In July 2005 the Polish parliament introduced new rules regulating public trading in securities. The rules were introduced through three items of legislation that came into force in October 2005 (collectively the Act).

The Act introduces a new framework for transactions involving the shares of listed companies. The requirement to obtain a regulatory consent for crossing certain voting thresholds in listed companies has been abolished. It is no longer necessary to obtain the Polish Securities and Exchange Commission's (the SEC's) consent for an acquisition of shares giving 25%, 33% and 50% of voting power. This is a far cry from the old law. Under the old law, investors were obliged to seek the SEC's consent, which enabled the SEC to delay or refuse its consent, especially if the acquisition would violate the provisions of law, threaten state interests or the national economy, or if the applicant had failed to comply with the reporting requirements over the previous 24 months. In practice, obtaining the SEC's consent was often a cumbersome process.

The Act also introduces a hitherto unknown squeeze-out procedure for public companies. Under the old rules, the squeeze-out procedure only applied to non-public companies. Under these old rules (still in force for non-listed companies) it was necessary to obtain 95% of the total outstanding share capital in a private company before a minority shareholder could be squeezed-out. According to the Act, shareholders holding at least 90% of the votes of a public company now have the right to purchase shares owned by minorities. The Act also introduces a reverse squeeze-out procedure whereby minority shareholders may require shareholders holding at least 90% of the votes to purchase their shares.

The Act introduces other regulations that regulate dealing with large numbers of shares. In particular:

• If an investor intends to acquire more than 33%, or more than 66%, of the voting power in a public company, then that investor is obliged to announce a public tender for up to 66% or 100% of the voting rights in that public company, respectively.
• If an investor acquires more than 66% of the voting power and within 6 months of this acquisition acquires further shares at a price exceeding the price previously paid for the 66%, the investor is obliged to pay the difference to those shareholders who previously sold their shares.
• The investor announcing a public tender must inform the market (and the SEC) about the planned public tender at least seven days in advance. Upon receiving notification, the SEC may require certain changes to be introduced to the tender particulars. This is especially the case if the content does not conform to the regulations. If the SEC requires changes, the launch of the tender will be postponed until the investor implements all of the amendments required.
• Two days before the subscription period starts, the management board of the target is required to issue its recommendation on the announced public tender. The Act compels the management board to publish an extensive opinion on the announced tender, including information on whether the purchase price proposed in the tender reflects the fair market value of the target. If the management board obtains an opinion as to the fair market value before issuing its recommendation, this fairness opinion must be disclosed.
• The Act maintains a similar delisting procedure to that provided under the old law. But, although the consent of the SEC to de-list is still required, the SEC may not refuse its consent if all of the formal requirements for delisting are met, that is, if the shareholders' pass a delisting resolution and a delisting tender is announced and completed. If a squeeze-out was performed before delisting, no resolution of the shareholders is required.

The Act's impact on transaction structuring

A typical P2P undertaken by a private equity firm usually involves considerable debt financing. For financing institutions (banks, mezzanine and other debt providers), it is essential to obtain access to the target's assets and cash flows quickly. This is so that the repayment of the debt incurred by the bidder (BidCo) can be secured and serviced by the cash flow generated by the target. The target, through the payment of dividends, intra-group upstream loans and/or management fees paid to BidCo, effectively assumes the burden of repayment of debt that BidCo owes to financing institutions. However, such a structure often raises concerns with respect to its financial or tax efficiency. One solution that recognizes this and provides a more efficient structure involves merging the target with BidCo. In this case the merged entity assumes all of the debt repayment obligations. If, however, this is not possible (due to insufficient cash flows and/or if the merger is delayed) it may be enough for the target to transfer some of its assets or business to BidCo. Upon transfer, BidCo can generate cash flow by way of lease or service or management fees that it charges to the target. This cash flow is then used to repay the debt.

It is for these (debt servicing) reasons that banks and other debt providers are prepared to provide financing for public takeovers subject to satisfactory and workable timetable for squeeze out, delisting and merger. Lenders and their advisers are extremely sensitive to any risk factors that impede the process and stop the merger regardless of whether those risk factors are actual or potential.

