Member Article

Comments on the consequences of failure to observe the required form when selling shares in a limited-liability company and the possibility of correcting this defect.

The current Commercial Companies Code went into effect in Poland in 2001, stiffening the requirements with respect to the form for transfer of title to shares in a limited-liability company (sp. z o.o.) Where ordinary written form had previously been required, it became necessary to have the buyer’s and seller’s signatures notarised. The consequence of failure to comply with the required form is the invalidity of the sale agreement, which means that the title to the shares is not effectively transferred.

Although this change in law has been in effect for over 13 years, defective agreements still crop up, and the effects of such irregularities may be severe. It must be pointed out that even a properly concluded share sale agreement (in the required form) will not exert its intended effects if there were agreements concluded in the history of previous transfers of the shares which were defective because the required form was not observed. This follows from one of the fundamental rules of law—that a seller cannot transfer to a buyer more rights than the seller holds. Therefore, if the seller did not effectively acquire the shares and does not have title to them, the seller cannot transfer title to another person, even through an agreement with notarised signatures.

It is thus apparent how important it is to conduct a thorough legal review to trace the entire history of transfers of shares in the company which the potential buyer is interested in acquiring. The fact that an irregularity involves an agreement signed more than a decade earlier does not erase the problem. It may turn out that a shareholder entered in the commercial register does not really hold valid title to the shares and is not aware of the problem. The fact that the putative shareholder intending to sell the shares was acting in good faith when he thought he was acquiring the shares does not improve the potential buyer’s position. Conducting a thorough legal examination of the company may protect the potential buyer against serious consequences, particularly if the fact that the buyer does not hold valid title to the shares comes to light only after some time has passed.

There is no easy way to correct these irregularities. As a rule, transactions transferring title to shares cannot be ratified retroactively. In many instances, the only way is to go back and conclude the agreement or agreements again, this time using the proper form. But this may be difficult or impossible if the ineffective transaction occurred so long ago that the prior shareholder has ceased to exist (for example through liquidation) and has left no legal successors.

The analysis of the earlier transactions involving sale of the shares should cover the agreement as such as well as all accompanying documents, such as consent by company authorities required by the articles of association. Lack of such consent results in “suspended ineffectiveness” of the share sale agreement. This defect does not have such far-reaching consequences as the failure to comply with the required form of the agreement, because it is possible to obtain the retroactive consent of the company, but it nonetheless introduces an undesirable state of uncertainty concerning the legal situation of the company and its owners, which should be avoided.