Law, Uncategorized

Simple Public Limited Company – New Solution for Startups?

On 2nd August, the President of the Republic of Poland signed an act which changes Polish code of commercial companies and introduces a widely anticipated and debated novelty – a simple joint-stock company (Simple JSC, in Polish – Prosta Spółka Akcyjna PSA). Ministry of Enterprise and Technology, being an author of the act, claims that such a company is a dedicated solution for startup companies and their specific issues. Can this new type of conducting business become an actual help for young entrepreneurs after its entry into force in March next year?

First look at the new act may lead to rather pessimistic conclusions when it comes to the actual simplicity of the company. The newly introduced chapter I.A has 133 articles – just slightly less than chapter regulating traditional company with limited liability. Many of those articles are, however, nothing more than repeated solutions for both types of companies – LLC and JSC already existing in Polish law. Real novelties in the Simple JSC can be summarized in a few points.

The most characteristic features of the Simple JSC is minimal share capital of just 1 PLN and possibility to contribute to company’s capital with work or service. It is an extremely controversial solution – after all, share capital is essential for functioning and the very existence of a joint-stock company. A company with low share capital may be considered untrustworthy, although there are more and more claims that share capital cannot be considered a guarantee anymore. Since 2008, Polish company with limited liability may have a share capital as small as 5000 PLN, which doesn’t offer much more financial security than 1 PLN, especially if we consider, that much of this sum will be quickly used up to launch activities of the company. On the other hand, a catchy perspective of just 1 PLN needed to start one’s own company is, in fact, a kind of marketing trick. Creation of company, its registration and preparation of its enterprise will definitely cost much more than that. Taking into account the fact that initial shareholders still need more than 1 PLN in their company, such a low minimal share capital is merely a legal curiosity, with little to none impact on real requirements.

Possibility of contribution with work or service does indeed seem to suit startup companies, by enabling people that cannot contribute financially, but have relevant skills and abilities to become shareholders. Nevertheless, it is a real revolution for a joint-stock company – this possibility opposes previous version of article 14 of Polish code of commercial companies, which explicitly forbade such contribution. A very insightful remark on this novelty has been included in opinion on the act by Institute of Law Studies, Polish Academy of Sciences. According to the document, contribution of work or service ”is in fact a contribution of debt – it is a commitment of future action, of which financial value is difficult to determine.” As a result, the Simple JSC introduces a new type of capital, called in Polish ”kapitał akcyjny” which literally translates into share capital. In the context of the Simple JSC  it is, however, a narrower term, taking into account only contributions that would comply with previous wording of article 14 mentioned above, and have a traditional contribution capacity. Regardless of the new type of capital, it is still safer to build company’s capital on financial contributions or something from a broad catalogue of things that have a traditional contribution capacity. For example, a potential shareholder may contribute a specific know-how (widely accepted as having a contribution capacity) instead of contributing work which uses that know-how. Additionally, extremely low requirements of share capital allow shareholders to contribute even with very limited funds.

An important aspect of the Simple JSC is a simplicity of creation and termination of a company. Like a company with limited liability, the Simple JSC may be created by notarial act or by filling a contract online. Official form of online contract is not yet known, and will be established by Minister of Justice after the act comes into force. Conclusion of contract online, using a dedicated S24 platform, is not a novelty, yet it contradicts a very nature of Simple JSC due to limitation imposed by new paragraph 4 of article 3007. It is impossible to contribute online using contributions other than financial ones, so there is no use in the broad catalogue of contributions possible in the Simple JSC. As authors of the project admitted, this limitation has been imposed due to technical shortcomings of the S24 system. Every kind of contractual provision that is not available in S24 has to be established in notarial act. As a result, creation of Simple JSC is virtually identical to creation of standard company with limited liability. On the other hand, A real improvement is a possibility to contribute all declared financial contributions up to 3 years after filling a motion to register a company. The 3-year treshold can be shortened and specified by the contract of company itself, or by a resolution of general meeting of the company or management board.

Termination of Simple JSC is largely based on standard solutions found in other limited companies, but there is an important difference in the fact that the Simple JSC can be removed from the registry by transferring all assets of a company to a single shareholder, who will then have to pay off all creditors and other shareholders of the company. Such a simple termination can be trigerred by resolution of general meeting of the company by majority of ¾ votes and quorum of 50%. It is important to notice that such termination has to be then allowed by registry court, where it has to be proven that termination will not harm shareholders or creditors. The judiciary control is conducted ex lege and does not require lodging an appeal against the resolution. Such  possibility clearly shows how the Simple JSC tries to correspond with needs of startup companies. A complicated, costly and long termination of such entities would be completely unnecessary and pointless, especially if we consider their small scale and considerable risk of failure.

