Due Diligence process in Poland
According to the information presented in the article concerning the M&A process in Poland, conducting due diligence investigations constitutes the foundation of the verification process of the target company by potential buyers prior to finalizing a planned business transaction. The time and effort that due diligence takes depends on the complexity of the target’s operations and the scope of information required. The purpose of this process is to provide the acquiring party with accurate information, enabling them to make informed decisions.
Comprising the fundamental assumptions, objectives, types of diligence investigations, and the scope and methodology set out in the due diligence checklist – it is essential to underscore that each final due diligence report must expressly define the diligence period subject to analysis. In practice, this typically refers to the last three financial years, which enables a reliable assessment of the target’s condition.
A due diligence report should also define the scope and type of documents required as its basis. The market standard includes both qualitative and quantitative specifications of particular documents, e.g., the 20 most relevant agreements with the target’s suppliers. It also includes the definition of materiality thresholds, understood as setting a financial value (e.g., EUR 100,000) above which a potential risk is considered material.
The requested documentation should be provided by the target within the specified dates to the designated review location for the due diligence team. This is usually a virtual data room (VDR).
In the course of the due diligence process, a diligence period is established during which documents may be uploaded to the VDR. After this deadline, the final report authors will no longer take updates into account. Such a procedure disciplines the target throughout the investigation and allows for its completion within the time frame agreed upon by the transaction parties.
The scope of the due diligence, in its extended form, usually focuses on legal, tax, and financial areas, although it may also cover different forms of review depending on the specifics of the transaction. Below, we briefly indicate the most important issues relevant to the due diligence report.
Legal Due Diligence Report in Poland
Legal due diligence focuses on the analysis of documentation provided by the company or obtained from public registers, such as the National Court Register (KRS) or the National Debtors Register.
An important source of materials for the diligence investigations also includes statements made by the target’s management, for example regarding pending court or administrative proceedings, presented in a specially prepared questionnaire. These allow the investigators to formulate appropriate assumptions within the legal due diligence framework and properly prepare the report in line with applicable relevant regulations.
Below we present the most characteristic areas of legal due diligence.
Due Diligence – Corporate Matters in Poland
In the area of corporate matters, the scope of the due diligence focuses primarily on:
- documents concerning the seller’s legal title to the shares in the target,
- the ownership structure of the target,
- and its corporate governance, as well as the proper incorporation of the target, appointment of its management board, and compliance with statutory reporting obligations.
Within this verification, the most important aspect is to confirm:
- the validity of the seller’s legal title to the shares,
- the absence of encumbrances over the shares,
- and the seller’s authority to dispose of the shares in favor of the purchaser as part of the business transaction.
The due diligence process includes a review of the company’s articles of association or statutes, share purchase agreements, and resolutions regarding share capital increases. It also involves verifying possible encumbrances over the shares, such as pledges, usufruct rights, or option agreements.
Additionally, the diligence checklist covers formal obligations that must be fulfilled prior to the transaction. In particular, it includes the requirement to obtain corporate approvals for the share transfer and obligations arising from pre-emptive rights that may be granted to other shareholders of the target.
The legal status of the target company is also verified through public registers, especially the accuracy and currency of entries in the National Court Register and the Central Register of Beneficial Owners. The review further includes the correctness, currency, and completeness of financial records, and corporate resolutions filed in the Financial Document Repository.
It must also be confirmed that the entity is not subject to any bankruptcy or restructuring proceedings, as disclosed in the National Debtors Register.
Due Diligence – Antitrust and Competition Law in Poland
The scope of the investigation carried out as part of due diligence in the field of antitrust and competition law in Poland concerns the review of the content of agreements binding the target company. This review takes into account the company’s market position and provisions that may restrict the scope of its business operations and broader business relationships.
Such agreements with suppliers, contractors, financial institutions, or those related to asset or technology transfers may include confidentiality clauses concerning data provided to the target. They may also contain clauses restricting the target’s cooperation with the acquiring company, conducting business in a specific market, or concerning certain product categories, including non-compete clauses.
These types of provisions should be subject to further investigation to assess risk, including potential contractual penalties for non-compliance, as well as to determine their conformity with applicable antitrust and competition law.
