The simple stock company
Polish companies operate under the rigorous restrictions of the Commercial Companies Code. But major changes in this regard can be expected from 1 March 2020, as the President of Poland has just signed into law the Simple Stock Company Act.
To date, the rules for operation of companies and partnerships in Poland have evolved slowly.
The types of companies, their managing bodies, their manner of operation, and rules concerning liability for the company’s obligations and protection of creditors, derive primarily from the 1934 Commercial Code and have changed little since that time. The 1990s saw a switch to contemporary regulation of the capital market in Poland. In the decades that followed, the Commercial Companies Code was passed and corporate law was gradually brought into line with EU standards. Laws were also passed allowing use of IT systems for founding limited-liability companies and conducting certain operations of companies of that kind.
In the course of these changes, more provisions were introduced adding new areas of regulation to the legal system, and allowing for more forms for partnerships. However, there was no major revision at any stage of these changes of the basic principles for operation of companies. Nor was any consideration given to creating any type of company (the group referred to in the code as “capital companies,” as distinct from partnerships) other than the limited-liability company (sp. z o.o.) and the joint-stock company (SA).
2020 will witness a major change to this situation.
At the initiative of the Minister of Economic Development, in February 2019 the Council of Ministers submitted to the Sejm a government bill introducing the “simple stock company” (prosta spółka akcyjna or PSA) into the Polish legal system. The act amending the Commercial Companies Code in this respect was adopted by the Sejm and signed today by the President. It enters into force on 1 March 2020.
This is important, as according to data released by Statistics Poland (GUS), at the end of 2017 there were almost 550,000 companies and partnerships of various forms in the country, of which more than 450,000 were limited-liability companies and 12,000 were joint-stock companies. At this stage, lawmakers are deliberately not interfering in the operations of currently registered companies. Introducing new, substantially updated provisions could destabilise firms operating according to regulations that have existed for decades.
In the near future, a large portion of new companies may be founded as simple stock companies. In time, the provisions governing simple stock companies may form the basis for amendment of the Commercial Companies Code with respect to limited-liability companies and joint-stock companies as well.
What is a simple stock company?
The simple stock company is being created as a vehicle for investing in innovation and new technologies. It provides the flexibility necessary to use electronic communications and other information and communications tools at every stage of a company’s operations.
There is every indication that the simple stock company will prove to be no less suitable, and probably more suitable, than a limited-liability company for conducting business of all kinds. The only exception is large-scale activity and activity subject to industry-specific regulations. This is because the simple stock company is designed to have attributes similar to other companies, but the rules for the functioning of the company’s managing bodies are less formal, it will be easier to trade in the shares of this kind of company, and the rules on protection of creditors’ rights and use of corporate assets are substantially revised.
With all of this, the Simple Stock Company Act also clarifies rules that have caused problems of interpretation affecting the functioning of the existing forms of companies.
Trading in PSA shares
One of the main advantages of a simple stock company will be the ease of disposing of shares in the company and issuing new shares.
Shares in a simple stock company will not be in material form, and it will be possible to sell them in document form, as a condition for validity of the sale. “Document form” for legal transactions was introduced into the Polish legal system in 2016. It is the proper form for making declarations of intent using data carriers and means of communication of any kind other than declarations of intent drawn up in “written form.”
Consequently, it will be possible to sell and encumber PSA shares using declarations of intent recorded and submitted remotely using electronic communications. A share document will not need to be issued, and it will not even be necessary for the signatures by the parties to the sale transaction to be notarised, as is required in the case of disposal of shares in a limited-liability company.
In a PSA, it will also be possible to conduct new issues of shares solely using electronic communications, as the share capital could be increased based on the current articles of association without amending them, and at most document form will be stipulated for the declarations of intent by the company and the shareholders, and adoption of resolutions by managing bodies.
