Purchase of a company in Poland by a foreigner – sale of shares in a limited liability company

Share purchase agreement (SPA) for shares in a limited liability company is one of the most frequently concluded agreements in legal transactions. In practice, such transactions are particularly important for foreigners planning to acquire a company in Poland as a means of entering the European Union market.

The composition of a limited liability company may change during its operation, as shareholders may join or withdraw from further involvement in the company’s operations. These circumstances require the execution of share purchase agreement.

Share purchase agreement in a limited liability company is subject to the provisions on contracts for the sale of goods set out in the Polish Civil Code. Its subject matter is the transfer of the seller’s share rights in a limited liability company to another entity. In practice, the purchase of a company in Poland by foreigners is one of the most common ways to start a business in the European Union.

Purchasing a company in Poland by a foreigner – practical aspects

First, it should be noted that from the perspective of a foreign investor, purchasing shares in a limited liability company is the most common form of acquiring a business in Poland.

In practice, foreigners opt for a so-called share deal instead of an asset deal, which allows them to take over the entire operating structure of the company, including contracts, permits, and business relationships.

However, it should be noted that acquiring a Polish company also involves assuming legal and tax risks, which should be identified during due diligence.

For this reason, share purchase transactions in Poland are almost always preceded by a comprehensive legal, financial, and tax audit.

Sale of shares in a limited liability company – when is it possible?

To sell shares in a limited liability company in Poland, the company must exist. Pursuant to Article 133 of the Polish Civil Code. Article 163 of the Polish Commercial Companies Code requires the following to establish a limited liability company:

• concluding a company agreement,
• making contributions by shareholders to cover the entire share capital, and if the share is acquired at a price higher than the nominal value, also contributing the surplus,
• appointing a management board,
• establishing a supervisory board or audit committee, if required by law or the company agreement, and
• entry into the National Court Register.

The sale of shares in a company therefore applies only to those shares that represent the registered share capital. This means that only those shares that have been formally recorded in the company register and constitute part of its share capital are subject to sale.

This is particularly important for foreign investors planning to purchase a company in Poland, as the condition for a successful acquisition is the existence of a fully registered company.

Sale of shares in a limited liability company in Poland – form of agreement

Pursuant to Article 180 § 1 of the Polish Commercial Companies Code, the transfer of a share, part thereof, or fraction thereof, as well as the pledge thereof, must be made in writing with notarized signatures. A share transfer agreement cannot be concluded orally or electronically, therefore, concluding share purchase agreement in standard written, oral, or documentary form will result in the agreement being invalid.

In practice, this is one of the most significant differences between Poland and other jurisdictions – many foreign investors assume that a fully remote transaction is possible, which is not always possible in the case of acquiring a Polish company.

Thus, the parties can draft the share purchase agreement themselves, but the agreement must be concluded in writing with notarized signatures. This involves signing the document (share purchase agreement) in the presence of a notary or recognizing the previously affixed signature as handwritten. The notary then verifies the identity of the seller and the buyer of the shares based on legally required documents, and in the absence of such documents, in a manner that eliminates any doubt as to the identity of the person participating in the notarial act.

Another method is to sell company shares through the s24 system, provided, however, that the company agreement was concluded using a template agreement. The fundamental disadvantage of this solution, however, is that it is based on a template agreement.

Sale of shares in a limited liability company – how to determine the selling price of shares in a Polish limited liability company?

Determining the price of the shares being sold is one of the most important elements of share purchase agreement. Article 266 § 3 of the Polish Commercial Companies Code does not explicitly specify the method the parties should use to value the shares, and consequently, the value of the company itself.

This provision is ancillary and refers to “actual value” in a different context, but is often used for interpretation purposes.

If a short period of time has elapsed between the company’s incorporation and the planned sale transaction, the value of the shares may correspond to their nominal value – although this is rarely the case in market practice.

However, if the subject of the transaction is an entity with an established market position, possessing, for example, assets, contractors, trademarks, movable and real estate assets, determining the share purchase price will be somewhat more complicated, and the parties to the share purchase agreement should seek the assistance of professional advisors.

