The Polish Commercial Code (Polish: Kodeks spółek handlowych – KSH) permits the merger of both corporations and partnerships, although partnerships – with the exception of limited partnerships with shares – may not act as either the acquiring company or the newly formed company. In the case of a merger of corporations, the process begins with the preparation of a merger plan. The essential components of this plan and its appendices, as defined by law, are not clearly defined. Errors in the preparation of the merger plan can lead to the rejection of its registration by the Commercial Registry.

In this article, we address practical questions regarding the determination of the assets of the transferring and acquiring companies in the context of a merger by acquisition.

Merger plan

The merger plan must be agreed upon in writing between the merging companies. It typically contains the following information:

• Designation of the merging companies,
• Details regarding the type of merger,
• Exchange ratio of the shares or stock of the transferring company against shares or stock of the acquiring company,
• Principles for the allocation of shares or units in the acquiring company, including the indication of the date from which these shares or units are entitled to profits,
• Rights granted by the acquiring company to the shareholders or special rights holders of the transferring company,
• Special benefits for members of the governing bodies of the companies involved or other persons involved in the merger.

The following documents must also be attached to the merger plan:

• Drafts of shareholder resolutions or general meeting resolutions regarding the merger,
• Draft amendment to the articles of association or changes to the partnership agreement of the acquiring company,
• Determination of the assets of the transferring company,
• Statements containing information on the accounting status of the transferring and acquiring companies, prepared for merger purposes using the same methods and in the same structure as the last annual financial statements.

It appears that the question of determining the assets of the transferring company is the source of the greatest controversy. The legal provisions do not specify how the valuation for merger purposes is to be carried out: whether only tangible assets are to be valued or also intangible factors such as goodwill; likewise, it remains unclear whether only the assets of the transferring company are to be valued – as the wording of the provision suggests – or also those of the acquiring company.

Method of asset valuation

The Polish Companies Code does not explicitly specify the method for determining the asset value of the transferring company. In particular, it remains unclear whether the valuation should be based on book value (balance sheet value) or fair value. The responsibility for selecting the appropriate valuation method and ensuring its proper implementation lies with the members of the transferring company's management board.

Applying a teleological interpretation of the regulations concerning the merger plan and its annexes, it appears appropriate that the valuation of the transferring company's assets should be based on market value. The law expressly requires two separate annexes: one on the accounting situation and one on the asset valuation. Since the balance sheet situation is already documented by one of these annexes, it seems logical that the second annex should provide additional information, particularly regarding the market value valuation of the transferring company. The Supreme Court of Poland also stated in its judgment of December 7, 2012 (Case No. II CSK 77/12) that "a comparison of Article 499, Section 2, Nos. 3 and 4 shows that the valuation is a valuation of the assets prepared for the purposes of the merger and not the so-called book value."

Some specialist literature takes the view that the valuation of the assets of the transferring company serves to determine the exchange ratio of the shares or stocks.

In practice, however, it turns out that this principle is deviated from, particularly in the case of the merger of a wholly-owned subsidiary with the parent company pursuant to Art. 516 § 6 of the SH Code. In such cases, where the acquiring company is the sole shareholder of the transferring company, it cannot receive any treasury shares (Art. 514 § 1 SH Code), which means that there is no capital increase and no exchange ratio. In these cases, it is justifiable to use the book value (balance sheet value) for valuation. Legal literature also emphasizes that an asset valuation based on book values ​​does not violate applicable law, as the legislator has not made any explicit provision on this matter.

Company valuation versus asset valuation

The Polish KSH (Company Valuation Act) explicitly stipulates the valuation of assets, not the company itself. This might suggest that only tangible assets, such as fixed assets, are considered. However, in our view, such an approach is insufficient to determine the market value, which serves as the basis for setting the exchange ratio (except in the previously described exceptional case). Rather, intangible assets such as goodwill, know-how, customer base, and intellectual property rights must also be included.

Valuation of only the transferring company or also the acquiring company?

A literal interpretation of the regulations might lead to the assumption that accounting information must be prepared for both companies, but the valuation of assets only for the transferring company. However, the Supreme Court, in its judgment cited above, emphasized that a teleological interpretation leads to the opposite result. The purpose of the regulations requiring the inclusion of valuations is to enable shareholders to verify the proposed exchange ratio. For this to be done properly, a valuation of the assets of both companies is necessary. This interpretation is also supported by some legal scholars.

conclusion

The method for valuing companies or their assets in connection with a merger is not explicitly regulated in the Polish Commercial Code. In our view, the market value method should generally be applied, with the aforementioned exceptions. To enable shareholders to verify the appropriateness of the exchange ratio, both the transferring and the acquiring company should be valued – including not only their tangible assets but also intangible components such as goodwill.

De lege ferenda, the legislator should explicitly regulate these questions in the law in order to create clarity and avoid questions of doubt.

---

For questions regarding Polish commercial law, please contact us by email at kontakt@kancelaria-pozniak.pl or by phone at +48 665 246 969 .