Control-Enhancing Mechanisms in State-Owned Companies – Analysis of Companies Listed on the Warsaw Stock Exchange

When it comes the supervision of subordinate companies, the state can be a “portfolio” investor, which is seen as a factor weakening a company’s activity, or a long-term investor, which may increase incentives to engage in a company’s affairs. The combination of these two perspectives encourages the application of mechanisms that enable effective control without excessive involvement in the company’s affairs (Adamska, 2013). The state, compared to other shareholders, is distinctive for how it operates and for its powers. Provisions included in companies’ statutes secure a privileged position of the state, e.g., in the election of the supervisory board members or in voting at general assemblies. In addition, the state as a shareholder contributes to the limitation of rights of other shareholders, even if they hold significantly larger stakes compared to the state’s holding (Wieczorek, 2018). Such practices are intended to ensure that the state effectively controls companies in which it does not hold a controlling interest.

Corporate control mechanisms used by the state can be divided into code-based and non-code-based (Bałtowski, 2015; Kuciński & Byczkowska, 2017).

For state-owned companies (as for all commercial companies), corporate governance is based on the Polish Commercial Companies Code (PCCC). For companies in which the state holds more than 50% of shares in the share capital, it generally uses standard control mechanisms, guaranteed by the majority of votes at general assemblies. In many cases, however, using code-based mechanisms, the state also seeks to assert its control over companies in which it holds a minority stake. For this purpose, the state uses the (PCCC) provisions, allowing for certain exceptions to the so-called “proportionality principle” which forms the framework of a capital company (especially a joint-stock company). This principle indicates that the shareholder’s powers should be aligned with the scope of their capital participation in the company (as much power as the capital) (Oplustil & Pokrzycki, 2018).

The code-based mechanisms most frequently used by the state to increase the control of companies include: 1)

Multiple voting rights shares (shares giving more than one vote);

These mechanisms may be used where appropriate provisions are included in the statutes of the relevant company. It should be noted here that the mechanisms described above apply to all joint-stock companies, not only the state-companies.

The most important non-code-based mechanisms (i.e., those not explicitly covered by the PCCC and other laws) include: 1)

The dominant shareholder status. This is a situation in which the state is a dominant shareholder in a company’s shareholder structure, while other shareholders are dispersed. Minority (small) shareholders generally do not attend general assemblies, and as a result, it is easier for the general assembly to make decisions as desired by the dominant shareholder.

In some cases, the state can also form alliances to obtain a majority of votes (or a qualified majority) with private investors, such as investment funds (Bałtowski, 2015). This tool may also include capital links in the shareholder structure. Economic operators linked by capital generate a dominant or dependent relationship that is reflected in the scope of corporate control exercised (Kuciński & Byczkowska, 2017).

As a consequence of the application of the above solutions, the operation of Polish companies with minority state ownership is very similar to companies with corporate governance fully in the hands of the state: Management and supervisory boards of these companies change with parliamentary elections (or even with changes in the office of the Minister of the Treasury), and the state has a decisive influence on the form of strategy or dividend policy in these companies (Bałtowski & Kwiatkowski, 2018).

In the Polish economy, the vast majority of cases where the state has “non-ownership-based” corporate control of companies (with only minority interest) are the result of a phenomenon referred to in the literature as “reluctant privatization.” All entities in these cases were the former property of the state, and the privatization processes initiated for them were not completed. As a result, the state continues to maintain minority interests in these companies and maintains a significant degree of corporate control (Bałtowski & Kwiatkowski, 2018).

To ensure control of selected entities, the state has also used the “golden share” mechanism in the past. This term usually refers to a specific right of its holder to influence strategic decisions in the enterprise. The adjective “golden” is intended to reflect the unique, valuable right of the holder (Matczyński, 2007). The state, as a holder of the golden share, was able to influence the most important decisions in the enterprise, holding only a small number of shares, sometimes even just one. The golden share mechanism was in contradiction with the “one share-one vote” rule (Kuciński & Byczkowska, 2017), and the mechanism in this form was challenged by the European Commission. As a result, the law which gave the state powers without linking them to the number of shares in a capital company, considered as conflicting with the principle of free movement of capital (Act of 3 June 2005), was replaced with a new law that introduced an institution of objection issued through an administrative decision regarding certain activities which would constitute a genuine threat to the company’s operations, business continuity, and integrity of critical infrastructure. (Act of 18 March 2010). However, the golden share mechanism provided for in the Act of 2005 was not used in practice, as the state had not disposed of the majority interest in the companies specified in the Act, which allowed the state to control these companies (Oplustil & Pokrzycki 2018, p. 466).

