate Court in Warsaw decided that Comp S.A., a shareholder of the public company Elzab S.A., was liable for damages towards a minority shareholder for its failure to announce a mandatory tender offer for shares in Elzab S.A. The damages amounted to the difference between the price that the minority shareholder could have obtained within the tender offer and the price that it actually obtained in about 140 sale transactions, ie, PLN2.2 million plus interest.
On 18 July 2019, the Supreme Court issued a decision which, contrary to the previous market practice, required that the price paid in an indirect acquisition of shares needs to be taken into accounting in setting the price within the resulting mandatory tender offer.
On 20 November 2019, the Supreme Court (full panel of seven judges) issued a decision according to which it is not permissible to stipulate a contractual penalty that will apply if a party rescinds the agreement due to the lack of payment by the other party. As a result, another mechanism (a “guarantee payment”) became more prevalent in M&A contracts to enhance deal certainty for the sell side.
Recent changes in corporate law have been extensive, including:
In 2021, further important amendments to Polish corporate law are planned, including the introduction of:
Stake-building strategies are limited by the disclosure obligations regarding major blocks of shares (see 4.2 Material Shareholding Disclosure Threshold) and insider trading regulations, as well as the requirements for the minimum tender offer price (see 4.3 Hurdles to Stakebuilding). In light of this, it is difficult for an acquiror to build a stake such that its moves remain unnoticed by the market participants (at least not after it reaches 5%). However, due to changes in law in the recent years, stake-building up to 32.99% of voting rights is, generally, permissible.
Obtaining or exceeding, directly or indirectly (including through a third party), or crossing (in either direction) any of the following thresholds of the overall amount of votes in a public company triggers disclosure obligations: 5%, 10%, 15%, 20%, 25%, 33%, 33⅓%, 50%, 75% or 90%.
Further, a shareholder who already holds more than 10% needs to disclose any change in its shareholding by 2% (WSE Main Market) or by 5% (other markets, including NewConnect). Moreover, if a shareholder holds more than 33%, it needs to notify any changes by at least 1%.
The notification shall be made to the PFSA (ie, the relevant regulatory authority) and the company. The company needs to provide the information to the public, the PFSA and the WSE.
The main rules that apply to stake building are the statutory disclosure obligations described in 4.2 Material Shareholding Disclosure Threshold. There is no known practice of introducing alternative thresholds for disclosure of shareholdings in company statutes or by-laws and, even if such existed, they could have an internal effect at the most.
Further, if an acquiror plans to build a stake before announcement of a mandatory tender offer (the thresholds are described in 6.2 Mandatory Offer Threshold), it needs to take into account that the tender offer price may not be lower than the price which it or its affiliates or parties acting in concert have paid for shares within 12 months prior to the tender offer.
Under Market Abuse Regulation No 596/2014 (MAR), if a person gets to know some information within the process of a public takeover and uses such information only for the purposes of that takeover, and the information becomes public before acceptance of the takeover offer by the shareholders, this does not constitute insider trading. However, this exemption does not apply to stakebuilding.
Dealings in derivatives are generally allowed in Poland to the extent they do not constitute market manipulation within the meaning of MAR (for instance, so-called “marking the close” by placing orders (also in concert with other investors) right before close of a trading session in order to maintain an artificially high closing price).
The closing price is usually the basis for settlement of derivatives, so attempts at such manipulation may potentially happen during “triple witching day” (the third Friday of every March, June, September and December) when three kinds of derivatives expire: stock market index futures, stock market index options and stock options.
The same disclosure obligations, as described in 4.2 Material Shareholding Disclosure Threshold, apply to derivatives. A list of instruments that are subject to those obligations has been issued by the Minister of Finance, and includes, among others, options, futures, swaps, forwards, subscription warrants and subscription rights.
For the purpose of determining whether the disclosure thresholds have been crossed, account is taken of the number of votes attached to the shares which the holder of a derivative is entitled or obliged to acquire (ie, only long positions are relevant). An updated disclosure may be required following the actual acquisition of shares on exercise, or following expiry without exercise, of the derivative if a relevant threshold is crossed.
Currently, there is no requirement to disclose the purpose of an acquisition and the bidder’s intentions regarding control. However, in the context of a tender offer, the offeror needs to provide information about the number of shares it intends to obtain within the tender offer, and details of its intentions towards the company.
Negotiated M&A deals do not require disclosure and the process is almost always kept confidential until singing/closing. However, public M&A deals require careful consideration as regards disclosure because of insider trading regulations and disclosure obligations. In Poland, MAR, including its quite comprehensive definition of inside information, is directly applicable.
The decision as to whether a given transaction step constitutes inside information and should be immediately disclosed to the public is the responsibility of the target’s management board members. A failure to properly perform the disclosure obligations is subject to severe fines (up to around EUR2.5 million or 2% of the yearly turnover for the company, or up to around EUR1 million for the management board members).