The public offer

Coming back to the Polish regulatory environment, the Act reduces the administrative burdens that the old rules imposed on investors. This is largely due to the abolition of administrative consents for crossing voting thresholds and it being no longer necessary to obtain the SEC's consent if these thresholds are likely to be exceeded. So investors wanting to take over public companies are no longer limited by time-consuming administrative proceedings that, in some cases, resulted in the rejection of the necessary consent. Under the Act, the SEC's only administrative intervention in the tender process is its right to review the tender particulars and require certain changes to be introduced to those particulars.

The tender is conducted through intermediation of a licensed brokerage house. Before the tender is announced the tenderor is obliged to establish a security for 100% of the value of tendered shares. Usually, this takes a form of a bank guarantee, cash deposits or pledge on already owned listed shares. The tender particulars are a straightforward document, usually prepared by legal advisers with assistance from a brokerage house and/or financial advisers. The tender itself can be open for a minimum of 30 days and no more than for 70 days. In exceptional situations this can be extended by an additional 50 days. For as long as the tender remains outstanding, the tenderor can not acquire shares in other way than through the tender, and may not withdraw from it unless a competing tender is announced.

Squeeze out

As said above, the Act introduces a squeeze out to listed companies. The new squeeze-out procedure can only be commenced if enough acceptances are obtained. If sufficient acceptances are not obtained, it is entirely possible to commence the squeeze-out at a later date, provided that subsequently to the tender, the BidCo has acquired the requisite 90% of the voting power. The squeeze-out procedure, under the Act, is straightforward and only requires the announcement of a tender for all of the shares held by the minority shareholders. Contrary to the squeeze-out procedure in non-listed companies, no resolution of shareholders is required. This means that the risk that the minorities can contest and block the squeeze-out is minimal, if any.

Delisting

After the squeeze-out is completed, the delisting procedure can begin. Delisting a public company requires a shareholders' resolution as well as the SEC's approval, which cannot be refused if the formal requirements are complied with. In this case a shareholders' resolution on delisting is passed after the minority shareholders have been bought out. The delisting resolution requires 80% of votes cast with presence of at least 50% of outstanding share capital. If there are no longer minority shareholders in the target, this resolution is a formality.

Merger

Once the minority shareholders are squeezed out and the target is de-listed, merging BidCo with the target is straightforward and usually takes no more than six months.

The Commercial Companies Code (the Code) creates a mechanism whereby two companies can be merged. In the context of any leveraged buyout (LBO), the BidCo could be merged into the target, the target could be merged into the BidCo, or a new company could be incorporated and both the BidCo and the target could be merged into the new company.

The merger process involves an application to the court, which will be concerned to ensure that the necessary shareholder consents have been obtained and that creditors of both companies are adequately protected or have otherwise been discharged. The main steps and issues in a merger are as follows:

• preparation of a merger plan, which is submitted to the court;
• preparation of a written report by the management boards of both companies giving grounds and reasons for merger;
• review of the merger plan by an expert appointed by the court;
• shareholder approval of the merger. A 75% majority is required at a shareholders' meeting at which at least half the shareholders are present; and
• registration of the merger with the registry court.

If all of the steps are completed in a timely manner, the financing institutions can obtain effective access to the assets and cash flows of the merged entity to secure the repayment of the debt.

The Act significantly amended the legal regime concerning public takeovers. Abolition of the SEC's consents streamlines the process and allows for effective and timely execution of the tender. The introduction of a squeeze-out procedure (and the reverse squeeze out) to listed companies helps to deal with minorities issues and allows for minorities to exit on favourable terms before the company is taken off stock exchange. Lastly, under the Act, the delisting rules, whereby no additional tender is required, should ensure an efficient delisting process.

Financial assistance

The Code, subject to limited exceptions, prohibits a joint stock company from giving financial assistance for the acquisition of its own shares. The prohibition extends to financial assistance given by a joint stock company in respect of a subscription for newly issued shares. More specifically, a joint stock company is prohibited from granting loans, security or guarantees or making advance payments for goods or services or providing any other direct or indirect financial assistance for the acquisition of its own shares.

