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The Warsaw Voice » Law » September 17, 2008
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Poland Follows EU in Liberalizing Financial Assistance
September 17, 2008   
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A company can kick-start growth by providing financial assistance for third parties to acquire its shares. The financial assistance facilities on offer make it possible to perform transactions such as leveraged buyouts (LBO) and management buyouts (MBO).

LBO and MBO financing structures hinge around the fact that they are both based on debt. The buyer borrows a serious amount of money to pay for the shares. Typically, the loan comes directly from the company or is secured on company assets.

Thus far it has been forbidden in Poland for a joint-stock company to give financial assistance aimed at the purchase of its own shares, irrespective of whether the shares were subscribed for or acquired from third parties. In fact, the ban cast its net very wide-a joint-stock company cannot directly or indirectly advance funds, make loans or provide security with a view to acquiring its shares.

EU-driven change
This will change on Oct. 5, 2008, after a recent amendment to the Commercial Company Code comes into force. This amendment is the response of the Polish parliament to Directive 2006/68/EC, which liberalizes rules on granting financial assistance for the acquisition of a joint-stock company's shares by a third party.

The main objective of the ban on financial assistance was to protect both share capital and company creditors, as it was said that the financial assistance could potentially undermine the stability of the share capital and give rise to abusive practices and unfair money transfers.

Nonetheless, the existing regulations have caused many difficulties and legal gray areas. In practice, the lack of a lawful way to give financial assistance forced investors to attempt to explore alternative solutions that teetered on the edge of legal acceptability and risked invalidity under the Polish Civil Code on the grounds of constituting a circumvention of law. Dubious practices are obviously best avoided, as they might be unlawful and they increase uncertainty in business dealings.

It was argued that the limitations imposed on financial assistance were too far-reaching in view of their objectives and that financial assistance should be permissible under the certain conditions that would, on the one hand, provide sufficient protection to share capital and creditors and, on the other hand, not unduly hinder commercial growth.

Financial assistance under new regulations
Under the amended Article 345 of the Commercial Company Code, as of Oct. 5, 2008, joint-stock companies will be allowed to, directly or indirectly (for example, through subsidiaries) finance the acquisition of or subscription for their own shares, in particular by advancing funds, making loans or providing security, provided that certain requirements are met.

Joint-stock companies will be able to participate in financing up to the limit of their distributable reserves created for that purpose from the company's net profit. Further, the law requires that financial assistance can only be granted on fair market conditions (especially as regards the interest rate) and provided that the debtor's solvency is audited and confirmed. Moreover, in all cases of acquiring or subscribing for a joint-stock company's shares with the company's financial assistance, the share price needs to be fair. Additionally, it is required, on pain of invalidity, that any financial assistance be authorized in advance by a resolution of the company's general shareholders' meeting, after analysis of the management board's written report, which should set out the reasons for the transaction, conditions on which the transaction is entered into, the risks involved in the transaction, and the price at which the third party is to acquire or subscribe for the shares. To further secure the interests of company creditors and protect against potential abuses, the management board report will be filed with the registry court and also made public.

A step in the right direction
To sum up, once in force, the amendment will allow joint-stock companies to provide financial assistance when their shares are being acquired or subscribed for and will make transactions such as LBO or MBO significantly easier. This regulation enhances flexibility and reduces the administrative burden for companies, which have to react promptly to market changes affecting the price of their shares. Furthermore, it increases flexibility with regard to changes in the ownership structure of company share capital. Finally, the risk of abuses seems to be minimized too since financial assistance is subject to safeguards aimed at protecting both shareholders and creditors.

Magdalena Karpińska
Natalia Ławniczak
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