Polish Company Blocked From Diluting Shares

(CN) - A Polish real estate company accused of massive fraud cannot dilute shareholders' ownership of the company by issuing more shares, a federal judge ruled.

Krakow Business Park (KBP) was formed in Poland in 1997 to buy and develop real estate near the Krakow airport. It owns several large office buildings and a railway station.

Minority shareholders Jan Domanus and Andrew Kozlowski filed suit in 2008 against the company's manager, Adam Swiech, several alleged shell companies, and Swiech's wife and brother.

"Simply put, these defendants have looted KBP, misappropriating tens, if not hundreds, of millions of dollars which they have in turn laundered through a worldwide series of dummy entities - the result being Swiss and U.S. bank accounts in the names of defendants holding more than twenty million euros," according to the complaint.

After receiving notice this month of a shareholders' meeting for the purpose of authorizing the issuance of 1,200 new KBP shares, Domanus and Kozlowski moved for temporary restraining order and preliminary injunction.

"Plaintiffs strenuously oppose the issuance of these shares because the resulting further dilution of their ownership interest to less than twenty-five percent will render them unable, under Polish law, to block certain fundamental corporate changes, such as a merger with a third party," the court summarized.

U.S. District Judge Elaine Bucklo granted the order and injunction last week, finding that their evidence "is more than sufficient to satisfy plaintiffs' burden to show a 'better than negligible' chance of prevailing on their claims at trial."

The judge cited plaintiffs' detailed claims that Swiech entered into sham contracts, self-dealing leases, land misappropriation and construction kickbacks.

Moreover the shareholders face irreparable harm if KBP merges with SMAL, a Polish company that Swiech's daughter owns. SMAL is not a party to the lawsuit.

"To be sure, plaintiffs emphasize the separate and additional irreparable harm they would suffer in the event of a merger between KBP and SMAL, after which SMAL could become the majority shareholder of the merged entity," Bucklo wrote.

"That scenario, plaintiffs explain, 'would enable the culmination of defendants' fraud: permanently depriving plaintiffs of any opportunity to reclaim their rightful majority ownership of KBP.' But this eventuality merely illustrates the significance of plaintiffs' ability to maintain sufficient control over KBP to block such a merger."

Though KBP claims it needs immediate capital to conduct its ongoing business, the court said the shareholders' sought-after injunction would not hamper fund-raising efforts.

"The plaintiffs' proposed injunction simply forecloses one discrete avenue for doing so: through a capital call that will inevitably result in a critical dilution of plaintiffs' interest in the company, and that appears, based on all of the available evidence, specifically designed to effectuate just this result in accordance with defendants' ongoing scheme," Bucklo wrote.

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