Impact of debt conversion on the ownership structure in a joint-stock company
Joint stock companies may benefit from a special form of debt restructuring in the form of debt conversion into newly issued shares. Pursuant to art. 156.5.3 of the Restructuring law, the composition proposals include a statement that the acquisition of shares is subject to the exclusion of pre-emptive rights.
Security of the ownership structure of a joint-stock company on the grounds of the Polish Commercial Companies Code.
The increase in the share capital of a joint-stock company through the issue of new shares directly affects the share position of the existing shareholders. One of the forms of protection of shareholders’ interests against dilution of shares (reduction of the value of corporate rights per share) is the pre-emptive right, understood as the right of existing shareholders to pre-emptive subscription for new shares. This mechanism makes it possible to maintain the corporate status quo of a shareholder in a situation where it acquires a number of newly issued shares proportional to its shareholding. Another possibility of shareholder’s activity is to sell his pre-emptive right to another shareholder or a third party.
The pre-emptive right is vested in shareholders ex lege, therefore it is not possible to limit or deprive them of their statutory right, and a legal action contrary to Art. 433 of the Polish Commercial Companies Code is invalid. Properly used pre-emptive right may serve the purpose of maintaining or shaping the ownership structure desired by shareholders in the company.
Measures to protect the ownership structure of a joint-stock company in the event of exclusion of pre-emptive rights under the provisions of the Restructuring law
Restructuring law refers differently to the protection of the interests of shareholders, with the primary objective of avoiding the declaration of bankruptcy of an insolvent or threatened with insolvency joint stock company by enabling the restructuring of its liabilities by way of an arrangement with creditors.
One of the types of arrangement proposals addressed to joint-stock company debtors is the conversion of receivables into shares issued as a result of the execution of the arrangement. In this respect, the provisions of the restructuring law provide for an exception to the rule expressed in Art. 433 of the Polish Commercial Companies Code in the form of exclusion of the pre-emptive right of existing shareholders. Therefore, the legislator decided to limit the rights of the shareholder in order to protect the interests of creditors.
The probable consequence of increasing the share capital of the restructured company as a result of converting receivables into shares may be a significant dilution of the existing shareholders’ share rights. The situation in which the amount of converted receivables significantly exceeds the value of the debtor’s existing share capital seems particularly problematic. In such a case, a shareholder interested in maintaining the existing influence on the functioning of the company, in the absence of security in the form of pre-emptive rights, may decide to purchase arrangement receivables together with the right to take up newly issued shares.
If the acquisition took place after the opening of the restructuring proceedings, the assignee does not gain voting rights, as a result of which he is excluded from the possibility to vote on the arrangement (no claim). However, the provisions of the restructuring law do not preclude the civil law protection of the purchaser’s interests in the form of the conclusion of a dissolutionary condition in the agreement, which is fulfilled in the event of non-acceptance of the arrangement by the creditors.
Voting rights from claims
Irrespective of that, Art. 116 of the restructuring law excludes the right to vote in relation to, inter alia, creditors – natural persons representing more than 25% of the company’s share capital, persons authorised to represent the company, as well as affiliated, parent or subsidiary companies and persons authorised to represent them. As a result, the regulation by the above mentioned entities, made between them, performs a similar function to the regulation of the pre-emptive right between the shareholders in the issue of shares carried out in accordance with the principles of the Commercial Companies Code, and at the same time does not affect the loss of the voting right at the creditors’ meeting – which would not be entitled to anyway,
One of the non-standard means of protecting the existing ownership structure in the company referred to in the literature is the transformation of a joint stock company into a limited joint-stock partnership in the restructuring proceedings. By means of the transformation, selected shareholders may obtain a corporationally secure status of general partners authorised to represent and manage the company’s affairs, while the remaining shareholders of S.A. together with the arrangement creditors will gain the position of shareholders in S.K.A. This scenario, although ensuring corporate stability, is associated with the assumption of significant financial liability (without limitation) by the company’s general partners.
In practice, debt-for-environment swap should be used by debtors with extreme caution. The consequence of the implementation of the above mentioned proposal may be facilitated (without the limitations of the C.C.C.) the acceptance of an external investor into the company, but also a threat in the form of an attempt to take over the company by foreign capital.