Mikołaj Kowalczyk
Mikołaj Kowalczyk
17 July 2019

A simple joint-stock company—a comprehensive study

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A simple joint-stock company—what is it, how it works, who can benefit from it and is it worth a while at all

So it happened. The Sejm passed a draft of the act amending the Code of Commercial Companies and Partnerships introducing a completely new company type to the Polish legal system—a simple joint-stock company (prosta spółka akcyjna, PSA). The core assumption of a simple joint-stock company is to response to demands of the rapidly developing startup market and various inconveniences connected with application of the existing forms of companies: a limited liability company (spółka z ograniczoną odpowiedzialnością), which is relatively simple, but has too many features of a partnership which hinder its operation in an ever-changing investment market, and a joint-stock company (spółka akcyjna), which is too complicated and expensive to run for a young enterprise. In the adopted simple joint-stock company model the Sejm paid a tribute to institutions known from transactions in the VC market (anti-dilution, or at least its certain; a model, statutory right of first refusal; facilitations in regulation of vesting) as well as solutions which are familiar to investors (foreign in the first place), as they apply in their home legal frameworks, but not until now were they present in Polish regulations.

In this article we would like to discuss this topic, at the same time carrying out an in-depth critical analysis of some aspects. Still, it is not a compendium describing this institution from A to Z, let alone a commentary on the statute. We have selected issues which may be of interest mainly to participants of the startup ecosystem—both startups themselves and investors.

What’s new in a simple joint-stock company?

SHARE CAPITAL

A basic feature which distinguishes a simple joint-stock company from other companies and joint-stock companies is lack of the initial capital. It was replaced by the share capital, which is on the one hand a similar construction as the initial capital but at the same time something completely different. Shares are not a part of the share capital (as could be concluded, looking at its name). The share capital is the company’s equity capital to which contributions paid for shares are allocated, except for provision of work or services (what will be discussed further in the article as it is one of the biggest novum introduced as part of a simple joint-stock company). Shares symbolise corporate entitlements of a shareholder in a company, but are independent from the paid contribution as they have no nominal value. The minimum amount of share capital is PLN 1—and this is the amount you need to contribute when you establish a company. Potential creditors are to be reimbursed for reduction of the deposit by mandatory payments out of generated profit and a mandatory procedure related to notification of the creditors on the share capital reduction with payments from the share capital in excess of 5% of the total liabilities.

PAYMENTS OUT OF THE SHARE CAPITAL

In a simple joint-stock company the regime of making payments to the shareholders known from other companies is a bit looser due to the possibility of not only making distributions out of profit (that is dividend), but also payments out of the share capital. With regard to dividends, generally there are no deviations against those already known company models. It looks completely different when it comes to payments out of the share capital. It is a new procedure which could be introduced only because of greater liquidity of the share capital. In order to make payment out of the share capital it is necessary to make an entry in the register, although the provisions regulating the calling up of creditors and the procedure for notifying the creditors on the share capital reduction are applied only upon payment in excess of 5% of the value of liabilities revealed in the last financial statements of the company, what is more it cannot lead to the company’s losing (in normal circumstances) its ability to pay outstanding cash liabilities within 6 months from making the payment. In the remaining scope the payment is generally unrestricted.

VOTING ENTITLEMENTS

A simple joint-stock company introduces 2 interesting changes concerning the voting entitlement attached to shares. Also the limit of 2 votes per share known from a limited liability company or a joint-stock company disappeared, so in theory 1 share may carry an unlimited number of votes, though it seems very controversial in the context of the statutory rule of equal rights of shareholders. What is more, the so-called founders shares were introduced (the name is as much misleading as they may be issued also later, after establishment of the company and awarded to shareholders other than the original founders). They incorporate their holders’ entitlements whose substance resembles the anti-dilution mechanism, which is common in the VC market—in this case it does not serve the purpose of retaining one’s share in the company’s capital though but of retaining the voting right. The mechanism works in such a manner that the beneficiaries of founders shares automatically, with each new issue, obtain as many new votes attached to existing founders shares as is needed so that a given beneficiary retain the same percentage of votes which was held before the new issue.

For instance: a company has 100 shares, including 51 founders’, which contribute to 51% of votes at a general meeting—each such share carries 1 vote. All founders shares are held by the founder. After some time, another 100 ordinary shares are issued to be acquired by a shareholder other than that founder (e.g. a new investor). As a consequence, without necessity of the company’s or shareholders’ taking any action, the founder retains the right to 51% of votes, but since the number of shares in the company increased, each of the founders shares held by the founder carries now not 1 but 2 votes.