Unless there are permissible grounds for withholding disclosure, transaction milestones such as receipt of a binding offer, walking-away from negotiations (if there was previously information on their commencement), signing of an NDA, signing of a formal sale agreement, fulfilment of conditions to closing and closing itself should generally be disclosed.
The need for disclosure of other steps such as the first approach, receipt of a non-binding offer, the commencement of negotiations, the start of due diligence or filing motions to regulators is considered case-by-case, and the disclosure of information about such steps is quite often delayed. A slightly different approach that sometimes is being taken is to start the process with company’s announcement that “it is considering its financing and investment options”, which is generally deemed to allow the M&A process to run without further disclosures until just before the announcement of a tender offer. When the company eventually publishes the information in respect of which it delayed disclosure, it also notifies the PFSA about the delay and explains the reasons in writing.
The regulations do not provide clear-cut boundaries or an exhaustive list of inside information, so the practice in that regard had to be developed. Bidders are usually reluctant to reveal their intentions and the status of negotiations too soon. Further, reporting on every transaction step might be cumbersome for the target and, potentially, confusing to the market (ie, market manipulation). For that reason, disclosure of information about a transaction should be properly balanced and considered having regard to the specific circumstances. Usually, a company has its own disclosure policy and provides information in compliance with its own past practice.
In public M&A deals in Poland, disclosure of non-conclusive transaction steps is usually delayed in accordance with MAR. In that regard, the risk of jeopardising M&A negotiations may be a premise for delay on the basis that the legitimate interests of the company may be prejudiced.
The scope of due diligence depends on various factors, including the target’s sector and the bidder’s expectations. In bigger deals, vendor due diligence is also not uncommon. Bidders usually conduct legal, financial, tax and accounting due diligence, and sometimes also IT, commercial, insurance, technical or environmental due diligence.
Full descriptive legal due diligence reports are rare in M&A deals in Poland. Legal advisors usually prepare “red flag” reports which summarise the main legal risks and provide recommendations in the context of the deal. The areas that are usually reviewed include contracts, corporate matters, financing, regulatory issues, employment matters, intellectual property and IT, and real estate. In public M&A, the scope of due diligence may be more limited.
Over the last year, in many cases it took a little bit longer to conduct due diligence, taking into account all the COVID-19 restrictions and remote working. The scope of due diligence did not change much, however, bidders started to pay special attention to the financial results and future business plans of targets having regard to the impact of the pandemic and related restrictions.
Exclusivity agreements are commonly seen in negotiated M&A transactions. In bigger deals especially, the seller might invite non-binding offers from various potential buyers, with a few among them being allowed to conduct due diligence, after which the formal sale agreement is negotiated in parallel with a few short-listed bidders, one of which might be able to secure exclusivity for a short period of time.
Standstill agreements are seen in deals regarding shares in public companies. Under such arrangements, the bidder undertakes not to acquire, directly or indirectly, any shares in the target on the public market before the main contemplated deal and/or otherwise than as part of an agreed tender offer.
In negotiated M&A deals, the terms are always documented. Unless the signing and completion are simultaneous, this occurs in phases. Specifically, the full terms are usually set out in a preliminary sale agreement and, at closing, a short form document is used to give effect to the transfer.
In public M&A transactions which aim at taking control over a company or at least a majority stake, a tender offer needs to be announced (for details about the thresholds for mandatory tender offers, see 6.2 Mandatory Offer Threshold). A bidder may, prior to announcing such tender offer, sign an agreement with a significant shareholder as to its participation in such tender offer. However, shares may not transfer under such agreement, but rather should only be acquired through the tender offer (however, the regulations allow flexibility for a bidder to agree with a holder of at least 5% of the shares that such shareholder will sell its shares at a price lower than the minimum price (but never higher)).
A tender offer is subject to a strict legal regime, especially as to the minimum price requirements. In particular, the price may not be lower than the average market price for the six months (and, with respect to tender offers for 100%, also the average market price for the three months) preceding the announcement of the tender offer or the highest price that was paid for shares in the company by the bidder or its affiliates or parties acting in concert within the last 12 months prior to announcement of the tender offer.
In terms of negotiated M&A, from the seller’s perspective, the process, including sounding out the market, preparation of an information memorandum, establishment and population of a data room, vendor due diligence, pre-sale reorganisations, initiating an auction process or entering into a term sheet, buyer due diligence, negotiation, signing, satisfaction of conditions precedent and closing, could take between six and 12 months.
However, from the buyer’s point of view, since it is not involved in all the preparatory steps undertaken by the seller, the process might be more like three to nine months. Of course, there are always outliers, with some deals being done in a matter of weeks, and others dragging on for more than 12 months.
Tender offers conducted on the Polish market in 2020 usually lasted two to four months from their announcement until the end of the subscription period. Generally, the subscription period cannot be longer than 70 days, however, it can be extended up to 120 days in justified circumstances, including in order to satisfy legal conditions (eg, regulatory approvals).
