Guide to Venture Capital 2021 – Poland | Global Law Group
[co-authors: Tomasz Kański, Jan Pierzgalski]*
Member firms of the World Law Group recently collaborated on a Global Guide to Venture Capital that covers over 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on capital transactions. -risk (and more!).
The guide does not claim to be exhaustive and the laws in this area are evolving rapidly. In particular, it is not a substitute for professional and detailed legal advice, as facts and circumstances vary from case to case and national regulations may change.
This chapter covers Poland. Check out the full guide.
Sołtysiński Kawecki and Szlęzak
In your jurisdiction, what industries 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 venture capital investments is not transparent, it seems that the e-commerce, communication, IT, FinTech and healthcare sectors have recently gained attention.
Do venture capital funds require approval before investing in your jurisdiction?
No general approval is required for venture capital funds to invest in Poland. The specific approval requirements may depend on the sectors (for example, the acquisition of shares in authorized financial entities may require prior approval), or whether the target owns agricultural land (in this case the Polish public authority has right of first refusal for target shares) or may apply to strategic entities (particularly in the energy sector), but they are rarely relevant for venture capital investments.
Are there any legal limits to an offshore venture capital fund that acquires control or influences the business, operations or governance of an investee?
Regarding the COVID-19 situation, a new regulation on the 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) intend to directly or indirectly acquire a significant interest (more of 20% of the votes, shares in a partnership, or profit participation) or control of a protected entity must make a formal deposit, and the competent authority can oppose (prohibit) the investment . For the purposes of the Regulation, a protected entity is an entrepreneur (in particular a company) who fulfills both of the following conditions: (a) having a turnover in Poland greater than EUR 10,000,000 during one or more other of the two previous years; and (b) be a public enterprise or carry out an activity listed in the regulation. The list of activities covers various activities related to the energy sector, telecommunication activity, preparation or modification of software used for purposes listed in regulation and cloud computing services.
The Polish government also has a tool to control investments (especially foreign investments) in companies which are strategic for national interest and security. However, this regulation is probably not relevant for venture capital investments, as the current list of protected entities includes large companies in the energy and telecommunications sectors, which do not fall within the typical scope of interest of companies. venture capital funds.
In addition, as a rule, the acquisition of real estate in Poland or of 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 ‘Interior. This restriction, subject to some minor exceptions, does not apply to foreigners from the EEA or Switzerland, nor to investment funds under Polish law (regardless of the domicile of the sponsors) or to investments in companies. public companies listed on the Warsaw share. 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 antitrust analysis before investing? When would such a requirement be triggered?
Larger-scale transactions that may influence the market are the responsibility of both Polish and European competition authorities (respectively the President of the Competition and Consumer Protection Office (UOKiK) and the European Commission). Any M&A operation may require an authorization from the competition of the UOKiK, provided that the turnover thresholds are exceeded and that the operation results in the acquisition of control over the target or the creation of a joint venture. The transaction requires authorization from UOKiK if the combined worldwide revenue of all the entities involved (i.e. both the buyer and the target or all the shareholders of the joint venture) exceeds the equivalent of EUR 1,000,000,000 or if the Polish turnover of these entities exceeds the equivalent of EUR 50,000,000 (unless the Polish turnover of the target or one of the shareholders of the JV exceeds 10,000,000 EUR). Until the UOKiK renders a decision authorizing the transaction (or the expiration of the legal deadlines for the UOKiK to issue the authorization, which is one or four months, depending on the complexity of the transaction), The purchaser must refrain from concluding the transaction. Antitrust issues are particularly relevant in the case of a commercial sale exit.
What are the preferred structures for investing in venture capital operations? What are the main drivers of each of these structures?
The venture capital investment is generally structured as an equity investment through the new issuance of shares in the equity capital of the target. The target company is usually incorporated as a limited liability company (Polish: spółka z ograniczoną odpowiedzialnością) or a joint-stock company (in Polish: spółka akcyjna). The limited liability company is a simpler and less expensive company than the capital company, while the joint stock company allows the setting up of more complex equity structures (via for example warrants or convertible bonds) and may be listed on the stock exchange. The main drivers of the structuring of venture capital investments are the level of control obtained by the venture capital fund and the planned exit mechanisms.
Are there any restrictions on the rights granted to venture capitalists in public enterprises?
No, there are no such restrictions (with the exception of the regulations described in point 3 concerning the control of foreign investments in protected entities).
What protections are generally offered to venture capitalists in your jurisdiction?
As a typical venture capital investment is made through the acquisition of shares, venture capitalists benefit from shareholder protection rights. The extent of these rights depends on the form of the company, the participation threshold and the provisions of the articles of association of the company concerned. In a limited liability company, a shareholder may benefit from an individual right of control (including access to all company files), while in a joint stock company, control rights are exercised by the board monitoring. The basic anti-dilution protection is a statutory pre-emption right for the new issue of shares (this right can only be excluded by a resolution of the shareholders adopted by a majority of 4/5 in a joint-stock company and 2/3 in a limited liability company. company, unless the company statute provides for more stringent requirements). Amendments to a company’s articles of association and the issuance of new shares require a shareholders’ resolution.
Usually, the company’s statute provides for specific protection measures through the individual rights of shareholders (in particular the individual right of the shareholder to appoint members of the management board and supervisory board), the right of veto on certain resolutions, the thresholds majority required for the adoption of certain resolutions aligned with investor participation or limitation of the transferability of shares.
Investor rights can also be contractually protected by a shareholders’ agreement and / or an investment agreement. Key issues regulated by these agreements often include representation and guarantees (and liability for their inaccuracy), control of the entry of new investors, and arrangements facilitating an exit from the investment (e.g., monitoring, dragging, right of first refusal). The provisions of shareholders’ agreements and / or investment agreements are generally reflected – to some extent – in the articles of association of the company.
Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
In recent years, warranty and indemnity insurance has become more common in M&A transactions in Poland. However, it is not typical of venture capital investments due to the cost and generally higher risk tolerance of investors in this type of transaction.
What are the 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 (eg, a private equity fund or other venture capital fund); (iii) management buyout; and (iv) the buyout by the founders. The IPO is the most difficult organizationally and the most expensive way out, due to legal and regulatory requirements. As a result, the private sale of shares to industry buyers, other funds, managers or founders is more common. The type of exit depends mainly on the success of the company and, therefore, on the entities interested in investing at a later stage. From a legal standpoint, the general risks and transaction structures are generally similar for all forms of stock sales. However, specific challenges may arise depending on the individual situation and the characteristics of the company as well as the goals of the new investor.
Do investors generally opt to exit the public market via an IPO? Are there specific public market challenges to overcome?
While an IPO is not a common exit route due to costs and organizational requirements, it does occur occasionally. Exit via NewConnect – a Polish multilateral trading facility – is much more likely than via the Warsaw Stock Exchange which is a regulated market.
*Sołtysiński Kawecki and Szlęzak