Sidestream mergers – a new model for reorganization in capital groups

The introduction of Article 515¹of the Commercial Companies Code ("CCC") is one of the most significant changes in recent years in the field of corporate restructuring law. This regulation concerns so-called horizontal mergers (sidestream), i.e. mergers between entities under similar ownership control.

This solution was fully regulated in the Polish legal system in 2022.

1. What is a sidestream merger?

Article 515¹ of the CCC covers two basic cases:

A merger of “classic sisters” - where one partner (directly or indirectly) holds 100% of the shares in the merging companies.

Example: Company A holds 100% of the shares in Companies B and C. Company B takes over Company C.
Merger with identical ownership structure - when the shareholders hold shares in the merging companies in the same proportion.

Example: shareholders X and Y each hold 50% of the shares in companies A and B - they merge.

In both cases, the key point is that economic control over the assets remains unchanged.

2. Merger without the allocation of shares

The most important feature of a sidestream merger is the possibility of carrying out a merger without allocating shares in the acquiring company (Article 515¹ § 1 of the CCC).

This means that:

there is no increase in share capital,
no exchange ratio is set,
there is no dilution of the ownership structure.

Economically, the assets are added together, but the owners' share in those assets remains the same as before the merger. This is what justifies the procedural simplifications.

The regulation applies only to mergers by acquisition – it does not apply to mergers by forming a new company.

3. Economic rationale for the regulation

The legislator's reasoning is simple: since companies under the same control are merging, the application of full protective mechanisms appropriate for “external” mergers would be excessive formalism.

A sidestream merger enables:

consolidation of assets and liabilities within the group,
simplification of the holding structure,
reduction of administrative costs,
increased organizational transparency.

It is therefore a particularly useful tool in intra-group restructurings.

4. Creditor protection – a special mechanism

Despite the simplifications, the legislator has provided for additional creditor protection in a specific variant of the sidestream merger (Article 515¹ § 2–3 of the CCC).

This applies to situations where:

one shareholder indirectly holds all shares in the acquired company,
the merger takes place without the allocation of shares,
there is an “intermediate” company in the structure which does not itself participate in the merger.

Right to request security

A creditor of a company not participating in the merger (e.g., the parent company) may request security for its claims if it submits a request within one month of the announcement of the merger plan and proves that the merger threatens the satisfaction of its claims.

In the event of a dispute, they may apply to the court (within two months of the announcement of the merger plan).

It is crucial that in the case in question:

only substantive claims are concerned,
protection is ex ante (before the merger),
it is necessary to demonstrate a link between the merger and the threat to satisfaction.

The rationale for this regulation is that in the sidestream model, valuable shares may be “lost” from the assets of the non-participating company without receiving a direct equivalent.

Security procedure

Security may be established:

voluntarily by the company (e.g., surety, guarantee, mortgage),
or by the court in security proceedings.

The legislator does not limit the list of permissible security measures exclusively to the forms specified in Article 747 of the Code of Civil Procedure – other adequate measures are also permissible, provided that they do not lead to an excessive burden on the debtor.

The purpose of this regulation is not to give preferential treatment to the creditor, but to maintain the balance that existed prior to the merger.

6. Sidestream and classic simplified merger (Article 516 of the CCC)

Although sidestream mergers (Article 515¹ of the CCC) and the acquisition of a wholly-owned subsidiary (Article 516 § 6 of the CCC) are sometimes perceived in practice as similar simplified structures, their legal nature and systemic function are different.

A merger under Article 516 of the CCC is vertical in nature, i.e., it concerns a parent-subsidiary relationship and involves the acquisition of a subsidiary by its parent company. The simplification of the procedure results from the full ownership control exercised by the acquiring company over the acquired company. The lack of issuance of new shares is a consequence of the fact that a company cannot grant shares to itself.

A sidestream merger, on the other hand, is horizontal in nature and therefore involves the merger of companies under the same ownership control or with an identical share structure. The simplification here is that, despite the formal transfer of assets between separate entities, the economic position of the shareholders remains unchanged. Therefore, there is no real change in the proportion of ownership, which justifies the decision not to grant shares in the acquiring company.

There is also a significant difference in terms of creditor protection. In the case of a vertical merger, the legislator has not provided for a separate, specific security mechanism beyond the general provisions on creditor protection. In contrast, in the case of a sidestream merger, an additional protective instrument has been introduced (Article 515¹ § 2–3 of the CCC), enabling creditors of a given company to demand security for their claims if there is a risk that they will not be satisfied as a result of the merger.

It can therefore be said that Article 516 of the CCC is an “intra-relationship” construct (parent-subsidiary), while Article 515¹ of the CCC is an “intra-holding” construct, aimed at reorganizing the horizontal structure. Both mechanisms serve to simplify restructuring in capital groups, but their ratio legis and scope of application are clearly different.

7. Practical significance

Sidestream mergers are now one of the most important tools for:

simplifying corporate structures,
eliminating redundant entities within a group,
consolidating operations,
and optimizing management.

In the reality of modern capital groups, Article 515¹ of the CCC serves as a “technical organizing instrument” that allows for quick and effective reorganization while maintaining a minimal but sufficient level of creditor protection.

Summary

A sidestream merger is an example of a regulation that balances two values: the efficiency of reorganization within a capital group and the protection of creditors. The legislator decided that in a situation of identical ownership control, there is no need to apply the full rigor of classic merger proceedings.

As a result, Article 515¹ of the CCC has become one of the key provisions for the restructuring of holding companies in Poland.