The Technology M&A Review: Poland
The technology sector in Poland belongs to industries that have rapidly developed in recent years. Players in the Polish market have benefited from a steady growth of one of the biggest economies in the region, good availability of funding and well-educated employees.
Last year was again successful in the technology M&A market. Despite a general slowdown in M&A activity in the second quarter of 2020, the technology sector remained generally unaffected with several exceptionally high-profile transactions that took place in the last 12 months. As an interesting trend we see initial public offerings (IPOs) as an exit route in the technology sector benefiting from favourable valuations and high demand on the stock markets.
There have been several success stories of companies in particular subsectors of the technology industry, including e-commerce, software developers, game development studios, fintech, IT services and data centres, with a highlight among them being Allegro. This e-commerce platform was established in 1999 and was sold in 2017 by Naspers to a consortium of private equity funds including Cinven, Permira and Mid Europa Partners for an enterprise value of approximately €2,750 billion. In 2020, Allegro made a debut on the Warsaw Stock Exchange; the most successful in the history of that stock exchange.
The Polish technology market attracts the interest of foreign investors that are both financial and strategic players. Alongside investments in Polish companies, direct investments into and the establishment of research and development (R&D) centres can also be seen. We are also observing increasing activity in the startup scene in the industry, which is fuelled by several support schemes offered by the state, a variety of venture capital funds, and more-and-more visible corporate venture capital funds, a new category of investors in Poland that were established by several major Polish companies to accelerate growth in the sector.
Year in review
In October 2020, Allegro made its debut on the Warsaw Stock Exchange, raising €2.1 billion and making it the most successful IPO in the history of Warsaw Stock Exchange. During the first day of trading, the company's market cap reached €14.7 billion.
In January 2021, shares in InPost, a leading Polish operator of automated parcel lockers, were offered and listed on Euronext Amsterdam. The IPO covered 35 per cent of shares and raised €2.8 billion, making it the largest IPO in Europe since 2018.
In March 2021, CCC, majority shareholder of eObuwie, the Polish online shoe shop, sold 20 per cent of shares in eObuwie to Cyfrowy Polsat and A&R Investments for approximately €220 million. Later that year, SoftBank announced its investment into eObuwie comprising uptake of convertible bonds that would be converted to shares at or directly prior to the company's IPO, which is contemplated to take place in the next 12–24 months.
In April 2021, Celnex acquired a 60 per cent controlling stake in a company operating approximately 7,000 communication sites of Play, the Polish mobile operator, where the investment value reached approximately €800 million. Subsequently, in July 2021, Celnex completed the acquisition from Cyfrowy Polsat Group of a 99.99 per cent stake of its telecommunications infrastructure operator, Polkomtel Infrastruktura, involving an investment of approximately €1.6 billion.
Legal and regulatory framework
The most significant laws and regulations that underly the legal and regulatory framework of the Polish technology M&A market are as follows:
- the Entrepreneurs' Law,2 which provides for general rules of conducting business activities in Poland;
- the Commercial Companies Code,3 which regulates the creation and functioning of companies, as well as the disposition of interest and shares in the same;
- the act of 29 July 2005 on the public offer and the conditions for introducing financial instruments to the organised trading system and public companies, which regulates the functioning and supervision of public companies, as well as the terms and conditions of making public offerings of securities;
- the act of 6 March 2018 on the rules of participation of foreign entrepreneurs and other foreign persons in trading on the territory of the Republic of Poland, which provides for general rules for the conducting of business activity in Poland by foreign companies;
- the act of 4 February 1994 on copyright and related rights, which regulates the protection of intellectual property (IP) rights;
- the act of 16 February 2007 on the protection of competition and consumers, which regulates the protection of competition and consumers, including merger control; and
- the act of 16 April 1993 on combating unfair competition.
In addition to the above, the respective laws and regulations of the European Union (EU) are also directly or indirectly applicable within the Polish legal system and, as such, potentially impact on the legal and regulatory framework of the Polish technology M&A market.
While the general rule under the Polish legal system is that of freedom of business activity, limited types of activities (e.g., financial services, gambling) require separate permits and licences that must be obtained from public authorities or registrations. As a result, certain regulatory requirements, relating in particular to the finance and insurance sector, may impact on the technology sector, such as licences required for payment companies, and the registration and supervision by the Polish Financial Supervision Authority of insurance brokers (applicable to, e.g., online insurance comparison platforms).
