On 30 April 2016, the amendment of the Act on the Structuring of the Agricultural System (ustawa o kształtowaniu ustroju rolnego) (the “Act”) came into force. The Act provides for several restrictions in the direct and indirect transfer of ownership and perpetual usufruct right (użytkowanie wieczyste) to agricultural lands located in Poland by private entities/individuals. Due to its broad scope, the Act may be onerous especially in case of M&A transactions or - even purely intra-group - restructuring processes. It is, therefore, of the utmost importance before planning a transaction, to assess whether the target company owns agricultural property in Poland, as the intended acquisition or restructuring could possibly trigger a special priority right of the State Treasury to purchase the land.
Purpose of the Act
According to its preamble, the Act aims at supporting balanced agricultural development in Poland. But, at the same time, it cannot be forgotten that the Act fills the gap created by the expiry of a grace period during which non-Polish entities/individuals had limited access to the acquisition of agricultural land. Generally, the new legislation stipulates that the agricultural property can be transferred without any limitations only to an individual farmer. The “individual farmer” is defined as a natural person holding a degree in agricultural sciences, residing for at least five year in the commune in which the land is located and owning no more than 300 hectares of land in total. Furthermore, an individual farmer who purchased agricultural land is not allowed to sell it or, for example, lease it to a third party, for 10 years from the purchase date. In exceptional cases, the court may consent to the transfer of agricultural property before the lapse of the 10-year period.
The practical importance of the Act for M&A transactions is mainly driven by two features: a very broad definition of “agricultural land” and by a wide range of transactions activating priority rights of the Agricultural Property Agency (Agencja Nierchomości Rolnych) (the “ANR”) acting on behalf of the State Treasury, among which the pre-emption right (prawo pierwokupu) is of key significance.
Definition of “agricultural land”
Pursuant to the Polish Civil Code, agricultural land is immovable property which is or can be used for plant and animal production, not excluding gardening, horticulture and fishery production. Hence, the actual cultivation of the land is not necessary since a mere possibility to use it for agricultural purposes suffices to classify a given property as being arable land. Nonetheless, the Polish lawmaker decided to exclude from the definition of “agricultural land” properties located in areas designated in the local spatial development plan (plan zagospodarowania przestrzennego) for other purposes than agriculture. Agricultural properties with an area below 0.3 hectares are also excluded from the application of the Act.
When it comes to the ANR’s role in M&A deals, it must be stressed that the array of transactions triggering the ANR’s pre-emption right covers not only an ordinary purchase of agricultural property but also share deals. Moreover, restructuring processes, such as transformations, divisions or mergers are also concerned.
Pre-emption right with respect to share deals
As already mentioned above, the Act vests - subject to some minor exceptions - the ANR with a statutory right of pre-emption in relation to the purchase of shares in a company owning an agricultural property in Poland. The said ANR’s pre-emption right has to be complied with even in case of a company whose business activity is unrelated to agriculture, but it owns an agricultural property. Thus, ultimately, it is the land’s status that counts and not the company’s business. However, the pre-emption right does not apply to, among others, transactions pertaining to shares of listed companies.
According to the Polish Civil Code, the statutory right of pre-emption requires the conclusion of a share purchase agreement under the condition that the ANR will not exercise its right of pre-emption. Such agreement should be immediately submitted to the ANR, which is entitled to purchase shares under the terms and conditions laid down in the conditional share purchase agreement within one month. Furthermore, prior to exercising the pre-emption right, the ANR can choose to conduct a due diligence examination of the target company owning agricultural property in Poland. It must be stressed that a transaction infringing the ANR’s pre-emption right by, for example, conclusion of an unconditional share purchase agreement, is invalid.
Pre-emption right with respect to restructuring
If the acquisition of agricultural land has occurred on a legal basis other than an ordinary sale agreement, i.e. by way of transformation, division or merger of a company, the ANR may buy-back the property by submitting a declaration of acquisition of the agricultural land and upon payment of its market value. The ANR can exercise its pre-emption right following the same principle as in case of a share deal, except that, immediately after completion of the restructuring, the acquiring company has to notify the ANR of the acquisition of agricultural land. Also in this situation, the failure to involve the ANR may imply that the transaction will be regarded as invalid.
The Act will significantly limit the trade in agricultural land in Poland and affect M&A transactions. Given the invalidity of agreements concluded in breach of the Act, investors planning to invest in Polish target companies will have to pay more attention to the transaction structure and its implementation. In particular, tax-driven intra-group restructuring processes that are usually carried out without a due diligence examination, will have to be analyzed more carefully in the future.