How to determine the price of shares in a limited liability company? Generally, three methods are used to value company shares (in other words, to value a company):

• Income method – this method assumes estimating future cash flows, calculated based on the company’s turnover as of the valuation date. This method is typically used for companies with significant growth prospects in the coming years.

• Asset method – this method involves calculating the value of shares by deducting the company’s assets from its liabilities, both long- and short-term.

• Comparison method – this method involves comparing the valuation of other similar companies; it can also be based on past transactions.

However, regardless of the method used by the parties to value shares in a limited liability company, it is worth considering the Polish Supreme Court’s case law, which refers to the interpretation of Article 266 § 3 of the Polish Commercial Companies Code, cited above.

A practical example from Polish case law:

• “The “actual market value of a share” is its “real” value, i.e., the market value, i.e., the value a shareholder would obtain on the market if they sold their shares in the company to a third party at a given time (Polish Supreme Court judgment of December 12, 2013, file reference II CSK 121/13).”

In practice, it is recommended that share purchase agreement explicitly include a provision addressing the adopted method of calculating the share value. In more complex and involved transactions, the calculation method may be included as an annex to the share purchase agreement.

Sale of shares in a Polish limited liability company – representations and warranties of the parties

What should the share seller’s declaration contain? Representations and warranties made by the parties in share purchase agreement (often referred to as “representations and warranties” or “reps and warranties”) constitute a key element of the agreement and, in practice, comprise a significant portion of the agreement. The purpose of representations is to provide the other party with knowledge about the company, while warranties constitute an acceptance of liability in the event of a false statement made in share purchase agreement. Representations typically concern the seller, the shares being sold, and the indirectly sold company in financial, legal, and accounting terms, as well as existing obligations.

Of course, the scope of the representations will vary in each case – it largely depends on the legal and factual status of the company, the terms of the transaction, and the legal and financial issues related to the project. Representations and warranties made by the selling party in share purchase agreement typically focus on three fundamental areas.

Seller’s legal status

Below are sample representations and warranties from the seller regarding this area of ​​the company being sold:

• The seller has the full right to execute the share purchase agreement and the obligations arising therefrom.

• To the seller’s best knowledge, there are no pending enforcement proceedings or proceedings to secure claims against the company or the seller within the meaning of applicable law, and to the seller’s best knowledge, there are no grounds to initiate such proceedings.

• There are no legal obstacles to the effective transfer of shares, in particular, the shareholders’ meeting has approved the transfer of shares (the shareholders’ meeting’s approval should be attached as an annex to the share purchase agreement).

• The company’s entire share capital has been fully paid up, and none of the current shareholders are in arrears with any payments to the company in this respect.

• All decisions of the company’s governing bodies were made in accordance with the law and the articles of association and are valid.

Subject of the share purchase agreement

Below are sample representations and warranties from the seller regarding this area of ​​the company’s operations:

• The seller represents and warrants to the buyer that, to the best of its knowledge, all information and documents provided to the buyer or its advisors prior to the conclusion of the agreement for the purposes of legal, financial, and tax due diligence of the company, shares, and assets to be acquired by or on behalf of the buyer are true, accurate, and not misleading, and contain all the legal and financial information required by the buyer to conduct due diligence in connection with the transaction.

• The conclusion of the share sale agreement and the acquisition of shares will not prejudice creditors or prevent, in whole or in part, the satisfaction of third-party claims.

• All company formation documents and documentation relating to the company’s affairs, including, but not limited to, the articles of association and annual financial statements, have been prepared and are stored properly and in accordance with legal requirements and are archived (in accordance with applicable law) at the company’s registered office. Furthermore, they are authentic, accurate, current, and complete. All related applications have been completed, all required fees have been paid, and no applications for any changes are pending with the relevant authorities.

State of the company and its business

Below are examples of the seller’s representations and warranties regarding this area of ​​the company being sold:

• The company has no tax arrears.

• The company is not a party to, and is not otherwise involved in, any court, arbitration, or administrative proceedings, particularly outside the Republic of Poland, and to the seller’s best knowledge, there are no grounds for initiating such proceedings in the future.

