M&A | In Principle

Foreign direct investment contributes to the growth of the economies where foreign money is invested, but can also undesirably interfere with resources of strategic importance to the functioning of the host country. In difficult times, security issues come to the fore at the national and EU levels, and protectionist tendencies rise. In recent years, the best example is implementation of regulations on control of FDI in the laws of various European countries (as reflected in the latest update to the procedural guidelines issued by the Polish competition authority).

On 25 October 2024, Poland’s Office of Competition and Consumer Protection (UOKiK) published updated guidelines on the criteria and procedure for notification of intended concentrations. This is the first change to the guidelines since they were published in 2015. The most important change is a more liberal interpretation of the effects doctrine (extraterritoriality), which is expected to reduce the number of foreign concentrations subject to notification in Poland.

The Polish Commercial Companies Code allows mergers of both companies and partnerships, except that a partnership (other than a joint-stock limited partnership) cannot be the acquiring entity or newly incorporated entity. For mergers of companies, the procedure begins with agreement of a merger plan. The necessary elements of the merger plan and annexes are listed in the regulations, but the wording is not clear. Mistakes in preparing the merger plan may cause the court to refuse to register the merger. In this article, we focus on doubts regarding the methods of valuing the assets of the acquired and acquiring companies during the merger of companies by acquisition.

Convertible loans are still a relatively rare debt financing instrument in Polish practice, but have recently gained popularity among startups and in venture capital. In essence, a convertible loan involves granting a loan that may be repaid by converting the debt into equity in the borrower. But depending on the expectations, circumstances and identified risks, the loan provisions can differ widely, with flexibility to modify the positions of the parties. This means it is worth paying attention to a number of financial and legal parameters, including obvious ones that can affect the feasibility of the undertaking.

In business practice, it is common for contracts to be entered into by companies in the same corporate group. And sometimes the same person sits on the management board of both companies. Can the same person represent both companies in the transaction—and in a sense enter into a contract with themselves?

On 9 May 2024, the Office of Competition and Consumer Protection (UOKiK) published updated guidance on notifications to the regulator and conducting proceedings under the Control of Certain Foreign Investments Act. The amended provisions of the act, which significantly expanded the scope of its application, entered into force almost four years ago, in July 2020. At that time, the regulator was granted additional powers to protect Polish companies deemed vital for public order, security or health (as we discussed in the article “Control of certain investments: new protective provisions”). The regulator published its first guidance on the new rules in 2022.

Usually, a merger of companies in Poland requires a number of legal steps and preparation of extensive documentation. This can make mergers complicated and costly, in particular if companies with different shareholding structures are involved. But in some cases the regulations allow the parties to simplify the procedure by excluding certain obligations—if certain conditions are met regarding the capital structure of the companies.

Under current regulations in Poland, in post-merger accounting, tax losses of the acquired company cannot be recognised. However, it is possible to settle tax losses of the acquiring company, although this is not always the rule. In determining whether the acquiring company is entitled to settle tax losses, it is necessary to assess whether the company’s actual principal business after the takeover is wholly or partially different from that before the takeover. What, in essence, is covered by the notion of “actual principal business”? When should the principal business be considered to have changed “in part”?

An element of any proposed merger of companies in Poland is determination of the ratio for exchange of shares of the companies participating in the merger and the amount of additional payments, if any, unless there is no exchange of shares. But sometimes the parties do not have to set a share exchange ratio in the merger process.

For companies participating in a reorganisation to continue pursuing their owners’ objectives, permits, licences or other administrative decisions necessary for operation must be secured. Proper preparation for this process requires not only knowledge of the regulations under which the administrative decisions are issued, but also the agencies’ procedural practice.

Converting a company’s liability into capital can be a way to “heal” its balance sheet. This can increase the company’s credibility with counterparties and reduce the risk of insolvency. Conversion can also generate tax benefits, for example by reducing interest expense to below the deductible limit.

The 15 September 2023 amendment to Poland’s Commercial Companies Code introduced a number of changes to the cross-border merger procedure. Such a merger has its peculiarities because it is subject to the laws of more than one EU member state. During a cross-border merger, a number of practical aspects can significantly affect the speed and efficiency of the procedure.