Control of certain investments: new protective provisions


On 19 June 2020, the Parliament adopted “Shield 4.0,” new law of great importance for M&A practice. Shield 4.0 amends the Act on Control of Certain Investments of 24 July 2015 and enters into force on 24 July 2020.

Current investment control

The Act on Control of Certain Investments came into force in 2015 and introduced an additional investment control mechanism, independent of the concentration control carried out by the president of the Office of Competition and Consumer Protection (UOKiK) to combat consolidation leading to a significant reduction of market competition.

In its original form, the 2015 act covered entities of strategic importance for the Polish state. In this respect, control has been and still is exercised by the ministers indicated in the act, and is aimed at assessing whether obtaining dominance or significant participation in a protected Polish entity by an entity from outside the European Union is a threat to public order or security, the country’s defence capabilities, or the ability to satisfy needs vital for protection of the life and health of the population. The entities considered strategic under the detailed criteria set out in the act were included in a list of entities subject to protection established by a regulation of the Council of Ministers (most recent regulation dated 23 December 2019). Currently, the list includes nine companies of strategic importance for the country, such as KGHM Polska Miedź S.A., Polski Koncern Naftowy Orlen S.A. and Grupa Azoty S.A. As this is an exhaustive list, there is no doubt which companies are covered by the act.

The existing investment control mechanism will remain in place. The investment control in relation to strategic companies, protected under the regulation of the Council of Ministers, will continue to take place in accordance with the control criteria currently in force, in proceedings conducted by the same competent ministers.

However, this mechanism will be supplemented by an additional mechanism, entirely autonomous from the previous one. It will apply only to entities not subject to investment control under the existing rules.

Who will be covered by the new rules and for how long?

The new investment control procedure related to the COVID-19 epidemic is introduced by Shield 4.0 (Act on Interest Rate Subsidies for Bank Loans to Businesses Affected by COVID-19 and the Simplified Procedure for Approval of Arrangements in Connection with Occurrence of COVID-19 of 19 June 2020). It will remain in force for two years and will be implemented by the president of UOKiK. The aim is to ensure that public order, security and health considerations are respected when investors acquire dominance or significant participation in protected companies. Investment control in the wake of the COVID-19 epidemic will result in far-reaching restrictions on the possibility for investors from outside the European Union who do not have their registered office in a member state of the European Economic Area or the Organisation for Economic Cooperation and Development to acquire shares in protected companies.

The list of countries from which investors will be subject to control is long. In particular, it includes Asian countries with the exception of Japan and South Korea, as well as Russia, Ukraine, all African countries, most South American countries including Brazil, all Middle Eastern countries with the exception of Israel and Turkey, and a number of other countries.

The control procedure does not contain an exhaustive list of entities to which it applies. Protection is extended to all entities that jointly meet two criteria. The first criterion is revenue from sales and services of the protected entity in the territory of Poland of EUR 10 million or more in either of the two financial years preceding the notification. This value is comparable to the criterion for merger-control proceedings conducted by the president of UOKiK.

The second criterion is that the protected entity meets one of the following characteristics:

  • It is a public company.
  • It holds property included in the consolidated list of facilities, installations, equipment and services deemed to be critical infrastructure.
  • It conducts business in an area defined extremely broadly by the new regulations as:
    • Developing or modifying software with applications for meeting public needs
    • Provision of data collection or processing services in cloud computing
    • Production or distribution of electricity, natural gas, or heat
    • Production, certain types of transport, transmission, storage and trade in petrol, diesel, natural gas, or gas fuels
    • Production of chemicals, fertilizers, and chemical products
    • Manufacture and trade of certain products and technology for military or police purposes
    • Extraction and processing of metal ores used in the manufacture of the aforementioned products
    • Transhipment in ports of fundamental importance to the national economy
    • Transhipment in inland ports
    • Telecommunications
    • Production of medical devices, apparatus and instruments
    • Production of medicines and other pharmaceutical products
    • Processing of meat, milk, cereals, fruit and vegetables.

In practice, this will mean that with regard to investors from the regions in question, control will extend to thousands or even tens of thousands of Polish entities. In addition, such broad criteria may make it difficult to assess whether a target entity meets the criteria.

Ex ante control: dominance, significant participation, and indirect participation

Proceedings before the president of UOKiK will be initiated on the basis of a notification submitted by an investor intending to obtain dominant status or significant participation in a protected entity.

Dominant status means having the ability to decide on the directions of activities of the protected entity.

Significant participation will mean achieving or exceeding respectively the threshold of 20% or 40% of the total number of votes in the decision-making body of the protected entity, of the profits of the protected entity, or of the capital in a protected entity which is a partnership.

Cases where an investor achieves or exceeds the relevant level of votes or other significant rights in relation to the protected entity as a result of events such as redemption of shares, division or merger of companies, or amendment of the articles of association of a protected entity, are also regarded as achieving significant participation or dominance. Significant participation may also be achieved through acquisition or lease of the enterprise, or an organised part of the enterprise, of a protected entity.

Indirect and subsequent acquisition

Ex ante control will also be exercised in cases of acquisition of dominant status or significant participation indirectly through subsidiaries controlled by the investor, or in cases of acting in agreement, even verbally, or through a trustee.

