Foreign direct investment (also known as FDI) is a form of capital investment in which an investor from one country acquires a permanent stake in a particular enterprise operating in a foreign market, thereby gaining real influence over its operations. This cash flow is long-term and serves not only to generate financial profits but also to provide operational and strategic control over the foreign entity. Through foreign investment, the investor can acquire a significant stake in the company’s ownership structure, and therefore hold at least 10% of the company’s share capital. Often, the decision to conduct such investments involves more than just transferring capital; the investor also invests resources, modern technology, and management staff, ensuring the efficient operation of the foreign entity. These investments can take various forms, from the construction of new plants to the acquisition of existing enterprises. In each of these situations, the investor is responsible for managing and shaping the entity’s market situation, which is the difference between foreign direct investment and passive forms of capital investment. Moreover, unlike short-term investments, FDI typically represents a long-term commitment to a specific foreign market, requiring compliance with specific regulations and meeting various requirements. Investors must primarily consider the target country’s political stability, the availability of qualified labor, and the potential for economic growth. Foreign direct investment currently constitutes one of the foundations of globalization and the integration of global markets.

Types of foreign investments

Greenfield

Typically used for smaller ventures, this form involves building a company from scratch, creating new production facilities, research and development centers, or logistics infrastructure in the host country. By launching such a business from scratch, the investor exercises control over quality standards, the business plan, and other activities within the company. Implementing this type of investment requires significant capital investment and a long payback period, but it also provides significant flexibility in adapting specific activities to local market conditions.

Mergers and acquisitions (M&A)

In this type of investment, the investor acquires an existing company or takes over a controlling stake in its ownership structure. The acquisition provides immediate access to the company’s existing customer base and established operational processes. This model reduces the risk associated with building new facilities and, above all, shortens the time needed to generate profits. However, this requires internal integration and alignment of the acquired company with the investor’s strategy.

Joint ventures

Joint ventures are implemented with a local business partner. A foreign investor forms a partnership with a domestic company, allowing for cost-sharing, risk mitigation, and the utilization of local market knowledge and expertise. Such collaboration facilitates adaptation to procedures in a given investment area, but it also requires compromises regarding management, development strategy, and the distribution of project profits.

Horizontal and vertical investments

Vertical and horizontal investments are interesting forms, differing in their expansion goals. Horizontal investments influence the development of operations similar to those conducted in the home country. A company relocates production, distribution, or a specific range of services to a new market to expand its geographic reach. In contrast, vertical investments direct capital to sectors complementary to the core business. An example would be the purchase of a mine where raw materials required for an industrial company’s operations are extracted, allowing for supply chain integration and reducing material procurement costs.

The role and factors determining foreign direct investment

Foreign direct investment influences market development, technology transfer between countries, and international integration. For host countries, it represents an increase in capital, leading to economic growth and increasing the productivity of enterprises operating in the local market. Their significance goes beyond the financial aspect; investments shape sectoral structures, modernize infrastructure, and enhance the competitiveness of domestic companies. Furthermore, they increase the knowledge of the workforce in a given local market and enhance the skills of the workforce. The main factors influencing an investor’s decision to engage in a local market include:

-financial stability (inflation, interest rates, currency exchange rate in a given country)

– legal regulations (regulations should enable investments, and not unnecessarily complicate and hinder them)

– labor costs and staff (the level of staff qualifications, training implementation and knowledge on a given topic can significantly influence the investor’s decisions)

– infrastructure (the network of connections, the quality of transport significantly influence the logistics of enterprise management)

-market size and growth potential (a potential investor is more likely to choose a market with a larger number of consumers and less competition)

– political risk (investors are more willing to invest capital in a country with a stable government and a marginal risk of political turmoil, e.g. revolution)

Legal Regulations in Poland

In Poland, foreign investments, and particularly those involving the acquisition of shares by a company from outside the European Union that owns real estate, are governed by the Act of 24 March 1920 on the Acquisition of Real Estate by Foreigners (consolidated text: Journal of Laws of 2017, item 2278). Interestingly, this is the oldest legal act currently in force in the territory of the Republic of Poland. Art. 3E point 1 of the Act indicates that the acquisition or takeover by a foreigner of shares in a commercial company with its registered office in the territory of the Republic of Poland, as well as any other legal act concerning shares, requires the permission of the minister responsible for internal affairs if, as a result, the company being the owner or perpetual usufructuary of real estate in the territory of the Republic of Poland becomes a controlled company. Furthermore, point Paragraph 2 informs that the acquisition or acquisition by a foreigner of shares in a commercial company with its registered office in the territory of the Republic of Poland, which is the owner or perpetual usufructuary of real estate in the territory of the Republic of Poland, requires a permit from the minister responsible for internal affairs, if the company is a controlled company and the shares are acquired or acquired by a foreigner who is not a shareholder of the company. These provisions, however, do not apply in a situation where the company’s shares are admitted to trading on a regulated market or the company is the owner or perpetual usufructuary of the real estate specified in Art. 8 paragraph 1 points 1, 1a and 5, subject to Art. 8 paragraph 3. Such an application for a permit, in addition to information such as          the name of the applicant and its legal status, and the name of the seller, should also include the name of the company whose shares are being acquired, acquired, or are the subject of another legal act; designation of a company which, as a result of acquisition, taking up of shares (stock) or another legal act concerning shares (stock) of another commercial company, will become a controlled company; designation of real estate owned or in perpetual usufruct by the company which will become a controlled company or whose shares (stock) are acquired or taken up by foreigners; designation of the method of acquisition or taking up of shares (stock) or another legal act concerning shares (stock) in the company, as a result of which a company being the owner or perpetual usufructuary of real estate in the territory of the Republic of Poland will become a controlled company.