• The company has all legally required licenses, concessions, consents, and permits necessary to conduct business activities.

• There are no tax procedures, audits, tax inspections, fiscal audits, or inspections pending against the company, including any proceedings aimed at determining tax liabilities.

However, we would like to reiterate that the above representations and warranties are merely examples, and each share sale transaction is different. Therefore, the scope of representations and warranties should be consulted with legal counsel in each case.

Disposal of shares in a limited liability company – breach of the parties’ representations and warranties

The seller’s liability for non-compliance with representations and warranties made in share purchase agreement is generally based on the mechanism of redressing damages or restoring the status quo that would have existed had the representation or warranty been consistent with the legal or factual circumstances. In practice, transactions involving the sale of shares in a limited liability company generally involve three mechanisms of seller liability.

Sale of shares in a Polish limited liability company – seller’s liability for damages

From a civil law perspective, if the seller breaches the representations and warranties made in the share purchase agreement, the buyer will undoubtedly suffer damages. Although damage is not defined in the provisions of the Polish Civil Code, it is assumed that “damage should be considered any loss to legally protected assets (interests), expressed in the difference between the condition of the assets that would have existed had a specific event not occurred and the condition that arose as a result of that event” (14 T. Dybowski, in: Z. Radwański (ed.), Polish Civil Law System, vol. 3, part 1, p. 213).

In practice, therefore, damage will include all costs incurred by the buyer to eliminate or minimize the effects of false representations and warranties made by the seller in the share purchase agreement.

The parties may have doubts regarding the interpretation of whether a given event (or lack of a given event) results in damage to the buyer. Therefore, the parties should carefully and precisely formulate provisions regarding representations and warranties and what may constitute damage within the meaning of the Polish Civil Code.

Transfer of shares in a limited liability company – the buyer’s right to withdraw from the share purchase agreement or to invoke an error

The buyer may also have the right to withdraw from the agreement if the statements and warranties made by the seller in the agreement are so material that their inconsistency with the factual/legal circumstances allows for the conclusion that, had the buyer known of their inaccuracy, the buyer would not have entered into the share purchase agreement. The legal consequence of withdrawal is that the share purchase agreement will be deemed not to have been concluded, and the parties will be obligated to return any consideration they have provided to each other.

If the concluded share purchase agreement does not provide for the right to withdraw from the agreement, the buyer may invoke an error. Pursuant to the first sentence of Article 84 of the Polish Civil Code, in the event of an error in the content of a legal act, the legal consequences of a declaration of intent may be avoided. The provision of Article 86 § 1 of the Polish Civil Code, in turn, provides that if the error was caused by the other party fraudulently, the legal consequences of a declaration of intent made under the influence of the error may be waived even if the error was immaterial and did not concern the substance of the legal act.

A fraudulent act can be any conduct that causes or reinforces in another person an erroneous perception of reality. It may consist of false assurances on the part of the counterparty, concealment of facts, false promises, and lies that cause the person making the declaration to have a specific, erroneous perception of reality. Assurances about specific future conduct may also constitute fraud (see Polish Supreme Court judgments of January 15, 1970, I CR 400/69, OSNCP 1970, No. 12, item 225, and of March 30, 2012, III CSK 232/11, not published). Examples include promises that are not factual, such as assurances that the parties will act in a specific manner in the future (e.g., regarding the immutability of the legal status, activity in shareholding matters, or provision of further management assistance), which are not fulfilled.

It should be noted, however, that provisions that may provide grounds for rescission of the contract should be material, i.e., refer, for example, to the company’s financial situation. Therefore, it seems that the buyer’s right to rescind the contract will apply in limited cases.

It is also worth noting that the Polish Supreme Court allows the buyer to invoke an error even if the contract does not provide for such a right of rescission (see the Polish Supreme Court judgment of October 29, 2010, file reference I CSK 595/09).

