Understanding the concept and importance of Share Capital

Updated: 28.11.2024

Understanding the concept and importance of Share Capital

What is share capital?

In Polish companies, equity share capital (kapitał zakładowy) represents the foundational equity contributed by shareholders, forming a base that allows the company to begin its activities and meet regulatory requirements. In principle, it provides some level of security for creditors, as the capital cannot be freely distributed among shareholders.

What is the required minimum Share Capital in Poland?

The minimum share capital requirement for a limited liability company (spółka z ograniczoną odpowiedzialnością or sp. z o.o.) in Poland is PLN 5,000, while for a joint-stock company (spółka akcyjna or S.A.) it is PLN 100,000. Although these amounts are relatively modest, Polish regulations provide this flexibility to support start-ups and smaller enterprises.

The information presented below will mainly refer to limited liability companies.

High share capital and perceived credibility: myths and realities

While increasing share capital can suggest stability and commitment, it’s important to recognize that high share capital alone does not guarantee the company’s reliability or reputation. This is largely due to the following factors:

• Lack of court verification: In Poland, the National Court Register (KRS) does not verify the accuracy or reliability of the share capital that a company declared. This means that even a company with high capital may not necessarily have assets of equivalent par value available.
• In-Kind contributions and potential overvaluation: When share capital is covered through in-kind contributions (assets other than cash), there is a risk of overvaluation face value. The valuation is based on the shareholders’ declaration, without the requirement for independent verification, making it possible to declare a high nominal capital that may not reflect the true value of the company’s assets.
• Implications for creditors: For creditors, this can mean that while the declared share capital appears high, in practice, asset liquidation might not fully satisfy claims in case of insolvency. Thus, while high share capital can suggest robustness, creditors and partners are advised to conduct thorough due diligence, as share capital alone does not fully guarantee solvency.

By understanding these nuances, investors and partners can make informed decisions and fundamental analysis, assessing both the nominal company’s shares capital and the actual financial standing of Polish company’s ability.

Contributions to cover shares in share capital

Types of contributions: monetary and in-kind

In establishing a limited liability company (sp. z o.o.) in Poland, contributions towards share capital can be made either in monetary form (cash) or in-kind (assets). While the basic legal requirements are clear, the practical aspects of making these contributions before the company is registered can vary widely.

Monetary contributions:

A proper monetary contribution to cover share capital can be made in one of two ways:

1. Cash Payment with Receipt: Cash can be handed to the company’s management, accompanied by a KP receipt (“kasa przyjęła”) as proof of payment. Since the company is required to keep accounting records from the moment of signing the Articles of Association, it can officially recognize these contributions, even though it is not yet formally registered.
2. Bank Transfer to the Company’s Account: Once a bank account has been opened in the company’s name, funds raised can be transferred directly.
3. Alternatively, funds may be temporarily deposited in the personal account of the company’s director, who later transfers them to the company’s bank account once it has been established.

Court oversight limitations

It’s important to note that the National Court Register (KRS) does not verify whether the capital has been actually contributed before registration.

The court relies on the board members’ declarations regarding the contribution of capital. While this practice is common, it is not technically correct according to Polish law, which envisions that funds should be held by the company (not its members) from the outset.

Valuing in-kind contributions

For in-kind contributions, which may include assets like real estate, equipment, or intellectual property, accurate valuation is essential. Polish law mandates that these contributions must be appraised properly, typically through the shareholders’ declaration, though no independent audit is required.

This lack of verification can, however, lead to overvaluation, posing a risk to creditors and investors who rely on the declared capital as a measure of the company’s actual assets.

How to increase share capital in a Polish company?

Increasing share capital can be an effective tool for equity financing growth, acquiring new assets, or positioning the company for strategic investments. Polish law provides two primary methods for increasing share capital, each company raises with distinct requirements and procedural steps.

Standard capital increase (Amendment to Articles of Association)

This standard raising share capital method involves increasing capital by amending the company’s Articles of Association. Here’s an outline of the key steps:

• Shareholders’ resolution: A formal resolution is passed by shareholders, typically at a general meeting, approving the increase in share capital.
• Qualified majority of votes: Such a resolution should be adopted by a majority of 2/3 votes unless the Articles of Association provides for stricter requirements.
• Statement of taking up shares: Each shareholder (or a new third-party investor) intending to take up shares in the increased authorized capital must submit a formal statement declaring their commitment. For a standard capital increase, this statement must also be in the form of a notarial deed.
• Notarial deed requirement: The resolution must be documented in a notarial deed, which makes it a legally binding record.
• Registration with the National Court Register (KRS): To finalize the capital increase, the change must be filed with the KRS within six months.

