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The dynamic growth of startups, innovative ventures in their early development stage, prompted the Ministry of Development to prepare a draft amendment to the Commercial Companies Code adding a new type of company: the simple joint-stock company (PSA). This will be done by adding Articles 300(1)–300(121) to the Code. Under the assumptions, these provisions are to take effect in 2020.
Running a business will be much easier
Startups are very often founded by young people with an excellent idea and very limited financial resources. The simple joint-stock company is intended to help young entrepreneurs start a business and enter the market.
The simple joint-stock company is to be a new type of capital company. The main purpose of this regulation is to introduce into Polish company law a legal form combining features of a joint-stock company and a limited liability company, with simple formal requirements and a relatively easy way to adapt the articles of association to the needs of the company and its founders.
Note!
The PSA is a solution not only for startups: the new regulations do not limit which entities may conduct business as a simple joint-stock company or specify its business activities. In practice, this means that any entrepreneur may use the new regulation.
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One zloty is enough to cover share capital
Until now, the defining feature of capital companies has been, as their name suggests, substantial share capital. Entrepreneurs wishing to operate as a joint-stock company must contribute share capital of PLN 100,000. According to Ministry of Development data, only 5% of startups choose to do so. A central premise of the PSA is to eliminate this obvious financial barrier: its share capital can be as low as PLN 1. The draft places no restrictions on the sources of financing that capital. Share capital may come from a venture capital fund or even crowdfunding.
Important!
PSA capital may be PLN 1 and divided into shares worth one grosz.
Such a small contribution is intended not only to make the new company form accessible but also reflects the legislature’s recognition that an innovative idea or know-how may be a more valuable contribution. The PSA will be able to issue special non-par-value shares in return for work for the company or an intellectual contribution.
Such low capital undoubtedly poses a serious threat to company creditors, whose claims may never be satisfied. For this reason the Ministry of Development proposes protective measures: a requirement for the PSA to maintain reserve capital, procedures controlling transactions between its shareholders or governing-body members and the company, and a solvency test. The solvency test means checking, before any payment to a shareholder, whether the transaction would threaten the company’s finances and solvency. These measures are intended to prevent shareholders from extracting company capital.
Under the draft, the PSA may issue several types of shares acquired by shareholders depending on the type of contribution:
- founder shares offered to the company’s founders in return for intellectual contributions, with restrictions on transfer;
- employee shares offered to employees free of charge or on preferential terms as additional motivation;
- adviser shares offered to company advisers and mentors, such as accountants or lawyers, in return for advice to the company;
- investor shares offered in return for monetary or non-monetary contributions;
- investor shares offered in return for an innovative idea when the company capitalises it.
The PSA will also be able to issue bonds and obtain convertible debt loans, a type of investment in which the investor can convert a claim into company shares.
A board of directors instead of a supervisory board
The PSA’s main body, as with a joint-stock company, will be the general meeting of shareholders. One simplification is the proposal to hold the general meeting electronically, by internet teleconference. This is intended to make it easier for shareholders to decide matters even if they cannot attend in person. Minutes of the meeting will not have to take the form of a notarial deed.
The PSA’s managing body will be a management board. Its members may be shareholders, especially investors, or third parties. Importantly, under the draft the PSA may appoint its management board for an indefinite term, until its dismissal.
Important!
The PSA’s bodies will be the general meeting of shareholders and the management board; a supervisory board or board of directors may be appointed optionally.
The decision to appoint a supervisory board will rest with the founders and shareholders. The draft assumes it will not be mandatory unless the company’s capital exceeds half a million zlotys. Importantly, a supervisory board may be replaced by a board of directors, a hybrid body combining management and oversight functions.
Complex relationships among shareholders
The Ministry of Development plans to introduce model solutions into the act governing relationships between the company and its shareholders. Such solutions already operate in practice, and placing them in legislation is intended to bring order to company organisations.
Examples of provisions included in the draft are:
- a drag-along clause, under which a shareholder planning to sell shares to another entity may require other shareholders to sell their shares alongside them;
- a tag-along clause, under which other shareholders may join a shareholder selling shares to a new investor;
- a shootout clause, under which, in a dispute and decision-making deadlock between shareholders, one shareholder must leave the company and sell shares to the other, who can either buy the shares offered or sell their own at the same price;
- a vesting clause, under which, after a period specified in the articles of association, a founder obtains the right to acquire new shares at a stated price;
- a right-of-first-refusal clause, under which a shareholder has priority over other buyers to purchase shares when another shareholder intends to sell;
- a liquidation-preference clause, under which a shareholder leaving the company is entitled to a specified distribution of the proceeds from selling their shares, for example recovery of the funds invested; this clause may also apply on liquidation of the company.
English-language documents as a convenience for foreign investors
A PSA may be established by preparing documents in traditional paper form or through the Ministry of Justice’s S24 online platform. The draft also allows company documents to be filed in English, undoubtedly a gesture towards foreign investors.
Important!
Electronic communication will play an extremely important role in the PSA: the company may be formed and dissolved by email. It will also be able to adopt resolutions in the same way.
No stock exchange listing for the simple joint-stock company
Under the assumptions, PSA shares will never be listed on a stock exchange, since the PSA cannot become a public company. This is intended to protect potential investors; stock exchange trading in its shares would also be impossible because of the many formal requirements concerning prospectuses and investor disclosure obligations.
The PSA will instead have to maintain a website containing all information needed by shareholders and investors, such as the dates of general meetings.
Winding up a PSA by email
Because fewer than 20% of all startup ventures succeed, the draft also seeks to simplify the company liquidation procedure. The model will be analogous to the liquidation of a limited liability company. The draft also envisages carrying out liquidation electronically, both filings with the National Court Register and company creditors’ claims.
Furthermore, under Ministry of Development plans, if the company faces the risk of a substantial loss, the general meeting of shareholders will have to pass a resolution to liquidate it.
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Summary
It should be noted that academic circles have strongly criticised the PSA proposals. Critics point out that a potential lack of capital and assets could very easily make the company insolvent and leave its debts unpaid. This threatens not only company creditors but also presents a significant risk to shareholders, whose shares may prove entirely worthless.
Startup communities, however, support the new idea, although only time will tell whether the new company actually meets the Ministry of Development’s objectives.
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