Key transactional issues
i Company structures
Polish law differentiates between the following types of companies:
- registered partnerships;
- professional partnerships;
- limited partnerships;
- limited joint-stock partnerships;
- limited liability companies (LLCs);
- joint-stock companies (JSCs) (private and public); and
- simple joint-stock companies (SJSC).
In addition to the above, business activity in Poland is also often conducted (1) with respect to individuals, through individual business activities; and (2) with respect to foreign companies, through a branch office (that needs to be registered with the Polish companies register).
Of the above, the company form that most often constitutes a target in M&A transactions in the Polish market is the LLC. Its most notable characteristics are as follows:
- An LLC may be established by one or more individuals or legal persons (e.g., corporations) with the proviso that an LLC cannot be established solely by another single-shareholder LLC.
- The establishment of an LLC requires, in particular, the execution of a company's articles of association and registration of the company with the Polish companies register.
- The minimum amount of an LLC's share capital is 5,000 zlotys. The share capital is divided into shares with a nominal value of not less than 50 zlotys.
- A transfer of shares in an LLC must be made in writing with signatures certified by a notary public.
- The shareholders of an LLC are not liable for its obligations (in practice, they bear financial risk only up to the value of their contributions to the company). On the other hand, an LLC bears liability for its obligations with all of its assets. In addition, if execution against an LLC proves ineffective, the members of its management board may be held liable for the company's debts and any tax and social security arrears unless they have filed a motion for bankruptcy in due time.
- The management board is the corporate body of an LLC, which is responsible for running the day-to-day business activities of the company and has the exclusive competence to represent the company towards third parties. A supervisory board, exercising supervision over the management board, may also be optionally established in an LLC (however, it is required in specifically enlisted circumstances).
- The most significant decisions regarding an LLC are made by its shareholders acting through the shareholders' meeting. Shareholders also have the right of individual supervision over the company (consisting of, for example, the right to inspect the books and documents of the LLC or to request explanations from members of the management board).
Because of its more complex and formal organisational structure with advanced corporate governance mechanisms, the JSC is a company form that is designed for large businesses with a significant number of shareholders that hold a passive position and have limited rights of individual control over the management board. Unlike the LLC, the JSC may become a public company listed on the stock exchange. Certain types of businesses (such as banks and insurance companies) obligatorily need to be conducted in the form of a JSC.
A recent development in the Polish legal system as regards the available legal forms of conducting business is a simple joint-stock company, which is a new structure, introduced as of July 2021, designed for young companies or people who are just planning to start a business, including technology startups. The crucial advantages of the SJCS as compared to the LLC and JSC are listed below; however, they have not been tested in practice yet because of the recent introduction of this legal form:
- low capital requirements (i.e., share capital that is not lower than 1 zloty);
- a flexible approach to corporate bodies, including the possibility of appointing a board of directors that combines the features of a management board and a supervisory board (while the two-tier structure is mandatory for the JSC);
- simple procedures and more freedom to adopt resolutions remotely; and
- flexibility in terms of types of shares and company rules, including shares for work or services.
ii Deal structures
The typical deal structures in M&A transactions on the Polish market are as follows:
- with respect to private (i.e., not listed) companies, share purchases or taking up shares in an increased share capital; and
- with respect to public (i.e., listed) companies, tender offers.
Mergers are not commonly used as a means of conducting deals on the Polish market. However, they are at times performed as a post-closing action (e.g., to simplify the corporate structure).
Tender offers are often succeeded by the target's delisting (i.e., removal of a listed company from the stock exchange). Alternatively, a delisting may also be performed prior to a transaction (as a result of which the target is a private company at the moment of the transaction closing).