A permit is not required if the foreigner does not obtain control of the company (does not hold 50% of the votes or obtain a dominant influence on the company’s operations) and the company is not yet controlled by foreigners. It is also not required if the company is listed on a regulated market (e.g., the Warsaw Stock Exchange) and the shares are acquired publicly. Furthermore, the Act does not apply if the company is not the owner or perpetual usufructuary of real estate. A permit is also not required if the shares were acquired through statutory inheritance. Furthermore, it is not required if the acquirer is a foreigner from the European Union/European Economic Community or Switzerland (although agricultural and forest land may be exceptions) . Furthermore, it is not required if the shares are acquired as a result of a capital increase or if the company only owns premises (not land).

For investments that are particularly sensitive to public safety or strategic sectors of state operations, the Act of 24 July 2015 on the Control of Certain Investments (Journal of Laws of 2024, item 1459, as amended) will apply. It applies to share acquisitions and transactions of greater economic significance, primarily in sectors such as energy, defense, transport, and even telecommunications.

Summary

Foreign direct investment is a crucial tool that influences the functioning of the modern economy. In an era of ubiquitous globalization, it significantly facilitates navigating the markets of specific countries, leading to the development of both businesses and workforces. It is also enshrined in Polish law.

Artykuł Direct investments – EU and Polish regulations pochodzi z serwisu KIELTYKA GLADKOWSKI LEGAL | CROSS BORDER POLISH LAW FIRM RANKED IN THE LEGAL 500 EMEA SINCE 2019.

For effective protection of foreign creditors in Polish jurisdiction, our law firm combines the experience of:

1/ the practices of lawyers and litigators who can predict the effects of M&A as a tool for the attempt to remove assets in the face of possible enforcement;

2/ OSINT analysts and private investigators who, using various methods of analyzing metadata, are able to track crypto transactions and information traffic in the Internet, also from the level of DEEP and DARK WEB, and are able to track the real value of the assets of the Polish company.

KIELTYKA GLADKOWSKI KG LEGAL is expanding its team for an increasing number of foreign clients who need support in the Polish jurisdiction in securing their interests in a situation when a Polish contractor undergoes the procedure of separating its assets to a nolish company. One example of the support provided by KIELTYKA GLADKOWSKI in the Polish jurisdiction is the case with the value of USD 2 million / USD 10 million in the cross-border entertainment industry, in which we protect a foreign company against a debtor that is in the process of dividing its assets and transferring the assets to a new company.

From the perspective of a foreign creditor with whom the Polish entity does not want to voluntarily settle accounts and leaves open debts, business intentions such as establishing a new company and separating its assets to transfer them to the new company should always be analyzed from the level of the threat to debt solvency in the future.

Polish law indicates that M&A procedures have the potential to be a tool for “runaway procedure” with corporate assets:

1. “removing” the debts of the divided company to another company intended for bankruptcy;
2. the case of creating a profit center and a loss center.

IN SUCH CASE, liability for the liabilities of the company being divided is limited to the value of the net assets allocated in the plan of division to each acquiring company or company newly established in connection with the division.

Artykuł KIELTYKA GLADKOWSKI IS EXPANDING ITS TEAM FOR PROTECTION OF FOREIGN CREDITORS OF POLISH COMPANIES IN THE M&A PROCEDURES FOR A) “SHIPPING” THE DEBTS OF A DIVIDED COMPANY TO ANOTHER COMPANY INTENDED FOR BANKRUPTCY AND B) IN CASES OF CREATING A PROFIT CENTER AND A LOSS CENTER. EXAMPLE VALUE 2 MILLION / 10 MILLION DOLLARS pochodzi z serwisu KIELTYKA GLADKOWSKI LEGAL | CROSS BORDER POLISH LAW FIRM RANKED IN THE LEGAL 500 EMEA SINCE 2019.