Simplified share capital increase – what is it about?
It has almost become a standard nowadays to introduce into the articles of association of a limited liability company a provision on the possibility of increasing the company’s share capital to the value specified in the agreement within a certain period of time, without the need to amend the agreement (so-called simplified share capital increase). This provision is practical insofar as, in the event of a need to quickly recapitalize the company, it is possible for shareholders to pass a resolution to increase the share capital without the need to involve a notary public in the entire process. However, this popular element of the articles of association may not always be used in practice, and sometimes shareholders, despite unanimous agreement on the need for a share capital increase, must resort to the traditional solution, i.e. a capital increase by amending the articles of association.
New shares must be allotted to existing shareholders
According to the Supreme Court (Resolution of the Composition of the Seven Judges of the Supreme Court – Civil Chamber of January 17, 2013 ref. III CZP 57/12), in the case of a simplified increase in share capital through the creation of new shares, they must be taken up by existing shareholders in relation to the existing shares in the share capital, and it is not permissible to exclude the priority right to take up shares by existing shareholders. Thus, under the simplified capital increase procedure, it is not permissible to offer new shares to a person outside the shareholders, to violate the existing proportion of shares of all shareholders by allowing one or more of them to take up all the new shares, and to exclude the priority right of shareholders to take up new shares. In a word, as a result of a simplified capital increase, only the amount of share capital and the number of shares may change, but no longer the number of shareholders, the persons of the shareholders and the structure of the shares they hold. For example: if before the simplified capital increase in the company 4 partners held 100 shares, 25 shares each, then for the simplified capital increase by creating an additional 40 shares to be effective, each partner will have to take up 10 shares in the increased share capital. Otherwise, the increase made in this manner will not take effect. Thus, if the shareholders would like the new shares to be taken up by a person outside of themselves, or for the new shares to be taken up entirely by one of the existing shareholders, they will not be able to use the option of passing a resolution under the simplified procedure, even though they are in agreement on the matter.
Excessive rigor?
One may wonder whether the view adopted by the Supreme Court does not introduce excessive rigorism in relations between shareholders and does not lead to limiting the possibility of using the simplified method of rapid recapitalization of the company in the most appropriate way (e.g., by offering new shares to a third party who will bring know-how, business contacts, valuable movables to the company in a situation where the existing shareholders do not have such capabilities). Even leaning towards criticism of the Supreme Court’s view, one cannot lose sight of the fact that it is risky to adopt a resolution on a simplified share capital increase against the court’s position, even though the court’s resolution is not binding.
It’s not worth the risk
What are the risks for shareholders acting in contravention of the Supreme Court’s resolution? There is a possibility that the registry court to which an application for registration of a share capital increase is submitted will find that the resolutions adopted are unlawful and will refuse to register the increase. Since the increase in share capital is effective only from the moment it is registered by the registry court, in the above situation, despite the adoption of the resolution on the increase, the company’s share capital will not be increased. Another risk is the possibility that such a shareholder resolution may be challenged in court by a shareholder who voted against it and requested that his objection be recorded.
Thus, it is more advantageous and safer for a company that intends, when increasing its share capital by creating new shares, to exclude the preemptive right of existing shareholders, change the proportion of shares held by shareholders or grant new shares to a third party, to carry out the increase by amending the articles of association in the form of a notarial deed. While this will entail additional costs and time, it will protect the company from negative consequences in the form of a refusal to register the capital increase by the registry court or a lengthy lawsuit against a shareholder voting against the resolution.
Limited liability company is one of the most popular forms of business activity in Poland. Shereholders, the Management Board and share capital – these are terms that are constantly mentioned in this context. So, what is share capital and how much should it be? Where can you register a limited liability company? How does the Management Board differ from a shareholder?
Polish business entities are differentiated between those that base on non-material assets such as personal involvement (partnerships) and those in which capital plays a greater role (companies).
