This country-specific Q&A provides an overview to private equity laws and regulations that may occur in Poland.
This Q&A is part of the global guide to Private Equity. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-equity/
What proportion of transactions have involved a financial sponsor as a buyer or seller in the jurisdiction over the last 24 months?
Private equity and venture capital funds have been extremely active in 2017.
According to M&A Index Poland, private equity entities comprised 17% of buyers and 13% of sellers in 2017.
Private equity funds act as sponsors in transactions in a wide variety of industries.
The acquisition of Żabka retail chain by CVC Capital Partners was one of the most significant transactions in 2017 amounting to PLN 4.3 billion.
Funds are also active in a wide variety of industries including financial services, energy, real estate and food production.
In the first quarter of 2018 private equity funds represented 17% of the buying parties and 13% of the selling parties.
Full data is not yet available for the second quarter of 2018 for private equity funds entities as buying parties, but they constituted 7% of selling parties.
What are the main differences in M&A transaction terms between acquiring a business from a trade seller and financial sponsor backed company in your jurisdiction?
It is important to set out the reality of Polish M&A transactions at the outset.
In certain jurisdictions, there is a marked difference in the terms that are offered in comparable deals, depending on whether the seller is a trade seller or a private equity fund.
Private equity funds often give substantially curtailed seller protections, for instance.
Polish M&A is different. Here crucial issues are the negotiating power of the various parties and, in particular, the sophistication of their advisers. So in a situation where two leading M&A law firms are retained, the result may be a shared understanding of certain deal parameters and a shorter negotiation process, comparable to a English law transaction elsewhere.
In circumstances where these parameters are not present the rule is “what you negotiate is what you get”. Accordingly, there is a wide degree of variability in deal terms.
On an acquisition of shares, what is the process for effecting the transfer of the shares and are transfer taxes payable?
For a limited liability company, a transfer of shares must be effected in writing with signatures certified by a notary.
In addition, the articles of association may stipulate that a transfer of shares is be subject to the consent of the company or otherwise restricted. In these cases a relevant consent must be obtained.
The transfer of shares must also be notified to the company concerned by the parties involved and proof of the transfer must be presented to the company.
The transfer of shares must also be reported by the management board of the company concerned to the registry court.
In case of a joint-stock company, the requirements regarding a transfer of shares depend on the type of shares being transferred, i.e. if they are registered shares or bearer shares.
In case of registered shares, their transfer must be effected by way of a written declaration either in the share certificates or in a separate instrument, and must require the transfer of possession of the shares.
In case of bearer shares, the transfer of rights related to them requires the hand-over of the share instrument.
A tax on civil law transactions in case of the sale of shares amounts to 1% of the market value of the shares.
The obligation to pay arises at the time of performance of civil law transaction, i.e. at the time of entering into the sale agreement – unless certain exceptions apply (for example sale of the shares effected through brokers is exempted from tax on civil law transactions).
How do financial sponsors provide comfort to sellers where the purchasing entity is a special purpose vehicle?
These depend on the negotiating strength of the seller. A full range of mechanisms exist including:
a. the equivalent of a parent company guarantee;
b. undertakings to retain a certain net value and financial covenants for a defined period;
c. escrow arrangements
d. W&I insurance, where appropriate.
How prevalent is the use of locked box pricing mechanisms in your jurisdiction and in what circumstances are these ordinarily seen?
They are available and familiar to parties but not used in every deal.
What are the typical methods and constructs of how risk is allocated between a buyer and seller?
The full range of methods and constructs typically seen are available.
For a buyer these would include:
a. a negotiation on the concept of and level of disclosure;
b. escrow arrangements;
c. purchase price reductions;
d. representations and warranties are typical devices in SPAs;
e. indemnities, in particular relating to tax, litigation and environmental risks. They are also being increasingly requested in relation to data protection;
f. for transactions governed by Polish law, contractual penalties and submissions to enforcements (a form of pre-agreed judgment) are also available.