Since the beginning of the pandemic, deals have sometimes taken a little bit more time to close, particularly where the closing was conditional on registration of some matter with or approval by a governmental authority. The deals that got broken, were put on hold, or had their deal terms materially modified, usually concerned the sectors most affected by COVID-19 related measures, including hotel and restaurant chains, and the entire retail sector.
Mandatory offer thresholds (33% and 66% of total votes) apply to the acquisition of shares in a public company. In the case of exceeding the 33% threshold, the bidder may announce a tender offer for the number of shares which confers the right to 66% of the total votes or, at the option of the bidder, 100% of the total votes. However, in the case of exceeding the 66% threshold, the tender offer must be for all the remaining shares (100%).
If crossing of a threshold was the result of an indirect transaction, including an indirect acquisition of shares or a merger or demerger of a company, the acquiror is obliged, within three months after exceeding the threshold, to announce a tender offer or dispose of a sufficient number of shares to fall below the threshold.
The purchase price may be a fixed amount or it may be defined by indicating a basis for its calculation. Transactions in which the seller shall receive shares as consideration are rare in the Polish market, both in negotiated M&A and tender offers.
Usually, in negotiated M&A, the price is established based on the locked box mechanism by reference to the most recent financial statements of the company prior to signing or with a post-closing price adjustment based on completion accounts (typically focusing on differences between actual net working capital and net debt as at closing compared to estimates prepared and agreed by the parties pre-closing).
In light of the COVID-19 situation, we would have expected greater than usual use of completion accounts rather than locked box mechanisms, as well as earn-out mechanisms, deferred payment or escrow accounts to hold back a portion of the purchase price until a certain issue is dealt with, or cherry-picking of assets. However, for now, there is no strong trend to that effect.
Generally, the purchase price may be established by the parties under principles of freedom of contract. However, the tax authorities may question a purchase price which appears to deviate extensively from the perceived market price. As noted in 5.5 Definitive Agreements, there are minimum price requirements with respect to shares sold within tender offers.
Offers may be conditional both in negotiated M&A and public transactions.
In negotiated M&A, a variety of conditions are used, the most common of which concern the obtaining of necessary regulatory consents (see 2 Overview of Regulatory Field) or the resolution of issues identified during due diligence.
Nevertheless, it is common that the parties seek to limit the number of conditions and, where possible, include post-closing obligations instead, rather than weaken the certainty of closing.
In tender offers, the scope of possible conditions is regulated by law. The most common conditions are regulatory consents and the minimum level of subscriptions, which cannot be higher than 66% of votes. Sometimes there are other conditions which are more in the hands of the key parties (eg, concluding certain agreements, and/or certain resolutions being passed by target’s corporate bodies).
A bidder may set a minimum acceptance condition. However, the number of shares taken together with the number of shares already held by the bidder may not be more than 66% of the overall votes. In other words, there can be no minimum acceptance condition between 66% and 100%.
The thresholds for triggering a tender offer and the permissible levels for a minimum acceptance condition do not necessarily align with the levels at which control is acquired.
Certain matters require a qualified majority according to the law (eg, three quarters of votes for shareholders of a joint stock company to approve the sale of its enterprise or change its statute, or two thirds to approve a material change of business activity). Further matters may require a qualified majority according to a company’s statute. Moreover, higher thresholds are required in order to facilitate a delisting or a squeeze out (see 6.10 Squeeze-Out Mechanisms).
For these reasons, certain additional conditions are being set in the tender offers, to side pass the aforesaid limitation (see 6.4 Common Conditions for a Takeover Offer).
Obtaining financing by the bidder is not named among the possible conditions to a tender offer under the relevant regulations. In the context of negotiated M&A, obtaining financing for the acquisition may be a condition precedent to closing but it is not very common. Rather, it is more common that a buyer is required to deliver proof that it has the necessary financial resources available or that it has already obtained bank financing.
Moreover, sometimes, sellers may require some sort of security for payment of the purchase price, eg, a parent guarantee, bank guarantee, payment into an escrow account, etc. However, such requirements are mostly imposed with respect to natural persons, SPVs or entities whose financial resources are not certain.
Break-up fees are not uncommon in Poland in negotiated M&A. These usually take the form of contractual penalties and/or guaranteed amounts payable in case a given party fails to satisfy certain conditions precedent, and/or in case of non-attendance at closing or a failure to perform a closing action. Such rights are usually combined with a right of the non-breaching party to rescind the sale agreement.
A buyer typically seeks to further protect its interests through MAC clauses, non-solicitation or non-compete obligations imposed on the seller, warranties, indemnities for certain identified risks, contractual penalties, etc.
The COVID-19 pandemic had some impact on the choice of deal security measures. In the absence of explicit contractual provisions to such effect, Polish law provides limited relief from contractual obligations in the event of an extraordinary change in circumstances. However, the precise circumstances and scope of such relief are not entirely clear. Consequently, since the beginning of the pandemic, it has become more popular for contracting parties to include MAC clauses and regulate force majeure events explicitly in their agreements.
