Limited Liability Company (LLC) is the most popular company form in Poland and is often chosen by foreign investors to access the Polish market for several reasons, such as: low initial share capital; limited liability; flexibility and simplicity in management; no social security contributions, etc.
When foreign investors buy minority shares in an existing LLC it is always a good idea to reflect the main points of the agreements between the parties in the corporate documents. In this brief post I will list seven common problems connected with the protection of minority shareholders, offering some possible solutions.
Problem 1: Polish law provides for a very basic protection for the minority shareholders.
Solution: if you want to have a strong position you should draft properly the Article of Association and preferably conclude also a side Shareholders’ Agreement.
Problem 2: Polish law provides no requirement related to the quorum of the Shareholders’ Meeting. In other words, if the Shareholders’ Meeting is properly convened, it may deliberate and adopt valid resolutions regardless of the numbers of shareholders present.
Solution: if you want the Shareholders’ Meeting to be valid only if a certain quorum is present, this should be included in the Articles of Association.
Problem 3: Polish law provides that the Shareholders’ Meeting resolutions are generally adopted with a simple majority (50% +1). Only some strategic matters it requires a qualified majority of 2/3 or 3/4. Thus the shareholder who owns at least 50% of shares dominates the company.
There may be two solutions to this situation.
Solution A: if the minority shareholder wishes to have a true influence on the company’s life, he should introduce a qualified majority for the validity of all Shareholders’ Meeting resolutions or of some of them (e.g. related to contracts of a significant value, to employment, to investments etc.).
Solution B: the minority shareholder may also negotiate that his/her shares will enjoy preference of votes. For example, each share may entitle to 2 votes. In such a way, his/her quota will have more influence.
Problem 4: According to Polish law, the Management Board Members are appointed by a resolution of the Shareholders’ Meeting, so usually the majority shareholder decides who will manage the company.
Solution: if the minority shareholder wishes to be sure that he will have real influence of the company’s activity, he may negotiate a clause of the Article of Association giving him a personal right to nominate and revoke one (or more) members of the Management Board.
Problem 5: Under Polish law the transfer of shares in an LLC is free, so the minority shareholder risks that the majority shareholder sells all his/her shares to a third party.
Solution: minority shareholder shall negotiate restrictions to the sale of shares. Restrictions may be of different kind, covering specific shareholders needs, such as: request the consent of the company for the sale (with possible recourse to ordinary jurisdiction); right of first refusal, etc.
One last tip: it is recommendable to conclude the shareholder’s agreement in a written form with signatures certified by a public notary. It is particularly important if this agreement contains clauses such as put option, call option, priority right, as written form is necessary to enforce the transfer of shares before the court. The lifetime of the shareholders’ agreement should be at least as long as the shareholders own the shares in the company. It may, however, extend beyond the moment when a shareholder leaves the company, e.g. with regard to the non-competition clause or confidentiality clause.