„Shareholders cannot always benefit from the facilitated increase of the company’s share capital”

Usually the increase of the share capital in a Polish limited liability company requires Articles of Association’s amendment. However, the possibility to increase the company’s share capital up to the amount predetermined in the Articles of Association and in the time limit specified therein (so called “facilitated increase of the share capital”) has lately become an almost standard clause in the Articles of Association of Polish limited liability companies. Why is it so popular?

The reason is simple – such provision is very practical. In case the company needs to be recapitalized fast (e.g. before an important investment), it gives the shareholders the opportunity to undergo such a procedure swiftly – by simple adoption of a shareholders’ resolution with no need to engage the public notary. The facilitated increase of the share capital does not require the Articles of Association’s amendment. However, this popular element of the company’s Articles of Association cannot always be used and sometimes the shareholders, even unanimous in their decision to increase the share capital, need to refer to the traditional solution – increase of the share capital via Articles of Associations’ amendment. This is the result of the Polish Supreme Court’s resolution which put an end to doctrinal and judicial disputes in that matter.

In most cases the share capital in a limited liability company is increased by creation of new shares. E.g. the share capital amounts to 10 000 PLN and is divided into 100 shares with a nominal value of 100 PLN each. The shareholders decide to increase it up to 20 000 PLN by creating 100 new shares with a nominal value of 100 PLN each. The question is – who can take up the new shares and how far does the freedom of shareholders go if they decide to benefit from the facilitated increase of the share capital instead of the traditional Articles of Association’s amendment?

Before the Polish Supreme Court’s resolution the disputes were running around two issues. The first issue concerned the problem of whether the new shares created through the facilitated share capital increase can be offered to some of the shareholders (not all of them) or even to an entity from beyond the shareholders’ group. The second concerned the question of whether the shareholders can exclude their right of priority to take up the new shares (which is their statutory right stipulated in Commercial Companies Code). This argument was an aftermath of a faulty redaction of a Commercial Companies Code’s provision which was interpreted differently by courts of law and doctrine. The provision’s redaction has not been amended, but the Polish Supreme Court in 2013 clearly spelled out where it stood and has not changed its position so far.

According to the Polish Supreme Court if the shareholders decide to benefit from the facilitated increase of the share capital, the new shares in the increased capital have to be offered to all the existing shareholders in proportion to the shares they already own and their right of priority to take up the new shares cannot be excluded. Briefly – an easier and cheaper method of the share capital increase does not allow entities to authorize from beyond the shareholders’ group to enter to the company, nor to disturb the proportion of the shareholding in the company e.g. by allowing one shareholder to take up all the new shares.

Therefore, if shareholders are willing to increase the share capital in the company and to offer the new shares to a new investor or e.g. there is one shareholder among the existing ones who is willing to take up all the new shares and make an in-kind contribution (a vehicle, a machine, etc.), the shareholders have to refer to the increase of the share capital via Articles of Association’s amendment, so before a public notary. In the Polish Supreme Court’s opinion the requirement to adopt such resolution in a notarial deed before a public notary protects the shareholders from dilution of the shareholding. Every amendment of the Articles of Association requires 2/3 of votes in favor of the resolution, while a facilitated increase of the share capital, done on the basis of a simple resolution of the shareholders, requires an absolute majority of votes.

As mentioned above – limitations on facilitated increase of the share capital are introduced by the Supreme Court’s resolution. Thus, such perception is the court’s view which, while being an important source of the laws’ interpretation, does not constitute in itself a binding law provision.  However, failure of performance in compliance with Supreme Court’s view may result in refusal to enter the share capital’s increase to the register by the register court. The register court is authorized to deny the registration of the share capital increase if it decides that the resolution was adopted with violation of binding legal provisions (so in case the register court interprets the Commercial Companies Code’s provisions in line with the Supreme Court’s opinion, which in practice is very probable).

As the increase of the share capital is effective from the day of its registration by the register court, it seems to be too risky, time-consuming and costly not to act in compliance with the Supreme Court’s view, even though it may seem a little bit too strict.