The prohibition against unlawful financial assistance can create problems in structuring an LBO if the target is a joint stock company. Problems arise because the banks providing debt finance will usually want to get access to the cash flows and assets of the target. The target and its subsidiaries will need to provide guarantees and security in respect of the SPV's acquisition financing.

Although the Code does not expressly deal with this point, it appears that the prohibition against giving financial assistance will not prevent:

• a subsidiary giving financial assistance for the acquisition of shares in its parent company. Problems would arise if a target that is a joint stock company provides assistance to a subsidiary, which in turn provides financial assistance for the acquisition of shares in the target; and
• the payment of a lawful dividend or redemption of shares in accordance with the Code.

The Code does not prohibit a limited liability company (Sp z oo) from giving financial assistance for the acquisition of its own shares. If the target is a limited liability company, the prohibition against providing financial assistance is not an issue in an LBO. Accordingly, if the target is a joint stock company and is called upon to do something that amounts to unlawful financial assistance (for example, giving security to a bank in connection with a loan given to the SPV), there is nothing in the Code to prevent a joint stock company being first converted into a limited liability company and then giving the financial assistance (in this case, providing the security in respect of the borrowings of the SPV). The Code contains a mechanism whereby a joint stock company can be converted into a limited liability company. The process takes about three to four months. If the bank providing acquisition finance can only be provided with a full security package by the target after its conversion from a joint stock company into a limited liability company, this will need to be raised as an issue when the transaction is structured. In the UK, the prohibition against providing unlawful financial assistance extends to both public companies (joint stock companies) and private companies (limited liability companies). There is, however, a more relaxed regime for private companies, which allows a private company that satisfies certain solvency tests to provide financial assistance. Accordingly, after an LBO of a UK public company, the target will inevitably be converted into a private company so that the financial assistance can be given. A similar whitewash procedure does not apply in Poland. The Code does not contain any express criminal sanctions for breach of the prohibition against giving unlawful financial assistance. Any member of the management board who sanctions unlawful financial assistance will be potentially liable to the company. There is a provision in the Code that any member of the management board or supervisory board who is adjudged by a court to have acted to the detriment of the company is liable to imprisonment or a fine. It would appear that any transaction entered into in breach of the prohibition would be void, although again the Code is silent on this point. The civil law consequences of a company providing unlawful financial assistance will be significant for the bank providing acquisition financing to the SPV. It will not want to discover that its security package is unenforceable.

The prohibition against a joint stock company providing financial assistance for the acquisition of its own shares does not create insurmountable problems, although is always an issue when it comes to structuring LBOs in Poland.

Author biographies

Dariusz Greszta CMS Cameron McKenna Dariusz Greszta received his law degree from the Jagiellonian University in Krakow and an LLM degree in international business law from the University of Houston, Texas. He is qualified as a legal adviser. He has represented a number of investment banks, Polish private and public issuers, and the government of Poland in various financial transactions, with particular emphasis on their activities in international capital markets. He also advises clients on mergers, acquisitions and corporate restructurings. His M&A experience covers share and asset transactions, leveraged management buyouts, institutional or contractual joint ventures, greenfield investments and others. Greszta advises his clients on corporate restructurings, divestures, group reorganizations and recapitalizations of existing investments. He also advised on some high-profile corporate disputes in Poland. Within CMS Cameron McKenna he is responsible for coordinating corporate practices of all the CEE offices of the firm. Giles Dean CMS Cameron McKenna Giles Dean has an MA in law from Trinity Hall, University of Cambridge and is qualified as a solicitor in England and Wales. Before joining CMS Cameron McKenna's corporate department, he worked for a US law firm in London. Dean typically represents private equity funds, venture capital funds, trade buyers/sellers, investment banks and other financial institutions throughout the US, UK and central and east Europe. He advises on all aspects of cross-border mergers and acquisitions, leveraged buyouts (including public-to-private), MBOs, as well as mergers and acquisitions and corporate practice of a more general nature.