In such case, the notification will be submitted by the subsidiary or other entity taking actions resulting in the indirect emergence of dominant status or significant participation, or by all members of the agreement as to joint action towards the protected entity or an entity with a dominant relationship towards the protected entity.

Subsidiaries of investors from outside the EU with no registered office in an EEA or OECD member state will also be subject to the same obligations as the investors themselves, even if the subsidiaries are registered in Poland. If indirect acquisition of dominance or significant participation subject to control takes place as a result of an act carried out on the basis of laws of a foreign country, in particular as a result of a merger of companies registered in a foreign country or acquisition or taking up of shares in such companies, then the subsidiary with dominance or significant participation in a protected entity will be obliged to notify the president of UOKiK of the relevant event after the fact. In such case, the president of UOKiK may issue a decision prohibiting the exercise of rights acquired on the basis of acts or events covered by the ex post notice.

We know from practice that subsidiaries may have difficulties meeting reporting obligations because, as in the case of obligations concerning beneficial owners, subsidiaries do not always have information on the changes giving rise to the reporting obligations.

Powers vested in the president of UOKiK

The president of UOKiK will be able to commence an examination procedure at the regulator’s own initiative if there are indications of abuse or circumvention of law. In particular, this will be the case if an entity achieving significant participation or acquiring dominance does not actually carry out economic activity on its own behalf other than that relating to achievement of significant participation or acquisition of dominance, or does not have a permanent establishment, office or staff in the territory of a member state. In these cases, proceedings at the regulator’s initiative will not be initiated only if 5 years have passed since significant participation or dominance was established.

As a result of investment control proceedings, the president of UOKiK will issue a decision on the absence of objection regarding the intention to obtain dominant status or significant participation in a protected entity. The deadline for issuing this decision is 30 days as part of initial proceedings, i.e. if the case does not require additional control proceedings. If control proceedings are conducted, the president of UOKiK will issue an investment control decision within a total of 150 days from initiation of the proceedings.

The president of UOKiK will be able to object to the intention to achieve the status of significant participation or dominance over the protected entity if there is at least a potential threat to public order, security or health. An objection may also be raised if the relevant legal acts are likely to have a negative impact on projects and programmes of European Union interest.

Legal acts carried out despite an objection raised by the president of UOKiK or without the required notification will be null and void.

Assessment of regulation

Obligations related to the verification of whether it is necessary to make a notification resulting from the amendments to the Act on Control of Certain Investments will be far-reaching, and in many cases may even prove impossible to perform properly. This is due to the broad definition of protected entities, the extension of control to cases of indirect acquisitions of dominance or significant participation, even as a result of an oral agreement by a group of investors, as well as subjecting transactions to control involving entities registered in the EU, EEA or OECD but controlled by entities from outside these areas.

The list of practical problems likely to arise from the imprecise new provisions, raised during the drafting phase, is long and probably not exhaustive. For example, it is unclear what the management of a Polish company must do to protect against liability for failing to report a secondary acquisition, and what initiative Polish management has to take to verify information about changes in the structure of the group (a problem generally similar to reporting changes in beneficial owners).

Another good example is investment control of companies owning critical infrastructure. According to the Crisis Management Act of 26 April 2007, the consolidated list of objects, installations, devices and services constituting critical infrastructure is covered by a classified information clause, and information on the inclusion of a given property or service on this list is provided only to public administration bodies with tasks included in the national critical infrastructure protection programme, and owners and holders of the relevant property. Thus, without applying the procedures for access to classified information, an investor intending to obtain dominance or significant participation in a Polish company will not be able to determine whether the relevant transaction is subject to notification of the president of UOKiK under the provisions on control of certain investments.

The Parliament tried to rationalise the restrictions related to simultaneous investment control in connection with the COVID-19 epidemic and merger control proceedings. The scope of application of the new provisions has also been limited, as the amendments adopted by the Senate excluded from control investors with their registered office in an OECD member state.

Despite these efforts, there are significant concerns that the regulations may greatly impede the process of acquiring control over Polish companies, regardless of who currently controls them and who intends to acquire their shares. This will make access to capital more difficult and increase costs.

It will take time to check whether the amended provisions of the Act on Control of Certain Investments will apply to a given transaction. Collecting the information necessary to make an appropriate notification to the president of UOKiK, and conducting proceedings before the regulator, will take even more time. On top of this, some provisions of the act cannot be interpreted unequivocally because they are mutually contradictory.

As a result, the new rules will have to be taken into account when carrying out transactions involving a truly vast set of entities, and the transactions will have to be carried out with great care, especially since the potential sanctions are drastic: invalidity, inability to exercise rights, and even criminal sanctions, such as fines up to PLN 50 million, imprisonment from 6 months to 5 years, or both.

It remains to be seen whether mechanisms can be developed to minimise risks and protect the parties to the transaction and entities on which new obligations have been imposed.

Krzysztof Libiszewski, attorney-at-law, Bartosz Kuraś, attorney-at-law, M&A and Corporate practice, Wardyński & Partners