The fall of the communist system in 1990 and Romania's accession to the European Union in 2007 were historic political landmarks that had a great impact on the country's economy and law. As a result, private property has been restored, a significant number of state-owned companies have been privatised, and new investments have emerged, which have been driven by the opportunities offered by the Romanian market. Simultaneously, legislation has been adapted to the requirements of a market economy and new rules have been gradually introduced in order to allow for the implementation of the acquis communautaire. Although the process is still continuing in some respects, one may confidently look back at this period as one that has shaped Romania's return to a market economy.

Romanian Law No 31/1990 on commercial companies, as republished and further amended (Company Law), generally kept pace with the changes in the overall economy and has been amended several times since its publication in order to provide a secure environment for businesses. Various corporate governance provisions have been introduced during the last few years, seeking to ensure a more effective management system and the enhanced liability of directors while also providing them with a reasonable degree of protection in the exercise of their functions.

Although several types of commercial companies are regulated under the Company Law, joint stock companies (generally used for large operations and often listed on the stock exchange) and limited liability companies (used for smaller, family businesses and not listed on the stock exchange) tend to be the preferred form of companies incorporated in Romania.

Joint stock

Since December 2006, joint stock companies may be managed either by a one-tier board (the most common system in Romania and the only one recognised prior to 2006) or by a two-tier board.

In the one-tier structure (the so-called unitary system) the management and supervision activities are carried out by one or several directors (administratori). When there are several directors a Board of Directors (consiliu de administratie) is created. The Board of Directors may delegate certain aspects of the company's management to one or more executive managers (directori) and appoint one of them as General Manager. The members of the Board of Directors may be appointed as executive directors. Companies which are required by law to audit their annual financial statements must have at least three directors and must delegate the management of the company to its executive managers.

The powers and duties of the executive managers are established either by law or by the company's bylaws. Practically speaking, the executive managers may undertake any necessary action for the benefit of the company that does not fall under the exclusive powers of the general meetings of shareholders, either ordinary or extraordinary (OGM or EGM), or the Board of Directors.

The two-tier system consists of a Managing Board (directorat) and a Supervisory Board (consiliu de supraveghere). In such a system, responsibility for running the company lies exclusively with the Managing Board, which carries out all necessary activities in this respect, except for the duties expressly granted to the OGM or EGM and/or the Supervisory Board.

Contractual and statutory

Under the Company Law, the duties of the directors are mainly owed to the company and the shareholders, and the directors may perform all operations required for the business purposes of the respective company, except for those activities which are expressly restricted in the company's bylaws. Directors are entitled to enter into any acts of conservation (for instance, registration of a mortgage), administration acts (for instance, execution of lease agreements) and/or disposal acts (execution of sale-purchase agreements) that are necessary for the administration of the company. Under a dual management system, the members of the Managing Board enjoy the same rights.

The duties of the directors and their liability towards the company are generally considered to be dual in nature and to originate from contractual provisions (for instance, the mandate agreement signed with the company) and the regulatory rules set forth in the applicable legislation (for instance, the Company Law).

Directors are jointly and severally liable to the company for: (i) the payments made by shareholders; (ii) the actual existence of paid dividends; (iii) creating and maintaining the registers required by law; (iv) convening and accurately implementing the resolutions of the OGM and EGM; and (v) lodging copies of the annual financial statements of the company with the Trade Registry, within 15 days of their approval by the OGM.

The liability of directors for acts or omissions does not affect those directors who required that their objection(s) be specifically mentioned in the minutes of the Board of Directors and who informed the censors or internal auditors and the financial auditor of the company, in writing, of such objection.

The directors are liable to the company for any loss caused by the executive managers or employees of the respective company when such loss would not have occurred had proper surveillance been carried out by the directors. The directors are also jointly and severally liable along with their immediate predecessors if, being aware of the irregularities performed by these predecessors, they fail to disclose such irregularities to the censors or internal auditors and the financial auditor of the company.

Specific duties and restrictions

The Company Law establishes a general statutory duty of diligence and loyalty of directors towards the company. Since Romanian law does not recognise trusts, this duty is derived from the general principles of agency and largely resembles the fiduciary duties of directors in common law systems.

The duty of loyalty presupposes that the director must act in good faith and for appropriate purposes within the limits of his or her agency with the company, putting the interest of the company before his or her personal interests and avoiding conflicts of interest with the company.

