17.02.2021

Dematerialization of shares: consequences

Paulina Opiełka
dematerializacja

The process of dematerializing shares in Poland, which was commenced in 2019, will soon come to an end. As of 1 March 2021, all of the traditional share certificates in joint-stock companies and limited joint-stock partnerships will be voided. After that date, they will be replaced with records in an ICT system (a register of shareholders). Read below to learn what dematerialization of shares consists in.

Consequences of failure to comply

Failure to comply with the obligations related to dematerialization entails several consequences. The main one is that the shareholders lose their entitlement to exercise the rights carried by their shares. In practical terms, this means the impossibility of receiving dividends, exercising the right to vote at general meetings, or disposing of or encumbering the shares. As of 1 March 2021, non-dematerialized shares will only serve as evidence, for the next five years. This means that they could be used only for the purpose of having them entered into the register of shareholders.

In certain cases, failure to comply with the obligations related to dematerialization may even entail criminal liability. For instance, failure to maintain a register of shareholders or to register shares with the Polish Central Securities Depository may results in a fine of up to PLN 20,000 for the members of a company’s management board. In turn, allowing for the issuing of share certificates and other documents entitling their holders to participate in profits and the distribution of assets entails a fine, community service, or imprisonment of up to 6 months.

Existing obligations of companies

According to the Law amending the Polish Code of Commercial Companies and Partnerships, by 30 September 2020, companies had to comply with a number of obligations vis-a-vis their shareholders. The most important ones included selecting an entity to maintain the register of shareholders (a brokerage house or a custodian bank) and requesting the shareholders, five times, to deposit their share certificates with the company.

Once these actions have taken place, dematerialization proper is carried out by the relevant entity. At this stage, the shareholders should surrender their share certificates to the company. The company is obliged to carry out all of the formalities with the entity the agreement for maintaining the register of shareholders has been executed with.

Benefits of dematerialization

Once the company or partnership has complied with all of the obligations related to dematerialization of shares, an electronic register of shareholders, maintained by a brokerage house that has a license to operate securities accounts or by a custodian bank, is established. The register is open to the company and each of the shareholders, but not to third parties. It will also contain information about the shareholders, including their name and address of residence or registered office or another address for deliveries.

One of the most noticeable consequences of dematerialization is that bearer shares lose importance. Thanks to general access to the register of shareholders, the identity of holders of such shares is known to all shareholders.

After 1 March 2021, the register of shareholders will have a significant impact on the practical functioning of joint-stock companies and limited joint-stock partnerships. In the future, it will also affect simple joint-stock companies. Disposal of shares will become effective at the moment of making the entry in the register of shareholders instead of the moment of executing the agreement in this respect, which has been the case so far. Furthermore, dividends for shareholders will be paid via the entity maintaining the register and the correctness of all actions concerning shares will be verified by that entity.

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