New rules of control of certain transactions involving entities outside the EU and its potential impact on M&A transactions

Basic mechanism to review transactions provided for in Shield 4.0.

The basic premise of the changes in the Act is to establish a mechanism to review transactions, corporate changes and other activities under which an entrepreneur from outside the EU would acquire control or dominance over an entrepreneur based in Poland. Shield 4.0 provides for the requirement to notify of the intention to conduct a transaction to the President of the Office of Competition and Consumer Protection (UOKiK) and proposes high sanctions for failure to make such a notification. 

The introduced restrictions are intended to be temporary. Special control powers are planned to be granted to the President of UOKiK for 24 months. In addition, the new rules are to apply to transactions that will be performed 30 days after the new regulations enter into force. This means that in some situations, new regulations may delay transaction processes initiated before the regulations entered into force (e.g. transactions awaiting the approval of the President of UOKiK).

Who is to be obliged to make the notification?

The obligation to notify will cover transactions carried out by an entity which:

(i) does not have the citizenship of an EU Member State - if the transferee is a natural person, and

(ii) has not had its registered office in an EU Member State for at least 2 years from the date of the preceding notification - if the transferee is an entity other than a natural person, and

(iii) an entity that may have its registered office in EU Member State, but is a subsidiary or branch of an entity whose registered office is located outside an EU Member State.

The draft act also imposes an obligation to make a notification on entities acting on behalf of the obliged entity in the case of transactions carried out indirectly. 

This means that the potential circle of entities covered by the new obligation can be very wide.

What categories of entities are to be subject to investment control?

Investment control within the meaning of the new regulation is to cover transactions involving, among others, the following categories of entrepreneurs based in the territory of the Republic of Poland: 

• public companies,
• entrepreneurs who own property that is part of the critical infrastructure within the meaning of the Act of 26 April 2007 on crisis management, 
• entrepreneurs developing or modifying software used in specific types of activities and industries,
• entrepreneurs operating in the field of energy generation or distribution, production, transport, processing, distribution and storage of fuels, crude oil, natural gas, production of chemicals, fertilizers and chemical, products related to the military or police industry, shipment of goods in key seaports and inland ports, telecommunications services, rhenium production, mining and processing of ores used in the military and police industries, activities in the medical devices, medicines, pharmaceutical and food processing industries.

The above entities will be subject to investment control if their turnover in at least one of the two preceding financial years exceeded the equivalent of EUR 10,000,000.

What types of transactions are covered by the new rules?

The obligation to notify under the Act covers transactions that involve or create the intention to:

(i) acquire or achieve significant participation,

(ii) acquire dominance.

The significant participation consists in having at least 20% of: 

• the total number of votes vested in the shares or stocks taken up, 
• the value of all contributions for equity in a partnership, 
• share in the profit of another entity. 

On the other hand, dominance status is understood as the possibility of direct or indirect possession of a majority of votes, appointing the majority of members of bodies, personal union of members of bodies or majority in the capital participation of a partnership. 

Each of the above forms can be achieved both actively (through the acquisition of shares, rights, conclusion of contracts, personal rights, increasing capital or other forms of transaction activities), and passively, by increasing the share without active action (e.g. through redemption of shares, division of the entity, acquisition of own shares, amendments to the statute). 

The Act also provides for a broad catalogue of indirect forms of acquiring significant participation or dominance status.

When, to whom and how to report a transaction?

Notification of a planned transaction is submitted to the President of UOKiK before performing any action that will result in a relationship of control or dominance over a given entity. 

In the case of passive forms of acquiring control or dominance, the notification shall be submitted before the rights resulting in a control or dominance relationship are exercised. 

Importantly, the said notification does not affect the obligation to notify the concentration to the President of UOKiK on the basis of the provisions of the Act on competition and consumer protection. It is therefore likely that some proceedings covered by the Act will be subject to a double regime of notification to the President of UOKiK.

Decisions and sanctions

Within 30 business days of initiating preliminary control proceedings, the President of UOKiK may issue: 

• a decision to refuse initiating control proceedings and not to object the transaction, 
• a decision to initiate control proceedings, if there are premises for further investigation from the point of view of public security or public order. 

In the second case indicated, if during the proceedings the President of UOKiK recognizes the existence of at least a potential threat to public order, public security or public health, the President of UOKiK may object the transaction. It is also possible to issue a decision authorizing the exercise of voting rights with no more than 10% of votes in the acquired entity if the President of UOKIK initiates proceedings ex officio because on the suspicion that the transaction will involve abuse or circumvention of the law or will avoid the initiation of the proceedings. The President of UOKiK has 120 days to issue a decision after issuing the decision referred to above.

If the President of UOKiK issues a decision to object or carry out the transaction without submitting a notification, the transaction will be invalid and the voting rights granted may not be exercised. 

A fine up to PLN 50,000,000 or imprisonment from 6 months to 5 years or both may be imposed for performing the transaction without submitting a notification.

The Act also sanctions the actions of persons, bodies and persons handling affairs or exercising voting rights on behalf of an entity, which has not filed a notification and provides for a fine of up to PLN 5,000,000 or imprisonment from 6 months to 5 years or both. 

The changes introduced, depending on whether and ultimately in what shape they will be introduced by the legislator, may have a significant impact on M&A transactions with the participation of foreign entities as buyers, in particular on timing of their implementation. 

Due to the very broad and not entirely precise catalogue of entities that are to be covered by investment control, determining which exact entities are protected may constitute material difficulty. In addition, given the wide scope of the proposed provisions, a number of transactions which were not subject to the obligation to notify the intention of concentration to UOKiK until now, in a new reality will be subject to the obligation to notify this authority. However, this assessment will not be related to the assessment of market competitiveness.

In addition, the President of UOKiK will be able to object such transaction. Therefore, it will be very important, especially due to the sanctions set out in the draft provisions, to thoroughly check the scope of activities of the acquired entities, including side activities, often irrelevant from the point of view of generating income, performed only "on the occasion" of the basic business activity, in order to check that they do not fall within the scope of the activities subject to restrictions.