
Polish authorities & private equity: a troubled relationship

Last week saw the headline-grabber that Abris Capital was suing Poland – the state's financial regulator had demanded Abris sell its holding in FM Bank PBP. Alice Murray speaks to Abris partner Pawel Boksa to hear the firm's side of the story
Earlier this month, the Polish financial watchdog KNF ordered Abris to sell portfolio company FM Bank PBP by 30 April 2015. According to a statement, KNF believes the central and eastern Europe-focused house had failed to meet investor commitments.
According to Abris partner Pawel Boksa, who is presiding over the ever-complex case, the tension centres around the buyout house's appointment of a new CEO for the bank.
Following the merging of FM Bank and Polski Bank Przedsiębiorczości (previously a subsidiary of WestLB) in 2013, a new management team had to be agreed upon. With the departure of the newly combined bank's deputy CEO, Abris needed to fill the gap. "We managed to bring in Sławomir Lachowski, the founder of mBank and MultiBank – retail banks in the BRE Group," says Abris partner Pawel Boksa.
Poles apart
Lachowski was initially appointed as an interim CEO while Abris sought approval from KNF for naming him as permanent CEO. "We followed the law but to our surprise KNF was disappointed with our procedure and started administration proceedings against us and the bank," says Boksa. "They said our actions as a shareholder were not in line with the sound and prudent management of a bank.
"However, the changes to the bank's management were made by the bank's supervisory board, which acts completely independently, with each member responsible for their own actions and decisions.
"We were accused by the KNF of not prudently managing the bank because we had appointed a high profile CEO. The KNF was upset that, in their opinion, we didn't consult them properly, even though we did indeed consult them regarding Lachowski's appointment in January 2013. Moreover, formally, a consultation is not a specific legal requirement and with this appointment the bank merely followed its normal procedures when making such an appointment. What's bizarre is that in July 2014, the KNF did formally approve Sławomir Lachowski as the CEO of FM Bank PBP. "
It would appear the KNF has a powerful tool when it comes to influencing regulated entities: the investor commitment. "We have been accused of breaking our investor commitment - a claim which we strongly deny. It is not written in law what the investor commitment is, but the regulator requires investors in banks to submit a commitment. When it is later reviewed, if is hasn't been adhered to it is treated as major offence."
Rather than warning Abris about its decision, the regulator began a procedure to force Abris to forgo its voting rights over FM Bank PBP and sell its holding.
Setting an example
What makes the KNF's aggressive decision curious is the breaking of another investment commitment by Rabobank. Rabobank had acquired Polish retail bank BGZ in 2013. In order to win the support of the Polish regulator, the Dutch bank had agreed to merge BGZ with its existing Polish unit by mid-2014, in order to prove its longstanding commitment to the Polish banking industry.
However, by mid-2014, Rabobank abandoned this plan – set out in its investor commitment – and offloaded BGZ to BNP Paribas. While reports surfaced at the time that the regulator could block the sale, in the end it went through without resistance.
When questioned by Polish press on whether or not there was a link between Rabobank's sell off and the Abris case, the KNF's chairman said there absolutely was – that both had broken their investor commitments.
However, only Abris is being punished.
Abris's case has now been taken to the Arbitration Institute of the Stockholm Chamber of Commerce. Abris is able to do this as it invested in FM Bank PBP through PL Holdings, a Luxembourg-based holding company. Through the bilateral investment treaty between Poland and Luxembourg, Abris is able to challenge the Polish state over KNF's actions.
"Under the bilateral investment treaty, for KNF's expropriation to be legal the decision has to be based on three criteria: that the claim is legal according to Polish law; that it is for a public purpose; and that proper compensation is awarded at fair market value," says Boksa. "We believe that none of these criteria have been met – the decision is not legal, there is no public benefit, there is no compensation."
Repercussions
However the case plays out, it seems the damage has already been done. According to Boksa, some of Abris's investors are so put off by the Polish authority's actions that they will not commit another euro to the country until this issue is resolved.
Against a backdrop of the Polish pension fund reform, whereby assets held by Polish private pension funds were taken over by the Polish government as a quick fix to its growing deficit, the country is emerging as an increasingly hostile environment for those trying to transact and support growth of domestic businesses.
Much of the issues are likely to have been caused by a lack of understanding of private equity on the regulator's part – a problem the asset class has long had to battle with and which was particularly pronounced during the drafting of the AIFM Directive.
Parallels can also be drawn with the tax court cases in Sweden, whereby the local tax authority attempted to retroactively charge individual practitioners income tax on carried interest, which is typically only subject to capital gains. Fortunately, a final decision was reached after several years of court cases, with Sweden's Supreme Administrative Court ruling that the tax authority did not have a claim.
With Abris's case now being taken to Stockholm, perhaps the recent memories of Nordic Capital's court battles can help the Polish buyout house in its fight against the Polish state.
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