Planning an M&A deal in Poland? Check the new Covid-19 regulation on FDI control first

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Jakub Jedrzejak
WKB, Warsaw
Jakub.Jedrzejak@wkb.com.pl

Anna Wyrzykowska
WKB, Warsaw
anna.wyrzykowska@wkb.pl

The Covid-19 pandemic is negatively impacting the global economy, including the Polish market. The question which needs to be answered now is not whether the pandemic will affect the mergers and acquisitions market in Poland, but to what extent and for how long these negative consequences will influence the health of businesses, their ability to continue ongoing transactions and investments, and their ability to carry out new ones.

The consequences of the pandemic are already visible at every stage of currently conducted transactions. The M&A market is likely to look very different in the coming months compared to what we are all used to. This is not only a consequence of the global crisis having significant impact on the economy and the investment market, but also due to new regulations on foreign direct investment (FDI) control being adopted worldwide, including in Poland.

The Polish Parliament has just adopted another ‘anti-crisis’ regulation. The new so-called Anti-Crisis Shield 4.0 includes, among others, provisions significantly extending the Government’s control over M&A transactions in some strategic sectors.^[1] These provisions come into force on 24 July 2020 and will be valid for 24 months (until 24 July 2022). As explained by government representatives, the provisions have been prepared to protect Polish industry against ‘hostile takeovers’ from outside the European Union (EU), European Economic Area (EEA) or the Organization for Economic Co-operation and Development (OECD).

The list of sectors covered by the above-mentioned regulations (protected entities) is relatively broad and includes, among others:

• entities which hold assets listed as ‘critical infrastructure’;

• entities in the information technology sector (software developers dedicated to certain specified sectors);

• entities involved in electricity generation (conventional and renewables);

• entities involved in energy transmission and storage, or generation and distribution of fuel, gas and heat;

• telecommunications companies;

• entities in the medical and pharmaceutical industry (manufacturing of medical devices, pharmaceuticals, etc.);

• some sectors of the food production industry; and

• all publicly listed companies.

Any transaction which may lead to the acquisition of dominant control of a ‘significant participation’ (which means reaching or crossing the 20 per cent or 40 per cent shareholding threshold) by a non-EU entity, non–EEA entity or non-OECD member country entity will require prior notification to the President of Office of Competition and Consumer Protection (UOKiK).

The President of UOKiK may object to the transaction if the applicant does not provide all the required information or if there is even a potential threat to public policy, public security and/or public health. Additionally, an objection may be issued if it is impossible to determine if an EU-based, EEA-based or OECD member-based entity acquiring control or significant participation has fulfilled these conditions within the previous two years at least. The assessment will therefore be performed based on very vague perquisites. As a consequence, the powers of the President of the UOKiK seems quite broad.

Only transactions regarding targets with an annual turnover exceeding €10m in either of the two previous financial years are subject to notification. It is already unclear, however, whether intragroup turnover will be excluded (as in a regular competition clearance processes) or included (therefore enlarging the scope of the control).

The law covers direct acquisition of shares, asset deals and any other type of direct or indirect control acquisitions (eg, mergers, demergers, amendments to articles of association, redemptions of shares or indirect acquisitions of controlling entities).

It needs to be underlined that only transactions undertaken by non-EU, non–EEA or non-OECD member country entities are subject to control. However, the new law is ambiguous. It is not certain whether a transaction in which the purchasing entity is based in the EU, but which is ultimately controlled by persons/entities from a non-EU state, would be obliged to seek clearance (in respect of the indirect acquisition by a non-EU entity).

The Act clearly stipulates that clearance will be required if an acquisition performed by an EU-based entity is intended to evade the law (eg, if an EU-based entity does not carry out its own activity, other than with respect to the acquisition of the interest in question – the question remains whether holding entities with multiple investments will be captured by these provisions or not) or if it does not possess a permanent enterprise (the notion of ‘permanence’ has not been defined), office or personnel in the territory of an EU Member State).

Therefore, in the case of a transaction undertaken by an EU-based entity which fulfills the above criteria, has a permanent enterprise, an office and personnel, it is questionable whether such an investment will be excluded from the application of the Act, or whether a notification requirement will exist in any case if such a ‘reliable’ EU-based entity is controlled by an entity from a third state.

In principle, a transaction must be notified to UOKiK prior to its completion. Unfortunately, the legislation is also imprecise in this regard, since in other sections it imposes an obligation to notify prior to the conclusion of ‘any agreement creating an obligation to acquire’. In relation to public companies, the abovementioned obligations would require notification prior to the announcement of a public tender offer, which may indicate that it is impermissible to announce a public tender offer.

Approval of a transaction or confirmation that it is not subject to control will be given within 30 business days. Cases requiring review from the public order perspective will be completed within 120 calendar days. The clock stops any time the President of the UOKiK seeks additional information. The second phase is explained as being similar to the second phase proceedings based on the Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (the EC Merger Regulation).

Any acquisition made without notification shall be invalid. Moreover, the law assumes both financial (up to PLN 50m) and penal (up to five years’ imprisonment) responsibility for non-compliance with the regulations. The penalties may be imposed both on the entity acquiring the interest without notification as well as natural persons acting on its behalf.

The legislation includes an option allowing for the government to adopt a specific regulation based on which some groups of companies could be exempt from the obligation to notify, depending on the factual effects of the pandemics.

The new regulation is generally in line with the broader trend of protecting national economies during the economic crisis caused by the pandemic. Similar laws are being adopted in France, Germany, Italy and Spain. However, the solutions adopted by the Polish legislator seem somewhat controversial considering their potential practical application. The competent authority will be vested with far-reaching powers, allowing it to block transactions in many sectors of economy based on criteria which are not entirely clear. This could discourage investors from carrying out acquisitions in Poland.

The new Act will have a significant impact on M&A transactions in Poland as it applies across a number of sectors of the economy and establishes a low materiality threshold (though, notably, the same as for merger clearance in Poland). It seems that the last-minute carve out from the regulation with respect to EU and EEA countries, but also to OECD member states, will substantially limit the impact of Polish FDI law in reality. Time will tell if the adopted measures will save the Polish economy against hostile takeovers or will disable the opportunities for the Polish companies to obtain capital injections needed in almost every enterprise in the post-Covid era, including those in strategic sectors.