What’s up with the reform of limited-liability companies?

On 22 February 2013, the lower house of the Polish Parliament voted to reject a bill that would reduce the minimum statutory share capital in limited-liability companies. But changes are still necessary.

The proposal from a member of the Sejm was submitted on 27 November 2012. It reflected a liberal approach to corporate law, departing from the traditional view of share capital as providing a protective function for creditors.

The proposal called for reduction of the minimum share capital of a limited-liability company (sp. z o.o.) from the current PLN 5,000 all the way down to PLN 1. The par value of a share, or shares arising as a result of a split or sale of a fraction of a share, could not be less than one grosz (PLN 0.01). The drafters of the proposal also addressed the regulations concerning voting rights. In the case of shares of unequal par value, there would be one vote assigned to each grosz of par value (rather than each PLN 10 as under current law). The proposal did not offer more comprehensive solutions related to share capital, e.g. concerning the agenda for shareholders’ meetings or the option of informal convening of a shareholders’ meeting.

The stated purpose for introducing the proposed reduction in share capital was to make it easier to establish a company, to eliminate unnecessary barriers to doing business, to increase the availability of this corporate form for entrepreneurs, and to eliminate the fiction of the protective function of share capital.

Apart from the issue of whether the current minimum value of share capital, set at PLN 5,000, presents a true barrier to businesses, it must be agreed that for a long time share capital has not been regarded as serving a protective function or improving the situation of creditors. Contrary to the common but erroneous view, share capital does not depict the value of the available capital or indicate the solvency of the company, because it does not reflect the true value of the company’s assets at any given time. Most often, share capital is of historical significance, showing the value of the assets contributed to the company by shareholders. Because even a high amount of share capital does not prove that the company is capable of meeting its obligations, the market standard is for creditors to protect their rights by demanding additional forms of security for payment of the company’s debts, whether from third parties or directly against the company’s assets.

Given the rejection of this legislative proposal, consideration should be given to more comprehensive changes to reflect more realistically the role of share capital and other forms of equity in a limited-liability company, without ignoring the need for mechanisms to protect creditors. A proposal for such far-reaching changes, the “modernisation” of the limited-liability company, has been drafted by the Civil Law Codification Committee, and contains not only a reduction of the minimum share capital to PLN 1, but also the introduction of shares without a par value established in the articles of association, as well as a solvency test. Although these proposed solutions have met with criticism from a large part of the legal community, they are patterned on solutions already introduced in other EU member states like Finland, France, Germany and the Netherlands.

Although the changes may have been postponed, they still appear unavoidable.

Magdalena Kasiarz, Mergers & Acquisitions Practice, Wardyński & Partners