Kernel case - delisting on steroids

Kernel Holding S.A. (“Kernel”) is a Luxembourg law company whose shares are admitted to trading on a regulated market in Poland.

On 30 March 2023. Namsen Limited (“Namsen”), i.e. a Cypriot company that is a significant shareholder of Kernel, announced a tender offer for the sale of Kernel shares (the “Tender Offer”). At the same time, Kernel announced its intention to apply for approval to delist its shares from the regulated market (the “Delisting”).

The share price indicated in the Tender Offer was PLN 18.5, i.e. it formally fit the criterion of the average market price of the shares for the 6 and 3 months preceding the notification of the Tender Offer, as the basis for determining the price of the shares proposed in the Tender Offer.

From publicly available information, one can conclude that Andriy Verevsky (founder of Kernel agricultural holding) took control of the company at a price inadequate to its value, to the detriment of minority investors.

For the time being, the material safeguards related to the necessity of issuing a tender offer, conducting a significant dilutive issue and initiating a delisting procedure have not worked.

Leaving aside specific business canons, the problem is legal issues and the operation of foreign companies listed on the WSE at the intersection of different legal regimes.

Kernel, as a Luxembourg company, makes corporate decisions (regarding authorized capital and delisting) essentially in accordance with the laws of the Grand Duchy of Luxembourg, not the Republic of Poland, as determined by Article 17(3) of the Private International Law of 4 February 2011. The indicated conflict of laws regulation takes precedence, in my opinion, over the provision of Article 91(3) of the Act on Public Offering and the Conditions for Introducing Financial Instruments to an Organised Trading System and on Public Companies of 29 July 2005 (the “Act on Public Offering”).

As a consequence of the above, the decision to delist the company does not have to be made by Kernel’s ownership (constituting) body, but by the board of directors.

In turn, Polish law will be applicable for the evaluation of a number of other issues, including the acquisition of control of Kernel at a controversial price, administrative oversight and possible compensation claims on the part of minority shareholders.

The necessity to apply Polish law to the issue of acquisition of control of Kernel arises from the principle of pro-EU interpretation of domestic law. Pursuant to Article 4(2)(b) of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (the “Directive”), if the securities of the offeree company are not admitted to trading on a regulated market in the Member State in which the company has its registered office, the authority competent to supervise the offer is the authority of the Member State on whose regulated market the securities of that company are admitted to trading.

Given the nature of public law and the interpretative guidance provided by the Directive, national law will be applicable to assessing the process of acquisition of control of Kernel, and the supervisory authority playing the first fiddle will be the FSA (in cooperation with the Luxembourg authority concerning primarily Kernel’s corporate issues).

The mosaic of legal threads is one thing, and the catalogue of countermeasures and the exercise of public authority in the interest of the Polish capital market is another.

In my opinion, the justification for the supervisor’s action already existed at the stage of the announcement of the Tender Offer. Therefore, the FSA’s laconic announcement about the formal correctness of the price indicated in the Tender Offer and the deferral of the authority's activity to the filing of a delisting application may cause dissatisfaction, especially in the context of the events that followed. In particular, the manner in which the dilutive issue was carried out within the framework of authorized capital, its motives and parameters, which cast a shadow over the efficiency and reputation of the capital market.

From the point of view of the EU safeguards directionally enshrined in the Directive, the practices of Kernel’s decision-makers, characterized by exuberance and disinclination, should not take place.

According to the preamble to the Directive, the purpose of its regulations (which require implementation at the level of national law) is to safeguard the interests of holders of securities of companies when those companies are subject to takeover bids or changes of control and at least some of their securities are admitted to trading on a regulated market in a member state.

Moreover, each member state should designate an authority or authorities to supervise those aspects of bids that are subject to the Directive and ensure that parties to takeover bids comply with the rules established pursuant to the Directive. To be effective, the regulation of takeovers should be flexible and adaptable to take into account new circumstances as they arise, and should therefore allow for exceptions and derogations.

Member States should take the necessary steps to protect security holders, particularly those with a minority stake, in the event of a takeover of their companies. Member States should provide such protection by requiring the person who has acquired control of a company to make an offer to all holders of the company's securities for all their securities at a fair price, according to the common definition.

The FSA had room to act more decisively already at the stage of the Tender Offer. First of all, because the supervision of takeover processes is not only about their formal correctness, assessed through the prism of minimum requirements, but also includes attention to the legitimate interests of the capital market and minority investors.

