What is legal due diligence?
Legal due diligence is an essential element of any M&A transaction in Poland. Due diligence analysis delivers comprehensive information on the legal status of the target entity / assets, and risks involved in the transaction.
Legal due diligence in Poland – Introduction
Due diligence plays a vital role in a process of the acquisition of an entity or engaging in business with potential partners. Most usually due diligence it goes beyond the legal layer, involving analysis of various important aspects for the benefit of the buyer and/or the seller.
Due diligence is typically aligned with the M&A, however its relevance may extend to other, often smaller processes e.g. contractor verification.
Usual scope of legal due diligence in Poland
Due diligence is not separately regulated by Polish Law. Its scope is usually tailored by M&A attorneys considering objectives of the transaction and sector / industry in which the target operates. Due Diligence in Poland it has its own customs, which reflect unique national legal environment. Comprehensive due diligence is always performed by wider team of experts that verifies selected fields.
|
Fields |
Usual scope of due diligence |
|
Corporate |
● shareholders structure ● vendor's title to shares ● restrictions in share disposals ● pledge, usufruct and other encumbrances on shares ● verification of the Articles of Association ● verification of Shareholders' Agreements and Regulations of the Management Board ● shares and bonds emissions ● capital and personal relations with other entities ● surcharges, additional payments and other settlements with shareholders ● verification of the correctness of entries in the National Court Register ● verification of the fulfilment of reporting obligations, ● analysis of documentation included in the Repository of Financial Documents ● corporate governance ● process of company registration in Poland ● powers of attorney and authorizations granted by the Management Board ● corporate disputes |
|
Real estate |
● usufruct and other encumbrances ● mortgages and easements ● development conditions, master planning and conservation ● construction process ● reprivatisation ● management and maintenance ● property services and utilities |
|
Key movables |
● vendor's legal title ● lease agreements ● pledges, usufruct and other encumbrances |
|
Key agreements |
● agreements necessary to continue operation ● change of control clauses ● key commercial contracts ● insurance agreements |
|
Competition law |
● non-competition agreements ● exclusivity clauses ● consortium agreements ● market sharing agreements |
|
Antitrust |
● examination of common markets affected by the transaction ● merger clearance ● concentration notification to European Commission or Polish Competition Authority |
|
Litigation |
● pre-court disputes and claims ● court and administrative proceedings ● arbitration and mediation |
|
Regulatory |
● regulatory requirements for the Polish company to conduct operations ● permits, concessions and licenses |
|
Financial |
● review of financial documents (e.g. balance sheet, profit and loss account, fixed assets) ● credit facilities ● key loans ● sureties ● grants and subsidies ● guarantees and warranties |
|
Employment |
● employment structure ● HR policies ● employment and B2B contracts ● material liability agreements ● non-competition agreements ● non-solicitation agreements ● collective labour agreements ● trade unions ● labour disputes |
|
Environmental |
● decisions on the environmental conditions of a project or investment ● environmental clearance ● environmental restrictions and standards ● environmental fees |
|
Data protection |
● GDPR implementation status ● subject and scope of personal data processing ● contracts for entrusting the processing of personal data ● personal data protection inspector ● complaints and proceedings before the President of the Personal Data Protection Office |
|
Intellectual property |
● verification of the vendor's title to copyright and IP rights ● IP rights transfers and license agreements ● computer software licenses ● patents, trademarks, industrial signs and utility models ● confidential information, know-how and trade secrets ● copyright disputes and claims ● proceedings before the Patent Office of the Republic of Poland |
|
Tax |
● Tax arrears verification ● Corporate Income Tax (CIT), especially: ○ CIT returns ○ CIT calculations ○ classification of costs and revenues ○ correctness of the tax deductible costs ○ transactions with related parties and transfer pricing study ● Withholding tax (WHT), especially: ○ tax treatment of financing costs ● Value Added Tax (VAT), especially: ○ VAT returns and VAT refunds ○ VAT rates verification ○ correctness of the tax point ○ input VAT ○ international transactions on goods and services ● Transfer Tax (PCC) ● Real Estate Tax (RET) ● Personal Income Tax (PIT) |
|
Public aid |
● state grants and subsidies ● EU grants and subsidies ● tax exemptions ● exemption from social security contributions ● co-financing from the Polish Development Fund (PFR) ● disputes and proceedings regarding the settlement of state aid |
Tailoring due diligence scope
Scope of due diligence shall be always tailored to needs, objectives of the transaction, as well as, to the environment of the sector / industry.