In the context of negotiated M&A, if the buyer is acquiring less than 100% ownership of the target, it usually seeks to enter into a shareholders’ or investment agreement with the remaining shareholders. Such agreements may include a variety of mechanisms protecting the buyer’s interests, eg, a catalogue of matters that the target cannot undertake without its approval, restrictions on the sale of shares by other shareholders (such as pre-emption rights, lock-ups, put/call option rights, or tag/drag-along rights), and certain information and personal rights (eg, rights under the constituent document that are personal to the existing shareholder(s) and non-transferrable).
In addition, a buyer might be issued with privileged shares (allowing not more than two votes per share (in companies other than public companies), up to 150% of the usual dividends, or priority as to division of assets). Any rights relating to privileged shares or specific board appointment arrangements need to be introduced to the company’s constituent document.
In the case of a public company, if a majority of three quarters of the votes approves, the statute may be amended to confer board appointment rights that are personal to a particular shareholder.
A shareholder may vote by proxy subject to certain restrictions. In particular, a power of attorney needs to be granted in writing (or, for a public company, potentially in electronic form).
In the case of a non-public company, a management board member or employee of the company may not be a proxy at a shareholders’ meeting. Further, if a matter on the agenda concerns a shareholder’s liability towards the company, neither the shareholder nor its proxy may vote on such matter. Those restrictions do not apply to public companies, but in such case the power of attorney under which the proxy is appointed may be granted only for one shareholders’ meeting.
In the case of a joint stock company, a shareholder may appoint multiple proxies. Further, one proxy may represent many shareholders and vote differently for each shareholder.
A squeeze-out may be performed in respect of a public company within three months after reaching or exceeding 95% of the total number of votes. A similar threshold applies to a private company, but without any three-month time limit. Currently, squeeze-outs are not available in limited liability companies, but this may change soon.
Squeeze-outs in public companies are quite common in Poland, usually as a preliminary step to delisting. A squeeze-out is subject to minimum price requirements. If the 95% threshold is reached or exceeded within a tender offer for all the remaining shares, the minimum price in the squeeze-out may not be lower than the tender offer price.
A squeeze-out in respect of a public company is announced and carried out by a brokerage house, and it is not permissible to revoke a squeeze-out once it has been announced. A squeeze-out requires the establishment of security for the price for 100% of the shares subject to squeeze-out. The form of security is not regulated by law, except that a bank or other financial institution must provide the security or intermediate in its establishment, and it should be easily enforceable, so bank guarantees or escrow accounts are typically used.
In public tender offers, all disclosure obligations and requirements as to the conduct of the tender offer apply to parties acting in concert, ie, parties that have concluded an understanding (irrespective of whether written or not, but excluding transient ad hoc understandings) as to the acquisition of shares in a public company, concurring on voting at a general meeting or pursuing a stable policy towards the company, even if only one of them takes actions triggering the disclosure of tender offer obligations.
As such, a potential bidder may seek to secure an irrevocable commitment from principal shareholders that, if it launches a tender offer, such shareholders will subscribe. These are negotiated prior to announcing a tender-offer and the shareholders would typically seek an opt-out option in case a better tender offer is announced in due course.
In private M&A transactions, the parties are not generally legally obliged to disclose that a deal has been signed and/or closed. However, the parties may wish to share some positive news with stakeholders, or manage the way in which their or the target’s respective business partners learn about the transaction. Further, if a notification is required to the POOCP, the submission of such notification will be announced on its website within a few days.
As such, the public will learn about the transaction relatively soon. For these reasons, the parties often discuss disclosure in the lead up to signing such that announcements can be made shortly after signing. The same applies to closing.
On the other hand, public M&A deals are subject to MAR restrictions and disclosure obligations with respect to purchases and sales of major blocks of shares (see 4.2 Material Shareholding Disclosure Threshold). Also, the target company is required to provide information about signing/closing the deal on its website in the form of a current report, but often with respect to other transaction steps too (see 5.1 Requirement to Disclose a Deal).
The issuance of new shares in a Polish company always requires registration of the increase of the share capital in the National Court Register (KRS).
For public companies, the issuance of new shares needs to be communicated to the public. If the new shares are to be the subject of an “offer of securities to the public” within the meaning of EU Regulation No 2017/1129, which is directly applicable in Poland, the issuer must prepare and publish a prospectus in electronic form and have it approved by the PFSA.
Of course, there are certain exemptions or qualifications with respect to this rule, eg, small offers only require a more limited information document (if less than EUR1 million) or an information memorandum (if more than EUR1 million but less than EUR2.5 million) instead of prospectus.
Bidders are not required to provide or disclose their financial statements in connection with either a negotiated M&A deal (unless required by the seller) or a tender offer. However, the most recent annual financial statements of a Polish company are publicly accessible in the National Court Register.
