What is a company merger and what are the stages of this process?

This article answers the following questions:

• What is a merger of companies?
• What are the objectives and effects of company mergers?
• What are the types of company mergers?
• What do company mergers involve and when are they possible?
• What are the stages of a merger?
• What registration activities have to be undertaken with respect to a merger?
• What are the costs of a merger?

A merger of companies (or partnerships) is a multistage process which may bring a lot of business benefits to ambitious entrepreneurs, hence it is worth considering. However, before starting the whole process, one needs to make adequate preparations and analyses as well as compile a number of documents, and that might be a rather arduous task, especially for active entrepreneurs who are busy with running their business on a daily basis. What is then worth knowing before deciding to carry out a merger of a company or partnership? What exactly is this process and at what stage is it worth seeking an expert’s assistance? Let us review the merger process step by step and have a closer look at the requirements set out in the Polish Commercial Companies Code for entrepreneurs who decide to take this action.

What are the benefits of mergers and acquisitions of companies and partnerships?

A merger is a process which, although time-consuming, has a lot of clear advantages. Some of the benefits which may be derived from a merger are:

• Optimisation of costs – by eliminating repetitive processes and more efficient use of available resources.
• Simplification of the structure – mergers allow companies to optimise the costs of business activity and improve the effectiveness of decision-making processes (for example, through delegation of the responsibility for managing the affairs to one management board).
• Scaling up the operations – consolidating smaller entities into one bigger whole strengthens the marketing position and confers a greater bargaining power.
• Diversification of the activities – mergers may broaden the range of products and services offered and help the company to enter new markets.
• Strengthening of the competitiveness – merging companies may increase their capabilities by using common technology and know-how.
• Better use of the capital – one large company in place of several smaller ones guarantees more competent financial management and improved liquidity.

Every merger, despite being undoubtedly beneficial, must be carefully planned and considered so that the desired outcomes and business objectives can be accomplished.

What merger types are provided for in the Commercial Companies Code?

A merger may carried out by:

1. Transferring all the assets of a (target) company or partnership to another (acquiring) company or partnership in exchange for shares which the acquiring company or partnership issues to the shareholders in the target company or partnership – it is the so-called merger by acquisition.
2. Forming a company or a partnership limited by shares to which the assets of all consolidating companies or partnerships are transferred in exchange for the shares of the new company or partnership – the so-called merger by formation of a new company or partnership.

Both types of undertakings, i.e. companies and partnerships, can go through merger. However, there are certain limitations that should be accounted for:

• Companies (i.e. joint-stock companies, simple joint-stock companies, and limited liability companies) may merge with other companies or partnerships. Partnerships, however, cannot be an acquiring or newly formed entity (with the exception of partnerships limited by shares).
• Partnerships can only merge with other partnerships to form a company or a partnership limited by shares (or by being acquired by a partnership limited by shares).
• Merger is not allowed if one of the entities:
  • is in liquidation and the division of the assets has already started,
  • is in bankruptcy. 

Merger of companies or partnerships step by step

A. Beginning of company merger – analysis of documents

Before commencing the merger process, it is first necessary to analyse contracts, administrative decisions, and key documents (such as licences, approvals, and permits related to the operation of the companies or partnerships going through the merger).

Polish law states that the acquiring (or newly formed) company or partnership assumes, as of the merger date, all the rights and obligations of the target or the entities consolidating to form the new company or partnership.

The law or documents may, however, impose additional requirements on the entities, for instance, the obligation to notify specific institutions of the planned merger or to gain the approval of the authorities for the entire process. This, in particular, refers to agreements with banks and lessors as well as issues related to grants and subsidies. For companies which deal with such tools, the lack of proper action may affect the agreed upon financing conditions or event result in the necessity to return the given aid.

If such requirements are in place, it is first and foremost necessary to satisfy them to ensure the complete succession of rights and obligations.

B. Preparation of draft terms of merger

A key stage in the company merger process is the preparation of relevant draft terms of merger in writing. This document must be approved and signed by the management boards of both merging companies.

Since the preparation of the draft terms of merger does not fall within the scope of the normal course of business, it requires relevant resolutions of the management boards of the merging companies.

The draft terms of merger must contain specific obligatory elements. Among the crucial information are the following:

• the legal forms, names of the companies or partnerships, addresses of the registered offices of every merging company or partnership, and the type of merger, and also – in the case of merger by formation of a new company or partnership – the legal form, name, and the address of the registered office of that new company or partnership,
• the exchange ratio of the shares in the target company or partnership (or companies or partnerships which consolidate to form a new company or partnership) to the shares in the acquiring company or partnership (or the newly formed company or partnership) and the amount of additional payments, if any – unless such an exchange does not take place,
• the principles governing the taking up of shares in the acquiring (or newly formed) company or partnership,
• the date from which the shares in the merging companies or partnerships entitle the shareholders to profit sharing in the acquiring (or newly formed) company or partnership,
• the rights which the acquiring (or newly formed) company or partnership confers on the shareholders or persons with special privileges in the target company or partnership (or in companies or partnerships which consolidate to form a new company or partnership),
• special benefits given to the members of the governing bodies of the merging companies or partnerships or to other persons participating in the merger (if such benefits have been given). 