The involvement and roles of advisers in M&A transactions on the Polish market largely depend on the size and nature of the transaction and the characteristics of the target. Larger transactions often engage a diversified set of advisers, including investment bankers, who usually lead the process and coordinate the work of the advisers responsible for respective subject matters (e.g., legal, tax, financial, environment). On the other hand, in smaller transactions legal advisers are at times the only advisers who coordinate the process.
iii Acquisition agreement terms
Depending on whether a transaction is structured as an acquisition of all shares or a portion of all shares, or taking up new shares in the increased share capital, the key documents governing the transaction are customarily the following:
- in the case of an acquisition of all shares, only the share purchase agreement;
- in the case of an acquisition of a portion of shares, the share purchase agreement and shareholders' agreement; and
- in the case of taking up new shares in the increased share capital, the investment agreement and the shareholders' agreement.
In the case of transactions relating to public companies, the key transaction documents are often an investment agreement or a tender commitment agreement, and the transaction terms need to reflect the specific requirements of capital markets laws such as, for example, the tender offer process, transaction settlement and disclosure obligations.
The key provisions of share purchase agreements in M&A transactions on the Polish market customarily have the following features.
The consideration is typically stipulated in cash rather than in shares. The respective provisions often contain purchase price adjustment mechanisms (further to which the consideration is finally determined dependent on the closing position in relation to the assumed debt or cash, working capital or net assets) or, in some cases, earnout mechanisms (further to which an additional consideration may be payable to the seller after completion, usually dependent on the performance of the acquired business during an agreed earnout period).
Representations and warranties
The scope of representations and warranties largely depends on the character and negotiation position of the parties. While representations and warranties typically cover the whole range of a target's business activity, the level of their thoroughness differs depending on the transaction and is often higher in the case of strategic sellers as compared to private equity (PE) sellers. In transactions involving PE firms (either on the sell or the buy side), we see an increasing applicability of warranty and indemnity insurance.
The most common closing condition is the requirement to obtain a merger clearance from the President of the Polish Office of Competition and Consumer Protection, which is required if the following turnover thresholds have been met: the aggregate worldwide turnover of the parties to the transaction exceeded €1 billion in the preceding financial year, or the aggregate turnover of the parties to the transaction exceeded €50 million in Poland in the preceding financial year with the proviso that – in addition to certain other exceptions – the merger clearance is not required if the target's turnover did not exceed €10 million in Poland in any of two preceding financial years.
Notwithstanding the above, the parties often agree on certain additional deal-specific conditions precedent (e.g., obtaining waivers in relation to change of control clauses with material customers) or include applicable regulatory action.
The most common pre-closing covenant is the obligation to run the target 'in the ordinary course of business in accordance with past practices', which is supplemented with a specification of restricted actions relating to shares in the target or material aspects of the target's operations, or both (e.g., a prohibition on increasing share capital, establishing encumbrances on shares, termination or amendment of material agreements).
As in the case of representations and warranties, the presence and scope of indemnification clauses depends on the parties' negotiation position. In the majority of cases, if indemnity clauses are agreed upon, they cover specific risks concerning taxes and social security contributions, and in the case of M&A in the technology sector, identified risks with respect to IP matters. The IP indemnities may cover, for example, irregularities with respect to key IP held by the target. Unlike several other countries, we do not often see general tax indemnity clauses agreed to in Polish M&A transactions.
M&A transactions are often financed by strategic investors with equity or (partially or in whole) using existing financing facilities, and in the case of financial sponsors (in particular private equity firms), often by a mix of debt and equity. Mezzanine instruments are also seen at times in deals as part of acquisition financing.
v Tax and accounting
In the case of sellers who are tax residents in Poland, Polish tax law levies a 19 per cent corporate income tax (CIT) on income from sales of shares. The taxable income is the difference between the purchase price of the shares and the costs of purchasing or acquiring them.
A sale of shares in Polish companies by investors who are not tax residents in Poland but who are residents of states with which Poland has concluded a double tax treaty (DTT) is generally not subject to tax in Poland. Pursuant to the provisions of the respective DTTs, a sale of shares is subject to taxation in the state where the seller is tax resident. Different regulations may apply in the case of companies in which most of the value is derived from owning real estate located in Poland; however, it most likely is not applicable with respect to technology companies.
A sale of shares in a Polish company will also be subject to civil law actions tax (CLAT). CLAT applies regardless of whether a seller is a Polish or non-Polish tax resident and is levied on the market value of the shares. The tax rate is 1 per cent. CLAT is non-recoverable and is payable by the purchaser.
