Bartosz Karolczyk, LL.M.[1]
In my last note on the Business & Law blog I presented an outline of the transformation process. In this one I will present some critical thoughts regarding its efficiency and simplicity. Misguided, vague, litigated, inefficient or doctrinally disputed legal norms should be eliminated from law, regardless of its particular body or type. The last thing a manager or owner wants is to litigate a ruling regarding his company or partnership. Having been exposed to significant number of transformation, in conclusion I argue that transformation procedure provided for in the Polish Commercial Companies and Partnerships Code could be enhanced through a few legislative amendments. It is my opinion that transformation in Poland is a painstaking and long-lasting process that is unduly burdened with imprecise provisions of the KSH and administrative hurdles. It ties up a lot of entity’s human resources, particularly on the accounting level since the accountants are usually assigned with the task of preparing the financial and accounting documents that need be a part of the transformation plan. These documents need to include financial statements, state the balance value of the entity, as well as the value of its assets as of particular day (KSH Art. 558). It includes several elements, which could surely be either simplified, or excluded in certain circumstances, or outright repealed. First and foremost this applies to the accounting stage and to the statutory four weeks for double notification of owners. Further, the KSH could be amended to increase the flexibility and utility of the process by expressly allowing new investors to become owners of the entity that is being transformed either through equity or by acquisition of interest. These topics are briefly explained below. The requirement to have the plan verified by a court-appointed certified auditor is a clear protective mechanism. However, this hardly should justify an absolute, mandatory requirement with no opt-out provision that in essence forces the entity to incur extra cost. The cost of auditor depends of course on the size of the entity and various other factors, yet it can be significant. Almost identical pre-condition used to apply in mergers and divisions. Currently, however, KSH expressly allows the owners to opt-out from it by unanimous decision.[2] These changes were introduced effective Feb. 28, 2009 and as of Oct. 27, 2011 the scope of opt-out provisions for these procedures was further increased. Furthermore, since its introduction in 2008 Art. 5166 § 3 KSH (transnational merger) has an opt-out provision regarding the auditor’s verification and report. Yet, no similar opt-out provision has been introduced to transformation proceedings[3], even though a partner (shareholder) cannot be legally forced to participate therein or can file a complaint attacking the resolution implementing the transformation. I believe that also in this regard the law – in the light of doctrine of volenti non fit injuria – should respect the autonomy and will of owners. Right now, this solution remains an unreasonable and costly burden that over-complicates and unnecessary prolongs the process[4]. Similarly unreasonable is the mandatory notice that should be given twice. In the context of family-owned business it is often the managers writing to themselves. There is absolutely no purpose behind it, only detrimental results that are a waste of time and sentiment short only of ridicule, arising from the apparent disconnection between the law and reality[5]. Thirdly, there are two issues related to the interest held in the transforming entity. One of them is the ability to combine transformation with accession of new partners or capitalization. Such transactions could be easily stipulated in the resolution authorizing the transformation, which is basically the “new” entity’s founding document. This would greatly increase the efficiency of the proceeding and significantly reduce transactional cost. In fact, instead of two registrations proceedings, only one would be required. Usually it takes a month to process the transformation or capitalization application through the court. Effectively, a month could be saved. What follows is not only the reduction of time, court resources use, but also legal fees. Second of them is the ability to transfer the interest in the entity after the resolution authorizing the transformation has been approved, and regardless of whether the declaration on participation in the transformed entity has been made. This is admissible given the structure of the process provided by KSH and as confirmed by some commentaries to the law. However, according to some Warsawpractitioners such proposition has been rejected by some register courts[6]. I believe that since neither of the above runs contrary to the provisions of KSH or any of the principles embedded therein, all should be expressly allowed. To conclude, there is room for improving the transformation process. This could be done for a designated group of entrepreneurs by introducing several opt-out provisions. Such solution would predominantly benefit family-owned firms where managers and owners are the same persons. Such businesses are still the backbone of Polish economy. Secondly, KSH should also expressly stipulate that transformation can be combined with addition of new owners to the business and that interest therein is transferable after the adoption of the owner’s resolution. Such changes would reduce the overall cost of the transformation, as well as simplify and expedite it. I have not doubt it would be a move welcomed by both entrepreneurs and legal practitioners.
[1] Ph.D. Candidate at theCollege ofLaw,Kozmiński University,Poland. LL.M., Faculty of Law and Administration at theWarsawUniversity (2005). LL.M. and Thomas Buergenthal Scholar at theGeorgeWashingtonUniversityLawSchool (2007). Currently (2011-2012), Visiting Scholar at the University of California,Berkeley,BoaltHallSchool of Law.
[2] See KSH Art. 503¹ (merger) and Art. 538¹ (divisions). [3] It should be noted that, as opposed to mergers and divisions, there is no EU directive regarding transformation, so the Polish legislator has considerable freedom in regulation this area of law. [4] But see Andrzej Szwaja, Commentary to Art. 559 KSH in Stanisław Sołtysiński, et al., Kodeks spółek handlowych. Komentarz do art. 459–633 KSH (CH Beck 2009) (arguing that requirement of court appointed auditor is a „systemic solution of Polish law” that protects “the security of commercial trade” and in fact decreases the cost that would otherwise have to be borne by the company in case of dispute between the owners). [5] In practice it is possible to address this issue in the owners’ resolution in a form of waiver and acknowledgment, thus avoiding double notification. In my practice the courts have never rejected such a resolution and approved the transformation despite the lack thereof.
[6] Given the reality of legal practice, I have not tried to implement either of the above solutions, despite their clear advantages, as the consensus was that the risk of failure was significant due to formalistic approach of Polish register courts.