This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Romania.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
Key regulations applicable to M&A in Romania include: (i) the Romanian New Civil Code (the “NCC”), into force since 2011, (ii) Law no. 31/1990 on companies, irrespective of the target’s form of organization (i.e. limited liability company or joint-stock company), or (iii) the Capital Markets Law No. 297/2004.
The key regulatory authorities depend on a case by case basis, however the following entities are likely to come up when structuring a deal: (i) Romanian Trade Registry – ensures publicity of all matters related to shareholding, and management, (ii) the Romanian Competition Council – clears economic concentrations, (iii) in certain cases, the Supreme Council for National Defence, and (iv) where listed companies are involved, the Financial Services Authorities – approve applicable prospectuses (the “FSA”).
What is the current state of the market?
Local statistics show the Romanian M&A market was 3rd best in the region in 2015, being surpassed only by Poland and Czech Republic. During such time, 120 M&A transactions have been successfully completed in Romania, with a total value of over EUR 3.2 billion, showing a growth of 23% in comparison to the previous year.
2016 appears to be a bit slow nevertheless, with Brexit, and local political context (local and parliamentary elections) playing a key role in such downturn.
Which market sectors have been particularly active recently?
The most active sectors in the past 12 months were IT, energy, real estate, services and pharmaceuticals/health care, representing about 50% of the M&A market. The sale of 45% of UniCredit Tiriac Bank was a notable deal, valued at more than EUR 700m.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
We would short list the following: (i) the appetite of foreign investors for local investments, (ii) the ability of the Romanian state to make Romania an appealing jurisdiction by improving and also putting forward predictable and clear legislation, and (iii) an international context favouring economies like Romania (see for example, political turmoil in Turkey, which makes Romania an appealing and stable jurisdiction).
What are the key means of effecting a merger?
A merger may be performed either by:
- absorption of a target company by the absorbent company followed by a transfer of patrimony to the latter, or
- amalgamation of several companies followed by the transfer of their patrimonies to a new incorporated target company and issuance and distribution of shares in the target company to the shareholders (and possibly a cash payment of up to 10% of the nominal value of the distributed shares).
Broadly, a merger is a two-step procedure performed before the competent Trade Registry and completed by a court resolution approving the merger. Depending on the parties to the merger and their scope of activity, the entire procedure takes generally about 6 months, involving multiple formalities and documents such as a merger project, multiple corporate approvals and statements, reports, certificates, permits, etc.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Public information on non-listed companies consist in their identification data (name, headquarters, registration code, company status, etc.), subscribed and paid share capital, current shareholders and directors and their identification data, registered branches and secondary units and, if such information were provided by the company, balance sheet related data such as total turnover, employees number, profits and losses, etc. Such information may be obtained from the Romanian Trade Registry or Ministry of Public Finance as well as from different websites tracking the financial and legal activity of Romanian companies.
Issuers admitted to trading on a regulated market are also bound by transparency obligations. Generally, such companies have the obligation to disclose to the public without delay any events which concern them and which may have an impact on their share price. Additionally, listed companies have to draft and make available to the public quarterly, half-yearly and yearly financial reports.
Moreover, the law protects the listed companies against insider dealing. Insider dealing rules apply to any person having knowledge of privileged inside information in relation to the target company (i.e. board member, shareholder, employee or third parties that unlawfully or fraudulently obtained inside information as result of criminal activities) and prohibits such person to:
- disclose, make available, recommend or induce a third party on the basis of such information to make an acquisition or disposal of the target’s shares; or
- make use of the inside information to acquire or dispose, for its own account or for the account of a third party, directly or indirectly, target’s shares; or
use the inside information for cancelling or amending an order concerning the target’s shares to which the information relates where the order was placed before the participant possessed the inside information.
To what level of detail is due diligence customarily undertaken?
Depending on the activity of the target company, a due diligence usually covers aspects concerning:
- legal matters;
- operational and business matters;
- tax matters;
- financial and accounting affairs.
The level of detail will depend on numerous facts, such as background and experience of the target company, scale of business, general current situation in the market, and may be either quick diagnostics or may include deeper analysis.
The usual scope of legal due diligence includes corporate matters, real estate and title to other substantial assets, loan and financial matters, material contracts, including contracts with key customers and suppliers, disputes and litigations, regulatory affairs and investigations, employment matters and intellectual property.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
In terms of corporate governance, the general meeting of shareholders is the supreme body of any Romanian incorporated company (the “general meeting of shareholders”). Actual management of the company is entrusted to directors, or a board of directors (where the company is subject to a unitary management system), or a directorate supervised by a supervising council (where the company is subject to a dualist management system) (“management bodies”).
The powers of the general meeting of shareholders’ are provided by law and concern the most important aspects of a company’s business (including merger, spin off, reorganization, dissolution, etc.). Some of the powers may be delegated to the management bodies of the company.
