State sell-offs summized
In line with the Privatization Law (Ustawa o komercjalizacji i prywatyzacji dated August 30, 1996) the employees of the privatized entities were entitled to receive up to 15 percent of their shares free of charge. The idea was to encourage the employees to support and participate in the privatization process. However, irrespective of the good intentions the State Treasury might have had in mind, the ultimate result of the privatization might not be so spectacular. Why is that?
First, there are the employees. Normally, privatization processes ended up with the employees having an insignificant shareholding stake far below the 15 percent threshold. Consequently, the extent of any influence the employees may have on the company's operations is questionable. What is more, real money may not go with the shares owned by the employees. In the first place, as they have the minority shareholding stake, by definition it is not that appealing and finding a potential buyer may be a problem. Also, the privatized company may need more capital to grow and, thus, any profits are reinvested within the entity rather than paid out as dividends. Such a situation may lead to some sort of resentment on the side of the employees, which in turn may partially adversely translate into the company's operations.
Now, let's look at the company itself and list the drawbacks that may exist: higher operating costs; the entity may have to incur some additional costs, e.g. related to holding general shareholding meetings; slowed-down management and decision-making processes; the presence of minority shareholders may adversely affect the decision-making processes at general shareholders meetings, on supervisory boards and even management boards; increased chances of the company's confidential information being revealed; and as the minority shareholders are entitled to participate in general shareholders meetings, there is an increased risk that confidential data and information may leak to outsiders.
The solution may lie in Article 418 of the Company's Code (Kodeks spółek handlowych dated September 15, 2000), which provides for the compulsory buyout (squeeze-out) of minority shareholdings in joint stock companies. And now let's jump into technicalities.
The general shareholders meeting may adopt a resolution on the compulsory buyout of shares owned by shareholders representing no more than five percent of the share capital (minority shareholders), by no more than five shareholders whose cumulative holdings amount to no less than 95 percent of the share capital (controlling shareholders). The controlling shareholders should hold no less than five percent of the share capital each. Your lawyer would prompt you that the resolution requires a majority of 95 percent of the votes cast and that each share carries one vote, without preferences or restrictions.
How about the price of the transaction? Just to soften the potentially heated discussions between the seller and the buyer a bit, the price of the shares should be determined by an independent expert (biegły) chosen by the general meeting. Where shareholders have not chosen the expert at the same general meeting, the management board should, within one week from the general shareholders meeting date, apply to the registration court requesting appointment of an expert to appraise the shares subject to buyout. The shares should be bought out through the management board. The buyout price may also be announced at the general meeting.
At this juncture, two comments are worth making. First, an expert does not necessarily mean an auditor (biegły rewident). Not to downgrade the work of auditors, it is fair to say that normally their job is to give opinions on financial statements, while in this case the task is to determine the value of shares. Consequently, it is reasonable that professional business valuation appraisers should be involved in assignments of this nature. Secondly, despite the exact wording of the Company's Code, bearing in mind the importance of the share price for both the seller and acquirer, the price should be announced at the general meeting. It happens quite often that an adjournment is ordered and the price is announced at the same general shareholders meeting. But remember that all adjournments shall last no more than 30 days cumulatively.
The effect of the resolution on the compulsory buyout of shares must be contingent upon the buying out of shares presented for buyout by those minority shareholders whose shares have not been covered by the buyout resolution. In other words, if the resolution covered four shareholders with the cumulative shareholding of four percent of share capital and there was also one shareholder holding 0.01 percent of share capital, this one shareholder has a right to decide whether he wants to stay with the entity or not. If not, then his shares have to be bought out as well.
The provisions on compulsory buyout of shares drawn above refer to privately held companies and not to public companies. Also, it is worth adding that the regulations refer to all privately held joint-stock companies and are not restricted to the ones formerly owned by the State Treasury.
Is it fair to carry out the buyout process of the minority shareholdings? Of course, yes. The process gives the possibility for the minority shareholders to exercise an exit strategy and there are obvious benefits for the entity itself. But there is also one crucial element needed in this picture: The price of shares should be fair.