ONE-TIER MODEL

Performing managerial and supervisory functions in a simple joint-stock company may take place either in a traditional two-tier model (management board + supervisory board) or in a one-tier model (board of directors). It is not the first time that our legal order prescribes a one-tier corporate governance model, yet so far it has been available only in a not very popular European company, the establishment of which is even more problematic than of a joint-stock company. What are its features? It assumes existence (apart from the general meeting) of one corporate body—the board of directors known from English-speaking countries, which is supposed to serve managerial and supervisory functions at the same time—in theory this makes delegation of those competences a bit more flexible than it is the case in the traditional model with the management board and supervisory board. The board of directors is composed of executive and non-executive officers, depending on the internal regulations of the company. Non-executive officers, as a rule, exercise constant supervision over company’s activity—their rights generally correspond to those granted to the supervisory board.

Why is a simple joint-stock company attractive?

SHARES FOR SERVICES AND WORK

The mechanisms described above are not the only novelties introduced by the amendment. Definitely, there are many more new solutions, even if they may seem less spectacular. The most important but apparently minor change is increase of the human factor in building up the company value—in other words, the possibility of taking up shares in consideration of services or work provided to the company. At the same time, it is the biggest deviation from the existing regulations related to companies. So far, works and services have had no contribution capacity in a limited liability company and joint-stock company, while today (in particular in the startup environment) the team is one of the most important factors deciding on the success of a project, whereby it is difficult to provide its formal estimation.

EXTENDED TERM FOR COVERING SHARES

Moreover, shares can be covered within 3 years, irrespective of the contribution type. It is again a tribute (possibly, an unaware one) paid to investors, who until now, when making investments in tranches, have had to use either risky forms of such activity (as e.g. convertible loans) or solutions which are quite problematic from the practical point of view (another capital increase). In a simple joint-stock company it is possible to pay subsequent tranches at agreed intervals as the court requires the management board to file no declaration on making contributions but only a declaration on the amount of the share capital.

There is also a possibility of excluding the pre-emptive right in the content of the company deed, without the necessity to adopt a separate resolution on that matter (which in turn requires a qualified majority of 4/5 of votes). Such provision guarantees the reliability of trade in shares, at the same time making the process itself informal (the management board does not need to issue an opinion on the justification of the exclusion). Taking into account flexibility of this solution, it should be regarded as beneficial.

SIMPLIFIED LIQUIDATION

Another novum is simplified liquidation. In the case of a simple joint-stock company, it is possible to remove the company from the register without the liquidation procedure—instead, the company’s assets and all its rights and obligations are taken over by one of the shareholders. Thus, such shareholder is in particular personally liable against company’s creditors for its liabilities. The procedure is supposed to be shorter than the traditional liquidation, although in practice its application will certainly be restricted to “dead” companies with minor liabilities or will be used as a measure to release the management board from the risk of liability for company’s debts. At the same time, the provisions are less restrictive in comparison with the “normal” liquidation—the minimum period between announcing it and dividing the assets is 3, and not 6 months (in fact, it is not determined, but 3 months is the term for creditors to submit—while the company may be removed from the register only upon satisfying or securing the creditors).

CONTINGENT SHARE ISSUE—SIMPLIFICATION FOR ESOP AND VESTING

Further, the amendment to the Act introduces a new mode of contingent share issue, which may be a very interesting solution when designing option plans or regulating vesting applicable to the founders (if an investor requests so). A contingent share issue resembles a contingent capital increase in a joint-stock company. Such issue in the new variant (apart from available subscription warrants and convertible bonds, already known from a joint-stock company) is made for the purpose of exercising rights arising for future shareholders out of agreements concluded by them with the company. The procedure for taking up the issued shares is deformalised and requires only a written declaration to be filed with the company, and then the company files a respective application with the National Court Register (KRS). Needless to say, all the foregoing requires a prior resolution of the general meeting and its consent to conclude such an agreement, but it is completely understandable and difficult to avoid. The procedure itself is quite interesting though, all the more so as the Act does not specify the form in which the agreement entitling to take up shares as part of a contingent issue should be concluded, so one may assume that even e-mail correspondence will suffice to determine mutual rights and obligations in this field.

Apart from solutions which at least at first glance, before they are developed with practice and case law, seem advantageous, the regulations applicable to a simple joint-stock company contain also some less-considered solutions.