The fact that the price proposed in the Tender Offer fell within the requirements of Article 91(6) of the Act on Public Offering is not tantamount to meeting the criterion of the fair price referred to in the Directive. The low price of Kernel shares indicated in the Tender Offer was influenced by, among other things, extraordinary circumstances (war), which de lege ferenda should be precisely reflected in national legislation. However, even in the current state of the law, it can be argued that the war is the reason why it is not possible to determine the price of the shares in the tender offer in accordance with Article 91(6) of the Act on Public Offering, making it necessary to offer a fair price to minority shareholders (Article 91(7) of the Act on Public Offering).

Moreover, in addition to the price issue, the FSA should have reviewed the entire Tender Offer document for its compliance with the public interest and the interests of minority shareholders. In my opinion, the content of the Tender Offer suggests the absence of a reasonable alternative for its addressees, i.e. the necessity to sell shares under pain of a compulsory buyout (at best at a similar price) or the obligation to be satisfied with the status of an investor entitled to the illiquid shares of a private company based in Luxembourg.   

With regard to this problem, the FSA could enforce changes in the wording of the Tender Offer, indicating, for example, that delisting could only be carried out with the supervisor’s approval, contingent on a positive assessment of the entire process of taking control, which temporally and functionally consisted of a sequence of events.

Currently, already after the Tender Offer has been completed, the supervisor can take remedial action in the initiated delisting proceedings.

The starting point for analysing the authority of the FSA is the norms of Article 91 of Act on Public Offering. Pursuant to Article 91(1) of this act, the FSA shall, at the request of a public company, grant permission to delist shares from the regulated market if the conditions set forth in paragraphs 3-5, 9 and 10 of Article 91 of the Act on Public Offering are met. The wording of the regulation indicates that the administrative act has the character of a bound decision, i.e. the supervisor should issue a positive decision if all the prerequisites indicated in the norm are met. However, especially in the case of foreign companies, the supervisor should not limit itself to verifying the prerequisites indicated strictly in Article 91 of Act on Public Offering, but in the system of regulations determining the admissibility of delisting. In the case of Kernel, the admissibility of a decision authorizing delisting should be affected by an assessment of the entire process of acquisition of control, especially with regard to its compliance with the principals protected by the Directive. Consequently, if it is found that there has been a blatant violation of the interests of minority investors and an abuse of corporate powers by a key shareholder with the aim of dominating a public company, the FSA should, in my opinion, issue a negative decision and suggest corrective measures.

The regulations of the Act on Public Offering on takeovers should be interpreted in the spirit of the Directive’s norms, which make the legality of the relevant processes conditional on respecting the interests of minority shareholders, giving them a chance to complete their investments on fair terms, and protecting the capital market as a whole. The FSA, by virtue of its function, has adequate sanctioning instruments at its disposal, the implementation of which is relevant to this particular case and to the credibility and capacity of the regulated market for the future.

In order to avoid similar controversies in the future, it is worthwhile to include in the legislation general clauses that will directly create the possibility for the supervisor to sanction actions detrimental to the interests of minority investors, and undertaken in the process of taking control or delisting. In particular, the FSA should be guaranteed the possibility of supervisory intervention (e.g., opposing the delisting process) in cases where minority shareholders have not had the opportunity to sell their shares at fair price.

Kernel’s situation is a difficult case and - given the scale and momentum of the parent company - a precedent-setting one. There are no ready-made and obvious prescriptions in this situation, as these are often derived from testing the normative ground, the political climate, or the experience of the lawyers involved in a particular proceeding (primarily the courts).

Nonetheless, tort claims by minority shareholders against the majority shareholder are available for consideration. The tort (Article 415 of the Civil Code) may consist of a violation of the obligation to respect the minority shareholder's investment in a public company from the regulated market in the process of taking control, and the abuse of corporate powers by the key shareholder. Given the rather agreed scenario between the majority shareholder and the company, joint and several liability of Namsen and Kernel (Article 441 § 1 of the Civil Code) cannot be ruled out. It is conceivable that an action for damages could be brought, also indicating the need to avert the threatened danger of harm associated with possible delisting (Article 439 of the Civil Code) and to adequately secure it.

It is worth mentioning that the applicable law for possible claims for damages by minority shareholders against Namsen will be Polish law, which follows from Article 4(1) of Regulation (EC) No. 864/2007 of the European Parliament and of the Council of 11 July 2007 concerning the law applicable to non-contractual obligations (Rome II). The Polish court is competent to hear the case (Article 7(2) of Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters).

As for minority shareholders who hastily sold their shares in the Tender Offer as a result of possible pressure or even corporate blackmail, in this case the regulations allowing to evade the effects of a declaration of intent burdened with the relevant defect, contained in the Civil Code, may come to their rescue.  The jurisdiction of Polish law follows directly from the wording of the Tender Offer document and Article 3(1) of Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). In turn, the jurisdiction of Polish courts can be inferred from Article 7(1) of Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.