An important legal regulation to protect strategic enterprises from a hostile takeover by undesirable investors is the Act of 24 July 2015 on the control of certain investments. Its purpose is to protect Polish state-owned companies from a hostile takeover, i.e., to prevent an investor that is undesirable by the state from obtaining control where the investor’s activity carries the risk of operating the company against the interests and economic policies of the state. The basic safeguard mechanism provided for in the Act is the requirement to obtain consent from the controlling authority (relevant minister)) to invest in an entity to the effect of acquiring 1) dominance (i.e., reaching or exceeding 50% of the total number of votes at the general assembly) or 2) a significant stake (reaching or exceeding 20%, 25%, 33% of the total number of votes at the general assembly).

Protected companies are those companies that operate in key sectors of the economy which require special protection because of their key market share, scale of activity, or the fundamental interests of society. The Act was adopted in the wake of an attempted hostile takeover of Zakłady Azotowe in Tarnów in 2012 by the Russian company Acron (Oplustil and Pokrzycki, 2018).

Several researchers have conducted studies on mechanisms used to strengthen corporate control of companies applied by the state (Adamska, 2013; Bałtowski, 2015; Kuciński & Byczkowska, 2017; Wieczorek, 2018; Zmysłowska, 2015).

The results of these studies show that, in addition to capital control, the state also applies certain control leverage mechanisms which derogate from the proportionality principle. The following mechanisms are particularly often used for this purpose: 1) Limitation of voting rights of shareholders other than the state; 2) Personal rights of the state (usually the right to appoint members of the company’s bodies); 3) Multiple voting rights shares; 4) Increased majority thresholds during votes at general assemblies in matters important for the company. As a result of these mechanisms being applied, the state retains effective control of these companies.

The most recent of the aforementioned relevant studies was published in 2017. Since then, there have been changes in the list of companies listed on the WSE under control of the state, and changes in the shareholder structure of some companies (including the stake held by the state). In some cases, provisions strengthening the control of the state have also changed. In addition, the changing economic conditions have had an impact on the development of mechanisms to supervise companies. These changes over the past few years justify the need to explore this issue further.

The dominant shareholder status of the state or state-controlled entities is evident in all of these companies. This status refers to a mechanism that involves shaping the shareholder structure in such a way that there is one shareholder holding a significant (but not always majority) interest, while the other shareholders are dispersed. Minority (small) shareholders generally do not attend general assemblies, and as a result, it is easier for the general assembly to vote as desired by the dominant shareholder. In some cases, the state may also seek allies among certain private investors, e.g., investment funds (see Bałtowski, 2015). The application of this mechanism gives the dominant shareholder effective control of the company, with the capital participation of approx. 32% stake in the company’s share capital, which can be seen in certain companies, e.g., Alior Bank S.A. and Pekao S.A. In many cases, the dominant shareholder status is further leveraged by limitation of the voting rights of shareholders other than the state or controlled entities. This is the case, for example, for the following companies: PKN ORLEN S.A., PKO BP S.A, and TAURON PE S.A. The combination of these two mechanisms allows the dominant shareholder to exercise control of the company even with a 27.5% stake in the share capital (see Bałtowski, 2015).

Personal right to designate the chairman or members of the supervisory board is the second most frequently used mechanism to control companies, occurring in 17 out of 22 investigated companies. In four of those companies, it takes the form of a personal right to appoint the chairperson of the supervisory board, and in other cases, it takes the form of the right to appoint members of the supervisory board. In the statutes of the investigated companies, this power has different variants. The broadest variant was applied in PKP Cargo S.A., where the dominant shareholder – PKP S.A. – is entitled to appoint or dismiss half of the supervisory board members (plus one, if the number is uneven). In addition, the dominant shareholder has the right to appoint the chairperson of the supervisory board and to determine the number of supervisory board members.

In the most narrow variant, which is seen in Enea S.A., for example, the state has the right to appoint one member of the supervisory board through a written statement submitted to the company’s management board. These personal rights do not deprive the state of the right to vote in the general assembly on the election of other supervisory board members or the board’s chairperson.

In its most basic variant, this mechanism limits the voting rights of shareholders in such a way that at a general assembly, none of them can exercise more than 10% of the total number of votes existing in the company on the date of the general assembly. However, this limitation does not apply to the dominant shareholder. In addition, the voting rights of shareholders holding more than 10% of votes are limited to 1 share only, if the number of votes held by the shareholder is not disclosed.

Aside from the dominant shareholder status, this mechanism is one of the most effective methods to leverage corporate governance. It is included in the statutes of 11 companies.

Another variant of this mechanism is seen in Grupa Azoty S.A., which has a principle that, as long as the state or state-controlled entities hold the company’s shares with at least one-fifth of the total votes existing in the company, the voting rights of the company’s shareholders are limited in such a way that at the general assembly, none of them can exercise more than one-fifth of the total number of votes existing in the company on the date of the general assembly. This limitation does not apply to the state or state-controlled entities.

