Merger of companies – what are the implications?

The process of merging commercial companies, as currently recognised in European legislation, has its origins in the German legal system. It was introduced in 1861 in the German Commercial Code. It served as a benchmark for Germanic-speaking countries, as well as for the Republic of Poland. For legislators at the time, the procedure for the merger of commercial companies was categorised as one of the methods of terminating a company’s legal existence without undergoing a liquidation process; however, even then it was possible to identify the fundamental features that characterise this process today. It primarily involved the transfer of the assets and liabilities of the acquired company to the acquiring company by way of universal succession, the dissolution of the acquired company without undergoing liquidation, the replacement of the shareholders’ interest in the acquired company with membership in the acquiring company, and a change of debtor without the creditor’s consent.

The Commercial Companies Code regulates the process of company mergers under Title IV (Articles 491–527 of the Commercial Companies Code), alongside the regulations on company divisions (Articles 528–550 of the Commercial Companies Code) and company transformations (Articles 551–584 of the Commercial Companies Code).

Article 492(1) of the Commercial Companies Code provides for two alternative methods of merger. These are merger by acquisition (fusion per incorporationem) and merger by the formation of a new company (fusion per unionem). A merger by incorporation involves the transfer of all the assets of the acquired company by way of universal succession to the acquiring company in exchange for shares which the acquiring company issues to the shareholders of the acquired company. As a result of the merger, the acquired company is dissolved without undergoing liquidation proceedings. In the case of a merger per unionem, a new capital company is formed, to which the assets of all companies participating in the merger are transferred by way of universal succession. The partners (shareholders) of the merging companies receive shares in the newly formed company. As a result of the merger, all merging companies cease to exist as legal entities.

Pursuant to Article 491(1) and Article 491(2) of the Commercial Companies Code, both capital companies and partnerships may participate in the merger process. In the case of the former, the Polish legislator has provided for unlimited merger capacity. Consequently, they may act in any capacity and configuration. With regard to partnerships, restrictions have been imposed, limiting them to the role of acquired companies, provided that the acquiring company is exclusively a capital company. The Act also permits them to merge with other commercial partnerships, but only through the formation of a capital company. According to the arguments put forward by legal scholars, the restriction on the ability of partnerships to merge stems primarily from their nature, which is based on the personal ties between partners, a feature that is difficult to reconcile with the pursuit of systemic economic consolidation. The merger of companies is a complex process comprising a series of factual and legal steps. It is fairly widely accepted in legal doctrine that this process is divided into three main stages: the preparatory (managerial) phase, the ownership phase and the registration phase, as well as the announcement of the merger (the so-called authorisation phase). The Commercial Companies Code does not, in its text, cover all the factual acts and legal actions undertaken in the process of a company merger.

One of the most important consequences of a company merger is universal succession, i.e. legal succession under a general title. The principle of universal succession is enshrined in Article 494 of the Commercial Companies Code. According to the wording of this provision, the acquiring company or the newly formed company assumes, as of the date of the merger, all the rights and obligations of the company being acquired, or of the merging companies through the formation of a new company. This structure simplifies the merger procedure and also facilitates the consolidation of assets. This position is also shared by case law. In its judgment of 6 April 2017, the Supreme Court stated that the rationale behind the provisions of Article 494(1) of the Commercial Companies Code and Article 494 § 2 of the Commercial Companies Code, in their then-current wording, was to facilitate and streamline merger processes, including with regard to safeguarding the interests of other participants in economic transactions. The law does not contain a normative definition of universal succession. According to the established view presented in legal doctrine, it involves the transfer of assets from one entity to another by means of a single legal event, the so-called ‘transfer in a single act’ (transitio uno acto). It is also the opposite of singular succession, in which individual rights are acquired through a legal act.

The Commercial Companies Code has adopted a broad scope of succession in the merger procedure. This encompasses civil law, procedural, public law and corporate relationships. This does not, however, mean that it is unlimited. Account must be taken of lex specialis provisions, which provide for a number of exclusions, including in the field of private law

The literal wording of Article 494(1) of the Commercial Companies Code indicates that the acquiring company or the newly formed company succeeds to all the rights and obligations of the company being acquired or of the companies merging by way of per unionem. By way of a single legal act, all liabilities are transferred along with the assets – both known liabilities and those of which the company was unaware at the time of the merger. Consequently, all claims, rights, expectations of obtaining them, know-how, receivables, as well as obligations, debts and other liabilities encumbering its assets are acquired. However, the internal relations of the acquiring or newly formed company remain outside its scope, the content or any amendments to the articles of association (statutes) of which are shaped by the merger plan. The consequence of adopting the position that legal succession under a general title is not a debt assumption agreement is that there is no requirement to obtain the consent of creditors for the transfer of all rights and obligations in the merger process. The acquiring company or the newly formed company becomes a debtor ex lege upon the merger. The successor’s liability is broad. It also extends to liabilities arising from tort, bills of exchange, default interest, or debit notes.  It is not dependent on knowledge of the existence of claims against the acquired company or the merging companies. The law does not provide for any legal instruments or circumstances that would limit the scope of this liability.

