Permit list grows longer with law aimed at foreign buyers
Permit list grows longer with law aimed at foreign buyers
Lejb Fogelman
Keeping up with the changes in the law sometimes requires that you act more like a detective than a lawyer. Fortunately, even donning classic Sherlock Holmes' attire allows me to wear one of my bow-ties. The legislative authorities (not only) of Poland are fond of slipping important amendments in unrelated, and usually fairly innocuous-sounding bills.
This is the case with the second of two recent changes to the "Act of June 14, 1991 on Companies with Foreign Participation." A law entitled "the Act on Changing the Act on Managing Agricultural Real Estate of the State Treasury and on Changing Certain Other Acts" (try to say that three times fast) introduced a new permit requirement that potentially affects every foreign investor in Poland.
But I get ahead of myself. As there have been two recent amendments to the act, let's take first things first. The first serves to liberalize the regime governing foreign investment in Poland. The other, as mentioned above, defines yet another situation in which a transaction involving a foreign investor requires a ministerial permit.
The first amendment, the liberalizing one, came into effect on Jan. 12, 1999, under the auspices of the new Foreign Exchange Law. As part of the revamped foreign exchange law, Articles 10, 11 and 26 of the act were repealed.
The first two provisions crossed out by the new foreign exchange law dealt with contributions to a company's share capital by foreign investors. Prior to Jan. 12, 1999, foreign investors could not freely choose the manner and source of such contributions. Both cash and in-kind contributions of foreign entities had to be made in compliance with the limitations provided for in the act. Thus, issues such as choosing the right currency, the right bank, or the right source of goods to be contributed had to be carefully considered, and only the Finance Ministry could, in some cases, waive these limitations.
Furthermore, upon registration of a company or a share capital increase in the Commercial Court, the management board of the company was obliged to file a written declaration that all share capital contributions made by foreign investors complied with Article 10 of the act. With the repeal of these restrictions, the act in its current wording does not place any special limitations on share-capital contributions made by foreign entities.
The other provision that has disappeared, Article 26 of the act, specified certain situations in which foreign entities could purchase foreign currency and transfer it abroad without a foreign exchange permit. Due to the overhauling of the foreign exchange law, this provision had lost its relevance and, thus, has been deleted. You should not, of course, read this as a complete liberalization of transferring money abroad. Many limitations still remain under the foreign exchange law; discussing them, however, exceeds the scope of this article.
The second recent amendment to the act took effect on June 15, 1999, and, as mentioned earlier, was enacted as part of a law dealing with state agricultural lands. The amendment deserves being noted for at least two reasons.
First, contrary to the general trend toward liberalizing Polish law with respect to economic activities, a new, and quite significant, restriction has been imposed. Second, a person trying to keep up with changes of the act is probably not likely to be following acts amending regulations on agricultural property of the State Treasury.
Enough commentary; let's discuss this new permit. As amended, the act requires that from June 15, 1999, a foreign entity must obtain a permit from the Treasury Minister to purchase shares in a limited liability company or stock in a joint-stock company if the company uses assets of a state-owned legal entity pursuant to an agreement that has a term of more than six months. For the purposes of this amendment, foreign entities should be understood as: natural persons domiciled abroad, legal persons having their seat abroad, companies established by such persons abroad, or Polish companies if they are "dependent" on foreign entities (this term is specifically defined in the act and refers to influence over a company, including through ownership or control of management).
What sets this new permit requirement apart from previously existing ones is its potentially broad reach. Unlike many permit requirements, the new requirement contains no thresholds relating either to the number of shares to be purchased or to the value of the relevant assets used. Similarly, no special definition of assets of a state-owned legal entity has been provided for the purposes of the new requirement. It should be assumed, therefore, that one needs to obtain a permit even for transactions that could be considered minor from a business point of view (such as the purchase of one share in a small company using insignificant assets of a state-owned legal person).
The application to obtain the permit must be filed by the company using the assets of a state-owned legal entity. Thus, the duty to initiate the procedure to obtain the permit is imposed not on the potential investor, but on the company whose shares are to be purchased.
The sanctions for failure to obtain the newly introduced permit are serious. Any legal actions undertaken in violation of the provision imposing the permit requirement are deemed null and void.
As so often happens, the recent amendments to the act are likely to leave foreign investors with mixed feelings. Although certain limitations were removed, a new restriction has recently appeared. As a result, the legal checklist of permits, approvals or necessary actions for foreign investors considering the purchase of shares in limited-liability companies or stock in joint-stock companies in Poland has become one item longer. We can only hope, as has happened with other laws, that legislative or administrative authorities will choose to narrow the potentially broad applicability of this new permit requirement.
This article was prepared by Lejb Fogelman, managing partner of Hunton & Williams Poland, with the assistance of Bartlomiej Ziebinski, an associate attorney.
