One of the leading private equity (PE) funds in central
Europe, Enterprise Investors, invested e791 million ($1.237
billion) in 96 companies in Poland last year. Some suggest the
PE market is now mature; the search for investments with high
rates of return is becoming more difficult. But then, on April
18 Advent International completed a round of fundraising that
resulted in ACEE IV, with e1 billion to invest in central and
eastern Europe. Between 20% and 40% of ACEE IV funds will be
invested in Poland.
There are two types of corporations in Poland. A limited
liability company is a strictly private entity; joint stock
companies can be either public or private. Leveraged buy-out
transactions (LBOs) are not allowed for joint-stock companies
because of provisions of the Polish Commercial Companies Code
(CCC). This Code replicates the Council's Article 23 of
Directive 77/91/EEC, dated December 19 1976 and commonly
referred to as the Capital Directive or Second Directive. The
CCC prohibits joint-stock companies from making loans or
advance payments and establishing security interest, and from
financing the purchase or taking-up of its own shares, directly
The CCC provides two exceptions to the general prohibition,
but given their lack of economic viability the exceptions have
no practical application. Article 23 of the Second Directive
has been implemented in its original wording across Europe,
with some jurisdictions establishing express exceptions for
private companies, and some states allowing LBOs for
joint-stock companies under certain conditions (for example,
Italy with la società per azioni).
In a classic LBO structure, the target company and SPV,
which has acquired shares in the target for borrowed funds,
merge, and the SPV disappears. The target's cashflow can then
service the debt originally incurred by the SPV. As a result,
the target's assets are used to collateralise the debt. One
could execute an upstream merger, with the SPV as a surviving
entity, but it is unlikely that lenders would finance this.
Given the limitations, LBO transactions in Poland have been
aimed solely at limited liability companies. This is
paradoxical given that in the early eighties in the US, where
LBO originated, most publicly traded companies were taken over
using LBOs. In Poland, LBOs of joint-stock companies (whether
public or private) are likely to be challenged as against the
provisions of the CCC. Such actions are void under Poland's
legal regime. So the market for PE is limited to mid-size
private businesses. One could always transform a joint-stock
company into a limited liability company before the LBO, but
this is time-consuming and costly. Similarly, if the investor
chooses an IPO as its exit, the limited liability company will
have to become a joint-stock company.
New approach needed
The Polish Parliament is working on amendments to the CCC.
The Bill implements Directive 2006/68/EC dated September 6
2006, which amends the 30-year-old Second Directive. The
Directive was to be implemented by April 15 2008.
The Directive was driven by criticism of share capital's
so-called guarantee function and the way it affects company law
in Europe. The traditional approach to protecting creditors
against corporation insolvency stressed share capital's
guarantee function, and maintained stiff rules on a company's
purchase of its own shares and the financing of that purchase.
The report of the High Level Group of Company Law Experts on
the Modern Regulatory Framework for Company Law in Europe
prepared for the European Commission in 2002 and the
Commission's acceptance of the report's conclusions indicate
that the traditional approach is no longer plausible.
The Bill does away with the flat prohibition of financial
assistance regarding joint-stock companies. It expressly allows
it under four conditions.
First, the financing is to be provided on "fair market
conditions", especially in relation to interest received by the
company or security interest established in its favour. The
financial condition of the debtor or any third party must also
be also verified. Second, the shares are to be purchased or
taken up for a "fair price". Neither the Bill nor its written
justification provides any guidelines about how this should be
interpreted. Third, a prior establishment of reserve capital is
required, under the provisions of the CCC. Fourth, a prior
resolution at the company's general meeting is needed. This
will lay down the terms of assistance. The resolution will
require a qualified majority of two-thirds, or a simple
majority if at least half the share capital is present.
A written report from the company's board will be the basis
for the resolution. It will include: i) the purpose of and
reasons for financing; ii) the company's interest in it; iii)
the terms and how the company will be secured; iv) the impact
on the company's liquidity and solvency; v) the purchase or
taking-up price of the shares and a statement that is it fair.
The company has to publish the report and submit it to the
court where the company is registered.
In the market's hands
It is good to remove the general prohibition of financial
assistance. But it won't necessarily attract investors.
Although the Warsaw Stock Exchange is predicted to have a
record number of IPOs this year, there is a risk that not all
securities will find investors. So PE is becoming even more
attractive for enterprises in search of both capital and
The proposed amendments would seem to open the door for
private equity. But they add yet another layer of liability for
boards, and the requirement to create reserve capital could
sabotage the whole idea. The report of the High Level Group and
the Directive leave no doubt that financial assistance is
allowed only as far as the distributable reserves provide full
cover of the risks associated with financial assistance.
By Bartosz Karolczyk of Hogan & Hartson, Warsaw
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