However, a sale of shares in a joint-stock company is exempt from CLAT if: (1) the purchaser is an investment company (e.g., brokerage house) or a foreign investment company; (2) the sale is carried out with the intermediation of an investment company or a foreign investment company; (3) the sale is carried out on a regulated stock exchange; or (4) the shares are sold outside of a regulated stock exchange by an investment company or a foreign investment company that first purchased the shares on a regulated stock exchange.
Polish tax regulations do not contain a separate capital gains tax. Instead, capital gains taxation is part of the standard income tax regulations.
Dividend payments are subject to 19 per cent income tax. The tax is calculated and paid to the tax authority by the company paying the dividend. The same regulation applies to both Polish and non-Polish recipients.
Polish tax law also provides a general exemption from this tax if the following criteria are met: (1) the paying company is registered or managed in Poland; (2) the receiving company is subject to worldwide taxation in Poland, another EU Member State, or a state belonging to the European Economic Area (EEA); (3) the receiving company owns at least 10 per cent of the shares in the paying company for at least two years (this condition may be fulfilled after payment); and (4) the receiving company is not exempt from tax on its total income (regardless of the source of its achievement). In the case of non-Polish recipients, the provisions of the respective DTTs may provide more favourable rules.
Polish CIT regulations include a special 5 per cent CIT rate applicable to qualified income (income calculated according to a special formula) from qualified IP rights. Qualified IP rights include patents, rights to integrated circuit topography or copyright to a computer program.
Moreover, a CIT research and development tax relief is available in Poland. The relief allows one to deduct the costs of research and development from the CIT tax base. Research and development include both scientific research and development works and covers, inter alia, creating improved or new products, processes or services (with the exception of activities involving routine and periodic changes to the products, processes or services). R&D costs that may be deducted from the CIT tax base include employees' wages (proportionally to the part in which the time allocated to R&D is part of their overall working time), the purchase of materials directly linked to the R&D or the purchase of specialist equipment.
Accounting in Poland may be carried out according to the provisions of the Polish Accounting Act or the International Financial Reporting Standards (IFRS). IFRS apply, for example, in the case of companies listed on the stock exchange or when a company is part of a capital group in which the head company prepares its consolidated financial statement according to IFRS.
vi Cross-border issues
As a general rule, foreign investors from EEA countries are treated equally to Polish investors (i.e., the same restrictions are applicable with respect to both these categories). On the other hand, foreign investors from outside EEA countries may conduct business activities in Poland with certain limitations as regards the types of companies: only limited partnerships, limited joint-stock partnerships, LLCs, SJSCs and JSCs are available as investment vehicles, although international treaties between Poland and respective countries may provide otherwise.
The most notable restrictions relating to foreign investors are as follows:
- Further to legislation adopted in connection with the covid-19 pandemic, the achievement of a substantial participation (i.e., at least 20 per cent of the shares) or the acquisition of dominance in a Polish company that is deemed material from the perspective of the Polish economy by an entity from outside EEA or OECD requires an additional clearance from the President of the Polish Office of Competition and Consumer Protection. The scope of targets that fall under the above restriction is relatively broad and includes in particular companies that develop or modify software in specific areas, but also public companies and other companies that carry on business activities in enlisted scopes, for example, telecommunications activities, and the production of medicines and other pharmaceutical products. Transactions performed in breach of the aforementioned restriction would be invalid, and the persons responsible could be subject to both financial and criminal liability.
- Limitations on the acquisition of real property located in Poland (in particular agricultural real property), including interests and shares in companies being owners (or holders of perpetual usufruct) of such real property (however, in most cases such limitations will not be applicable with respect to technology companies).
The main legislation acts regulating IP rights in Poland are:
- the aforementioned act of 4 February 1994 on copyright and related rights;
- the Industrial Property Law,4 which regulates, inter alia, inventions, utility models, industrial designs and trademarks;
- the act of 27 July 2001 on protection of databases; and
- the aforementioned act of 16 April 1993 on combating unfair competition, which relates to the protection of know-how and business secrets.
In addition to the above, a number of European and international regulations relating to IP protection are also effective in Poland. At the European level, IP protection is consistent and harmonised among Member States, and Poland's law regarding IP rights is also aligned with international regulations.