For public offerings of shares, the issuer is generally obliged to prepare a prospectus, including financial statements of the issuer compliant with IFRS, and have it approved by the PFSA. Further, listed issuers are required to regularly inform the public about their financial results under the disclosure regime.
In the context of a negotiated M&A transaction, the target company is required to file motions to the National Court Register (KRS) for the purpose of updating its data in the public register. For such purpose, documents evidencing the transfer of the shares need to be appended to the filing eg, an updated list of shareholders for limited liability companies. Further, under newly introduced provisions described in 3.2 Significant Changes to Takeover Law, the valid transfer of shares in a joint stock company requires an entry to the shareholders’ register run by a brokerage house or another certified entity.
In the context of a public tender offer, the terms of the transaction are publicly disclosed in the tender offer document, subject to the possibility of negotiating special terms with certain significant shareholders as mentioned in 5.5 Definitive Agreements (such agreements do not need to be made public).
The management board of a Polish company manages the affairs of the company, provided that given matters do not lie within the competence of another corporate body, and represents the company before third parties.
There are various bases for liability of a management board member including, among other things, liability towards the company, liability towards the company’s creditors if enforcement proceedings instigated against the company prove to be ineffective (certain protections exist, eg, filing a motion for declaration of bankruptcy within the statutory deadline), criminal liability (eg, criminal offences of abuse of trust or frustration of creditors), or liability for infringement of binding regulations (eg, MAR).
In general, a management board member is liable if they failed to perform his/her duties with due diligence and for damage inflicted through an action or omission contrary to law or the company’s constituent document, in each case, provided that there is an adequate causal link between the damage done and such action or omission, unless they are at no fault (ie, they performed their duties with due diligence characteristic of the professional nature of their activity).
After closing of an M&A transaction, the management board is obliged to update the company’s share register and file motions to the National Court Register as described in 7.4 Transaction Documents.
Also, in the context of public M&A, the management board of the target has various obligations relating to disclosure of inside information and in connection with the announced tender offer eg, disclosure of its opinion on the fairness of the price, the strategic plans of the bidder towards the company, and the expected impact on the company’s interests.
Under Polish law directors’ duties are owed to the company, and the company’s interest shall be viewed as independent from that of the company’s shareholder(s) and/or affiliates.
There are no obligations for the management board to form any special or ad hoc committees in the context of M&A, and doing so voluntarily is not common. However, issues relating to a transaction may be considered by existing committees, usually of the supervisory board, such as audit, remuneration, corporate governance, strategy and development, or CSR committees.
There is currently no explicit equivalent of the business judgement rule in Poland, however, the courts often accept that some reasonable level of economic risk is normally connected with management of a business.
The formal introduction of a business judgement rule to Polish corporate law is planned for 2021, as mentioned in 3.2 Significant Changes to Takeover Law.
The scope of independent advice sought in the context of M&A transactions varies depending on the party to the transaction.
Sellers usually seek advice from law firms, corporate advisory firms, and financial and tax advisors, especially for the purpose of finding potential buyers, running a sale process, setting up a data room, assisting with replies to bidders’ Q&A, analysing offers, preparation and implementation of transaction documents.
Buyers usually seek comprehensive advice from a similar array of external advisors. Such advice usually relates to due diligence, strategy, financial or tax implications, deal structuring, and preparation and implementation of transaction documents. In the context of a tender offer, the advice will also cover the obligations and strategy regarding the implementation of the tender offer. Moreover, the conduct of a tender offer requires the intermediation of a brokerage house.
The management board of a target may also seek external advice, especially concerning matters which directly affect them such as new management contracts or management stock options plans. In the context of a tender offer, the management board would also usually seek external advice with regard to disclosure obligations, and the management board’s opinion regarding the tender offer. If the management board consults an external expert on the tender offer price and its fairness, the target shall disclose such expert’s fairness opinion to the public, the PFSA and the WSE.
The regulations which seek to prevent conflicts of interest in respect of Polish companies include:
The management of conflicts of interest is subject to detailed regulations and meticulous scrutiny by the PFSA with regard to companies under its supervision, including investment funds, brokerage houses and other investment firms. The PFSA has imposed some severe fines for conflicts of interest in the past.
Hostile takeovers are permitted on the Polish M&A market. However, taking into account that many listed Polish companies are controlled by a particular investor or group of related investors who also usually nominate the members of the management board and/or supervisory board, and that the free-float is often quite small, “friendly” takeovers are significantly more common. Nevertheless, hostile takeovers do happen from time to time (eg, the well-known hostile take-over of the jewellery company Kruk S.A. in 2008 by Vistula & Wólczanka S.A.).
The new law on investment control, described in more detail in 2.6 National Security Review, aims at preventing hostile takeovers of public companies and other companies from industries that may be considered strategic for the Polish economy, public security or public health.
The management board of a target may take defensive measures against a hostile takeover. However, such actions are taken by the management board at its own risk having regard to the potential liability as described in 8.1 Principal Directors' Duties.