The company’s business is managed by management bodies which decide(s) on the main course of activity and development, accounting and financial plan, managers’ appointment and dismissing, the organization of the general meeting of shareholders and the implementation of its decision.
Every shareholder has the right to attend and vote in the general meetings of shareholders (unless he holds priority shares with no voting right). M&A transactions are, to a large extent, decided and approved by the general meeting of shareholders.
What are the duties of the directors and controlling shareholders of a target company?
Directors of the target company are required, as a general rule, to act reasonably, and in good faith in the interests of their company.
Romania has rules which forbid financial assistance, or misuse of corporate assets, therefore controlling shareholders should take into account such limitations when structuring the deal.
In the event of a merger, pursuant to Romanian Law, the directors of the target company, alongside with the ones of the buyer must draft a merger project which will be submitted with the relevant authorities.
Also in case of mergers, the merger must be approved by the general meeting of shareholders of both companies, target and buyer.
Do employees/other stakeholders have any specific approval, consultation or other rights?
A shareholder has the right to withdraw from the company and request the company to buy its shares if, in a general meeting of shareholders, he voted against any of the following matters:
- change of the main object of activity of the company;
- relocation of the company’s headquarters abroad;
- change of the company’s form, or
- merger or spin-off of the company.
Although no approval is required from them, the creditors of the merger parties have a temporary opposition right against the merger. The same applies when the shares of a limited liability company are transferred to a third-party buyer (not applicable if the shares are internally transferred, i.e. withdrawal of a shareholder).
As a rule, although the employees have to be notified on the merger/shareholding changes, they do not have any specific approval rights in M&A transactions, unless they are shareholders. However, certain conditions and clauses may be imposed with respect to the continuity of the employment contract and the rights and obligations deriving from it. Also, “silver parachute” clauses may be included in an employment contract.
What regulatory/third party approvals are required and what waiting periods do these impose, if any?
Any M&A transaction must be notified to the Competition Council, prior and after its closing, if the aggregate turnover of the involved parties exceeds the RON equivalent of EUR 10 million and at least two of the involved parties achieved on the territory of Romania a turnover higher than the RON equivalent of EUR 4 million in the previous financial year. The Competition Council should reply within 45 days whether an investigation is required or not. If an investigation is started, it may take up to 5 months, it being completed with a favourable/negative decision regarding the transaction.
Also, an approval from the Supreme Council for National Defence (“CSAT”) is required if assets or companies of interest for national security are involved. If a CSAT analysis is deemed as necessary, it may take up to 50 days as of the date CSAT holds the necessary documents and information. A Government Decision will be issued if the transaction is considered a risk to national security, implementing any necessary measures in view of forbidding it.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality of an M&A transaction is an approach accepted by Romanian law and by the market and often encountered in Romanian M&A transactions.
What steps can an acquirer of a target company take to secure deal exclusivity?
According to the Romanian Civil Code, parties must act in good faith during negotiations. Unreasonable and unexpected withdrawal of a party from negotiations is viewed as bad faith in negotiations, and may result in the liability of such party in the form of payment of any damages suffered by the other party.
In order to secure deal exclusivity, parties generally enter into exclusivity arrangements.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
A common way to secure the transaction is by including a liquidated damages clause within the agreement, whereby the parties agree and asses, in advance, the amount of cash compensation that will be owed by the defaulting party to the other(s), in case of failure or improper fulfilment of obligations.
Another deal protection and cost coverage mechanism is an advance payment (or security deposit) of a small amount of the agreed transaction value. If the acquirer refuses to conclude the transaction, the advance payment is retained by the target. On the other hand, if the target refuses to conclude the transaction, it must return the advance payment in double amount to the acquirer.
Which forms of consideration are most commonly used?
We mostly see funds as consideration for M&A deals.
At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Public disclosure depends on the type of the target company (e.g. issues, non-issuer, limited liability company, joint stock company etc.).
In case of limited liability companies, any change in the shareholding structure must be recorded with the Romanian Trade Registry.
Such registration is not mandatory for joint-stock companies, although generally the shareholding structure is still registered with the Romanian Trade Registry.
Any person, may at any time, request information held by the Romanian Trade Registry in connection with a certain company.
In case any of the buyer or seller are publicly listed companies, capital markets rules shall apply, and the level of disclosure is usually high, in order to not affect the investors’ rights.
Are there any circumstances where a minimum price may be set for the shares in a target company?
It is common that the shares are sold at their nominal value or at a higher price, depending on the target’s financial status. Selling the shares for a lower price than their nominal value is not expressly prohibited, however, objections may be raised by the relevant authorities if there is no reasonable justification for the lower price (e.g. such as that the target undergoes an economic deadlock).
Is it possible for target companies to provide financial assistance?
As a rule, no, target companies are not permitted to provide advances or guarantees for the acquisition of their own shares.
Which governing law is customarily used on acquisitions?
