Poland’s Covid-related foreign investment regime: it may not show up as often as expected - but it can still trip you up!
In July 2020, Poland introduced a fully-fledged foreign investment screening regime as part of its Covid-19 economic defence package.* The regime covers a broad range of transactions (acquisitions of more than 20% of shares, voting rights or rights to profits may trigger a filing requirement) carried out by investors from outside the EU, EEA or OECD countries into Polish companies active in sectors considered to be sensitive, such as energy, defence, software, pharmaceuticals or cloud computing.
The wide scope of application of this new legislation initially raised concerns among both investors and Polish companies. They expected the law to place an excessive burden on potential investors. In addition, lawyers anticipated an influx of filings to the Polish competition authority, the agency responsible for reviewing such cases. However, after nearly a year of being in force, the Polish foreign investment regime has resulted in only limited enforcement from the Polish competition authority.
Much ado about nothing? Not really
The limited number of cases so far should not lead parties to overlook the new law when considering investments in Poland. This is because M&A transactions carried out without notifying the Polish competition authority as required are void, and responsible managers may face criminal sanctions including imprisonment.
To this end, it is particularly important to note that indirect acquisitions of Polish protected entities could trigger a post-closing filing requirement. In such cases, a filing should, as a rule, be made within seven days of closing. Until clearance is granted, an acquirer cannot generally exercise its corporate rights concerning the Polish protected entity.
In practice, post-closing filings should be regarded by investors as a default consideration for multinational M&A deals with a Polish element. In addition, the severe consequences for missing a Polish foreign investment notification may result in long-term negative consequences for the governance of Polish protected entities. This makes the Polish foreign investment requirement an important factor to consider when dealing with transactions concerning Poland.
Some questions are still up in the air
As with any new regulatory regime, investors continue to face ambiguity in relation to the wording and concepts of the new Polish rules.
Given the wide scope of the sectors covered by the law as well as its imprecise language, companies from a variety of sectors could fall within the scope of the Polish foreign investment review. This could even be the case if their main activity is not carried out in a sensitive sector. It remains to be seen how expansive the Polish competition authority will be in classifying companies as protected entities, but it cannot be excluded that the approach may indeed be broad.
A wide approach has, in fact, already been adopted by the Polish competition authority as regards investments by private equity firms whose funds are located outside the EU, EEA and OECD. The authority considers funds registered outside the OECD as falling within the scope of the law, even if the private equity firm’s management company is domiciled in the EU, EEA or OECD.
These novel concepts have led to uncertainty for deal teams as regards two aspects in particular, namely protected entities and foreign investors. As a result, we are receiving a significant number of queries on whether proposed M&A transactions are subject to the Polish foreign investment notification requirement.
The Polish foreign investment regime was introduced for an initial two year-period, which will end in July 2022. Although there has not been any public discussion about prolonging this period, the global push for tougher national foreign investment screening – evidenced, among others, by the recently introduced EU foreign investment mechanism and the European Commission’s call for EU Member States to make full use of their respective FI control mechanisms or to introduce such mechanisms – may lead to a decision to keep the law in place for longer than planned. However, these plans will not apply retroactively to M&A transactions carried out while the Covid-19 foreign investment regime applied.
*Additionally, Poland has a separate quasi-foreign investment regime concerning entities included on a list of protected companies. It covers any transactions concerning these companies, regardless of where the investor is domiciled. In January 2021 the list was extended and as of May 2021 covers 13 companies.