As mentioned above, capital of the Simple JSC is different than share capital known in other types of companies. Shares in the Simple JSC have no par value and only reflect shareholder’s rights within company. Capital of the Simple JSC is much less formalised and it is not mentioned in a contract establishing the company. As a result, there is no need to amend the contract when the capital is changed. The capital is, however, mentioned in registry, so registry court will always supervise any changes. At the same time, the contract does have to mention the amount and data of shares themselves, so annulment of shares will always lead to amendment of contract. Free withdrawals from the capital may reach up to 5% of all obligations based on last fiscal year’s financial statement. This correlation between obligations and withdrawals is a result of dynamic, unstable nature of capital of the Simple JSC and establishes a fairly balanced alternative for strict requirements of Polish law. Withdrawals that exceed 5% require a standard procedure of notifying the creditors, while withdrawals below that treshold are limited only by a very general requirement of leaving the company with ability to perform its financial obligations in the next 6 months under normal circumstances. Lawyers rightfully criticise this solution, claiming that it is too general and insufficient. The bigger the company, the bigger its obligations will be, and as a result there will be a steadily growing amount of money that can be managed without creditors’ supervision. This creates an actual risk and shows that authors of the act did not manage to balance needs of shareholders and creditors, overly emphasizing right to manage company’s money by the former. Newly introduced article 30019 provides a solution similar to supplementary capital, yet it is still less strict than in standard joint-stock companies. Taking into account such general and rather unconvincing regime, it comes as no surprise that the Simple JSC is strictly non-public and cannot sell its shares on stock market. On the one hand, the Simple JSC regime would be hand extremely dangerous for potential small shareholders, while on the other hand it could create unfair competition against joint-stock companies with their more strict requirements.

Shares in the Simple JSC have no documentary form, which means that they are dematerialized. Dematerialization is a constant goal of Polish lawmakers, and a total dematerialization of joint-stock companies’ shares is expected to follow the Simple JSC’s example soon. Lack of documentary form is not only a part of general tendency towards modernization, but also a guarantee of safe trading and financial facilitation for the company. Strict regime of dematerialization for public companies does not apply to the Simple JSC. Another very modern solution is a possibility to use blockchain technology while creating a registry of shareholders. It may seem that the Simple JSC is a kind of proving ground for modern technologies that may be introduced to other joint-stock companies and limited-joint stock partnerships in the future.

Finally, the key novelty when it comes to management of the Simple JSC is a possibility to choose between standard structure of organs, with management board and optional supervisory body, and board of directors. The new board is supposed to combine representation, as well as executive and control duties in one body, with a possibility to choose within its ranks executive directors, obliged to perform one or more duties connected with management. The rest of directors then become non-executive directors and perform control duties. In this way, both supervision and management can be performed by a single body with clear division of duties, thus lowering possible costs. Of course, in both schemes general meeting remains the main law-making body of the company. Members of all bodies mentioned in this paragraph may take part in their proceedings and voting using means of direct distance communication, such as videoconferencing.

Apart from the innovations described above, the Simple JSC is a hybrid company copying numerous solutions from both existing limited liability and joint-stock companies with minor adjustments. Most of its solutions are therefore well known to entrepreneurs dealing with standard forms of companies and to lawyers. However, the Simple JSC as a whole is a completely new regime, and – in some cases – a real revolution in business environment. Contrary to the word ”simple” used in its name, the Simple JSC  is far from being simple when it comes to its interpretation and actual usage of new provisions. Complications arising from this type of business may be disappointing for many minor entrepreneurs. Of course, the Simple JSC may over time prove to be easier and more cost-effective than its traditional counterparts, but especially at the beginning of its operations it will need a proper back office and legal assistance. It is impossible to predict how will potential investors react to this new entity, considering that the Simple JSC seems to offer relatively poor protection of their interests. Legal discussions aside, we may certainly claim that the Simple JSC will find its users and will meet expectations of at least part of minor entrepreneurs and startup companies in Poland. Nevertheless, it definitely will not replace the company with limited liability as the leading form of company on Polish market.

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