Due Diligence in Poland – Financing and Insurance Agreements
The due diligence investigation review covers loan agreements, leasing contracts, credit facilities, and other financial instruments entered into by the target company. This type of diligence requires legal and financial expertise, particularly in transactions involving financial institutions.
These agreements are first examined for change of control clauses and related obligations that must be fulfilled in connection with the transaction for the agreements to remain in force.
The review also covers:
- clauses suggesting non-market conditions of the financing (including appropriate determination of interest rates),
- loan repayment schedules,
- penalties for late repayment,
- security interests granted to lenders,
- grounds for termination by lenders,
- as well as the consistency of financial records disclosed in the target’s financial statements with the terms of financial agreements.
It is also considered particularly important to verify the existence of any financial arrangements between the target and its shareholders, especially the sellers, in particular short-term shareholder loan agreements. All potential claims of the sellers against the target and any counterclaims of the target against the selling shareholders must be reviewed. These claims are typically subject to negotiation in the transaction process, as they may affect the purchase price.
Due Diligence in Poland – Regulatory Compliance
The regulatory part of the due diligence focuses on those aspects of the target’s company activity that are subject to specific administrative obligations under applicable law (regulatory regime). This type of diligence involves examining whether the company is legally obligated to operate under particular licenses or authorizations.
Examples of industries subject to such regulatory requirements include financial services, gambling, defense, pharmaceutical, medical, telecommunications, mining, and energy sectors.
In the case of regulated activities, there is typically an obligation to register with a competent authority or obtain the necessary license or concession required to conduct such business operations. The absence of such registrations may involve risks under administrative or even criminal law, depending on the circumstances.
Due diligence in this respect focuses on obtaining from the target information regarding its operations and documents enabling its conduct, such as concessions, registration numbers in regulated activity registers, permits, notifications, licenses, or approvals. Once obtained, such documents are reviewed to verify facts concerning their validity, currency, and compliance with relevant regulations, as well as whether the target operates within the scope defined in those documents. Failure to obtain the required registration or authorization may give rise to the risk of operating a regulated business in violation of the law, which must be carefully assessed.
Due Diligence in Poland – Real Estate
An essential part of the target’s operations may involve ownership or other rights to use real estate necessary for conducting business activities. Due diligence in this area may focus on various aspects related to real estate, depending on the target’s industry. For example, different types of risks will arise in construction, manufacturing, or renewable energy sectors.
Therefore, a basic element of the real estate due diligence is identifying all real properties used by the target. This is followed by gathering information on the legal status and title to use such properties – whether the basis is lease, tenancy, gratuitous use, or ownership.
The information is then compared with the manner in which the properties are used, as well as with any encumbrances over the property, such as mortgages, pledges, third-party rights (e.g., easements, leases), and any potential restrictions resulting from zoning and planning documents.
As part of the requisite effort to complete the due diligence process with reasonable care, the review may also include a property inspection or a property survey, especially where real estate assets are material to the transaction.
Depending on the target’s specific business needs, zoning documentation and administrative decisions concerning the property are then analyzed to assess the feasibility of the planned investment by the buyer. In the case of lease agreements for commercial space, the review focuses on the lease terms, stability, and potential financial burden for the target.
Special attention is paid to agricultural real estate owned by the target, due to the specific rights of the National Support Centre for Agriculture (Krajowy Ośrodek Wsparcia Rolnictwa) to acquire such properties or acquire shares in a company that owns them through statutory pre-emption rights. Such circumstances typically constitute a material fact and may represent a red flag, as they condition the legality and effectiveness of completing the transaction.
Due Diligence – Movable Assets
A standard element of the due diligence process is the review of the target’s movable assets. This typically concerns the most significant components of such assets, most often vehicles, machines, equipment, and other high-value fixed assets.
The Due Diligence focuses primarily on verifying the legal title entitling the target to use the movable assets, as well as the method of financing the related costs.
Where movable property is leased from third parties, and not owned by the target, this may be considered a business risk, especially when such assets are essential to the company’s business model or supply chain.
The analysis also includes any security interests established over such assets (e.g., pledges), as well as the content of agreements governing the use of fixed assets.