Paweł Cygański is a chartered appraiser and partner at Cann Financial Advisory
First, there are the employees. Normally, privatization processes ended up with the employees having an insignificant shareholding stake far below the 15 percent threshold. Consequently, the extent of any influence the employees may have on the company's operations is questionable. What is more, real money may not go with the shares owned by the employees. In the first place, as they have the minority shareholding stake, by definition it is not that appealing and finding a potential buyer may be a problem. Also, the privatized company may need more capital to grow and, thus, any profits are reinvested within the entity rather than paid out as dividends. Such a situation may lead to some sort of resentment on the side of the employees, which in turn may partially adversely translate into the company's operations.
Now, let's look at the company itself and list the drawbacks that may exist: higher operating costs; the entity may have to incur some additional costs, e.g. related to holding general shareholding meetings; slowed-down management and decision-making processes; the presence of minority shareholders may adversely affect the decision-making processes at general shareholders meetings, on supervisory boards and even management boards; increased chances of the company's confidential information being revealed; and as the minority shareholders are entitled to participate in general shareholders meetings, there is an increased risk that confidential data and information may leak to outsiders.
The solution may lie in Article 418 of the Company's Code (Kodeks spółek handlowych dated September 15, 2000), which provides for the compulsory buyout (squeeze-out) of minority shareholdings in joint stock companies. And now let's jump into technicalities.
The general shareholders meeting may adopt a resolution on the compulsory buyout of shares owned by shareholders representing no more than five percent of the share capital (minority shareholders), by no more than five shareholders whose cumulative holdings amount to no less than 95 percent of the share capital (controlling shareholders). The controlling shareholders should hold no less than five percent of the share capital each. Your lawyer would prompt you that the resolution requires a majority of 95 percent of the votes cast and that each share carries one vote, without preferences or restrictions.
How about the price of the transaction? Just to soften the potentially heated discussions between the seller and the buyer a bit, the price of the shares should be determined by an independent expert (biegły) chosen by the general meeting. Where shareholders have not chosen the expert at the same general meeting, the management board should, within one week from the general shareholders meeting date, apply to the registration court requesting appointment of an expert to appraise the shares subject to buyout. The shares should be bought out through the management board. The buyout price may also be announced at the general meeting.
At this juncture, two comments are worth making. First, an expert does not necessarily mean an auditor (biegły rewident). Not to downgrade the work of auditors, it is fair to say that normally their job is to give opinions on financial statements, while in this case the task is to determine the value of shares. Consequently, it is reasonable that professional business valuation appraisers should be involved in assignments of this nature. Secondly, despite the exact wording of the Company's Code, bearing in mind the importance of the share price for both the seller and acquirer, the price should be announced at the general meeting. It happens quite often that an adjournment is ordered and the price is announced at the same general shareholders meeting. But remember that all adjournments shall last no more than 30 days cumulatively.
The effect of the resolution on the compulsory buyout of shares must be contingent upon the buying out of shares presented for buyout by those minority shareholders whose shares have not been covered by the buyout resolution. In other words, if the resolution covered four shareholders with the cumulative shareholding of four percent of share capital and there was also one shareholder holding 0.01 percent of share capital, this one shareholder has a right to decide whether he wants to stay with the entity or not. If not, then his shares have to be bought out as well.
The provisions on compulsory buyout of shares drawn above refer to privately held companies and not to public companies. Also, it is worth adding that the regulations refer to all privately held joint-stock companies and are not restricted to the ones formerly owned by the State Treasury.
Is it fair to carry out the buyout process of the minority shareholdings? Of course, yes. The process gives the possibility for the minority shareholders to exercise an exit strategy and there are obvious benefits for the entity itself. But there is also one crucial element needed in this picture: The price of shares should be fair.
Paweł Cygański is a chartered appraiser and partner at Cann Financial Advisory
