Company reorganisation: what are the conversion, merger, and division processes and why are they beneficial?

This article answers the following questions:

• What are the processes of company conversion, merger, and division?
• Which companies can undergo particular reorganisation processes?
• What is universal succession of rights and obligations what does the continuity-of-entity principle look like?
• What did the amendment to the Commercial Companies Code of 15 September 2023 bring and what possibilities does it offer to Polish and international businesses?

Business reorganisation, although labour-intensive oftentimes, allows companies to solve a lot of problems and may open up new opportunities for growth, However, for the process of conversion, merger, or division to be successful, one needs to prepare well and devise an adequate plan of action. What are the most important rules and regulations governing reorganisation as stipulated in the Polish Commercial Companies Code? When is it possible to change the legal form of an entity? To answer these and other questions, we will explore the key terms and regulations in effect.

General characteristics of the processes of company conversion, merger, and division

The processes of conversion, merger, and division of companies are – due to their role – collectively referred to as reorganisation processes. 

These activities are mostly associated with the intention to adjust the structure of a business (within a single company or a group) to changing regulations or market conditions. Companies can achieve this by proper risk diversification, capital consolidation, or a change of the legal form to such that would best respond to the current needs of the owners.

A detailed description of each of the reorganisation processes is a topic for numerous separate papers, so let us briefly explain here that:

• conversion means changing the legal form of the company (e.g. a limited partnership to a limited liability company);
• in mergers, depending on the option:
  • one company acquires another, or
  • companies consolidate to form a completely new entity;
• through divisions, a company's assets are transferred, in whole or in part, to other (existing or newly created) entities.

In spite of different outcomes, particular reorganisation processes are of quite similar nature. Most of all, a key document which must be prepared are draft terms (of conversion, merger, and division, respectively), specifying the most important premises of the entire process.

These draft terms must be communicated to the shareholders sufficiently in advance in the form an announcement (in the case of a merger or division) or a notice (in the case of conversion). Only after drawing up the draft terms and notifying the shareholders (and after the time prescribed in the announcement / notice elapses) is it possible to adopt relevant resolutions by the shareholders (after the adoption of which the reorganised entity is obliged to submit a relevant application to the National Court Register). 

Important! As a general rule, the processes of merger and division (and also certain conversion processes) require that the shareholders commission a statutory auditor to examine the draft terms prior to the adoption of a relevant resolution. In most cases, however, the entity is allowed to – under a shareholders' decision – bypass this stage.

Ultimately, each reorganisation process must be concluded with a constitutive entry into the National Court Register; in other words, the process may be deemed effectively completed only at the moment of making a relevant entry. 

It is also worth noting that all conversion, merger, and division processes typically carry tax implications. Therefore, entities undergoing reorganisation may have additional duties in the form of reporting tax schemes.

Which entities can undergo particular reorganisation processes?

Whether an entity can undergo a particular reorganisation process depends on the type of the process. Until 15 September 2023, the situation was as follows:

• conversion was available to any commercial company and partnership;
• division was only applicable to companies (i.e. limited liability companies, simple joint-stock companies, and joint-stock companies);
• in the case of merger, three configurations were possible:
  • merger of companies,
  • acquisition of a partnership (i.e. general partnership, limited liability partnership, limited partnership, or partnership limited by shares) by a company,
  • consolidation of partnerships to form a new company.

As for conversion, it was (and still is) allowed under the provisions of the Commercial Companies Code to convert a civil-law partnership into a commercial company or partnership (under the same procedure as for commercial companies and partnerships) and to convert a sole trader business into a single member company – this type of conversion is subject to separate regulations which, however, bear certain similarities to the regulations governing conversion of companies and partnerships¹.

In spite of the wide range of possibilities indicated above, Polish law does not allow to convert a branch of a foreign entrepreneur into a commercial company or partnership.

Despite the fact that the concepts of universal succession and the continuity-of-entity are slightly different in their theoretical background, in practice, they have similar implications: following reorganisation, the "new company" (i.e. depending on the process: the converted, acquiring, or newly established company) assumes all the rights and obligations of the "old company" (the company being converted, acquired, or divided).

As mentioned earlier, the assumption of all the rights and obligations is particularly important and constitutes one of the reasons behind conducting such processes, as after their completion, an entity which is able to continue the previous activities comes into existence without the need to carry out the tedious operation of asset transfer, which might otherwise require necessary approvals of third parties.

Amendment to the Commercial Companies Code – new possibilities for Polish and international businesses

In concluding the general description of reorganisation processes, one should also take into account the amendment to the Commercial Companies Code of 15 September 2023.³

It introduced a number of changes (also for the purpose of the implementation of EU legislation) facilitating the internationalisation of the processes of division and conversion of companies and partnerships (the possibility of cross-border mergers was introduced already in 2013) and made it possible for partnerships limited by shares to participate in reorganisation processes on a broad scale⁴.  In addition, the amended legislation introduced a new type of division, i.e. the so-called hive down.

Hive down consists in the formation of a completely new company from a part of the assets of the company being divided, where the company being divided is the sole shareholder in the new entity⁵.

A more detailed description of the changes introduced by the amended legislation will be presented in separate articles. Nevertheless, we could assess them favourably at this point, as opening companies to cross-border reorganisation processes matches the realities of contemporary business dealings (due to the simplification of transferring the business abroad, in whole or in part) and should be especially interesting for multinational groups.

There is also no doubt that the inclusion of a partnership limited by shares in these processes is in line with the nature of this entity (which is in fact a hybrid of a partnership and a company), while the introduction of a new type of division constitutes an interesting and practical alternative to the traditional methods of expanding the structure of groups.

As you can see, the processes of company reorganisation may offer plenty of benefits, mainly due to the possibility of risk diversification, concentration of capital, or adjusting the legal form to changing market conditions. An additional incentive warranting such a response to volatile business realities is the possibility to transfer assets (including business contracts) in an easy manner, enabling effective continuity of business.

However, in spite of the various advantages, it is important to remember that conversion, merger, and division of companies are relatively complex processes, entailing serious, often irreversible consequences. Thus, at the stage of planning and execution of the processes in question, it is recommended to take advantage of experts' support, in particular in corporate law and tax law.

If you would like to apply the processes of conversion, merger, or division in your Polish entity, or if you seek advice as to the possibility or profitability of such solutions, feel free to contact our experts.

¹The process of converting a sole trader business into a single member company requires most of all the draft terms of conversion, which, as opposed to the draft terms of conversion of a company or partnership, must be in the form of a notarial deed and is subject to examination by a statutory auditor, irrespective of the form of the newly created entity.

²From the practical perspective, a characteristic feature of the continuity of entity is no change in NIP and REGON numbers; in the case of conversion, these numbers remain the same, and the converted company only receives a new KRS number.

³Introduced by the Act to Amend the Commercial Companies Code and Certain Other Acts of 16 August 2023 (Dz.U.2023.1705 of 25 August 2023).

⁴In accordance with the amended legislation, a partnership limited by shares may be divided (including by way of a cross-border division), acquire other companies or be formed by way of a merger, and undergo cross-border conversion processes. 

⁵In the case of the remaining types of division processes, similarly as in the case of a merger, the principle is that the shareholders in the company being acquired or divided become the shareholders in the newly created or acquiring company.