Defensive measures do not require any consent of the shareholders or the supervisory board as a general matter. However, consent may be required for particular actions under the law (eg, the sale of the company’s enterprise requires shareholder approval) or under the company’s statute (eg, the statute may require that the management board and supervisory board must obtain shareholder approval for any actions aimed at frustrating a tender offer for 100% of the shares). If consent is required under the law, any action taken without such consent is invalid. However, the failure to obtain consent required under the statute only results in potential liability for the management board members.
Common preventive measures include:
In terms of reactive measures, the most common in Poland are:
Also, in response to the COVID-19 pandemic, hostile takeovers of public companies and in certain strategic sectors have been made a little bit more difficult, as described in 2.6 National Security Review.
In the case of a “friendly” take-over under a tender offer, the principal duty of the management board is to provide its opinion as described in 8.1 Principal Directors' Duties and 8.4 Independent Outside Advice.
In the face of a hostile take-over, defensive measures are generally within power of the management board, which needs to consider whether it is properly discharging its duties as discussed in 8.1 Principal Directors’ Duties and 8.3 Business Judgement Rule, avoid any possible conflicts of interest as discussed in 8.5 Conflicts of Interest, and seek shareholder approval if required as discussed in 9.2 Directors' Use of Defensive Measures.
The management board of a Polish target has no powers under Polish law to block a hostile take-over by a single discretionary decision, ie, it needs to resort to any available defensive measures (see 9.3 Common Defensive Measures). However, as mentioned in 9.1 Hostile Tender Offers, many listed Polish companies have a large or majority block of shares held by a shareholder or group of related shareholders who also nominate the members of the management board, so there may be sufficient alignment between the management board and key shareholders in order to block a hostile takeover in any event.
Disputes concerning M&A transactions are quite rare in Poland. If any disputes arise, they usually relate to matters like mechanisms for price adjustments, breaches of warranties or indemnification, or breaches of non-competition undertakings.
Arbitration is generally considered a better choice than proceedings before the commons courts, especially for foreign investors. Arbitration may be conducted in a foreign language, arbitrators usually have a better understanding of M&A deals than common court judges, and arbitration is considered to be much quicker. Arbitration is usually before one of the prominent permanent arbitration courts in Poland, or the ICC International Court of Arbitration, or LCIA.
Litigation in respect of tender offers is not especially common.
In the context of negotiated M&A, litigation would typically arise post-closing, and concern the sorts of matters referred to in 10.1 Frequency of Litigation.
In tender offer processes, litigation may arise at virtually any stage, including the tactics of and opportunities available to the litigant. For example, a party may allege that various other parties have been acting in concert in breach of the tender offer rules, have misused inside information, or have failed to inform the market as required. Later, a party might question the validity of certain steps relating to fulfilment of tender offer conditions.
After the initial lockdown in the first quarter of 2020, there was some degree of mobilisation to close on-going deals. This was followed by a slight slow-down as investors displayed more cautiousness and scepticism.
However, as regards public deals, the market was very active in 2020, including the IPO of Allegro with a transaction value exceeding EUR2 billion, which made it the second biggest in Europe in the third quarter of 2020 and one of the biggest in the history of the WSE.
The last quarter of 2020 brought significant revival of M&A transactions in general, which has continued throughout the first quarter of 2021.
In this context, “broken deal” disputes were not especially frequent. Withdrawals from deals happened mainly in sectors which were most adversely affected by COVID-19 restrictions, but they were not a rule, particularly because many investors started looking for bargains while, at the same time, other players looked for divestment opportunities for a variety of reasons, including cost-cutting.
Shareholder activism has not been very common in Poland. The separation of roles into ownership, management and supervision is still quite strong in Polish companies. Nevertheless, there is a developing view that shareholders, especially institutional investors, should participate more in exerting influence over the business of public companies. Laws introduced in 2019 to implement SRD II (2017/828), including, among others, an obligation of public companies to have a remuneration policy approved by shareholders, are aimed at reinforcing shareholder activism.
Shareholder activism on the Polish market has usually focused on the appointment of the right people to the supervisory board which keeps watch on the actions of the management board, taking a position on the remuneration of the management board members (ie, “say on pay”), the dividend to be paid to the shareholders, etc.
In the course of the COVID-19 pandemic, shareholder activism concentrated on measures to help companies survive in difficult times, including promotion of disinvestments and cost cutting.
For the reasons discussed in 9.1 Hostile Tender Offers, 9.5 Directors' Ability to “Just Say No” and 11.1 Shareholder Activism, there has been little visible encouragement by shareholder activists of M&A transactions, except to the extent the contemplated transactions would aim at saving or gaining resources by companies especially affected by the COVID-19 situation.
For the reasons discussed in 11.1 Shareholder Activism and 11.2 Aims of Activists, if there are examples of interference with completion of M&A deals on the market, they are the exception rather than the rule.
