[co-authors: Tomasz Kański, Jan Pierzgalski]*
World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Poland. View the full guide.
Sołtysiński Kawecki & Szlęzak
In your jurisdiction, which sectors do venture capital funds typically invest in?
Venture capital funds generally invest in new technologies and innovations as they create opportunities for rapid growth. Although the data on Polish VC investments is not transparent, it appears that the e-commerce, communication, IT, FinTech and healthcare sectors have attracted most focus recently.
Do venture capital funds require any approvals before investing in your jurisdiction?
No general approval is required for VC funds to invest in Poland. Specific approval requirements may depend on the sectors (e.g., acquiring shares in licensed financial entities may require prior approval), or whether the target holds agricultural land (in such case the Polish public authority has the right of first refusal pertaining to shares in the target) or may apply to strategic entities (in particular in the energy sector), but they are rarely relevant to venture capital investments.
Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
In relation to the COVID-19 situation, a new regulation on control of foreign investments in Poland was introduced in mid-2020. In general, non-EU entities (as well as EU entities that have had their registered office in the EU for less than two years) intending to directly or indirectly acquire significant interest (more than 20% of votes, shares in a partnership, or participation in profits) or control over a protected entity must make a proper filing, and the competent authority may oppose (prohibit) the investment. For the purpose of the regulation, a protected entity is an entrepreneur (in particular, a company) that meets the two following conditions: (a) having a turnover in Poland exceeding EUR 10,000,000 in either of the two preceding financial years; and (b) being a public company or conducting an activity listed in the regulation. The list of activities covers various activities related to the energy sector, telecommunication activity, preparing or modifying software used for purposes listed in the regulation and cloud computing services.
The Polish government also has a tool to control investments (in particular, foreign investments) in companies that are strategic to the national interest and security. However, this regulation is likely not relevant to venture capital investments, since the current list of protected entities includes major companies from the energy and telecommunication sectors, which are outside of VC funds’ typical scope of interest.
Also, as a general rule, acquisition of real estate in Poland or shares in a company holding real estate by a foreign entity (or by a Polish entity controlled by a foreign entity) requires the prior approval of the Ministry of Internal Affairs. This restriction, subject to some minor exceptions, does not apply to foreigners from the EEA or Switzerland, nor does it apply to Polish law-governed investment funds (regardless of the sponsors’ domicile) or to investing in public companies listed on the Warsaw Stock Exchange. Other foreign investors may decide to operate through holding companies incorporated in an EEA country to avoid the above requirements.
Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
Larger-scale transactions that may influence the market come under the purview of both the Polish and European competition authorities (the President of the Office of Competition and Consumer Protection (UOKiK) and the European Commission, respectively). Any M&A transaction may require competition clearance from UOKiK, provided that the turnover thresholds are exceeded and the transaction leads to the acquisition of control over the target or the creation of a joint venture company. The transaction requires clearance of UOKiK if the combined worldwide turnover of all the entities involved (i.e., both the purchaser and the target or all JV shareholders) exceeds the equivalent of EUR 1,000,000,000 or the Polish turnover of such entities exceeds the equivalent of EUR 50,000,000 (unless the Polish turnover of the target or any of the JV shareholders does not exceed EUR 10,000,000). Until the UOKiK issues a decision allowing the transaction (or the lapse of the statutory deadlines for the UOKiK to issue the clearance, which is one or four months, depending on the complexity of the transaction), the acquirer should refrain from closing the deal. Antitrust issues are especially relevant in the case of a trade sale exit.
What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Venture capital investment is typically structured as an equity investment through the new issuance of shares in the target’s share capital. The target company is usually formed as either a limited liability company (Polish: spółka z ograniczoną odpowiedzialnością) or a joint-stock company (Polish: spółka akcyjna). The limited liability company is a simpler and less expensive than of capital company, while the joint stock company allows for the implementation of more complex equity structures (through e.g., subscription warrants or convertible bonds) and may be listed on a stock exchange. The main drivers for structuring venture capital investments are the level of control obtained by the VC fund and the planned exit mechanisms.
Is there any restriction on rights available to venture capital investors in public companies?
No, there are no such restrictions (except for the regulation described in point 3 regarding control over foreign investments in protected entities).
What protections are generally available to venture capital investors in your jurisdiction?
As a typical venture capital investment is made through acquisition of shares, the venture capital investors benefit from shareholder protection rights. The scope of these rights depends on the form of company, shareholding threshold and provisions of the statutes of the given company. In a limited liability company, a shareholder may benefit from an individual right of control (including access to all the company’s files), while in a joint-stock company, the control rights are exercised by the supervisory board. Basic anti-dilution protection is a statutory preemptive right for the new issue of shares (such right may be excluded only by a shareholders’ resolution adopted with a 4/5 majority in a joint-stock company and 2/3 majority in a limited liability company, unless the company’s statute provides for more stringent requirements). Changes to a company’s statute and the issuance of new shares require a shareholders’ resolution.
Usually, the company’s statute provides for specific protective measures through the individual rights of shareholders (in particular, the individual right of the shareholder to appoint members of the management and supervisory boards), right of veto with respect to certain resolutions, majority thresholds required for the adoption of certain resolutions aligned with the investors’ stake or limitation on shares’ transferability.
Investors’ rights may also be contractually protected by a shareholders’ agreement and/or investment agreement. Key issues regulated by these agreements often include representation and warranties (and liability for their incorrectness), control over the entry of new investors and provisions facilitating an exit from the investment (e.g., tag-along, drag-along, right of first refusal). The provisions of shareholders’ agreements and/or investment agreements are usually mirrored – to some extent – in the company’s statute.
Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
In the past few years, warranty and indemnity insurance has become more common in Polish M&A transactions. However, it is not typical for venture capital investments due to the cost and the investors’ generally higher tolerance for risk in this type of transaction.
What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
Common exit routes are: (i) IPO; (ii) sale to a third-party buyer (e.g., private equity fund or another venture capital fund); (iii) management buy-out; and (iv) founders’ buy-out. The IPO is most challenging from an organizational perspective and the most expensive way to exit, due to the legal and regulatory requirements. Therefore, private sale of shares to industry buyers, other funds, managers or founders is more common. The type of exit depends primarily on how successful the business is and, as a result, what entities are interested in investment at a later stage. From the legal point of view, the general risks and transaction structures, are generally similar for all forms of share sales. However, specific challenges can arise depending on the individual situation and the characteristics of the company as well as the goals of the new investor.
Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
Although an IPO is not a common exit route due to the costs and organizational requirements, it takes place occasionally. Exit through NewConnect - a Polish multilateral trading facility - is much more likely than through the Warsaw Stock Exchange which is a regulated market.
*Sołtysiński Kawecki & Szlęzak