Due Diligence – Intellectual Property
The scope of the review depends on the industry in which the target operates, as this determines how crucial intellectual property rights are to its ongoing operations. This type of due diligence is particularly important when the transaction involves a target that heavily relies on intellectual property rights (copyrights or industrial property rights), especially if it is engaged in the creation and resale of such rights, such as a software house or video production company.
In the case of a target in the food or FMCG sector, it is necessary to examine trademark rights for the brands of products sold on the market.
Within the field of intellectual property rights, it is essential to determine the legal basis under which the target uses such rights – i.e., whether the rights are owned or merely licensed. It is also necessary to review the contents of agreements related to the use of these rights and to confirm with the target that it is using the copyrights in accordance with the terms of the agreements.
The scope of protection of intellectual property rights is also subject to analysis, especially the registration status of trademarks in the relevant Polish or international registers.
Due Diligence in Poland – Commercial Agreements and Transactions
This is a category present in every due diligence process and focuses on reviewing agreements concluded with the target’s most significant business partners.
Depending on the size of the target and the scope of its operations, the number, type, and materiality (in terms of monthly or annual financial exposure) of contracts will vary. Special attention is also given to commercial agreements entered into by the target with the sellers, broker dealers, entities, or individual investors affiliated with them. Such transactions may be subject to enhanced due diligence, especially where they could affect shareholder value analysis or raise concerns under current compliance procedure.
In the first stage of the review, investigators look for any security interests granted by the target under the agreements, such as promissory notes, pledges, or other provisions that may burden the target’s assets.
Next, clauses that may pose business risks to the target are analyzed, including liquidated damages clauses, warranty clauses, contract termination periods, contractual liability terms, change of control provisions, non-compete clauses, confidentiality clauses, and non-solicitation clauses.
Due Diligence in Poland – Employment
Employment constitutes another category that is part of every M&A transaction. Depending on the number of target’s employees and contractors engaged by the target and the nature of their engagement (employment contracts or other forms of agreements), the scope of the due diligence review will be more or less extensive.
The primary information gathered by the investigators includes the number of employees and contractors engaged under various forms of contracts. Depending on the workforce size, the investigators then verify whether the required employment regulations are in place, such as internal work rules, remuneration policies, regulations for the functioning of the Company Social Benefits Fund, whistleblower protection documentation, and other related policies. These checks are part of compliance procedures aimed at reducing the risks involved in the transaction and ensuring that the employer observes current practices and legal obligations concerning human resources.
Another critical area is the assessment of the relationship between the target and individuals engaged under civil law contracts. It is necessary to assess their duties against the level of independence, place of work, subordination, and other factors that may indicate de facto employment, which should be performed under an employment contract. If such situations are identified, it is essential to assess the level of risk to which the target is exposed in the event of a Labor Inspectorate investigation.
In this context, soft due diligence may also be applied to assess non-financial aspects of employment, such as company culture, internal relationships, and workforce stability. Unlike hard due diligence, which focuses on verifiable legal and financial data, soft due diligence explores the human side of the organization.
Due Diligence in Poland – Litigation
As part of the due diligence process, the target’s litigation matters (and occasionally those involving its management board members) are reviewed, including their current status, the value of the disputed subject matter, and an assessment of the litigation risk that the proceedings may end unfavorably for the target. This is often supported by summaries of the proceedings provided by law company and power of attorney representing the target before the competent courts.
Special attention is given to certain types of proceedings, such as collective labor disputes, lawsuits involving allegations of mobbing, violations of human rights, corporate disputes, and criminal proceedings against members of the management board or executives of the target. In such cases, the relevant documents in the proceedings are often subject to detailed review.
These background checks help to identify and mitigate risks related to reputation, potential conflicts of interest, or undisclosed legal exposure.
Due Diligence in Poland – Environmental Matters
Environmental issues primarily concern targets conducting business activities that require an environmental decision or are subject to other environmental obligations, including reporting and registration duties – such as those related to waste management.
In this area, it is necessary to verify with the target the environmental decisions it holds, as well as any other permits, restrictions, or obligations, in order to determine whether the business activity is conducted within the limits set by applicable law and the obtained administrative decisions. In other words, this diligence means confirming that all required environmental approvals are in place and that the target has implemented proper compliance procedures.
