Privatization primer: Steps in selling a state-owned company
For many years now, as part and parcel of the overall process of reforming the economy, various industry sectors have been in the process of being privatized. Numerous state-owned companies, large and small, have already been privatized or are quite close to it. Others still wait in line, some impatiently and some rather fearfully, for new investors.
While privatization is almost a household term, most of us see or hear it only when the press reports on some investor who has purchased a large packet of shares and now intends to spend millions of dollars modernizing a company. The good (or bad, depending on one's perspective) news is preceded by an onerous, lengthy and often turbulent procedure, the details of which remain rather remote from common knowledge. Without delving into all the complexities, I would like to propose a walk down the major paths of the privatization process.
Typically, a company is privatized either through a sale of its shares owned by the state treasury or through a sell-off of its assets. The first method has been the one most commonly employed, particularly with respect to larger companies that have the potential of attracting major foreign or domestic investors.
Shares in a state-owned company may be sold in a number of different ways, including by a public offer, a public tender, or negotiations pursuant to a public invitation. This time, it is the third method that is used most often, and this is the method on which I will concentrate.
The commencement of a privatization is usually signaled by press announcements. First, the treasury minister announces an invitation to submit offers to provide advisory services to the state treasury in connection with the privatization of a particular company. Later, the minister publishes another announcement, usually both in Polish and English and in a Polish newspaper and a foreign one (e.g. The Financial Times). The announcement contains an invitation to investors to submit initial offers to purchase shares of a particular company (usually worded as: "not less than x number of shares, constituting at least y% of the company's share capital") and commence negotiations.
The invitation announcement will also state that potential investors upon presentation of certain corporate documents and signing a confidentiality agreement may obtain the "Information Memorandum." This memorandum is prepared by the advisers to the state treasury (selected pursuant to the first announcement) and contains basic legal and financial information on the company being privatized.
By the deadline specified in the invitation announcement, each potential investor should submit to the Treasury Ministry an initial, non-binding offer to purchase shares in the company. The offers should contain certain basic information on the investor, its plans with respect to the company and initial price for shares offered.
Following a review of the initial offers, the minister usually selects two to four investors to participate in further stages of the privatization. Occasionally, the shortlist may actually be longer. For example, in a recent energy company privatization as many as eight investors were invited to participate in further stages.
The lucky investors named on the initial shortlist are permitted to conduct a due diligence review of the company. Each investor has an opportunity to conduct the review in the same data room at the company's premises, with equal amounts of time assigned to each investor. The availability of documents in data rooms is quite formalized, in an attempt to assure that each investor has access to the same information.
Following the due diligence, the short-listed potential investors (provided, of course, that they are still interested in the company) should submit to the minister binding offers specifying, among others, the number of shares to be purchased and the price offered.
Upon review of these offers, the minister comes up with a yet shorter list of potential investors. This is when actual negotiations of the share purchase agreement commence. Depending on the circumstances, negotiations with the company's trade unions relating to the investor's employment commitments may also start at this point. While the minister has the option of conducting parallel negotiations with several investors, eventually, one investor is selected to participate in exclusive negotiations. The negotiations are often turbulent and can last for significant periods of time.
Permits! As the prospects of purchasing shares of the company begin to crystallize, the investors (and their lawyers, of course) will be busy trying to obtain all of the regulatory consents and permits required. At a minimum, a potential foreign investor will likely need to contact the Office for Competition and Consumer Protection (UOKiK), the interior minister, and the treasury minister.
Finally, after negotiations have ended with handshakes and champagne, the state treasury and our lucky investor sign the share purchase agreement. In addition to provisions dealing with the purchase of shares, the agreement will also govern numerous other issues, such as the investor's employment and investment commitments and its specific rights to appoint representatives to the company's governing authorities. The employment commitments are often also contained in a separate agreement with employee trade unions. These commitments usually include a guarantee of employment levels for a specified period of time, guarantees relating to the levels of wages and periodic salary increases, and additional employee benefits (e.g. medical care, training).
Once all of these steps, together with a multitude of intermediary ones, are duly completed, we will read or hear once again that another investor has purchased a large bulk of shares and now intends to spend millions of dollars on modernizing a company. With so many state-owned companies still waiting in line for a new owner, you should not allow the fear of the unknown privatization process keep your firm from being that next company announced as the happy investor.
This article has been prepared by Lejb Fogelman, the managing partner of Hunton & Williams' Warsaw office, with the assistance of Bartlomiej Ziebinsk, an associate attorney.
