Valuation of assets of companies merging by acquisition: Practical doubts
The Polish Commercial Companies Code allows mergers of both companies and partnerships, except that a partnership (other than a joint-stock limited partnership) cannot be the acquiring entity or newly incorporated entity. For mergers of companies, the procedure begins with agreement of a merger plan. The necessary elements of the merger plan and annexes are listed in the regulations, but the wording is not clear. Mistakes in preparing the merger plan may cause the court to refuse to register the merger. In this article, we focus on doubts regarding the methods of valuing the assets of the acquired and acquiring companies during the merger of companies by acquisition.
In a corporate merger in Poland, the merger plan is agreed in writing between the merging companies. In principle, it contains the following elements:
- Designation of the merging companies
- Information on the merger method
- Ratio for exchange of shares of the acquired company for shares of the acquiring company
- Rules for granting shares in the acquiring company, including the date from which the shares in the acquiring company will participate in the profits
- Rights granted by the acquiring company to shareholders and other persons holding special rights in the acquired company
- Special benefits for members of the authorities of the merging companies or other persons involved in the merger.
Additionally, the merger plan is accompanied by:
- Proposed shareholder resolutions on merger of the companies
- Proposed amendments to the acquiring company’s articles of association
- Valuation of the acquired company’s assets
- Statements on the accounts of the acquired company and the acquiring company prepared for the purpose of the acquisition using the same methods and format as the companies’ last annual balance sheet.
Of these items, valuing the assets of the acquired company seems to be the most controversial issue. The regulations do not specify how to value the assets for purposes of a merger: whether to value only the company’s assets or also other elements of the company (e.g. its reputation) and whether, for purposes of the merger, to prepare only a valuation of the assets of the acquired company, as the regulations literally suggest, or whether the assets of both merging companies should be valued.
Method of valuing the company’s assets
The Commercial Companies Code does not expressly regulate how the value of the assets of the acquired company should be determined. In particular, the code does not specify whether the assets should be assessed at book value (carrying value) or market value (fair value). It is up to the management board of the acquired company to select an appropriate valuation method and to carry it out correctly.
Interpreting the provisions establishing the content of the merger plan and appendices in light of their purpose, the valuation of assets of the acquired company should aim to establish its fair market value. The code requires two different annexes to be attached to the merger plan, one with information on the company’s accounting status and another with information on the value of the company’s assets. As the accounting status of the company will be apparent from one appendix (expressly required by the code), it seems reasonable to imagine that the second appendix, with information on the company’s assets, should contain other information for users of the merger plan and its appendices, namely a fair valuation of the acquired company. And as the Supreme Court of Poland pointed out in its judgment of 7 December 2012 (case no. II CSK 77/12): “It follows from a comparison of Art. 499 §2(3) and §2(4) that what is at issue is determination of the value of the company’s assets prepared for purposes of the merger of the companies, and not the book value.”
Some commentators take the view that the purpose of valuing the assets of the company being acquired is to enable determination of the parity of exchange of shares of the company being acquired for shares of the acquiring company adopted in the merger plan (K. Oplustil, commentary on Art. 499, in J. Bieniak et al. (eds.), Commercial Companies Code: Commentary (9th ed., Warsaw: Legalis, 2024)).
Nevertheless, it is worth pointing out a market practice that for pragmatic reasons deviates from this rule. Specifically, this is the case of a takeover by the acquiring company of its wholly-owned subsidiary pursuant to Art. 516 §6 of the code. In such a situation, pursuant to Art. 514 §1, as the sole shareholder of the acquired company, the acquiring company cannot acquire its own shares in exchange for the shares that the acquiring company holds in the acquired company, and therefore no increase in the share capital of the acquiring company will occur in such a merger. In such a situation, there is no determination of the parity for exchange of shares of the acquired company for shares of the acquiring company, and therefore the shareholders of the merging companies do not have to assess whether the parity proposed by the management board is fair. Thus it seems reasonable to conclude that when a subsidiary is acquired by its parent company, the acquired company can use the balance-sheet method of valuing its assets, which is easier for the accountants. It is also pointed out in the legal literature that adopting the balance-sheet value of the company’s assets cannot be regarded as a violation of the law, as the parliament has simply not spoken on this issue (M. Rodzynkiewicz, commentary on Art. 499, in A. Opalski (ed.), Commercial Companies Code: Commentary, vol. 4 (Warsaw: Legalis, 2016)).
Valuation of the company vs. valuation of the company’s assets
For purposes of a merger, the Commercial Companies Code literally requires a valuation of the company’s assets, not a valuation of the company. This might suggest that only the assets of the company’s enterprise, e.g. fixed assets, should be included in such a valuation. But in our view, inclusion of only the assets in the valuation will not reliably determine the market value of the company, which is the basis for determining the parity of exchange of shares in the acquired company for shares in the acquiring company (subject to the exception cited above). To determine the market value, other elements such as the company’s reputation, knowhow, customer base and intellectual property rights should also be taken into account.
Valuing the assets of the acquired company, or both merging companies?
Applying a literal interpretation of the provisions, it might be assumed that while accounting information is prepared for both merging companies, valuing the company’s assets should be carried out exclusively for the acquired company. In the judgment cited above, the Supreme Court indicated that this position is not supported by a purposive interpretation of this regulation. According to the court, the purpose of the provisions on including valuations of the merging companies in the merger plan is to give their shareholders the information they need to verify the correctness of the parity for exchange of shares of the acquired company for shares of the acquiring company adopted in the merger plan. To allow this verification, a valuation of the assets not only of the acquired company, but also of the acquiring company, must be prepared. This position is also supported by some commentators in the legal literature (ibid.)
Summary
The issue of how to value companies or their assets in the event of a merger is not directly regulated in the Commercial Companies Code. Nonetheless, in our view, in principle it is advisable to apply the market method, with some exceptions indicated above.
To help the shareholders of the merging companies assess the correctness of the adopted parity of exchange of shares of the acquired company for shares of the acquiring company, it will be necessary to prepare a valuation of both the acquired company and the acquiring company, and to value not only the companies’ assets but also their other elements such as reputation.
But to clarify these issues, the parliament should ideally amend the Commercial Companies Code to expressly regulate these matters.
Maciej Wierzchowiec, Wiktor Zborowski, adwokat, M&A and Corporate practice, Wardynski & Partners