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The Warsaw Voice » Other » October 22, 2008
Privatization in Poland
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Protecting the State Treasury's Interests as a Minority Shareholder
October 22, 2008   
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When the State Treasury disposes of majority share blocks during company privatization, it becomes a minority shareholder, consequently reducing its influence on the company. While this process-which can take various forms-is a natural consequence of the majority block share sale aimed at divesting the State Treasury of control, it also reduces protection of the State Treasury's interests, because the State Treasury then becomes a minority shareholder.

Generally, when well thought through and effective, these new structures focus on giving the State Treasury certain corporate rights-that minority shareholders do not usually have-which it can exercise until such time as it ceases to be a shareholder.

It is equally important for the State Treasury to be reassured that it can exit the company on favorable terms. Although this appears to be obvious, experience shows that in reality it is sometimes underestimated.

An example-by no means unrealistic-shows how easily this issue can be overlooked.

In privatized limited-liability company X, the State Treasury holds less than 50 percent of the shares. According to the company's articles of association, the company's consent is needed for shares to be sold.

With the intention of disposing of its remaining shareholding in the company, the State Treasury announced a tender. The outcome was that the most favorable bid was submitted by an entity which, for reasons known only to itself, was willing to pay a price for the shares that was several times higher than their objective market value.

Unfortunately, the transaction was never carried out, as the company refused to give its consent. This did not, of course, definitively block the road to the State Treasury selling the shares, as under article 182 § 3 of the Code of Commercial Companies, the State Treasury could, for example, apply to the registration court for clearance to carry out the sale.

However, if the court gave its permission, company X could select a different bidder from the one chosen by the State Treasury (article 182 § 4 of the Code of Commercial Companies). If the State Treasury and the buyer selected by the company are unable to reach an understanding as to price, it will be set by the registration court, which will, if necessary, appoint an expert for the purpose.

If this happens, the buyer will pay the State Treasury the market price for the shares, as this is the price the expert will set applying objective valuation criteria-not the subjective reasons based on which the buyer chosen by the State Treasury was willing to pay a considerably higher price for the shares.

The conclusion that should be reached from this example is not that the clause requiring the company's consent for a share sale is in itself unfavorable for anyone. This requirement is tried and tested and is a universally applied mechanism for protecting shareholders from undesirable changes in ownership relations (in certain instances, a specific shareholder or the company itself may not be indifferent to who owns the other shares and who, consequently, has a say in decision making in the company).

Therefore, while not moving away from this solution and in order to retain the balance of interests, the general Code of Commercial Company rule incorporated in the company's articles of association should be amended (the code clearly states that this is admissible) to provide that for any statement made by the company refusing its consent to be valid, the buyer chosen by the company is obligated to pay the same price as that offered by the buyer selected by the shareholder.

Mirosław Drzewicki, attorney-at-law, Domański Zakrzewski Palinka
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