The draft terms of merger must be appended with:

1. draft merger resolutions,
2. a draft amendment to the articles of association of the acquiring company or partnership (or draft articles of association of the newly formed company or partnership),
3. a document establishing the value of the assets of the target company or partnership (or of companies or partnerships consolidating to form a new company or partnership) as at a specific day of the month preceding the filing of the application for the announcement of the draft terms of merger (typically, the balance sheet and the profit and loss statement of the merging companies or partnerships are sufficient, submitted together with a brief declaration of the management board in which the members refer to the value of the assets of the company or partnership),
4. a declaration containing the information on the accounting situation of the company or partnership, drafted for the purposes of the merger, as at a specific day of the month preceding the filing of the application for the announcement of the draft terms of merger and using the same methods (and in the same layout) of preparing the previous annual balance sheet (typically, a brief declaration of the management board in which the members refer to the accounting situation of the company or partnership is sufficient).

C. Preparation of a management board’s statement before the merger of companies takes place

The management boards of the merging companies or partnerships are additionally obliged to prepare a statement in writing which includes:

• the reasons for the merger,
• the legal and economic bases for the merger,
• the exchange ratio of shares.

However, the shareholders in the merging companies or partnerships may decide on waiving this requirement.

D. Filing the draft terms of merger with the registration court and their examination by an auditor

Another stage in the merger procedure is filing of the draft terms of merger with the registration court together with an application to appoint a statutory auditor who will review the draft terms of merger.

The auditor examines the draft terms of merger for their accuracy and compliance with the law. It is worth noting that the audit time may be shortened if a specific statutory auditor is indicated in the court application, who has confirmed their availability and capability to carry out the audit beforehand. Our experience shows that courts are more likely to grant such applications, as indicating a specific auditor facilitates the merger process and optimises the registration procedure.

It is worth pointing out, however, that the shareholders in the merging companies or partnerships may decide on waiving such an audit, which lowers the costs of the process and accelerates it altogether.

One must not overlook the obligation to publish an announcement of the draft terms of merger. It must be made not later than one month before the date of the general meeting at which the merger resolution is to be adopted. The announcement should be issued in Monitor Sądowy i Gospodarczy (the Court and Economic Gazette) and in other publications or in a different manner as set out in the articles of association (if this is required).

An exemption from the obligation to publish an announcement of the draft terms of merger applies to companies and partnerships which, within a specified period: until the conclusion of the general meeting at which the merger resolution is to be adopted, will publish, without interruption and free of charge, the draft terms of merger on their websites.

E. Notice to the shareholders of the planned merger

After filing the draft terms of merger with the registration court and having the draft terms of merger audited by a statutory auditor, the management boards of the companies or partnerships which go through the merger are obliged to notify their shareholders of the planned process.

The first notice of merger must be communicated to the shareholders at least a month before the planned date of adopting the merger resolution. The second notice must be sent at least two weeks following the first one.

F. Adopting merger resolutions 

The next step is the adoption of merger resolutions by the general meeting. Such resolutions must be prepared in the form of a notarial deed. Their adoption requires a 75% majority representing at least half of the share capital of the company or partnership. In addition, depending on the type of the merger, it might be necessary to amend the articles of association of the target (or draft new ones).

G. Filing relevant applications with the National Court Register

The penultimate stage is filing relevant applications (including an application to register the merger) with the National Court Register (KRS). Depending on the type of the merger, it will be an application to register a newly formed company or partnership or an application to increase the share capital of the acquiring company or partnership.

The obligation to file an application with the KRS lies with the management boards of all the companies and partnerships going through the merger.

H. Announcement of the merger

The final action taken by companies or partnership in the merger process is the publication of an announcement of the merger by the acquiring or newly formed company or partnership accordingly. The announcement is issued in the Court and Economic Gazette and in another form if the articles of association so stipulates.

How long does the merger process take?

The duration of the merger depends on the type and characteristics of the merging companies or partnerships.

Typically, a merger lasts from 3 to 6 months. The duration of the process is affected not only by the statutory time limits, but also the effectiveness of actions taken by the management boards, shareholders, accountants, auditors, and lawyers who serve and support the entity. Furthermore, the processing times of applications by registration courts may have an impact on the length of the procedure.

What are the costs of mergers?

The costs of a merger may differ depending on the complexity of the case and the procedure adopted by the management board. Among the expenses which should be definitively accounted for while planning the merger process are:

• notarial fees and, if applicable, tax on civil-law transactions if the share capital is increased,
• court fees and the costs of the publication of the announcement in the Court and Economic Gazette,
• costs of auditing the draft terms of merger,
• costs of legal advisory, tax advisory, and accountancy.

An expert can help you in analysing cross-border merger issues

Mergers are complicated and require cautious approach, compliance with numerous legal requirements, and preparation of proper documents. Furthermore, managers, shareholders, and experts must be involved in the entire process, and that requires careful coordination of actions.

It should be emphasised that in certain cases, simplified procedures can be followed. However, due to the volume of the content, it will be the subject of another article.

Such a complex process may call for the assistance of experienced lawyers, who will support you at its every stage: from preparing the draft terms of merger to filing applications with the National Court Register.

If you need support in merger documentation or would like to commission a company with extensive experience in this area to carry out the process, feel free to contact us. Our team of experienced global law experts will provide you with necessary information and help you to comply with all the obligations imposed by Polish law.