Despite the Ukraine war and the impact of COVID-19 on the M&A market, the high volume of cross border M&A transactions in Poland continues apace as both buyers and sellers seek out attractive acquisition opportunities on a global basis.
Many business-owners in Poland have been waiting for a good moment to sell their businesses and now it seems that this moment has come. The Polish owners want to capitalize on the years of hard work that have gone into building up their businesses throughout the last 30 years. Poland has been constantly progressing ever since the fall of the communist regime in 1989. The country has successfully managed to catch up with other competitive countries in the EU. There is no doubt about it - Poland is an economic success story. Many Polish small and medium enterprises have grown significantly during the last 30 year and now they decide to sell their businesses.
There are many ways of managing a sale process. The most common approach is signing the letter of intent, carrying out the due diligence analysis and signing the sale and purchase agreement (SPA
Typically, the SPA will be governed by the Polish law because it refers to the transfer of legal title to the Polish shares and it needs to comply with the Polish law requirements. There will be different set of formal requirements when we deal with the shares of the joint stock company and different set of formal requirements when we deal with the shares of a private limited company. In both cases, the Polish lawyers should be involved to make sure that the purchase has been done successfully.
The SPA should set out the definitive terms of the purchase and should include all the protections sought by the buyer to safeguard its investment. The SPA will include the following:
- A. The price and all payment terms – where the deal includes an earn-out element, the SPA will also include the formula for arriving at earn-out payment – usually a multiple based on average profits over three to five year period. The definition of profits for these purposes will usually be very detailed and will include numerous adjustments to the reported figures in the statutory accounts.
- B. Any price adjustment mechanisms agreed – buyers typically require the business to be left with sufficient working capital in order to be self-funding when they take the business over. As the level of working capital will fluctuate on a daily basis, it is quite common for the SPA to provide for accounts to be drawn up after completion based on the position as at the completion date (known as completion accounts) and for the price to be adjusted retrospectively, depending on whether the working capital shown in the completions accounts is above or below a pre-agreed target figure.
- C. Warranties and indemnities – warranties are a series of statements by the sellers about the condition of the business at the date of sale. If these turn out to be untrue, the buyer has a means of redress by way of a claim for breach of warranty. These will cover everything from the accuracy of the accounts used by the buyer to value the business to the absence of disputes with staff and relationships with customers.
- Because the warranties are, so extensive it is often the case that they will not be all true. This does not mean that the warranties cannot be given, just that the seller must make disclosures, so that the buyer is aware of the true position before completion. Before the SPA is signed, the seller should prepare a list of all the areas where the warranties do not accurately describe the business in a letter known as the disclosure letter. This is delivered to the buyer on signing of the SPA. To the extent of the disclosures, the buyer will not be able to claim breach of warranty. The more comprehensive the disclosures are, the less risk there will be of the buyer making a warranty claim after the deal has been completed.
- An indemnity is an undertaking by the seller that it will meet a specific potential liability which has been identified by the buyer and which the buyer is particularly concerned about.
- A buyer and sellers may wish to add other deal documents such as loan notes or shareholders’ agreement if the sale is proceeding by way of a partial sale so that for a period of time both the sellers and the buyer will be shareholders in the company.
- The SPA should be governed by the Polish law. It is recommended that the parties agree the arbitration clause to be contained in the SPA. It is better for both parties to use arbitration as the preferred dispute resolution method because the state courts in Poland are not familiar with M&A process.
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