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DEFENCE I OFFSET

Jarosław Kruk 

TROUBLES OF MINISTRY OF TREASURY - NEXT STEP OF CONSOLIDATION OF THE DEFENSE INDUSTRY

21/10/2013

Our intrepid administration has got down to work and is translating into practice the Prime Minister’s announcement of appointing The Polish Armament Group (PGZ or Pegaz [Pegasus]).

Personally, I can see a few problems: I wonder whether The Ministry of National Defense will agree to incorporate its WPRP to PGZ so easily. This will only cause irreparable losses, there will be fewer cosy jobs in Supervisory Boards – a loss hard to recover. Moreover, the likely arguments to be used are those that WPRP is indispensable in the Armed Forces to implement the defense policy, and that it serves more to keep the defense potential than produce equipment, unless the Ministry of National Defense on behalf of the State Treasury has supervision over Pegaz…

Secondly, there is a problem with PHO, and especially with valuation of its assets. Rumour has it that the Minister of the State Treasury or rather Minister Gawlik would like PHO to transfer stocks/shares it holds in its subsidiaries to Pegaz. It simply has to transfer them – for example, for nominal price, i.e.  Cenrex for about PLN 500,000, Cenzin for PLN 10 million. Alternatively, transfer/contribution (?) is to take place at a lower price than the market price. And there is one more important issue: what PHO is expected to get in return from Pegaz – shares or cash? At the same time, the State Treasury wants to introduce provisions in the statutes of Pegaz that are similar to those in the statutes of PKN Orlen, Azoty and other companies that limit the exercise of voting rights by stockholders other than the State Treasury to 10% of the shares. Moreover, the Ministry of the State Treasury considers reduction of PHO’s share capital. But how?

The PHO’s Management Board which would accept such a solution, i.e. underestimated valuation or consent to contribute to Pegaz, the statute of which will have provisions limiting the exercise of voting rights by PHO to 10 or 20% in exchange for PGZ’s shares, would inevitably risk proceedings before the public prosecutor under Article 296 of the Criminal Code (in the nearest future) – our prosecution is, after all, extremely inventive in presenting criminal charges when it’s necessary. Moreover, if the opposition took over the political power then one could expect home detention. The PHO’s Management Board would have to be stupid or would have to show suicidal tendencies if it agreed to the potential plans of the Minister of Finance. I suggest that PHO’s management board should order its own valuations of assets, independently from the Ministry of the State Treasury. This will be safer procedurally.

As regards the procedure concerning reduction of the share capital, it will take several months to several years. The creditors will be mandatorily called on and a great number of them will probably appear and will raise well-grounded- and sometimes groundless – claims. And, in accordance with the provisions of the Commercial Companies and Partnerships Code – Article 265, they will have to be satisfied, unless PHO’s management board gives false testimony.

Of course, there are some options for redemption of shares, or even dissolution of the company, but this will be a long process. Another important factor is the attitude of banks and other creditors. It is known that some of the credits taken by Bumar or with PHO acting as a guarantor, were i.a. secured by pledge on stocks/shares of the subsidiaries. Credits were often granted for the implementation of ongoing orders of the Armed Forces, or export contracts.

Banks think of their own interests, not of “the idea of changes in the armament sector”. It would be reasonable to expect that banks will send calling-up notice to Bumar/PHO and to their subsidiaries, this in turn, will result in immediate demand for payment in full. Consequently, this will cause collapse or major delays in the implementation of important programs for the Armed Forces. Or … put some PHO subsidiaries into liquidation. What does local community say, e.g. in Nowa Dęba, Pionki or Łabędy? What do MPs from these areas say? And most importantly, what does Prime Minister, who can understand what the small group is prompting him to do with the armament industry and what consequences this will have for Poland, think about it?

One has to be aware that PHO’s shares are held by former and current employees, usually not rich, and by some PHO’s creditors. For them, reduction of PHO’s value is an evident loss. They have remedies to challenge resolutions, to bring legal actions based on actio pauliana [Pauline action] for recognition of ineffectiveness of actions involving the transfer of stocks/shares from PHO to Pegaz, or other actions aimed at reducing the assets of PHO. In addition, it would be a good idea to inform the Ministry of the State Treasury, ARO, Pegaz and PHO itself of the claims against PHO. Then the case of ineffectiveness of such transfer with respect to the creditors under Article 59 of the Civil Code could occur. There are also other remedies to defend interests of the injured parties.

The attitude of the Ministry of State Treasury as regards defense industry issues may arouse amazement: Minister Gawlik said that we would contribute the assets of the subsidiaries to Pegaz, PHO would stay until the end of the existing contracts, and then we would see what we could do with that company. For me these words are fairly irresponsibly.

Rumour has it that the Ministry of the State Treasury expressed deep dissatisfaction that several days ago PHO succeeded in negotiating some very big export contact – the largest since 2006. This is because today every potential success of PHO would put the Ministry of the State Treasury, and in particular, Minister Gawlik in a fairly uncomfortable position. So how can you justify dismissal of the management board of the strategic company, which until recently was told to accelerate re-branding, and today they are throwing mud at that company for that.

I wonder if any “successes of PHO” will be approved by the Supervisory Board? The latter under the influence of the words of the Prime Minister and the Minister of the State Treasury advised that the Management Board of PHO should withhold strategic decisions, such as reducing expenses i.a. for the promotion of its products, etc. I do not know the form of those recommendations – if they had the form of a resolution of the supervisory board – then if I were in PHO’s shoes, I would think of appealing those resolutions to court. If these were some guidelines, then the situation is getting increasingly interesting. Certainly, withholding conclusion of new national agreements or export contracts exposes the company to damage or at least to imminent danger of inflicting significant damage. Our brave prosecutors take delight in reaching for Article 296 of the Criminal Code, and if the political power is taken over by the opposition, they will certainly do this. From the legal perspective, still the previous decision of the government as to the defense industry consolidation is binding. If I were in the position of the Supervisory Board, I would avoid hasty implementation of politicians’ oral declarations.

The decision of the Supervisory Board in question will be the reason for great satisfaction of professionals trading in arms at 27 Stromynki Street in Moscow. In the nearest future several contracts will be decided in countries that have only recently bought our weapons. Highly-regarded lawyers acting on behalf of their governments in matters concerning these transactions are very earnestly asking whether Bumar (because for them PHO is still Bumar) has the ability to sign contracts and whether this new creation, which is to be built, is the legal successor of Bumar or another beast. They are saying openly that they believe the new entity will not be able to show credentials, so in general it may not be allowed to make offers. So we can score an own goal.

What a mess ….or one is tempted to phrase it otherwise. And who gains? Maybe that great company from the east coast of the Mediterranean Sea which I recently wrote about? The next episodes will show- if the situation allows.

 

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