For local deals, Romanian law. For cross border deals, a mixture of foreign law, and Romanian law is used.
What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?
The acquisition of shares in a listed-company is carried out by specific intermediaries (investment firms, credit institutions authorised to provide financial services, and financial investment services companies), through specific capital markets procedures. Such procedures generally mirror European directives, and regulations dealing with capital markets and public offerings.
In case of acquisition of more than 33% of a listed company’s shares, the buyer must give a notice to the FSA. The FSA will approve the notice and forward it to the target company and to a central and local newspaper in view of publication. Within 30 days as of the publication of the notice, the buyer must submit a mandatory takeover bid addressed to all of the target’s shareholders to the FSA in view of approval.
No specific public-facing documentation must be provided for on the market acquisitions of shares in listed companies.
However, in case of mandatory or voluntary take-over bids the potential buyer must provide vast information in connection with both its and the envisaged transaction, including a complete identification of the buyer and any other information that the authorities seem appropriate for the investors’ protection.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
These vary depending on the type of the target company.
A transfer of shares to a third party in a limited-liability company requires undergoing a two-stage procedure with the competent Trade Registry and publicity formalities.
The first stage requires submitting a file with the competent Trade Registry, and among others, a corporate resolution of the seller company approving the transfer of shares to the buyer. Such resolution is forwarded to the Romanian Official Gazette for publication.
Following publication, a 30-day opposition period starts during which creditors of the target company may oppose to the transfer.
If no opposition is raised by the target’s creditors during this period, the second stage of the transaction may be initiated, and a second file will require to be submitted with the competent Trade Registry, comprising of, among others, the constitutive deed of the company with the new shareholding structure and main clauses of the share-purchase agreement.
There are no transfer taxes or duties, however the Trade Registry charges a rather medical fee for the changes operated in the register and for the publication of the GMS Resolution in the Romanian Official Gazette.
For private joint-stock companies, the transfer of nominative shares (issued either in materialized or dematerialized form) is based on a statement made in the shareholders' registry signed by the buyer and the seller or by their proxies. The transfer of bearer shares is made by their simple delivery (traditio).
The revenues obtained in Romania following a transfer of shares are generally subject to a 16% tax rate due by the Romanian/non-resident legal entities or individuals obtaining such revenues, with certain tax exemptions being provided by law. Moreover, the provision of the Double Tax Treaties concluded by Romania should be taken into consideration when analysing the relevant tax treatment).
Are hostile acquisitions a common feature?
Hostile acquisitions are not a common feature in Romania.
What protections do directors of a target company have against a hostile approach?
The law does not offer a real protection against the revocation of a company’s directors since a mandate agreement (and not an employment contract) is concluded between them and the company. If they are unjustly revoked, they only have the right to claim for damages and cannot appeal in court the GMS Resolution by which they were revoked.
However, certain conventional clauses such as a “golden parachute” can be included for protection in their agreement with the target company.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
In case of a listed joint-stock company, a person (legal entity or individual) who, due to its own acquisitions or those of the persons acting in concert with, holds more than 33% of the voting rights in a company is obliged to initiate a takeover bid addressed to all shareholders and for all their shares, no later than two months after reaching this holding percentage. This obligation is not imposed if the shares package was acquired following an exempted transaction, such as privatisation, share transfer between mother-daughter companies or following a takeover bid.
As a majority shareholder, a buyer may “squeeze-out” the minority shareholders if, following the completion of a takeover bid addressed to all shareholders for all their holdings, the buyer is entitled to claim the shareholders who have not subscribed within the offer to sell their shares at a fair price, if the buyer is found in one of the following cases:
- owns shares representing at least 95% of the total number of shares in the share capital which entitle the right to vote and at least 95% of the voting rights that can be effectively exercised;
- acquired, in the takeover bid addressed to all shareholders for all their holdings, shares representing at least 90% of the total number of shares in the share capital which entitle the right to vote and at least 90% of the voting rights referred to in the takeover bid.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
In addition to the withdrawal right mentioned above for listed companies, the minority shareholders of both closed and listed companies enjoy the following rights:
- If they hold more than 5% of the share capital of the target, to convene the general meeting of shareholders and to add new points of discussion on the agenda of a general meeting;
- to request additional reports and information concerning the company;
- to file on behalf of the company a liability court application against directors, officers or members of the executive board and the supervisory board and the censors or auditors.
Pursuant to the law, all shareholders must exercise their rights in good faith, respecting the legitimate rights and interests of the company and other shareholders. Based on this provision, minority shareholders are well protected against a potential abuse made by the majority shareholder.
Is a mechanism available to compulsorily acquire minority stakes?
In addition to the “squeeze-out” right of the majority shareholder, for the same scenarios mentioned at point 24 above, a minority shareholder of a listed joint-stock company has the right to determine the majority shareholder to buy its shares at a fair price.