Mandatory dematerialisation of shares from a Polish banking perspective

Under the Act dated August 30, 2019 amending the Commercial Companies Code and certain other acts (Journal of Laws 2019, item 1798) (Amending Act), regulations concerning the mandatory dematerialisation of shares in businesses operating in the form of joint stock companies (spółka akcyjna) or limited joint-stock partnerships (spółka komandytowo – akcyjna) (hereinafter referred to as companies regardless of their legal form) will come into force on January 1, 2021. Provisions of the Amending Act regulating requirements as to the procedure of dematerialising shares and sanctions for failing to do so have been in effect since January 1, 2020.

The Amending Act will not affect public companies as their shares are already dematerialised in accordance with the Act dated July 29, 2005 on trading in financial instruments.

Non-public companies, i.e. those whose shares are not admitted to trading on a regulated market or multilateral trading facility within the territory of the Republic of Poland, will be able to dematerialise their shares by registering them with the Polish central securities depository operated by Krajowy Depozyt Papierów Wartościowych S.A. (KDPW) or a shareholder register operated by an organisation licensed to operate securities accounts (i.e. mainly brokerage houses).

Due to the fact that the process of dematerialising shares by registering them with the KDPW is far more complicated and costly, we believe that such method will be used significantly less often than dematerialisation via organisations licensed to operate securities accounts; therefore we have – for the most part – omitted the former method in our further considerations.

What awaits companies and shareholders in light of the Amending Act?

The steps to be taken by joint stock companies and limited joint-stock partnerships under the Amending Act and the effects arising from the aforementioned act are set forth in the table below:

Most important planned changes entering into effect on January 1, 2021:

1. Shareholder register

From January 1, 2021, shares will no longer have the form of a document. They will exist in the form of entries in shareholder registers kept by appropriate organisations licensed to operate securities accounts (i.e. mainly brokerage houses).

2. Entry in the shareholder register – new requirement

Under the Amending Act, only parties entered in the shareholder register of a given joint stock company or limited joint-stock partnership will be treated as its shareholders.

Furthermore, the amendment foresees that the acquisition of a share or the creation of a limited right in rem over a share shall occur – in principle – upon the registration of such event with the shareholder register. Such an entry will have a constitutive effect.

There are certain exceptions to the aforementioned rule. However, none of them concern the acquisition of title to shares or their sale in the enforcement of pledges. In other words, under the Amending Act, the acquisition of title to a share or the sale of a share when a pledgee enforces a pledge created over shares will also need to be registered with the shareholder register in order to be effective.

What is more, a registered pledge will also have to be entered in the shareholder register, which requirement will be independent of the obligation to enter a given registered pledge in the register of pledges operated by the relevant court of registration.

3. Certificate from the shareholder register

From January 1, 2021, upon the request of a shareholder or pledgee, the organisation operating the shareholder register will issue a certificate from the shareholder register (świadectwo rejestrowe) to such shareholder or pledgee within one week of its request. Such document will contain information on existing share transfer restrictions and encumbrances over a given share, as well as on the pledgee’s rights (if any) to exercise voting rights attaching to the share.

From the issue of a given certificate from the shareholder register until the date on which it expires or until it is returned prior to its expiry, it will not be possible to dispose of the number of shares stated on such certificate.

4. Exercise of voting rights by the pledgee

After January 1, 2021, assuming that shares have been effectively dematerialised, the exercise of voting rights will be possible after a certificate from the shareholder register confirming entitlement to exercise voting rights and the blocking of the appropriate number of shares in the shareholder register has been obtained. If shares are not dematerialised by January 1, 2021, both the shareholder and the pledgee will not be able to exercise voting rights attaching to shares.

A pledgee or usufructuary (użytkownik) will be able to exercise voting rights attaching to shares over which a pledge or right of usufruct (użytkowanie) has been created, if the relevant shareholder register or securities account contains an annotation about the creation of a limited right in rem or about the entitlement to exercise voting rights.

It is worth noting that the organisation operating the shareholder register will make an annotation about the creation of a limited right in rem at the request of a party having a valid legal interest in this respect (i.e. the pledgor or the pledgee), whereas an annotation that the voting right attaching to the encumbered share is vested in the pledgee can only be made at the request of the pledgee. In our opinion, the application for an annotation that the voting right is vested in the pledgee can be filed by the pledgor acting under a power of attorney given by the pledgee to such effect.

Securing the pledgee’s interests in connection with the dematerialisation of shares

1. Risk connected with the release of the share certificate by the pledgee

When pledges are created over shares as a form of financial collateral share certificates are often deposited with the bank or other financial institution acting as the pledgee, which holds them on deposit until the secured claims are repaid.

Due to the obligation to dematerialise shares, a given company will have to provide the organisation operating its shareholder register with (as required by such organisation) either (i) original share certificates, or (ii) a statement containing a list of shareholders, along with copies of share certificates delivered to the company; in both instances share certificates will have to be provided to the company beforehand.

The Amending Act contains general provisions outlining the share dematerialisation process, which assume that share certificates will remain in the hands of shareholders.

However, when a share certificate has been deposited with the pledgee, releasing it to the shareholder in connection with the dematerialisation of shares on general terms, prior to the repayment of the secured claims, may result in the expiry of civil or financial pledges created over shares or impede the enforcement of security interests created over shares prior to the date of mandatory dematerialisation (i.e. prior to January 1, 2021).

In order to eliminate the aforementioned risk, the principles of releasing share certificates should be regulated in an agreement so as to introduce a mechanism that provides the pledgee with full control over the course of the dematerialisation process and control over the share certificate.

As part of one of the solutions we propose, an agreement regulating the hand-over of share certificates is concluded between: (i) the pledgee (as the party holding share certificates on deposit), (ii) the company over whose shares a security interest has been created, (iii) the shareholder being the pledgor; and (iv) the legal adviser of the pledgee, acting simultaneously as the attorney-in-fact of the company.

Under this scenario, the company appoints the legal adviser of the pledgee as its attorney-in-fact authorised to collect share certificates from the pledgee and to (depending on the arrangements agreed):

(i) Provide the originals of the share certificates to the brokerage house on behalf of the company.
(ii) Hold the share certificates on deposit on the company’s behalf until they expire, i.e. until January 1, 2021 (if the original share certificates do not have to be provided in order to dematerialise shares).

The aforementioned solution will ensure that the process of dematerialising shares is conducted safely (from the perspective of the interests of the pledgee and other finance parties). We are of the opinion that no conflict of interests arises from the fact that the company is represented by the legal adviser of the pledgee, as the interests of the company and the pledgee in ensuring the safety of the share dematerialisation process are aligned.

2. Necessity to amend the pledge agreement

In addition, in connection with the Amending Act certain amendments have to be made to share pledge agreements. These include, among other things, the deletion of provisions under which shares are held on deposit by the pledgee, the introduction of the obligation that annotations about pledges and voting rights be made in the shareholder register and that the pledgee be provided with a certificate from the shareholder register.

Legal advisory services offered by Norton Rose Fulbright

In light of the significant nature of the changes in law arising from the Amending Act, we can offer the following legal advisory services to clients:

1. Review and adaptation of finance documents with a view to ensuring that dematerialisation of shares proceeds safely (from the perspective of the interests of the finance parties).

2. Ensuring that security interests created over shares remain valid and effective, all required annotations in the shareholder register are made, all required changes in the register of pledges are made and all rights vested hitherto in the pledgee, including voting rights attaching to shares, survive.

3. Where a joint stock company does not dematerialise its shares by statutory deadlines – analysis of the effects of such failure to dematerialise shares and proposal of appropriate remedial actions.