Recent rulings that are of importance for the protection of IP include:
- the judgment of the Court of Justice of the European Union (Fifth Chamber) of 2 April 2020 in Coty Germany GmbH v. Amazon Services Europe Sàrl and Others, which addresses a key issue for trademark protection of when the trademark is actually used, which in turn makes it possible, inter alia, to determine whether there is a risk of an infringement of the exclusive rights of a third party or whether it is necessary to obtain a licence from the rights holder to use the trademark; and
- the resolution of the Supreme Court issued on 18 May 2021 on the method of calculating the limitation period for claims for trademark infringement, according to which, if the infringement of the trademark is of a repeated nature and continues at the moment of filing a non-pecuniary claim, including the claim for prohibition of infringement, the five-year limitation period shall run from each day on which the infringement occurred.
As regards the specifics of technology-related transactions, particular attention should be paid to:
- the limited lifetime of particular IP rights (patents, designs);
- potential assistance from the seller after the acquisition of IP rights to provide updates in relevant databases with respect to the current owner of IP rights;
- co-ownership of particular IP rights; and
- if the subject of the transaction are computer programs, the aspect of providing the source codes to computer programs.
Non-competition agreements with employees may be concluded both in relation to ongoing employment or with respect to the post-employment period. As regards the latter, the key statutory limitation is the minimal amount of compensation received by an employee in connection with the non-competition obligation, which should not be lower than 25 per cent of the compensation received by the employee in the period of work directly preceding the termination of employment, corresponding to the non-competition period.
The acquisition by an employer of the objects of IP created, made or developed by an employee depends on the type of IP as follows.
i Inventions, utility models and industrial designs
Protection rights are vested with the employer by virtue of law if they were made as a result of the performance of obligations under the employment contract or other type of contract. However, the employer and employee may agree that even in the case of, for example, an invention being made as a result of the performance of duties under an employment or contract relationship, the creator will still be entitled to a patent, utility model or industrial design.
ii Copyrightable works
Unless otherwise provided in the employment contract, an employer whose employee has created a work as part of his or her duties under the employment relationship acquires, upon acceptance of the work, all the economic copyrights to such work within the scope of the purpose of the employment contract and the unanimous intention of the parties. If the employer does not undertake to distribute work within two years of the date of its acceptance, the rights acquired by the employer may return to the author, unless otherwise provided for in the employment contract. The parties may agree on a different time limit to undertake distribution of a work.
iii Know-how, trademarks
Polish regulations do not provide for a statutory mechanism for acquisition by an employer of the right to obtain trademark protection or rights to know-how. Therefore, the above should be addressed by the employer (principal) in the contracts with employees (contractors).
Personal data is a material factor that needs to be considered in a M&A transaction in all its stages. It gained importance after Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (GDPR), entered into force, when a risk of high penalties that may be imposed under the GDPR arose. Because there are no country-specific requirements in this context, the general rules set out in the GDPR would apply.
It is thus important – at the initial stage of a transaction – to consider the legal basis for sharing and processing the personal data contained in a transaction. One of the possible grounds for legal processing of personal data contained in such documentation would be a legitimate interest of the data controller (i.e., the potential buyer). However, availing of this legal ground does not allow the buyer to obtain all the personal data processed by the target company, including, for example, employee data, at the pre-closing stage.
The data minimisation principle allows a person to obtain and process only such data that is adequate, relevant and limited to what is necessary in relation to the purposes for which it is processed. As an example, for the purposes of a transaction, only limited statistical ('aggregated') data regarding employees may be relevant and necessary: it may be permissible to share personal data concerning each individual employee at this stage in only a small number of cases.