The year 2020 was indeed a peculiar year for the M&A market in Poland. The original assumptions and prognoses made in late 2019 or even at the beginning of 2020 had to be substantially revised when the COVID-19 pandemic hit Europe and, ultimately, Poland. Practically everyone was horrified then with what the new “flu” could bring about and how it might affect the market. There was a lot of fortune-telling (much more than usual) in M&A market prognoses released in March–April 2020. What did most of them have in common? Virtually all of them were wrong.
Not only did the M&A market fail to fall, but it actually grew. While it is always hard to rely on M&A statistics (as different sources tend to present different figures), it seems that the overall number of transactions in Poland grew by almost 30%! That sort of transactional activism might seem to be surprising, but as will be discussed, in fact it is not a surprise at all.
The Polish M&A market has prospered continuously over recent years. It has been one of the most active in Central & Eastern Europe, and has generated growth for a long time (in both deal number and value). This may not have been visible in every single sector, but with a certain oversimplification, on a macro scale it has applied to the whole economy.
In 2020, the market was continuously dominated by sector investors, who accounted for a vast majority of transactions, with PE funds awaking towards the year-end. It is difficult to indicate a single dominant sector, with the Polish M&A market being rather scattered, however, some kind of duality was observed. While some sectors were struggling to survive, in particular HoReCa, others thrived. There is no doubt that the broad media/IT/telecom/e-commerce/logistics sectors have been practically untouched by the effects of the pandemic, and even grown.
The growth of those sectors was reinforced by an increase in e-commerce itself. Thus, it accounted for a substantial portion of the market and also produced some of the top deals of the year. Second place was taken – also no surprise – by the financial services sector. Transactions in these sectors accounted for nearly a third of all M&A projects in 2020.
It was specifically in the second half of 2020 when a certain revival was observed in terms of both quantity and value of M&A transactions in Poland. This trend seems to be continuing, with the energy sector (in particular renewables) also gaining momentum through the first quarter of 2021 (when this article is being written) and (presumably) going forward. This is specifically attributed to the rather wide access to capital on the investors’ side (specially PE).
The Implications of COVID-19
At first the coronavirus pandemic caused fear over its impact on deals recently completed or still being negotiated. It was believed that certain boilerplate provisions in M&A agreements, such as force majeure, might be commonly triggered, causing chaos and effectively jeopardising neatly sewn-up deals. Likewise, it raised concerns over occurrence of circumstances expressly provided for in contracts, particularly material adverse change or impact, typically giving the parties (or one of them) the ability to terminate the contract due to the worsening situation of the target (eg, a certain decline in turnover or increase in debt). There might have been individual instances where that did happen, but no general tendency was observed.
Categorical, universal conclusions cannot be drawn for either of these aspects of M&A projects. Just as the transaction agreements are drafted through a process of bilateral or multilateral negotiations, and thus greatly individualised, so the measures the parties should pursue in the current situation must be determined on a case-by-case basis. In certain instances, unilateral action may be considered to renounce the contract (eg, if the transaction has entirely lost its purpose for one of the parties), or modify the contract due to a change in circumstances. But it seems that most often the solution has been dialogue between the parties, seeking solutions through good-faith negotiations.
From the perspective of negotiation and drafting of transactional agreements (which can also be conducted remotely), it should nonetheless be borne in mind that concluding new contracts during a pandemic may in certain circumstances be regarded as imprudent and deprive the parties of protection in the future (as we write here). Thus it cannot be excluded that the other party will allege that a rational undertaking concluding a contract during a pandemic must foresee difficulties related to the current situation and take them into account when incurring new obligations, to ensure that they can be performed.
Thus, in contracts currently being negotiated, provisions should be included addressing potential inability to perform contractual obligations due to the COVID-19 pandemic. This may involve in particular appropriate framing of provisions on force majeure or circumstances excluding the parties’ liability.
Practically, and paradoxically, the timing of the COVID-19 outbreak could not have been better. The key reason is technology.
In an age of progressive digitalisation, there is no barrier to continuing due diligence already begun, or even beginning new due diligence projects. Such processes may be conducted on an entirely remote basis. But the review must appropriately reflect circumstances related to the pandemic and their impact on the current and future condition of the target.
This very much extends to negotiations and technicalities of running transactional processes. While virtual signings and closings have never been customary in Poland (and are not likely to entirely replace physical ones, specifically due to Polish legal requirements for notarisation of most types of share transfer agreements and mandatory notarisation of contracts involving real property), they were pretty swiftly implemented, limiting physical interaction between the parties and their lawyers to an absolute minimum.
The art of virtual negotiations has been developed, replacing not only the old-style conference call, approaching in-person interactions in their effectiveness, but also generating the significant benefit of not spending time on the road for meetings. To some extent this has also forced both parties to take a reasonable approach, as much more balancing and compromise are required to close the deal.
