On 5 October 2023, the amendments to the Law on Formation of the Agricultural System entered into force. The changes have significant effect on the real estate transactions in Poland as well as on the acquisition of shares in companies. Here are the most important changes:
Pre-emption right with respect to share deals has been extended to include shares in parent companies
Up until recently, the Law on Formation of the Agricultural System (as amended in 2016) provided KOWR (acting on behalf of the State Treasury) with a statutory right of pre-emption in relation to the purchase of shares in a company holding an agricultural land in Poland. The pre-emption right applied even in case of a company whose business activity was unrelated to agriculture, but it owned an agricultural land. Thus, ultimately, it was the land’s status that mattered and not the company’s business. Any share deal had to take into account the right of pre-emption and the parties could only sign the conditional share sale agreement stating that the transfer of shares would take place under the condition that KOWR would not exercise its right of pre-emption. Such agreement should have been immediately submitted to KOWR, which was entitled to purchase shares under the terms and conditions laid down in the conditional share sale agreement within two months. A transaction which did not comply with KOWR’s pre-emption right (for instance the parties signed an unconditional share sale agreement) was invalid.
Under the new rules, the KOWR’s pre-emption right to purchase shares in companies holding agricultural land in Poland has been extended in such a way that it now covers not only the acquisition of shares in a company which actually holds at least 5 ha of agricultural land but also the acquisition of shares in the parent company (so in a company which has dominant position over the company with at least 5 ha of agricultural land). The procedure for a share deal will be the same as before – parties will have to sign the conditional share sale agreement under the condition that KOWR would not exercise its right of pre-emption. Only upon expiry of 2-month period, the deal can be finalized.
Changes to the definition of agricultural area
The amendment introduces a change in definition of the agricultural land to which the provisions of the Law should apply.
Up until recently, the agricultural land (within the meaning of the Law on Formation of the Agricultural System) used to be every real estate of the area exceeding 0.3 ha (say 10 ha) even if only a small part of that real estate was actually of agricultural use (say 0.1 ha). So, the acquisition of 10 ha of land fell under the provisions of the Law although only 0.1 ha was actually of agricultural use.
Under the new rules, it has been clarified that the scope of the Law does not cover such cases. The Law should be applied only in situations where - as a matter of fact - the area of agricultural use is above 0.3 ha.
Such a solution will significantly expand the list of real estates to which it will not be necessary to apply the provisions of the Law and, consequently, any limitations on disposal of agricultural land resulting therefrom.
Division and merger of companies
Up until recently, the Law on Formation of the Agricultural System provided that acquisitions of agricultural land as a result of division, transformation or merger of commercial law companies were excluded from the obligation to obtain the KOWR's consent. This regulation poses many difficulties in its correct interpretation, especially in situations where an entrepreneur or a civil partnership is transformed into a commercial law company.
Under the new rules, in case of transformation of an entrepreneur or a civil partnership into a company under the provisions of the Commercial Companies Code, the requirement to obtain a consent from KOWR will not apply. In such a situation, however, KOWR will still be able to make a statement on the acquisition of agricultural property.
Period of validity of KOWR consent
A time limit has also been introduced for the validity of consents granted by the Director General of KOWR for the acquisition of agricultural land by an entity other than an individual farmer, to which no statutory exceptions apply, and for the disposal or giving possession of agricultural land before the end of the 5-year period following its acquisition. Now such consent will be valid only for one year from the date on which the decision became final.
Sanction on invalidity
Up until recently, the Law on Formation of the Agricultural System provided that acquisitions of agricultural land made in violation of the Law were invalid, regardless of whether the acquisition took place on the basis of a legal act (e.g., an agreement) or a legal event (e.g., a court decision).
According to the new regulations, the sanction of invalidity will be limited only to cases of acquisition of agricultural land made as a result of legal acts contrary to the law. Acquisitions of agricultural land made under legal events, even if made in violation of the law, will be valid and KOWR will have no grounds to challenge their validity.
The most important change is the extension of the State Treasury’s pre-emption right which now includes also the purchase of shares in parent companies. This will have profound impact on the M&A transactions in Poland. Given the invalidity of agreements concluded in breach of the Law, investors planning to invest in Polish target companies will have to pay more attention to the transaction structure and its implementation. Any share deal in relation to a company which may, directly or indirectly, hold more than 5 ha of agricultural land in Poland will require a detailed verification of the current status and its land situation. All transactions of this type will be more complex and will require more time.