It is common for Polish technology companies to apply for and receive subsidies or other incentives, or both. Typical subsidies currently comprise the following:
i Subsidies financed from EU funds that are granted by governmental entities
These subsidies are granted for the development of specific projects. The respective agreements governing the granting, utilisation and settlement of subsidies often contain specific change of control clauses or quasi change of control clauses that provide for the obligation to ensure the durability of a project over a specified period of time, whereas any modification in this respect requires either the notification or consent of the financing entity. Given the vagueness of the above obligation and difficulties connected with its interpretation, parties to a transaction consisting in the acquisition of a target being a recipient of a subsidy often decide to comply with the respective obligations or secure the underlying risk through an indemnity mechanism.
ii Subsidies connected with the covid-19 pandemic
These subsidies are granted by various governmental or quasi-governmental entities to ensure companies' financial liquidity in the period of instability caused by the covid-19 pandemic. The most substantial subsidies in terms of value are granted by the Polish Development Fund, whereby agreements governing the granting, utilisation and settlement of the discussed subsidies do not currently contain any specific change of control clauses.
Legal due diligence of technology companies does not materially differ from the due diligence conducted with respect to other targets, although more emphasis is usually put on issues relating to IP and information technology. The key matters customarily investigated are:
- corporate matters, such as title to shares (including encumbrances established on shares), reorganisations and resolutions of corporate bodies;
- title to and protection of IP;
- contracts and business relationships, including financial arrangements;
- employment matters, such as terms of employment and remuneration, contracts with key employees and bonus arrangements;
- protection of personal data;
- litigation; and
- title to fixed assets, including real property (owned or leased).
In addition, depending on the target's nature, legal due diligence may also cover regulatory issues and environmental matters (if applicable to the target's business).
Legal due diligence with respect to IP often concerns key value drivers of the target or assets that are indispensable for continuing operations post-completion. Therefore, as a rule, comprehensive due diligence is conducted in this area. Particular focus is placed on the title to key IP used by the target, as well as the scope of those rights. This covers, for example, the agreements based on which the target acquired or uses IP and proper registration of all key IP in the relevant registers. Pending and threatening litigation with respect to IP are also an area of concern.
Another key area of the review are a target's rights to key IT systems, including the rights to upgrading the systems and hardware, as well as systems' maintenance. A review of the rights to key domain names may also be important, as well as the rules relating to R&D and protection of know-how.
Since the GDPR entered into force, due diligence with respect to data protection has become increasingly important. In practice, during the legal due diligence process, the relevant documentation as made available by the vendors is analysed with a view to determining whether the target has properly implemented the requirements resulting from the GDPR.
In some instances – in particular in relation to technology – companies where data, including personal data, is the main asset, additional research is conducted based on dedicated questionnaires and a factual (i.e., not only formal) analysis. However, because of the dynamics of M&A transactions, the research of the data protection area usually does not include a full audit of compliance with the GDPR (in the form of a gap analysis).
Other areas that are of key importance for conducting proper legal due diligence include, inter alia, compliance with regulatory requirements that apply to specific activities, such as with respect to financial services; and, in the case of businesses directed to consumers, compliance with legal requirements in that area.
Usually, the decision as to whether the respective arbitration court is Polish or foreign depends on the value of a transaction (due to the underlying arbitration costs) and the origin of parties to the transaction (i.e., Polish or foreign). The most popular Polish arbitration courts are the Court of Arbitration at the Polish Chamber of Commerce and the Court of Arbitration at the Confederation of Lewiatan.
As a general rule, foreign judgments are recognised and enforced in Poland, subject to certain exceptions (e.g., if a judgment was issued in a case that should have fallen under the jurisdiction of Polish courts).
The overall forecast for the industry is positive and there are strong indications that the rapid growth of the technology sector in Poland will continue. The general perception is that the technology market is not affected by the covid-19 pandemic and we see many cases where the implications of the pandemic constitute an additional growth factor.
Looking at the activity on the Polish M&A market we see a very good deal flow in the sector, with the industry quickly recovering from a slowdown in the second quarter of 2020. This is generally because of the positive outlook, the variety of investors seeking opportunities, as well as the number of interesting targets on the market. Potential deals may relate in particular to e-commerce, software companies and infrastructure. However, the current situation on the market may still be influenced by the ongoing covid-19 pandemic and its implications. This factor should be still closely observed.
In M&A negotiating and contracting, we see a rather balanced position between sellers and buyers. This shows confidence of the investors in the industry and is also an implication of a stable deal flow. With respect to potential legal changes, we see a trend in the region that will need to be monitored over the next months, to consider extensions of the FDI screening rules to cover 'critical technology' as it has been the case recently in some European countries (e.g., Germany).