One significant advantage of the standard capital increase is its flexibility in accommodating new investors. Under this method, shares in the increased capital can be taken up by a third party who was not previously a shareholder. This opens the door for external investors to acquire an interest in the company, making it a straightforward approach to introducing new capital and expanding the shareholder base.

Simplified capital increase

Polish law also allows a streamlined way to increase share capital without amending the Articles of Association. This simplified method is available under the following conditions:

• Special provisions in articles of association: The Articles of Association should contain a provision specifying the maximum amount of the share capital increase and the period within which such increase is possible.
• Subscription limited to existing shareholders: Importantly, the simplified capital increase can only be covered by existing shareholders. This means that no new investors can participate, limiting this method to current shareholders of the company.
• Written statement of taking up shares: In this simplified process, shareholders intending to take up shares must submit a statement as well, but here it can be in a written form without the need for notarization, simplifying the process.
• Expedited procedure: This method does not require a notarial deed, thus reducing time and administrative costs.
• Registration with the National Court Register (KRS): To finalize the capital increase, the change must be filed with the KRS.

While the simplified increase is faster and less complex, it does not permit third-party investors to acquire shares, making it suitable for companies where only existing shareholders are funding the increase.

By understanding the differences between these methods, companies can strategically decide on the best approach based on their funding needs and whether they plan to bring in external investors or rely solely on current shareholders.

How to reduce share capital?

In some cases, companies may opt to reduce their share capital.

Reasons for capital reduction
Capital reduction may be motivated by various strategic or operational needs, including:

• Covering Losses: Reducing share capital can offset company losses without further burdening the balance sheet.
• Enhancing Capital Structure: A reduction may balance debt-equity ratios, making the company more attractive to investors.
• Return of Capital to Shareholders: In cases where excess capital exists, a reduction allows shareholders to recover a portion of their investment.

Legal process and creditor protection

The capital reduction process involves formal procedures designed to protect creditors, including:

• Shareholders’ Resolution: The reduction requires approval through a shareholder resolution, similar to an increase.
• Notarial Deed Requirement: The resolution must be documented in a notarial deed.
• Notice to Creditors: Creditors are notified and requested to file an objection to the capital reduction within 3 months. Those who have not raised an objection should be satisfied or secured by the company.
• Registry Filing: As with an increase, the reduction must be registered in the KRS to become legally binding.

By reducing capital, companies gain the flexibility to adjust their financial structure, although they must observe strict legal requirements to ensure compliance.

Registering changes to share capital

Overview of registration requirements
Any changes to share capital, including both increases and reductions, require registration with the KRS to be binding. This ensures transparency for shareholders, creditors, and the public, maintaining the integrity of Poland’s business environment.

Filing timeline and documentation
Companies must file changes to the KRS within six months of the shareholder resolution. Required documentation includes:

• Resolution and notarial deed (if applicable): For increases, this must document the shareholders’ decision.
• Statements of taking up shares.
• Updated articles of association: In cases of capital increase (in a normal mode) or reduction, the updated Articles must reflect the new share capital amount.
• Board’s statement: in the case of an increase in the share capital, the management board shall submit a declaration of contributions being made to cover the increase, and in the case of a decrease – evidence of due call to creditors and a declaration that creditors who filed an objection have been satisfied or secured.

The registration process ensures compliance and provides legal certainty, preventing disputes over ownership stakes or capital allocation.

Key takeaways – the strategic importance of share capital in Polish companies

Share capital plays a pivotal role in the establishment and operation of Polish companies, offering a financial foundation while providing assurances to clients, partners, and creditors. For foreign investors, understanding types of share capital, share capital’s strategic and regulatory significance can facilitate smoother company operations, drive financial growth and safeguard investments.

Whether raise capital for expansion or restructuring for efficiency, aligning with Polish regulations ensures robust, compliant growth and a stable foundation for long-term success. Need assistance with share capital management, colect more capital, avoid company issues or compliance in Poland? Contact our law office at [email protected] today for expert guidance.

FAQ: Share Capital in Polish Companies