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

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 (an alternative to acquiring an existing company is to register a new limited liability company in Poland, which has no prior legal, tax or financial history). Article 163 of the Polish Commercial Companies Code requires the following to establish a limited liability company:

• concluding articles of association,
• 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.

Registration of the company and of an increase in share capital must be distinguished from disclosure of shareholders. Article 16 of the Polish Commercial Companies Code invalidates a disposal of a share before the company or the capital increase is registered. This does not mean that every share and shareholder must be individually disclosed in the KRS as a condition of 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

As a rule, a share transfer requires written form with notarised signatures. Article 180 § 2 nevertheless permits transfer of shares in a qualifying company using the template in the electronic system, signed with qualified electronic signatures, trusted signatures or personal signatures. An ordinary email or scanned contract does not replace these requirements.

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.

The parties may prepare their own agreement with notarised signatures or use the appropriate electronic template if the requirements of Article 180 § 2 are met. In the notarial procedure, the signatures may be made before the notary or acknowledged as previously affixed; the notary verifies the signatories’ identities.

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?

The price in a voluntary share sale is agreed by the parties, subject to the applicable law. Article 266 § 3 of the Polish Commercial Companies Code concerns a different situation: judicial exclusion of a shareholder, where the court determines the takeover price by reference to the shares’ actual value when the claim is served. It is not a general pricing rule for every share sale.

In an ordinary sale, the shares may be valued using an appropriate method, while the agreed price may also reflect the risks and terms of the transaction. Referring to Article 266 § 3 does not replace agreement on the price or its calculation mechanism.

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 liabilities from its assets, 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.

The judgment quoted below concerns the meaning of actual share value in the context of Article 266 § 3. It may assist in understanding valuation, but does not require every voluntary share sale to take place at market value.

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 the share purchase agreement explicitly include a provision addressing the adopted method of calculating the share value. In more complex 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 are a key part of a share purchase agreement and often account for a substantial portion of its text. 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 a 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 a 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 a 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” (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 disagree about whether a particular event, or its absence, caused the buyer loss. Representations, warranties and the definition of loss for the purposes of the Polish Civil Code should therefore be drafted clearly and precisely.

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

An inaccurate seller representation does not automatically create a right to withdraw merely because the buyer considers it material. An applicable contractual or statutory ground and its requirements must be established. A contractual withdrawal right under Article 395 of the Polish Civil Code requires a time limit for its exercise. The effect on the shares, purchase price and other performance depends on the legal basis used and the agreement.

Avoidance of a declaration made under mistake or fraud is a separate remedy under Articles 84 and 86 of the Polish Civil Code. It is not limited to agreements lacking a withdrawal clause. The statutory conditions, form and time limit under Article 88 must be checked. Disappointment with the company’s value or an inaccurate representation does not invariably suffice to undo the transaction.

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

If the parties intend a payment for an inaccurate representation without proof of loss in the ordinary sense, they should clearly define a separate contractual guarantee mechanism, its triggers and the amount payable. Making liability independent of the seller’s knowledge does not itself remove the need to establish loss where the claim remains one for damages. The agreement should distinguish these mechanisms.

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

• the deadline for notifying the seller of untrue representations and warranties,
• the deadline for the buyer to pursue claims,
• 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).

There are no “universal rules” for limiting the seller’s liability in a share purchase agreement. The limits should reflect the circumstances of the transaction, and different clauses may have different time limits and financial caps.

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

After the transaction, the interested parties should notify the company and provide evidence of the transfer; under Article 187 § 1, the transfer becomes effective against the company when it receives those documents. The management board updates the share register and files a new shareholder list with the registry court under Article 188. It must separately assess whether data subject to an entry in the KRS have changed: not every shareholder is individually entered. An application to amend an entry is generally due within 7 days of the event justifying that entry, subject to specific provisions.

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 a 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 a share purchase agreement. Due diligence should be comprehensive and cover a range of issues, primarily legal, accounting, and tax.

In a share purchase, the company remains a separate entity and continues to be liable for its obligations. Buying shares does not automatically make the buyer personally liable for the company’s tax or employment debts (Article 151 § 4 of the Polish Commercial Companies Code). Hidden liabilities may nevertheless reduce the investment’s value and threaten the company’s business. Additional obligations undertaken by the buyer and liability arising from other roles require separate assessment.

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.