Even simple due diligence of small or medium company in Poland may take significant time and cost if the examination is too wide or too comprehensive – not adjusted to real need of the investor. It order to save time and money it is crucial to define justified scope of due diligence and level of risk tolerance. Experienced M&A lawyers are always able to provide reasonable balance between informative value (scope), time and cost of particular due diligence.
Depending on your situation, due diligence may take a few days or even several weeks to complete.
Basic due diligence
We often encounter question – what shall be the basic scope of due diligence? Such questions are often placed when the transaction covers whole corporate group and Polish subsidiary is just minor part of lower importance. Answer shall be tailored to particular transaction, but corporate and basic financial due diligence would always be flagged as elementary.
Buyer and vendor due diligence
Essentially, due diligence is crucial for decision making process and negotiations. For this reason, it is usually performed for the interest of the potential investor i.e. buyers due diligence. Vendor due diligence is often underestimated. As a legal audit requested by the seller (vendor) it precedes the consultations with potential buyers. It aims to resolve all possible issues or risks, which otherwise will undercut the price of sale.
Examples of corporate risk
- Unclear corporate governance may ultimately lead to decision-making deadlocks.
- Improper representation or failure to meet requirement of legal form (notarial signature) may lead to invalidity of shares transactions.
- Encumbrances on shares may lead to acquisition of shares without effective control over the company.
- Absence of proper corporate governance / voting majorities may lead to loss of control / dilution of shareholding.
Example of key agreements risk
- Failure to properly review the company's contracts may result in overlooking clauses that terminate key contracts in the event of a change of control. This can lead to disruptions in business continuity.
Examples of IP risk
- Incomplete or improperly drafted IP rights transfer agreements may result ineffectiveness of IP acquisition.
- Overlooking expiring or short-term license agreements can lead to critical distortions and the loss of valuable rights in transactions.
- Verification that fields of exploitation are sufficiently broad for the intended operations under licence and copyright transfer agreements is essential to avoid the risk of breach of related contracts.
Examples of competition and investment control risk
- A comprehensive analysis of the transaction parties and their dependent entities is necessary to determine whether the concentration requires notification. Failing to conduct such a thorough examination poses a high risk of a sanction for a concentration without notification imposed by the Office of Competition and Consumer Protection (UOKIK), but more importantly, such transaction may be deemed invalid.
- The UOKiK
decision to approve a concentration may be overturned if it relies
on unreliable information from participating entrepreneurs,
potentially leading to
a transaction annulment.
Examples of real estate risk
- Undisclosed mortgages, natural defects; legal defects; claims by third parties, encumbrances on the property; servitudes are generally not visible to the buyer. These circumstances ultimately result in obstacles to the exercise of the right to property.
- Failure to comply with the local authority's master plan by the target company can lead to regulatory problems resulting in delays, fines and even bans on certain development activities. Investment in such entities, rather than profits, can result in losses.
Examples of employment risk:
- The risk of recognizing employee contracts as invalid (by law) - if signed in a way that is not compliant with current labour law requirements (for example exchanging scans with employees, signing with regular electronic signature such as DocuSign), which may lead to negative consequences in case of a dispute with employee or even a fine - in case of a labour inspection.
- Inadequate management of employee documentation, lack of appropriate training, or absence of work regulations in a company with over 50 employees poses a buyer risk, exposing the acquiring entity to potential sanctions in the event of labour inspection.
Risk markers in due diligence
Risks are usually evaluated using a scale that classifies them as high, medium or low.
- High risk is characterised by tough bargaining and a high probability of occurrence.
- Medium risk is associated with negotiation challenges but with a moderate likelihood of occurrence.
- Low risk is characterised by a smooth course of negotiations and a low probability of materialisation. Mostly, however, low risks are easily removable, even after the deal is closed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