In most cases, this takes the form of the right to convene an extraordinary general assembly and include certain matters in its agenda. In some cases (e.g., Energa S.A.), this right applies to a specifically mentioned shareholder (in this instance, the state). In other cases, the provisions indicate this to be for a shareholder holding a certain stake in the share capital (e.g., at least 30% or 50%), which in fact, due to the shape of the shareholder structure, means that this right applies only to the state or its controlled entity.

This mechanism introduces the principle that resolutions of the general assembly concerning certain categories of matters can be adopted if at least half of the company’s share capital is represented, and they require a majority higher than that which is provided for in the Polish Commercial Companies Code for such activities. This majority is defined as, respectively: 3/4, 5/4, or 90% of votes. As a general rule, they apply to the following categories of matters: Preference shares; mergers, liquidation, and incorporation of another company; acquisition of the company’s own shares; transformation or transfer of the company’s registered office abroad; and reduction of the share capital. This mechanism was used in 10 companies.

This mechanism occurs in 2 companies. In PKP Cargo S.A., the dominant shareholder (PKP S.A.) has a personal exclusive right to designate candidates for the Chairman of the Management Board. In PKN ORLEN S.A., the state has the right to appoint one member of the Management Board, until the state disposes of the last share in the company.

This mechanism is used in only 2 companies. In Giełda Papierów Wartościowych w Warszawie S.A., registered shares held by the state have a privilege attached to them that gives two votes per such a share at the General Assembly. As a result, a 35% stake of the state in the share capital results in 51.8% of votes at a general assembly. In Energa S.A., registered shares held by PKN ORLEN S.A. have a privilege attached to them that gives two votes per preference share at a general assembly. As a result, a 90.92% stake of the state in the share capital results in 93.28% of votes at a general assembly.

In 10 out of 22 companies, the stake of the state or state-controlled entities in the share capital does not exceed 50%. However, the use of the above control-enhancing mechanisms allows the state or its entities to exercise effective control of these companies.

These mechanisms allow the state to exercise effective control of the companies even if the state’s stake in the share capital is between 27.5-35%.

On the other hand, in the statutes of companies in which the state or state-controlled entities hold a controlling interest (51.5-95.9% in the share capital), the state also includes provisions to strengthen corporate governance, to the extent that it is comparable with companies with minority state ownership. This is intended to strengthen the leverage effect and thus secure the appropriate majority for the state required for voting on matters of special importance to the company.

For some companies that are important for state security (e.g., Polskie Górnictwo Naftowe i Gazownictwo S.A., LW Bogdanka S.A, or PKN ORLEN S.A.), the state includes additional, non-standard provisions to strengthen control, related to the specific characteristics of the sector in which they operate. For example, in the statute of Polskie Górnictwo Naftowe i Gazownictwo S.A., a provision was included stipulating that consent of the minister responsible for energy matters would be necessary in order to amend material provisions of existing trade agreements on the import of natural gas into Poland and to conclude new such trade agreements. According to the statute, the minister should also give consent to the implementation of strategic investment projects, or to the company’s participation in investment projects, which may permanently or temporarily impair the economic viability of the company’s business, but which are necessary to ensure energy security. In addition, the management board of the company should submit to the minister upon every request, and in the form of the annual report, information on the tasks performed to ensure the country’s energy security (Statute of Polskie Górnictwo Naftowe i Gazownictwo S.A.).

The statutes of LW Bogdanka S.A. include a provision that the purpose of the company is to carry out tasks related to the country’s energy security through the execution of the company’s mission and strategy, with regard to the mission and strategy of the ENEA Group, however, the execution of the mission and strategy of the ENEA Group may not prejudice legitimate interests of the Company’s minority shareholders (Statute of LW Bogdanka S.A).

On the other hand, the statutes of Polski Koncern Naftowy ORLEN S.A. stipulate that, as long as the state has the right to appoint a member of the Supervisory Board, resolutions granting permission to dispose of shares in the following companies: Naftoport Sp. z o.o., Inowrocławskie Kopalnie Soli S.A., and in a company to be established to carry out activities in the pipeline transport of fluid fuels, require a vote in favor of their adoption by a member appointed by the state (Statutes of the above companies).

In this context, the provision in the statute of Polski Holding Nieruchomości S.A. stipulating that the shares in the company held by the state cannot be disposed of seems to not be a standard one. The state’s share of 72.17% in the company’s shareholder structure means, in fact, that the state has guaranteed control of the company and that it will not be possible for another company to take it over (Statute of of Polski Holding Nieruchomości S.A.).

All of the analyzed companies are also required to comply with the following acts: Act of 16 December 2016 on the rules governing the management of public property and Act of 9 June 2016 on the rules for establishing the remuneration of persons managing certain companies, i.e., the application of appropriate requirements to candidates for members of management and supervisory bodies, the procedures for their appointment, and the application of appropriate rules for establishing their remuneration.