The broad scope of the succession means that, with regard to the phrase ‘all rights and obligations’ used in Article 494(1) of the Commercial Companies Code, both legal literature and case law agree that it encompasses both substantive and procedural aspects. Upon the merger, the acquiring company or the newly formed company becomes a party to civil and administrative proceedings in which the acquired company or the merging companies had previously been involved through the formation of a new company. An issue giving rise to considerable doubt is whether the scope of the legal consequences extends to non-transferable rights of the company ceasing to exist or of the merging companies through the formation of a new legal entity, e.g. rights of pre-emption, repurchase, usufruct and personal servitude.

In regulating the succession of rights in the event of a merger, the legislator has opted for a broad scope, covering both civil and public law aspects. Article 494(2) of the Commercial Companies Code states that the acquiring company, or the newly formed company, succeeds in particular to the permits, licences and concessions of the company being acquired or of the companies merging by way of a merger through unification, subject to the proviso that this succession may be excluded by statute or by a decision under public law.

Succession in the field of administrative law is of a limited nature. The list of administrative decisions set out in Article 494(2) of the Commercial Companies Code is not exhaustive, meaning that its scope covers all such acts. Such succession in the process of the merger of commercial companies will not occur where it is excluded by a specific provision in the form of an Act or an administrative decision. The prevailing argument for the incomplete scope of administrative succession can be found in the very structure of administrative decisions, which are based on the fact that a state authority, through these acts, shapes the rights and obligations individually assigned to a specific addressee. The above list in Article 494 § 2 of the Commercial Companies Code is subsidiary to specific provisions of public law. It is worth emphasising the view found in legal doctrine that the wording of Article 494 § 4 of the Commercial Companies Code is unfortunate, since, in fact, the subject of universal succession in the administrative sense comprises all rights and obligations arising from administrative decisions, and not, as a literal interpretation of the provision would suggest, concessions, permits and reliefs. A similar view was expressed by the Supreme Court in its judgment of 18 October 1985, in which it stated that the naming of a given act is irrelevant in the context of its classification as an administrative decision, provided that it is, pursuant to Article 104 of the Code of Administrative Procedure, an act which substantively resolves an individual matter falling within the competence of a public authority.

The administrative aspect of the legal consequences in the process of a merger of companies may be subject to statutory, subjective and temporal restrictions. The first of these arises from the provision contained in Article 494 § 2 in fine of the Commercial Companies Code. By introducing the proviso that the acquiring company or the newly formed company assumes all the rights and obligations of the company being acquired or of the companies participating in the merger procedure, provided that no law or administrative decision provides otherwise, the legislator ensures legal protection and security for those entities in whose favour or against whom the right or obligation has been established. The subjective limitation is also contained in the wording of Article 494 § 2 of the Commercial Companies Code and stems from the systemic structure of administrative decisions, which are addressed to a specific entity and shape its legal position. In turn, the temporal buffer relates to the relationship between Article 618 of the Commercial Companies Code in conjunction with Article 494 § 2 of the Commercial Companies Code, the implication of which is that universal succession in this context applies to administrative decisions granted to entities after the entry into force of the Commercial Companies Code, i.e. after 1 January 2001.

When outlining the scope of succession, it should be noted that it also covers tax law aspects. Article 93 of the Act of 29 August 1997 – the Tax Ordinance – provides that the acquiring company or a company newly formed as a result of the merger assumes all the rights and obligations of each of the merging companies as provided for by tax law. This provision means that it applies to both mergers by amalgamation and by acquisition, as well as to all possible configurations of company mergers.

The legal consequences of a company merger also extend to the employment sphere. Article 231 of the Act of 26 June 1974 – Labour Code applies accordingly, under which, as a consequence of the transfer of a workplace or part thereof to another employer, the latter becomes, by operation of law, a party to the existing employment relationships.

The consequence of the merger is the dissolution of the acquired company or the merging companies through the formation of a new company without undergoing liquidation proceedings. As a result, the acquired company or the merging companies are struck off the register through the formation of a new company.

The moment at which the merger of companies takes place is known as the ‘merger date’. Depending on the method of merger, the merger date is the date on which the company resulting from the merger is entered in the National Court Register (KRS) or the date of registration of the increase in the acquiring company’s share capital.

In summary, it should be noted that the effects of a company merger are varied and encompass both legal and economic aspects. The company formed from the merger and the acquiring company assume all the rights and obligations accruing to the merging companies per unionem and the merging companies per incorporationem, respectively. This also applies, with certain exceptions, to concessions, permits and licences related to the business activities carried out. In connection with the acquisition of the assets of the acquired or merging companies, the shareholders of those companies also become shareholders of the newly formed company or the acquiring company. From a business perspective, among the positive effects of a company merger, the following can be mentioned above all: the opportunity to exploit economies of scale and synergies, a reduction in operating costs, increased management efficiency, changes to existing taxation rules, modifications to existing liability rules, or the strengthening of market position, as well as increased competitiveness and attractiveness to potential investors.

Author

Adrian Łukasik

Radca prawny, Senior Associate

He gained his professional experience in one of Lublin's renowned law firms, dealing with civil and business law in its broadest sense. At the law firm Hewelt Wojnowski i Wspólnicy spółka komandytowa, he deals on a daily basis with current counseling in the field of business and the development of corporate documentation of companies, such as. Company agreements, bylaws of company bodies, agreements regulating relations between shareholders, resolutions of company bodies, M&A transactions. In addition to…

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