On April 18th, the government adopted a draft law amending the Commercial Companies Code and other laws and referred it to the Sejm for further work. According to the planned changes to the Polish legal system, a new type of division, Division by Separation (Polish: podział przez wyodrębnienie), is to be introduced. It can be widely used in practice, especially for transactions involving an organized part of an enterprise.
Division by Separation, once it becomes part of the Polish legal order, will be a side effect of implementing a package of changes related to cross-border division, transformation, and merger activities.
Article 160b(4)(c) of Directive 2017/1132, added in Directive 2019/2121, provides for a new type of company division that does not exist in Polish law. This division consists of transferring a part of a divided company's assets and liabilities to one or more acquiring companies in exchange for the issuance of shares or stocks in a newly formed company to the divided company.
The introduction of new types of cross-border transformation of companies into the Commercial Companies Code was an impetus to revise national types of company transformations. This type of division exists in German law (Article 123(3) of the Umwandlungsgesetz). The Directive refers to this division as "division by separation" (while "partial division" refers to "podział przez wydzielenie").
The difference from the previous division by separation is that the divided company holds shares in the company to which a part of its assets is transferred. In the case of division by separation, the shareholders of the divided company receive shares in the entity to which the assets are transferred.
In the rationale for the proposed changes, the following arguments were given for introducing the new type of division:
"1) Failure to take into account this new type of division in provisions relating to national transformations would lead to the phenomenon of reverse discrimination against Polish entities. Due to the principle of numerus clausus of types of transformations, it would not be possible to avoid this phenomenon in the process of applying the law;
2) Introducing identical types of transformations at the national and cross-border level will increase the competitiveness of Polish entities on the domestic market and the attractiveness of the Polish market for foreign entrepreneurs;
3) Introducing a new type of domestic company reorganization will increase the flexibility of these entities, which is particularly important when the reorganization aims to restructure the company. Spinning off unprofitable parts of the company into a separate entity may be driven by the need to reduce debt and enable development of the remaining parts of the business;
4) Unlike a typical contribution in kind in the case of a division by separation, there is a transfer by universal succession, which constitutes a significant simplification compared to a typical contribution in kind. Therefore, division by separation can also involve a reduction in formal burdens;
5) Introducing a new type of division at the national level can also increase flexibility in preventing monopolistic practices. The necessity of dividing a company may be a consequence of the President of the Office of Competition and Consumer Protection's finding of a monopolistic practice."
In particular, the new type of division will be useful in building holding structures, including in cases where the separated part constitutes an organized part of the enterprise. Previously, such an operation was carried out by contributing assets to a subsidiary company. However, the advantage of division is enormous in terms of operational ease of carrying out such a transaction and is related to universal succession, which does not exist in contributions in kind.
According to the rules concerning divisions: "Acquiring companies or newly established companies resulting from a division shall assume, on the day of the division or on the day of separation or separation, the rights and obligations of the divided company specified in the division plan." (I provide the wording from the draft of the legal amendment)
This also applies to licenses, permits, know-how, and references.
"The acquiring company or newly established company resulting from the division shall acquire, in particular, permits, concessions, and benefits related to the components of the divided company's assets allocated to it in the division plan, which were granted to the divided company, unless the law or the decision granting the permit, concession or benefit provides otherwise."
Division also allows for easy entry into procedural rights.
"A company that acquired, as a result of the division by separation or division by separation, part of the assets of the divided company in the course of a proceeding for the right covered by the transferred assets, shall enter into the proceeding for that right in the place of the divided company without the need to obtain the consent of the opposing party."
As planned, division by separation will benefit from a series of simplifications compared to other types of division. The division plan will be simplified, there will be no need to prepare a report justifying the division of the company, its legal and economic basis, and it will not have to be subject to the examination of an expert in terms of correctness and reliability (although in a different scope, a contribution in kind will be examined when it concerns a joint-stock company).
As with partial division, division by separation can be made from the company's own funds other than the share capital (which unequivocally simplifies the entire procedure, as there is no need to reduce the divided company's share capital).
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