Sale of shares in a limited liability company – seller’s liability for the company’s value

However, situations may also arise where a breach of the representation and warranty contained in the share purchase agreement will not result in damages for the buyer as defined by the Polish Civil Code, or the amount of damages will be difficult to determine or even impossible to determine. To prevent such situations, the parties may stipulate in the share purchase agreement that the seller is obligated to compensate the buyer for any damages incurred due to the representation’s inconsistency with the factual/legal status – depending on or regardless of the seller’s knowledge. This assumption stems from the fact that the seller, as the controlling entity of the company, should have full knowledge of the legal and factual status of the company.

In the situation described above, the share purchase agreement should include precise provisions regarding how the parties define damages and what the seller’s compensation will entail (e.g., payment of a predetermined sum) or how the third party will calculate the amount of damages.

Transfer of shares in a limited liability company – limitations on the seller’s liability

As a general rule, in share purchase agreement, the seller’s liability for untrue representations and warranties (contradictions with the factual and legal status) may be limited to:

1) the deadline for notifying the seller of untrue representations and warranties,

2) the deadline for the buyer to pursue claims,

3) the minimum amount of damages entitling a claim or the maximum amount of damages for which the seller is liable.

In practice, share purchase agreements often include the premise “to the best of the seller’s knowledge” – according to the prevailing view in legal doctrine and case law, this statement limits the seller’s liability if any of their representations proves to be inconsistent with the factual or legal status. The seller may then argue that they were unaware of the fact and, despite exercising due diligence, could not have learned of it. It is likely that the seller’s warranty liability will not arise (for example: A. Szlęzak, “Representations and warranties in contracts governed by Polish law,” Przegląd Prawa Handlowego 2007/10, p. 8).

Of course, referring to the above-mentioned possibilities for limiting the seller’s liability, it should be noted that there are no “universal rules” that can be applied to every share purchase agreement. Each share purchase agreement is different due to a number of factors, and therefore the parties may define these limitations differently. It is also possible to introduce provisions that differentiate the above-mentioned deadlines and amounts for individual provisions of the agreement.

Sale of shares in a limited liability company – change in the Polish National Court Register (KRS)

The parties to the transaction should note that the mere execution of share purchase agreement in a limited liability company does not automatically update the data in the polish National Court Register (KRS). Pursuant to the regulations, the company’s management board is obligated to report any change in shareholder to the KRS within 7 days of the date of the acquisition of the shares. The application is submitted via the Polish Court Register Portal, and the application must be accompanied by, among other things, the share purchase agreement and an updated list of shareholders.

In practice, failure to comply with this requirement can lead to discrepancies between the actual and registered status, which not only complicates relationships with contractors but can also result in the imposition of a fine, initiation of enforcement proceedings, and, in extreme cases, even the dissolution of the company. It is also worth remembering that the registry court may request the correction of formal deficiencies or reject the application if the submitted documents do not meet formal requirements. Therefore, it is important to ensure the formal accuracy of the documents already at the stage of preparing the share purchase agreement and their subsequent filing with the Polish National Court Register.

It is also important to note that the application is subject to a fee. The fee for reporting a change of shareholders in the Polish National Court Register is currently PLN 250.

How long does it take to register a change of shareholder in the National Court Register? In our experience, the average waiting time for an updated entry ranges from two weeks to two months.

Summary

From the perspective of a foreign investor, purchasing shares in a limited liability company in Poland is an effective way to enter the market, but it requires knowledge of local legal regulations and trading practices.

While it may seem that share purchase agreement in a limited liability company is not a complex agreement, in practice this is not always the case. Share purchase agreements are often several pages long with numerous annexes, and extensive provisions regarding representations and warranties provided by the seller and potential limitations on the seller’s liability can constitute key provisions in the agreements.

It is also worth noting the need to conduct a legal audit of the company before entering into share purchase agreement. Due diligence should be comprehensive and cover a range of issues, primarily legal, accounting, and tax.

This is particularly important for foreigners, as acquiring a company without prior due diligence can lead to the assumption of undisclosed liabilities, including tax or employment obligations.

Only the conclusions from the company’s legal audit will allow potential buyers to make rational and optimal investment decisions and will constitute important factors influencing the valuation of the company’s shares.