Merger of Capital Companies by Acquisition

The Commercial Companies Code (CCC) regulates a number of transformations of companies in the broad sense of the word. They include mergers, divisions and transformations in the strict sense (the conversion of one company into another). Mergers of companies may take two forms (Article 492 § 1 CCC):

1. Merger by acquisition: one company acquires or absorbs the other,
2. Merger by the formation of a new company: a new company is created, which acquires or absorbs the merging companies.

Merger by acquisition is heavily restricted for partnerships, which can never be the acquiring company but may be the company being acquired. The exception is the limited joint-stock partnership, which, however, has a number of features of a capital company. It is the only partnership that may be the acquiring company.

There are several ways of merging companies by acquisition:

1. The "ordinary" merger by acquisition,
2. The "ordinary" simplified procedure (where the acquiring company holds shares representing at least 90% of the capital of the company being acquired, but not the entire capital),
3. The "special" simplified procedure (where one person holds, directly or indirectly, all the shares in both the acquiring company and the company being acquired).

Below we discuss the typical case of a merger by acquisition, that is, the "ordinary" merger by acquisition.

Merger of Capital Companies by Acquisition, Step by Step

Merger Plan

For a merger by acquisition, the companies must agree a merger plan between them in writing. Under Article 499 § 1 CCC, the plan should contain at least:

1. the legal form, business name and registered office of each of the merging companies and the method of merger and, in the case of a merger by the formation of a new company, also the legal form, business name and registered office of that company;
2. the ratio for exchanging shares in the company being acquired, or in the companies merging by the formation of a new company, for shares in the acquiring company or the newly formed company, and the amount of any cash payments, unless no such exchange takes place;
3. the rules for allotting shares in the acquiring company or the newly formed company;
4. the date from which the shares referred to in point 3 entitle their holders to participate in the profit of the acquiring company or the newly formed company;
5. the rights granted by the acquiring company or the newly formed company to shareholders and persons holding special rights in the company being acquired or in the companies merging by the formation of a new company;
6. special benefits for members of the governing bodies of the merging companies and for other persons participating in the merger, if any have been granted.

The following documents must also be attached to the plan:

1. the draft resolutions on the merger of the companies;
2. the draft amendments to the articles of association or statute of the acquiring company, or the draft articles of association or statute of the newly formed company;
3. a determination of the value of the assets of the company being acquired, or of the companies merging by the formation of a new company, as at a specified date in the month preceding the filing of the application for publication of the merger plan;
4. a statement containing information on the company's accounting position, prepared for the purposes of the merger as at the date referred to in point 3, using the same methods and the same layout as the last annual balance sheet.

No new stocktaking is needed for the statement referred to in point 4. Bear in mind that the values shown in the last balance sheet should remain unchanged. They may be changed only where this is necessary to reflect changes in the accounting records. A public company that makes half-yearly financial statements available to its shareholders is exempt from the obligation to submit such a statement.

Filing the Merger Plan With the Court

The next step is to file the merger plan with the registry court. An application for the appointment of an expert, who will examine the correctness and reliability of the merger plan, must be attached to the merger plan.

Management Board Report

The management board of each of the merging companies should prepare a written report setting out the reasons for the merger, its legal basis and its economic justification. The report must in particular contain the share exchange ratio. It is worth explaining at this point what the share exchange ratio is. The shareholders of the company being acquired will lose the shares they hold in it (because the company will cease to exist). They must therefore receive new shares from the acquiring company by way of compensation. Cash payments are also possible alongside the shares. These arrangements should be contained both in the merger plan and in the management board report, as mentioned above.

Examination of the Merger Plan by an Expert

After examining the merger plan for correctness and reliability, the expert will prepare an opinion stating whether the ratio of the shares received by the existing shareholders of the company being acquired has been properly determined. The expert should also consider the method used to determine that exchange ratio and assess whether it was appropriate to apply it.

The expert's opinion is not required where all the shareholders of each of the merging companies have consented to the merger. In that case, the management board report mentioned above is not required either.

Notifying Shareholders of the Intention to Merge With Another Company

The management boards of the merging companies should notify the shareholders twice of the intention to merge with another company, in the manner provided for convening shareholders' meetings or general meetings. The first notice should be given no later than one month before the planned date of adopting the merger resolution, and the second at least two weeks after the first notice. Shareholders have the right to inspect documents such as the merger plan, the financial statements, the draft merger resolutions, the draft amendment to the articles of association or statute of the acquiring company, the determination of the value of the assets of the company being acquired and certain other important documents.

Resolution on the Merger by Acquisition

A merger of companies requires resolutions of the shareholders' meeting or general meeting of each of the merging companies. Such a resolution is adopted by a majority of ¾ of the votes, representing at least half of the share capital. For a public company, this requirement is lowered to a majority of 2/3 of the votes. Bear in mind, however, that the statute or articles of association may provide for stricter conditions for adopting such a resolution, and this should be checked before work on the plan for transforming the company begins.

After these resolutions are adopted, the management boards of the companies should file them with the registry court having jurisdiction over the acquiring company. The court should enter a note of the resolution in the register.

The merger should then be published, on the application of the acquiring company.

Effects of a Merger by Acquisition

What does such a merger mean in practice? The company being acquired is dissolved without liquidation proceedings and its assets are taken over by the acquiring company. Initially, despite the merger, the assets of the pre-merger companies are managed separately. This is because the creditors of the pre-merger companies must be satisfied from those assets with priority. Separate management should continue until all creditors whose claims arose before the merger date, and who demanded payment in writing within 6 months of the publication of the merger, have been satisfied. After that, the assets are managed as in any other company.

Merger by Acquisition and Employees

Under Article 494 § 1 CCC, from the merger date the acquiring company assumes all the rights and obligations of the company being acquired. This is what is known as universal succession, which is a favourable solution for persons working for the company. From the merger date, all employment contracts, contracts of mandate, contracts for specific work and B2B contracts pass from the company being acquired to the acquiring company, without any need to sign annexes or to terminate these contracts and conclude them anew.

Legal Assistance With Company Transformations

Do you need help developing a strategy for transforming companies? Our Law Firm specialises in business law. We help clients prepare the documentation needed to transform companies. Please contact us and we will set out a plan of action that gives you appropriate legal protection.

The co-author of this article is trainee Paweł Kośka.