To keep trading secure, issues and trading in PSA shares will have to be recorded in a share ledger. The company will be required to commission a notary or licensed operator of securities accounts to maintain the share ledger. The share ledger can be maintained electronically, including in a distributed, decentralised database. The obligation to outsource the maintenance of the share ledger to a third party could be an extreme practical limitation on the functioning of a simple stock company, but it is likely that most banks will provide this service in connection with operation of the company’s bank account. If that is the case, this restriction will not be troublesome.
Disposal of PSA shares will be effective when the relevant entries are made in the share ledger.
At the same time, PSA shares will be dematerialised according to simplified rules, substantially similar to dematerialisation of shares in public companies. It will be possible to trade shares and register a shareholder’s rights online or using a blockchain.
While PSA shares will not be admitted to organised trading, there will be nothing to prevent a company from allowing online subscription for its share issues, and for offers to sell shares held by a shareholder in the company to be made in the same way, especially in situations where there is no requirement under capital market regulations to draw up a prospectus or information memorandum for a public offering.
Assets, contributions, shareholder rights, and protection of creditors
Under the act, in a simple share company there will be share capital created from shareholder contributions of PLN 1 or more. The PSA shares will not have nominal value and will not be part of the share capital. Unlike in the current types of companies, in-kind contribution of an inalienable right or labour will be permissible.
These rules will allow persons contributing nothing but information and skills to also become shareholders. This extensive freedom in establishing share privileges and personal rights in the company will mean flexibility in tailoring corporate relationships to the company’s circumstances, regardless of the nature of the company’s operations. This flexibility will be a major attribute of the simple stock company as a vehicle for any structured investments.
Shareholders will be able to withdraw share capital contributions and the entire undistributed profits without calling on creditors to submit claims. Such payouts will be impermissible only when in normal circumstances it would put the company at risk of not being able to meet its due and payable monetary obligations within six months after the payout was made. Similar protection will be achieved by a rule requiring 8% of the annual profit to be applied to increasing the company’s share capital to cover future losses, until the share capital reaches a minimum of 5% of the company’s total liabilities listed on the most recent annual financial statement.
As is currently the case with members of the management board of a limited-liability company, management board members or directors of a simple stock company will be liable for the company’s obligations if they fail to apply for bankruptcy within the required time.
Other important features of a simple stock company
It will be possible for a sole shareholder to establish a simple stock company, including through the use of a template for the articles of association on the S24 online system, once the articles of association are signed using a qualified electronic signature or trusted signature. The articles of association will have to be notarised only if the PSA is incorporated solely through in-kind contributions, but the value of the in-kind contributions will not have to be verified by an auditor.
In a PSA, a supervisory board will be optional, and the management board can be made up of one person. The articles of associations may provide for a board of executive and non-executive directors, in place of a management board and supervisory board. This means that the bodies of a simple stock company can be established in accordance with the monistic (one-tier) corporate governance model common in Anglo-Saxon legal systems as well as China, France, India, Russia, and certain other countries.
It will be possible for all of the meetings of managing bodies of the PSA to be held via electronic communications.
A simplified form of liquidation will be available, not requiring liquidation of the company’s assets and paying off its obligations, if one or more shareholders assume the company’s assets and liability for its obligations.
Is the simple stock company needed?
The rules for operation of companies in Poland need to be relaxed.
The share capital of a limited-liability company or joint-stock company, and the rules for protecting it, do not provide sufficient commercial certainty under the existing system. At the same time, they are a practical hindrance to a company’s normal operations.
The same applies to rules for issuing and trading in shares. The PSA Act offers an appropriate compromise between today’s corporate law rules and the needs of a modern economy.
It is also a good idea that the reform of the rules for operation of companies is being divided into phases linked to the introduction of the new type of company. This enables lawmakers to act more quickly while allowing time to evaluate which of the new rules should be carried over to other types of companies.
Overall, the new rules will be beneficial to everyone, as the simple stock company is more flexible than the existing corporate forms.
Krzysztof Libiszewski, attorney-at-law, M&A and Corporate practice, Wardyński & Partners