First of all, similarly as in the case of a limited liability company, also shares of a simple joint-stock company cannot be the object of a public offer and listed on a stock exchange. For this purpose, a simple joint-stock company would have to be transformed into a joint-stock company—unfortunately, the provisions regulating transformation into a joint-stock company has not been simplified. Still, a wink in the direction of new technologies and enabling a company to keep a shareholder register in the blockchain network do not translate into practice in any manner whatsoever as trading shares within a public distributed ledger would require a thorough remodelling of legal regulations, so one would hardly deem the possibility of keeping the shareholder register in a private distributed ledger as any breakthrough. Therefore, insofar as in practice trading shares in a simple joint-stock company would be easier, it will still not be free enough.

One can also have some doubts as to the shareholder register and the mandatory dematerialisation of shares—since it is not possible to trade in shares in a simple joint-stock company in the stock exchange, their mandatory dematerialisation seems simply pointless. The shareholder list is filed with the register of entrepreneurs anyway, and as a result of creation of the register of beneficial owners all significant shareholders of the simple joint-stock company will also be included, therefore the thesis on secrecy of the shareholding which would guarantee lack of access of third persons to the shareholder register is hard to accept. As an advantage one can mention lack of dematerialisation procedure, which is typical of securities and the Act on trading in financial instruments. Shareholder registers will be kept by notaries or investment firms in the electronic form which has not been specified anyhow, what will involve certain additional costs to be incurred by the shareholders.

Below we present a brief table presenting basic differences between a joint-stock company and a simple joint-stock company

Object of regulation Limited liability company Simple joint-stock company
Management One-tier model (management board and optional supervisory board) Two-tier or one-tier model (the board of directors possible)
Minimum share capital PLN 5,000 PLN 1
Transferability of rights attached to shares Mandatory written form with a notarised signature Entry in the shareholder register is key; deformalised turnover; document form is sufficient to transfer share ownership
Shareholders’

meetings

So far it has not been possible to participate using remote communication means It is possible to participate using remote communication means
Contingent increase Impossible Possible in 3 forms (subscription warrants, convertible bonds and taking up shares on the basis of an agreement with the company)
Liquidation 6 months, at the earliest, from announcing the opening of liquidation in Monitor Sądowy i Gospodarczy 3 months, at the earliest, from announcing the opening of liquidation in Monitor Sądowy i Gospodarczy; as an alternative: possible dissolution without liquidation by the shareholder’s taking over the company’s assets
Payments to shareholders Dividend (possibly interim dividend) Possible payments out of the share capital, irrespective of payments of dividend
Transparency of shareholders Shareholders holding more than 10% of shares in the share capital are presented in the National Court Register (KRS); the list of all shareholders is submitted to the registry court The National Court Register (KRS) presents only information on the sole shareholder; the list of all shareholders is submitted to the registry court
Voting entitlements No more than 3 votes per share One share may theoretically carry an unlimited number of votes; founders shares automatically increase the number of votes attached to them in the case of a capital increase
Contributions Cash or in-kind, except for non-transferable rights and provision of work or services Provision of work or services may be contributed to the company.

 

 

Other equally significant changes introduced by the amendment

Are there any other interesting things introduced by the amendment? Not only a simple joint-stock company, but all companies under commercial law will be subject to the changes in restructuring processes (mainly transformation and mergers) introduced by the amendment.

So far, in the event of any transformation of a company, each of its shareholder could refuse to participate in the transformed company. The amendment considerably restricts this right. As a result of the changes, shareholders of the company under transformation has the right to refuse to participate in the transformed company only when such company is transformed into a partnership. What is more, such shareholder may exercise this right only by means of the “right to exit” a company, i.e. by demanding all the held shares to be repurchased. In order to do this, such shareholder has to vote “against” the resolution and demand that an objection be recorded in the minutes, similarly as in the case of challenging resolutions. Such procedure was designed to improve the pace of transformation processes. Also the procedure for adopting resolutions was improved—now, it is only necessary to adopt a resolution regarding transformation which, by virtue of law, has the effect of conclusion of a deed of a transformed company or its establishment (if the transformed company is a joint-stock company).

An interesting fact to end with—it will (at last!) be possible to move the company’s registered office abroad without the liquidation proceedings. In this scope the legislator adopted the provision to the order of the Court of Justice of the European Union in a famous case of Polbud Wykonawstwo. Still, this refer only to “migration” within the EU or EEA and, what is more, such solution must also be permitted by the law of the accepting country.

The amendment has taken no final form yet and currently is processed by the Senate—as at today Senate’s opinion has already been known—more than a dozen of amendments were submitted, still this should not affect the effective date or considerably impact the solutions discussed above. The new provisions will come into force on 1 March 2020, so if anyone is going to form a simple joint-stock company or transform into one—it is worth a while to start to consider it right now.

By: Marcin Jaraczewski and Mikołaj Kowalczyk

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