For the seller the protections available would include:
a. quantum and timing limitations of liability;
b. caps, de minimis and basket clauses;
c. specifically negotiated disclosure and exclusions;
d. procedural clauses dealing with third party claims.
How prevalent is the use of W&I insurance in your transactions?
Fairly uncommon, though the market is developing.
One exception is cross-border real estate deals, where title insurance is often purchased.
How active have financial sponsors been in acquiring publicly listed companies and/or buying infrastructure assets?
Acquiring publicly listed companies constitute a smaller part of the financial sponsors’ activity in Poland.
With respect to buying infrastructure assets, according to the 2017 European Private Equity Activity Report prepared by Invest Europe/EDC, only 3.3% of private equity investments in Europe were investments in the Construction sector and only 1.3% in the Real Estate sector.
The above statistics are mirrored also in Poland. However, real estate investment funds, in particular from the Republic of South Africa, have become more and more active on the Polish market.
Outside of anti-trust and heavily regulated sectors, are there any foreign investment controls or other governmental consents which are typically required to be made by financial sponsors?
Apart from the anti-trust aspects and specific requirements related to highly-regulated industries, the most important governmental consents concern acquiring real estate properties, either directly or through a special purpose vehicle.
In particular, acquisition of real properties by a foreigner requires a permit issued by the minister competent for internal affairs, unless the minister of defence lodges an objection, and as regards the agricultural real properties - unless the minister competent for rural development lodges an objection.
Such permit is issued upon a foreigner’s application.
Additionally, different types of pre-emptive right, which depend on the real estate types and locations (e.g. special economic zones, forest real properties, developed real properties) might be applicable to a transaction.
How is the risk of merger clearance normally dealt with where a financial sponsor is the acquirer?
Polish antitrust law establishes uniform rules – i.e. regardless of the industry or type of transaction participants – in relation to the turnover thresholds determining the obligation to notify the intention of concentration as well as for the antitrust assessment of the notified concentration. Therefore, the potential risks should be considered in the context of the “specifics” of the operation of financial sponsors.
The basic risk results from the fact, that entities in the financial sponsor's portfolio will be treated as "controlled" under antitrust law, and thus they will create a "capital group" together with the sponsor.
On the one hand, this may affect the assessment of the fulfilment of the notification thresholds and the requirement to notify the transaction – due to the need to take into account the turnover of the entire capital group for calculating the thresholds.
On the other hand, this may affect the antitrust evaluation of the transaction – depending on the branches or industries in which the companies in sponsor’s portfolio as well as the entity to be acquired operate, horizontal or vertical (as well as conglomerate) effects may occur (the "concentration" of entities operating in the same market or related markets). In the case of a significant impact on the effective competition on a given relevant market(-s), there is a risk of refusal of consent by the antitrust authority or the risk of issuing a commitment decision (e.g. the obligation to sell out a part of the entities form sponsor’s portfolio to satisfy the antitrust authority). These issues arise fairly uncommonly in practice.
Have you seen an increase in the number of minority investments undertaken by financial sponsors and are they typically structured as equity investments with certain minority protections or as debt-like investments with rights to participate in the equity upside?
Most transactions we have seen tend to be majority investments. For minority stakes, there is a mixture or debt and equity structuring with no clear preference.
How are management incentive schemes typically structured?
There is always a degree of tax optimisation inherent in these schemes, but there is no uniform solution. Equity, options, hybrid debt and contractual profit participation mechanisms are available. In some deals, all of these mechanisms are employed, depending on the seniority of the management.
Are there any specific tax rules which commonly feature in the structuring of management’s incentive schemes?
This depends on the tax residence of the managers.
For Polish resident managers, in order to ensure that the tax of 19% will be paid not upon receiving the securities in the incentive scheme but upon the final sale of the received securities numerous conditions have to be met, in particular the incentive scheme has to be established upon decision of the general meeting by the joint-stock company which is employing or cooperating upon a civil contract with the beneficiaries of the securities or by a joint-stock company which is a parent to the company employing or cooperating with these beneficiaries and the beneficiaries have to actually take up or acquire the securities (i.e. cannot receive only financial equivalent due to the participation in a program).
