Handlowy deal moves from votes to courts
The proposed merger of Bank Handlowy and BRE Bank moved late last week from the conference room to the court room as a dissident shareholder vowed to fight approval of the banking combination.
While continuing the merger battle, the court case is also likely to highlight shortcomings in the securities law and give further impetus for the government to speed consideration of legislative amendments, lawyers said.
It also will call into question government policy in regard to its role as a shareholder in various companies.
"Overall, it only shows that there is a lack of consistency in Polish economic policy and that the law has a lot of loopholes," said Marek Szydlowski, a securities lawyer with Cameron McKenna. "But the whole situation is surreal."
On Friday, insurer Powszechny Zaklad Ubezpieczen (PZU) filed a legal challenge to have declared invalid the previous day's approval of the merger by Handlowy shareholders. It is arguing that a decision by shareholders to reduce the voting rights of it, the Treasury Ministry and certain related entities ran afoul of the civil code and the company act. Taken separately, the ministry, PZU and 10 other shareholders opposed to the deal held 27.3%, which would have been enough to block the merger.
"We've already submitted a legal challenge to Warsaw Circuit Court to make all the decisions made by the shareholders meeting invalid," said Adam Taukert, PZU's spokesman. "At the same time, we applied to suspend execution of all the decisions."
A decision on the motion is not expected for several weeks.
The merger, which would create the third largest bank with zl. 29 billion ($6.9 billion) in total assets, has been fiercely opposed by PZU and the ministry. They and other shareholders believed the share swap ratio of one BRE share for 2.4 Handlowy shares was unfavorable to the latter's shareholders. They favored a 1-1.7 ratio.
Handlowy shareholders approved the merger Thursday with 77.9% of votes, just slightly above the 75% needed. BRE approved the deal by a large majority.
Handlowy provided opinions from six independent lawyers to back its decision to treat PZU, the ministry and certain related shareholders as one. Ultimately, the courts will have to decide the issue, but even they might find it difficult.
Lawyers said this was because Polish securities law does not adequately deal with the issues of companies acting in concert, the role of the Treasury Ministry in regard to companies it controls and the parking of shares to conceal ownership.
The key to the conflict was the decision to treat the ministry, PZU and its subsidiary life insurer PZU Zycie as one entity. By doing so, Handlowy reduced the three groups' voting power from 11.84% to 5%. The proposal to do so was made by a group of U.S. shareholders led by investment bank J.P. Morgan.
PZU argued that there was no legal basis for amalgamating the entities into one capital group.
"What happened during the shareholders meeting had no precedent in Polish practice," Taukert said.
But some lawyers disagreed.
"I have no doubt that the state treasury should be treated as a dominant entity" in regard to PZU, said Grzegorz Domanski, a securities lawyer and a partner with Domanski, Szubielska i Wspolnicy. The ministry owns 70% of the insurer.
Domanski added that in previous cases the ministry had acted as a dominant entity, so there is no reason why it should not be in the Handlowy-BRE merger.
"When the state treasury transferred Handlowy's convertible bonds to PZU without asking the Securities (and Exchange) Commission for a permit, it used the argument of its ownership in PZU," Domanski said.
He also noted that prospectuses for all 15 National Investment Funds (NIFs) clearly state that the ministry is a dominant entity.
Part of the confusion as to how to treat the ministry may also be due to the fact that this is one of the first times that the ministry has behaved as an active, rather than passive, shareholder, Szydlowski said.
While limiting the votes of the insurers and the ministry, Handlowy shareholders also curtailed to 5% from 7.61% the voting rights of two Portugese investment funds owned by Banco Comercial Portugues (BCP).
This move brought up uncertainty in relation to the lack of rules governing companies acting in concert and the parking of shares.
"This is very unfortunate, but Polish securities law allows such practices," Szydlowski said.
At the beginning of November, PZU sold 7.61% of its Handlowy shares to the two Portugese funds, Ocidental Vida-Companhia Portuguesa De Seguros De Vida and Preamium-Sociedae Gestora Fundos Pensoes. The funds then voted with PZU. Lawyers said this was a classic case of a company parking shares and then the funds acting in concert.
In other countries such practices are forbidden or the shareholders must reveal the fact that they are related and they are then treated as one capital group, Szydlowski said.
"This is necessary for the transparency of the shareholders structure," Szydlowski said.
While the courts wrestle with such issues, amendments to the securities law to regulate such activities are the subject of inter-ministerial discussions.
