Stages of the process
An overview of mergers and acquisitions in Poland. The process, structure and parties to M&A deals, legal restrictions and tax aspects, discussed clearly and accessibly. What to bear in mind, and what details require special focus.
When approaching the legal side of an M&A transaction, management will typically already have completed the stage of taking a strategic decision to buy or sell the specific unit or set of assets.
As a model, transactions may be broken down into the following stages:
- Due diligence
- Negotiation and drafting of transaction documentation
- Closing (conclusion of the operative agreement or agreements)
- Postclosing actions.
Once a decision has been taken to conclude a specific transaction, the parties will often sign a letter of intent. This is a form of expression of the intention of entering into a contract in the future. The actual contract will be concluded only following negotiations.
A letter of intent (also referred to as a "letter of understanding," "protocol," "heads of agreement" or "memorandum of understanding") is not a concept specifically defined in Polish law, but is widely used in current market practice.
The parties sign a letter of intent in order to establish procedures for going forward with the transaction, scheduling, the goals they seek to achieve, and the conditions for negotiations toward signing of the operative agreement and any related agreements. The letter of intent will often include provisions concerning conduct of legal, tax and financial due diligence of the target prior to conclusion of the op
erative agreement, as well as provisions addressing situations in which negotiations are broken off. It may also address confidentiality issues, or these may be governed by a separate nondisclosure agreement.
The letter of intent should expressly provide that it does not impose any obligations on the parties to conclude the final agreement (but may contain other obligations, such as an obligation to maintain confidentiality, or exclusivity of negotiations), and eventual conclusion of the agreement between the parties will require negotiation of all material aspects of the deal. The letter of intent may also include binding provisions with respect to choice of law, the manner of dispute resolution, and the controlling language version of documents. The legal effect of signing a letter of intent in this form is limited to liability for the party's outofpocket costs in the case of badfaith negotiations (culpa in contrahendo).
At the preliminary stage, the parties will also typically decide whether it is necessary to enter into a framework agreement. In transactions with a complicated structure, a framework agreement will identify and organise the actions that must be undertaken as part of the transaction in order to achieve the purposes of the parties and compliance with legal requirements. It thus serves as a roadmap for the transaction.
The stage of legal analysis of the target, commonly referred to in Polish by its English name "due diligence", derives from the AngloSaxon common law tradition and the ancient principle of caveat emptor. As the buyer proceeds at its own risk, the buyer should examine the target "with due diligence" before deciding to acquire it.
In Poland, due diligence is typically conducted by the buyer in order to assess the degree of risk associated with the planned acquisition and to determine the value of the assets, enterprise, organised part of an enterprise, or shares being acquired.
But increasingly often, the seller itself prepares a due diligence report (known as a "vendor's due diligence report"), which is then typically verified during due diligence by the buyer.
The subject of due diligence will vary depending on whether the transaction involves the sale of shares (a share deal).
In the case of a share deal, analysis of the target's corporate documents is critical, but the company's enterprise is also examined. Because the transaction involves the shares (rather than the enterprise as such or its assets), it is necessary to:
- First, confirm the existence of the shares and determine the rights attached to the shares
- Second, verify that the seller owns the shares and whether there are any encumbrances on the shares or restrictions on selling them.
In either of the main types of transaction, the scope of due diligence typically includes, in addition to corporate matters, an analysis of documents concerning:
- Real estate (land, buildings and other structures)
- Movables and encumbrances established for the company or on the company's assets
- Rights to intangible assets
- Financial matters
- Employment matters
- Environmental issues
- Judicial and nonjudicial proceedings and the status of receivables and other claims
- Shares and other securities owned by the company
- Fundamental operations of the company (e.g. contracts with suppliers and customers, administrative contracts and the like)
- Competition issues
- Regulatory matters (licences, permits, other administrative issues, and the like).
Negotiation and drafting of transaction documentation
After gaining information about the target, the parties begin negotiations toward a mutually satisfactory price (or mechanism for calculating the price) and transaction structure (i.e. the terms under which ownership of the target will pass to the buyer).
A frequently encountered model is to sign an undertaking or conditional agreement which defines the conditions that must be fulfilled before signing of the final agreement transferring ownership of the target to the buyer or direct passage of the target to the buyer. In practice the parties often decide to sign a preliminary agreement. If it meets the requirements for the validity of the final agreement (for example, in the case of a share sale agreement, if it is made in writing with notarised signatures), and one party refuses to conclude the final agreement, the other party can enforce conclusion of the final agreement through the courts.
Conditions may include, for example, obtaining permission for a concentration or for acquisition of real estate by a foreigner, or failure to exercise a right of preemption by an authorised authority in the case of agricultural and forest land. Other conditions may arise under the business terms agreed between the parties, e.g. prior restructuring of employment or financing of the business.
Depending on the nature of the agreement signed before (e.g. preliminary, conditional or promissory agreement, final agreement subject to a condition, or the like), the transaction is carried out by the parties signing the operative agreement, in the form required by law, together with enclosures (e.g. list of documents disclosed to the acquirer during due diligence, price adjustment mechanisms, entities subject to noncompetition) and any related documents under which the title to the target is finally transferred to the buyer (referred to as "closing" or "completion"). Often this will be accompanied by conclusion of an agreements governing the future cooperation of the parties, e.g. a shareholders' agreement (typically in the case of a joint venture or agreements specifying the terms for dividing the operations. It may also be necessary to prepare documents connected with the changeover in management or laying down the rules for continuing cooperation with the existing management or key employees.
If it is a deal involving shares in a jointstock company, it will also be necessary to transfer possession of the share certificates (in the case of registered shares) or deliver share certificates to the buyer (in the case of bearer shares).
After the closing the buyer is required to pay taxes due and to file the relevant declarations with the tax authorities. The share ledger must be updated, as well as public registers affected by the transaction such as the National Court Register, the land and mortgage register, etc.
After the closing, the buyer may conduct followup due diligence, particularly if at the time of the original due diligence, prior to the transaction, certain confidential items were not disclosed.
Sometimes the mechanism for calculation and payment of the price provides for an adjustment, depending on certain events or results achieved by the target after the closing. Then the operative agreement transferring title to the target will define how the parties are required to cooperate and report on the financial results. This also determines how the transaction will impact the operations of the target and how the parties will make their final settlement.
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