October 15, 2024

Are your company’s articles suitable for your Polish business?

Most limited companies in Poland are set up using the standard Articles of Association, which are based on the provisions of the Commercial Companies Code of 2000 and consist of the set of governance rules for a company. Many founders don’t give much thought regarding whether standard articles are appropriate for their business.
 
However, there are several reasons why standard set of Articles of Association based on the provisions of the Commercial Companies Code of 2000 might not always be suitable for new companies, or even existing ones as their business develops.
 
What are the articles?
 
Articles of Association – usually abbreviated to just “articles” – are written rules governing the operation of a limited liability company, as agreed upon by its shareholders. Articles are required for every company incorporated in Poland and must be provided and made available for public viewing at the commercial register when a company is registered.
 
What are the standard articles under Polish law?
 
Standard articles are a default set of articles regulated in the Commercial Companies Code which will apply automatically to your company in Poland from formation, unless you provide amended (bespoke) articles. For instance, according to the standard rules set out in the Commercial Companies Code, any amendments of the articles requires a shareholder resolution adopted by 2/3 majority (approx. 66%), and details of any increase of the share capital and the issue of new shares. Moreover, under the standard rules amending the scope of activity requires a 75% majority vote, in contrast to most shareholder votes (approving the financial year, paying out dividends, changes to the management board etc.) which can still be adopted via a simple majority of 50%, plus 1.
 
Standard articles usually give the following information:
 
  1. The company’s name and seat (e.g. ABC sp z o.o. with the seat in Warsaw).
  2. The company’s share capital and shareholders shares (e.g. PLN 5,000).
  3. The number of Directors in the management board and the manner of representation (1-signature or 2-signature).
  4. The matters in which the shareholders’ resolution is required (e.g. the purchase or sale of the property).
  5. The basic corporate issues in relation to accounting and book keeping.
 
Usually, no other provisions are included, which is not ideal because, depending on a situation, some companies may need bespoke solutions.
 
Why might the standard articles not be suitable for your company?
 
Although the standard articles aim to simplify things for smaller businesses, however it is an inescapable fact that some companies may benefit from alternative provisions and more flexibility in certain areas. Here are the most important issues to consider:
 
  1. Thresholds set out in the Commercial Companies Code can be modified upwards.
 
Companies with standard articles have to rely on the official thresholds (50%, 66% and 75% of votes) which not always is the best choice. These thresholds can be modified towards higher numbers and stricter rules.
For instance, the shareholders can agree that any amendments of the articles requires a shareholder resolution adopted by an 80% majority. This would give minority shareholders who holds 21% shares in the share capital a veto power, thus protecting them from being diluted.
 
Another example relates to implementing Management Board changes. Here shareholders can agree in the articles that any changes in the management board require shareholders’ resolution adopted by a 90% majority, or even 100% of the votes. This affords protection for minority shareholders and ensures that their voice will be heard.
 
  1. Pre-emption rights.
 
The Commercial Companies Code provides that, on any issue of new shares, existing shareholders have the right to take up those new shares in proportion to their existing shareholdings. These are called “pre-emption rights”.
 
The pre-emption right provides protection for existing shareholders against dilution. The shareholders are free to decide how this should be resolved. The pre-emption right can also be agreed in the articles in relation to the existing shares. The shareholders can agree in the articles that if any shareholder wants to sell his shares, the other shareholders have pre-emption right of first refusal. As such, the shareholder that wants to sell his shares to a third party can only do so if the other shareholders do not exercise their pre-emption rights.
 
  1. Share transfers.
 
There are no restrictions within the Commercial Companies Code which would prevent an existing shareholder transferring their shares to a third party. Shareholders are therefore free to sell their shares to anyone else – inside or outside the company – at whatever price they choose. If the shareholders want to keep the shareholding structure as it is, it is better to include some kind of restrictions on the sale of shares otherwise so as to avoid unnecessary misunderstandings from the outset.
 
The best option is to include some form of restrictions on share transfers in the articles (including also the situation where a shareholder who is a physical person dies). There are various ways to introduce restrictions on share transfers; it could be a shareholders’ resolution, a company’s consent, or something more sophisticated. It always requires careful thought and consideration of the position of individual shareholders.
 
  1. Dealing with the situation where a shareholder dies.
 
According to the general provisions of the Polish law, shares in a limited liability company are inherited as any other assets. So, if a shareholder who is a physical person dies and there is nothing in the articles about the inheritance of shares, the heirs of the deceased person inherit his shares and become the new shareholders. This may cause serious problems because the new shareholders may have different views than the existing shareholders. It would be better to avoid situation that the death of a shareholders leads to conflicts and misunderstandings and this is why the wording of the articles is so important.
 
The Commercial Companies Code provides that the articles may limit, or restrict, the entry of a shareholder’s heirs into the company. One popular solution in the articles is to state that the heirs of the deceased shareholder are excluded from the inheritance process while the existing shareholders have the right to purchase these shares from the heirs, or that the shares of a deceased shareholder will be redeemed by the company at the book value.
 
  1. Personal liability of Directors if the enforcement against the company is unsuccessful (art 299 of the Commercial Companies Code).
 
The Commercial Companies Code provides that Directors (i.e. members of the management board) are personally liable for the company’s debts, if the enforcement of a judgement against the company is unsuccessful. According to art 299 point 2, the Directors can free themselves from this liability if they can prove there was no fault on their side, or that they filed for bankruptcy on time. In practice, it is extremely difficult to defend such cases because the grounds for defense are so limited.
Similarly, the matter of insurance regarding Director similarly merits careful consideration.
 
How can Woźniak Legal help?
 
Taking the time to customize your articles now can save time, reduce costs, and help to avoid potential issues as your business grows and evolves. We recommend reviewing the existing articles to identify area which needs to be improved. Careful thought and consideration of the position of individual shareholders is required.

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