Additionally, securities have to be received from companies with their seat within the EU or EEA or with their seat in a country with which Poland entered into a treaty for avoidance of double taxation.
Additionally, any revenues received gratuitously in the management’s incentive schemes other than revenues from shares, transferable securities or financial derivatives cannot be taxed as revenues from the capital gains (i.e. it is impossible to apply flat tax rate of 19%).
Are senior managers subject to non-competes and if so what is the general duration?
Non-competes are often used and vary in duration from 12 to 24 months. These are often more elaborate clauses which encompass non-solicitation as well.
How does a financial sponsor typically ensure it has control over material business decisions made by the portfolio company and what are the typical documents used to regulate the governance of the portfolio company?
These would be controlled in the following way in a shareholders’ agreement:
a. a list of reserved matters which require the financial sponsor’s consent;
b. control by the financial sponsor of the management board of portfolio company;
c. detailed business plans and budgets that the company is bound by.
Additionally, the financial sponsor typically holds the majority of the voting rights for the shareholders’ meeting of the target company.
Is it common to use management pooling vehicles where there are a large number of employee shareholders?
Management pooling devices are possible. If they are under Polish law, they are often structured as debt or options to purchase shares. Virtual share arrangements, where the underlying interest is contractual rather than ownership of shares, are also available.
What are the most commonly used debt finance capital structures across small, medium and large financings?
This is a question of more commercial nature and such information are not generally available to legal advisors.
Is financial assistance legislation applicable to debt financing arrangements? If so, how is that normally dealt with?
There are no financial assistance issues as long the Polish target has a form of a limited liability company (PL: spółka z ograniczoną odpowiedzialnością).
Restrictions apply only in case a Polish joint stock company (PL: spółka akcyjna) is involved.
Generally speaking, a Polish joint stock company may, directly or indirectly, finance the acquisition of the shares issued by it by way of granting a loan or providing a security. However, such financing or security provision is subject to the following limitations:
a. financing or providing security should be done at market conditions and after the solvency of the borrower has been verified;
b. the Polish company may finance the acquisition (or provide security for the financing) of shares issued by it, provided that (i) the shares in the Polish company will be acquired for a fair price and (ii) the Polish company previously established for that purpose a reserve capital from the amount which can be subject to distribution among the shareholders.
Financing or providing security should be done within the limits set forth in the resolution previously adopted by the Polish company’s shareholders. The basis for the shareholders’ resolution concerning financing or provision of security is a written report of the management board of the Polish company specifying: (a) the reasons for or purpose of the financing or provision of security, (b) the Polish company's interest in the financing or provision of security (c) the financing conditions, including in the field of securing the Polish company interests, (d) the influence of financing on the risk for the Polish company's financial liquidity and solvency and (e) the price of the acquisition of shares accompanied with a justification that it is a fair price.
For a typical financing, is there a standard form of credit agreement used which is then negotiated and typically how material is the level of negotiation?
Yes, the loan agreements are commonly based on the templates of the Loan Market Association, which are subject to further negotiation between the parties. The negotiations concern mainly the provisions regarding representations, undertakings and definitions of an event of default.
What have been the key areas of negotiation between borrowers and lenders in the last two years?
Depending on which side the party is involved in the negotiations, the approach may be different.
From the lender's perspective the important issues are:
a. increased costs related to the introduction of new European regulations in this area, such as Basel II and Basel III, on the basis of which new costs may be generated in the future;
b. transfer of rights clause enabling the lender to transfer financing to another entity.
From the borrower's perspective the important issues include:
a. depending on the borrower's needs in terms of their business, clauses relating to negative pledge, non-disposal of assets, financial indebtedness, merger and acquisitions;
b. material adverse change (MAC) clause allowing the lender to qualify practically any event as an event of default under the loan agreement;
c. clauses referring to possible changes in law in the future that would increase the cost of financing for the borrower.
Have you seen an increase or use of private equity credit funds as sources of debt capital?
Yes. There is an increasing array of funds, often on a cross border basis, which are providing debt.