M & A code to start in new year
Mergers and acquisitions: These are two of my favorite words and favorite types of transactions. We may be hearing more about mergers and acquisitions next year when the new Commercial Companies Code (CCC) comes into effect. From the beginning of next year, merger procedures will be significantly streamlined and a number of merger-friendly provisions will become available to companies considering a merger.
One of the key changes that have been introduced is the abolition of the requirement that only companies of the same type may merge with each other. Under the CCC, corporations such as joint stock companies and limited liability companies will be allowed to merge with each other. Even a partnership may merge with a corporation. Or rather, I should say that a partnership may be merged into a corporation, as a partnership may not be either the bidding entity or the surviving entity.
The merger provisions of the CCC retain the difference between the two basic methods of mergers. The first method involves transferring the target company's property to the bidding company in exchange for shares issued by the bidding company to the shareholders of the target company. Under the second method, a new corporation is formed, all of the assets of merging entities are transferred to the new corporation, and shareholders receive shares of the new corporation. The CCC also retains some flexibility with respect to the exchange made to the existing shareholders of the merged entities. The shareholders of the entities that will not survive the merger may receive a cash payment along with the shares of the bidding company/new corporation. The total amount of these payments may not exceed 10% of the balance sheet value of shares in the bidding company/new corporation allotted to these shareholders.
The CCC also helps to clarify what happens to the administrative licenses and permits held by the merging companies. Even under current merger regulations, the surviving entity assumes upon the merger all of the rights and obligations of the merged company. The existing regulations did not specify what happened, however, to those all-important licenses and permits. The CCC clearly states that the surviving entity assumes all permits, licenses and preferential relief (such as tax breaks) that were granted or awarded to the merged company unless statutory law or the decision on granting or awarding a permit, license or preferential relief states otherwise.
Financial institutions need to note that this automatic assumption of permits and licenses does not necessarily apply to them. The CCC provides that the authority granting a license or permit to a financial institution has three weeks after receiving the merger plan (a new requirement introduced by the CCC discussed below) to object to the transfer. One of the merging companies must notify the relevant authority about the merger no later than two weeks after the merger plan has been announced. If the licensing authority objects to the transfer, the licenses, permits and preferential relief enjoyed by the merged entity may be lost. If the licensing authority does not object in three weeks, the surviving entity will not need to reapply for the same permits and licenses as it will be the beneficiary of the permits, licenses and preferential relief held by merged entity. For all that the CCC serves to clarify the effects of a merger, some uncertainty remains. With respect to financial institutions, it is not clear whether this right to object to a transfer encompasses all permits and licenses held by a financial institution or only to those that are specific to a financial institution.
The CCC introduces a new requirement that the merging entities prepare a "merger plan" prior to the merger. One exception to this rule is that a merger plan does not have to be prepared when two partnerships are merged by establishing a new joint stock company.
The CCC retains the procedural requirement that the shareholders of the corporations participating in a merger adopt resolutions approving the merger. The CCC, however, introduces new regulations concerning the required majority of votes to adopt this type of resolution. With respect to private companies, the adoption of a merger resolution requires approval by a 3/4 majority of the votes cast by persons holding shares representing at least half of the share capital of the company (quorum), unless the company's articles of association set forth stricter requirements. When it comes to public companies, a 2/3 majority of the votes cast is required to adopt a merger resolution, but the CCC does not impose a quorum requirement in this instance.
The CCC also helps to simplify the administrative details of finalizing the merger. According to the CCC, a merger takes place on the date it is recorded in the commercial register maintained by the court that has jurisdiction over the surviving entity. In closing the loop, the merged entity(ies) must be correspondingly deleted from the commercial register. The registry court that has jurisdiction over the surviving company is now required to notify the registry court that has jurisdiction over the merged entity about the merger. Further, that registry court must then delete the merged entity from the commercial register. Thanks to this provision, one of the bigger problems that had troubled mergers to date has been resolved. Up to now, the registry courts were not required to communicate with each other about this matter. In addition, the CCC clearly states that the merged entity is dissolved as of the date of the registration of the merger in the commercial register, without any need for additional liquidation procedures.
This article has been prepared by Lejb Fogelman, the managing partner of Hunton & Williams' Warsaw office, with the assistance of Beata Kostro, an associate attorney.