In terms of waste management, it is also necessary to confirm the specific nature of the target’s activity and how it introduces waste into the environment. This information must then be compared with the applicable regulations to determine whether reporting to the Waste Database (BDO) is sufficient or whether additional compliance steps are required.
Due Diligence in Poland – Grants and State Aid
The due diligence process also involves the verification of all subsidies, grants, financial aid, and exemptions received by the target during the audited period. Once information on the sources of state aid obtained by the target is collected, the documentation is reviewed, starting with the decision on granting the aid, the agreement with the relevant public authority, and ending with documents related to the implementation and settlement of the project.
The review focuses especially on “change of control” clauses that may prevent the use or settlement of public aid in the event of a transaction. If such clauses are present, it is important to assess the consequences of the transaction and the possibility of extending or continuing the financing post-transaction.
The review of the target’s documentation for the years 2020–2024 particularly focuses on subsidies received under the so-called Anti-Crisis Shields and other specific support measures related to the COVID-19 pandemic.
Due Diligence in Poland – Personal Data Protection
The scope of the personal data review depends on the nature of the target. If the target is a manufacturing company or a transport firm, the due diligence focuses only on basic issues, such as the obligation to obtain consent for the processing of personal data from employees or contractors.
However, if the target is a company providing online services to consumers, such as an e-commerce platform, or a business that holds and uses sensitive data in its operations, for example a lending company or a betting operator, the review in this area is significantly more extensive. In such cases, enhanced due diligence may be required due to the nature of the data and the associated risks involved.
In addition to reviewing the content of consents for personal data processing, an in-depth term due diligence process verifies the categories of entities from whom personal data is collected, the types of data gathered (including confirmation of whether sensitive data is involved), the methods of data processing, as well as compliance with legal obligations, such as appointing a Data Protection Officer within the organization.
The review also covers the manner in which personal data is acquired-whether through initial consent for processing or through secondary acquisition based on an appropriate data processing agreement. Finally, the report is supplemented by an analysis of how data is processed and whether it is further transferred to third parties.
Tax Due Diligence in Poland
The scope of tax verification of the target for the purposes of an M&A transaction depends on the type of business conducted by the company under review.
In the case of a transport company, a detailed review will cover the taxes paid on driver salaries and per diems. A company operating in the renewable energy or gas sector will be reviewed for excise tax liabilities, while a real estate development company will be assessed in terms of whether it qualifies as a so-called real estate company and its potential obligation to pay the so-called building income tax.
As a rule, the tax due diligence covers the target’s compliance with PIT (Personal Income Tax), CIT (Corporate Income Tax), and VAT (Value Added Tax) obligations. After identifying the nature of the business conducted by the company, additional industry-specific taxes may be included in the scope of the review, such as excise tax, withholding tax (WHT), civil law transaction tax (PCC), and other potential tax liabilities.
The target is then required to provide information on tax returns filed, the amount of tax paid (and the calculation method), and the tax base, in order to verify the accuracy of its tax settlements.
In this context, the investigators primarily look for undeclared income, unpaid or incorrectly calculated tax liabilities, unfiled tax declarations, and assumptions about exemption from tax that are not supported by individual tax rulings or protective opinions.
Financial Due Diligence in Poland
This type of pre-transaction review focuses strictly on the financial data of the target. It includes an analysis of financial statements and other accounting documents to determine revenues, costs, liabilities, and taxes, in order to confirm that the data provided by the seller is accurate.
The objective is to determine the actual financial condition of the target and to identify any financial issues that may affect the company’s value and, consequently, the transaction price – a matter of particular relevance for institutional investors and fund managers. It is also important to identify any potential indirect financial liabilities of the target toward the sellers or entities and individuals affiliated with them.
During this financial due diligence, the financial statements or other accounting records of the target for the audited period are examined. Based on these, an analysis is performed to determine the most relevant financial indicators for the business, such as profitability, liquidity, turnover, and indebtedness. This makes it possible to assess whether the company has a stable financial foundation and what the appropriate transaction price should be, given the financial health of the enterprise.
