Merger by acquisition – what is the procedure?

Which companies may take part in a merger by acquisition?

In accordance with the basic principle governing mergers, limited companies may merge with one another and with partnerships. However, a partnership, with the exception of a limited joint-stock partnership (i.e. a general partnership, a professional partnership or a limited partnership), cannot be the acquiring company or a newly formed company. A common example is the acquisition by a limited liability company of a limited partnership that is a partner in that limited liability company.

Partnerships may merge with one another only by forming a capital company (limited liability company, public limited company, simple public limited company) or a limited joint-stock partnership, or through acquisition by a limited joint-stock partnership. Furthermore, more than two companies may participate in a merger, which means that the acquiring company may take over more than one company.

It should also be noted that a company in liquidation which has commenced the division of its assets, or a company in bankruptcy, regardless of its legal form, may not merge.

Purpose and effect of a merger by acquisition

The successful completion of a merger by acquisition results in the assets of the acquired company being transferred to the acquiring company by universal succession. As a general rule, the acquiring company assumes all the rights and obligations of the acquired company, whilst the shareholders of the acquired company become shareholders of the acquiring company, receiving its shares. A merger by acquisition takes effect upon registration of the merger in the Register of Entrepreneurs of the National Court Register. As a result of the acquisition, the acquired company ceases to exist as a legal entity – it is dissolved without the need for liquidation proceedings on the date of its removal from the National Court Register.

Merger by acquisition

The merger of companies by acquisition is a complex and time-consuming process requiring the preparation of a range of corporate and financial documents in accordance with a schedule and in the correct order. This process is generally divided into three stages:

1. the managerial stage – i.e. the preparatory phase
2. the shareholder stage
3. the registration stage – registration of the merger and announcement of the merger

However, before the management bodies proceed to prepare all the transaction documentation, it is advisable for them to carry out a legal review of the company or companies being acquired, i.e. a due diligence review.

What is due diligence?

Due diligence is a legal review of a company involving an analysis of its documentation subject to the review – corporate, financial, tax and other documents, depending on the nature of the business. The review covers contracts entered into by the company, contract templates, regulations and procedures in place within the company – for example, personal data protection procedures, compliance with labour law, and the fact of conducting or participating in legal proceedings. The review may cover all documentation or a specific scope of activity of interest to the auditor. A detailed, separate audit often concerns the company’s tax affairs.

The purpose of a due diligence review is to identify and assess the risks associated with the investment, determine the ownership structure, costs, market position and revenues, thereby enabling a reliable valuation of the company for a potential investor. Due diligence is carried out not only in the case of mergers, but also in all other situations where a transaction involving the company’s assets is planned, e.g. as part of the sale of its shares, rights or an organised part of the business.

Procedure for the merger of companies by acquisition

Following an analysis of the company’s legal status, the management phase involves taking the most important decisions regarding the merger, in particular the agreement by the governing bodies (management board, general partners or shareholders) on the merger plan, which is the most significant document setting out the main principles of the merger. Importantly, depending on the legal form of the companies involved in the merger, different provisions of the Commercial Companies Code will apply; however, the main principles of the merger remain the same.

The merger plan should include at least:

• the legal form, name and registered office of each of the merging companies, and the method of merger;
• the exchange ratio of the shares of the acquired company for shares of the acquiring company and the amount of any cash top-ups, unless no such exchange takes place;
• the rules governing the allocation of shares in the acquiring company;
• the date from which the shares referred to above entitle the holders to participate in the profits of the acquiring company;
• the rights granted by the acquiring company to the members and persons with special rights in the acquired company;
• any special benefits for members of the governing bodies of the merging companies, as well as other persons involved in the merger, if such benefits have been granted.

The merger plan shall also be accompanied by:

• draft resolutions of all the merging companies regarding their merger;
• draft amendments to the articles of association or statutes of the acquiring company;
• a valuation of the assets of the acquired company as at a specified date in the month preceding the submission of the application for the announcement of the merger plan (in practice, this means that if, for example, we plan to announce the merger plan in July, financial statements must be prepared for the acquired company as at a specified date in June);
• a statement containing information on the company’s financial position prepared for the purposes of the merger as at the date referred to above, using the same methods and in the same format as the latest annual balance sheet.

The agreed merger plan should be announced no later than one month before the date of the shareholders’ meeting or general meeting at which the resolution on the merger is to be adopted. The merger plan must also be filed with the competent registry court for the merging companies. As a general rule, the merger plan should be examined by an expert for correctness and reliability, unless all shareholders of each of the merging companies have agreed not to subject the merger plan to an expert examination (with certain exceptions arising from the Commercial Companies Code). The absence of an expert review will significantly speed up the entire merger procedure.

The management boards of the companies or the partners managing the company’s affairs (depending on its legal form) are required to notify the partners of the company concerned of the planned merger on two occasions. The first notification must be made, in the case of a merger of partnerships, no later than six weeks, and in the case of companies with share capital, no later than one month before the planned date of adopting the resolution on the merger; the second notification must be made at an interval of no less than two weeks from the date of the first notification.

Remaining stages of a merger by acquisition

The shareholder stage of the merger involves the adoption by the governing bodies (depending on the legal form of the companies, this will be a partners’ meeting, a general meeting or a shareholders’ meeting) of all the merging companies of resolutions approving the merger. To be valid, such a resolution must be recorded in the minutes by a notary.

Once all the above-mentioned steps have been completed, the management bodies of the companies must report the merger to the competent registry court by submitting an appropriate application, to which all required attachments must be appended.

As indicated at the outset, the merger only takes effect on the date of its registration in the National Court Register (KRS). It is at this point that the acquiring company becomes the legal successor to the acquired company or companies under the principles of universal succession, whilst the acquired companies cease to exist as legal entities and must be struck off the KRS. The registry court should carry out the striking-off ex officio; however, it is often the case that the acquired company, despite no longer operating, remains listed in the National Court Register. In such cases, it is advisable to send a letter to the registry court reminding it of the merger and, consequently, of the need to strike the acquired company off the National Court Register.

Author

Zuzanna Bokina-Kielbasa

Radca prawny, Managing Associate

Specializes in corporate services for business entities and personal data protection. Assists the firm's clients in the preparation of all corporate documentation, including the registration of commercial companies and the further registration of changes, and provides ongoing and comprehensive advice on business. Provides advice in carrying out transformation processes of commercial companies, including transformations and mergers. Prepares and gives opinions on contracts, regulations and current documentation…

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