...and analogue threats
Certain practical threats cannot be disregarded, nor consequences of the pandemic, such as the illness of employees and legal consequences (in extreme instances resulting in the restriction or temporary shutdown of activity), which may still impact the economic assumptions underlying a contract signed by the parties. This primarily concerns the valuation of the target and the mechanisms for setting the final price (whether based on a closing-accounts model or a locked-box model). For now, after over a year of pending lockdowns and restrictions, the actual impact of COVID-19 on the Polish M&A market has been rather limited (despite all the inconveniences).
Conversely, limitations on the work of courts, state offices, banks and other institutions have led (and presumably will continue to lead) at least to delays in fulfilling conditions for closing the transaction (eg, obtaining approval from competition authorities) or carrying out activities foreseen by the parties during the interim period (eg, corporate changes requiring entry in the National Court Register, deletion of pledges or mortgages, and the like).
This certainly presents a risk that the transaction cannot be closed by the long-stop date set by the parties, which in turn gives rise to a risk of automatic dissolution of the contract or termination by one of the parties.
The impact of the political situation in Poland on the business environment, including the M&A market in particular, is still a vital issue. No one would deny that some changes in law, tied to destabilisation, affect state institutions whose task is to help maintain stability, and thus exert a negative impact on the economy. This specifically applies to the judicial system, which has been subject to special concerns over the last few years. For one thing, these changes make the legal environment less predictable, and thus riskier for investors.
Of course, Poland is not an utterly isolated case. It is one element of a Central European trend – or perhaps an even wider one. That is why such political impact on the economy is not apparent, at least not at this stage, when analysing the situation from a high vantage point.
Politically driven attempts to influence or even take control of certain markets have not been too excessive. But one cannot exclude a risk (which is not dormant) of the government’s plans to take over (or, as it is being called, to “nationalise”) particular areas of economy, as COVID-19 has accelerated a trend of protectionism and regulatory restraints.
One of the main obstacles mentioned by investors, alongside merger clearance, is the new regime for oversight of foreign investments. It was introduced to protect companies and critical assets during the pandemic from capital flows from non-EU countries, when the acquisition could increase security risks. Thus, it seems inevitable that contracts will be subject to more conditionality.
The M&A processes functioning in Poland do not display many country-specific issues. The country simply follows worldwide trends.
A story of due diligence
Once upon a time, behind the scenes of Polish M&A practice, there was a disturbing tendency to regard legal due diligence as little more than a technical exercise, which should be limited or even skipped if possible. This tendency could be observed in some deals, especially ones involving Polish entities or assets as part of global mega-deals, where this approach meant that due diligence was increasingly truncated. This was due to major limitations in scope and time of the review, an inadequate sample of material for review, etc. As a result, such an examination often failed to serve a larger purpose – and this may still be the case in deals where this limited approach to due diligence is taken.
Fortunately, this tendency has not developed into a standard approach, and an extensive and thorough review of the legal standing of transaction targets is still the norm. Even the anticipated decline in significance of due diligence review in cases where parties seek transaction insurance proved unjustified, as underwriters are all the more anxious to have a clear understanding of what they are underwriting.
Simultaneously, the growth in technology has sparked a discussion of how this will impact due diligence. On the one hand, the ability to access source documents online has been a game-changer, but on the other, even further-reaching change lies ahead. This involves the use of artificial intelligence in the process of digesting and analysing documents.
Changes going forward
Work on the relevant technologies is already well advanced, but it will still be some time before they displace lawyers from involvement in the due diligence process to any great degree. While technological support may indeed change due diligence as it is perceived now, it is a long path ahead before technology can substitute for analysis of identified issues by professional advisers.
These trends undoubtedly affect the way transactions are handled in Poland, and there is reason to believe that they will continue to have a growing impact on transactional processes. Notably, the decline in Polish GDP in 2020 was just 2.8%, one of the smallest in the EU. Simultaneously, Poland generated a 2.8% increase in exports, with a corresponding 2.0% decrease in imports.
Despite the decline in the manufacturing sector, in 2020 the number of bankruptcies declined as well.
The Prospects Ahead
The long-term legal consequences of the COVID -19 pandemic can hardly be predicted at this point, as the situation is highly dynamic and depends on too many factors.
However, irrespective of the fears or threats highlighted above, on the broader horizon (ignoring the turbulence caused by the pandemic) there should be no doubt that there will be numerous interesting transactions on the Polish market. This applies to both “ordinary” transactions and COVID-19-driven ones. The latter may specifically involve distressed-asset transactions (particularly in business sectors severely affected by the pandemic and resulting regulations), which, although expected, were not really visible in 2020, mainly because of some short-term and mid-term measures and relaxed insolvency rules introduced by the government to protect companies from going bankrupt.
Conversely, it is expected that some companies that have benefitted from the pandemic and are now overvalued may be subject to revaluation, thus leading to numerous interesting acquisition opportunities. The TMT sector as well as life science, healthcare, automotive, green energy and companies supporting remote working are listed among these industries that will be in demand in 2021.
Increased activism of private equity and venture capital investors is another factor that may boost the market in 2021.