Under these obligations of diligence and prudence, directors must conduct the company's business according to professional and profit-orientated criteria.

The aforementioned duties are not breached if the director could reasonably have presumed at the time he/she made a business decision that he/she was acting on the basis of adequate information and for the benefit of the company. A business decision under the Company Law encompasses any decision to take or refrain from taking action with regard to the management of the company.

Directors of joint stock companies

a) As a matter of principle, the directors and their relatives may not receive loans, security for personal loans, or any other financial incentives from the company unless the value of the transaction is below €5,000 ($8,000) and/or the transaction occurred during the current activity of the company and the terms of the transactions are no less favourable than those applicable to third parties.

b) A director who has interests in a particular operation, either directly or indirectly, which is contrary to the interests of the company, must duly inform the other directors and auditors of the company of this conflict and not participate in any deliberation concerning such operation. The same obligation is applicable to the family members of the director, up to the fourth degree of kinship.

c) Under the penalty of being revoked and held liable for damages, the executive managers in the one-tier system and members of the Managing Board in the two-tier system cannot be, without the authorisation of the Board of Directors or of the Supervisory Board, executive managers, members of the Board of Directors, members of the Managing Board, members of the Supervisory Board or, as the case may be, internal auditors, partners with unlimited liability in competing companies or in companies having the same business purpose as the concerned company, nor exercise the same trade or other competing trades, for his/her own benefit or for the benefit of others.

d) Unless specifically authorised by the bylaws of the company, and subject to the sanction of nullity, the directors and members of the Supervisory Board may not sell to, or acquire assets from, the company, in a personal capacity, if the value of such assets exceeds 10% of the value of the net assets of the company without the prior approval of the EGM. The same obligation is applicable in principle to the family members of the directors and members of the Supervisory Board, up to the fourth degree of kinship.

e) The Board of Directors and respectively the Managing Board may enter into transactions, in the name of and on behalf of the company, in order to acquire assets for the company or to sell, lease, pledge or mortgage the company's assets, the value of which does not exceed 50% of the company's assets' book value at the time the transaction is concluded. The prior approval of the EGM is required for operations where this threshold is exceeded.

f) The directors may not delegate the powers of representation of the company bestowed upon them, unless such delegation is specifically permitted under the company's bylaws. Should this obligation be breached, the company may claim from the respective representative the benefits resulting from the operation that was carried out in this capacity. In this case, the director shall be jointly and severally liable with the representative for all of the damages thus caused to the company.

g) The directors are not allowed to disclose confidential information and company business secrets of which they become aware in their capacity as directors. This duty survives beyond the end of the director's position with the company for the duration set forth in the agency agreement entered into with the company.

Directors of listed companies

Under Law No 297/2004 on capital markets (Capital Markets Law), the directors of listed companies may conclude any acts of acquisition, sale, exchange or the setting up of guarantees involving immovable assets, the value of which does not exceed, either individually or cumulatively, during a financial year, 20% of the total assets of the company. The prior approval of the EGM is required for operations that exceed the aforementioned threshold. This provision deviates from the requirements of the Company Law and overrides its provisions with respect to listed companies. Similar provisions are applicable to listed companies in relation to lease agreements with a duration of less than one year.

The Capital Market Law provides for additional and sometimes deviating duties applicable to administrators of listed companies, such as: (i) the duty to notify the Romanian National Securities Commission of any transaction having a value in excess of €50,000 and concluded between the company and its directors, employees, or associates who exercise control, or any persons related to them; (ii) the duty to provide shareholders with accurate information regarding the financial and economic status of the company (that is, the duty of disclosure); and (iii) the duty not to disclose inside information or use such information by acquiring or disposing of, or by trying to acquire or dispose of, securities of the company to which the information relates, for his/her own benefit or for the benefit of a third party, either directly or indirectly.

Directors' liability

Towards the company

An action for liability for damages caused to the company can be brought against the directors pursuant to a resolution of the OGM. The OGM is entitled to resolve such matter after deciding upon the annual financial statements, even if the liability of the directors was not included in the agenda of the respective OGM.

Shareholders having at least 5% of the registered capital, either individually or jointly, are also entitled to initiate such legal action in their own name, but on the account of the company, against the company's directors if the general meeting of shareholders does not do so.

Exceptionally, an action for liability against the directors may also be brought by the creditors of the company, but only if an insolvency procedure has been commenced against the company.

In joint stock companies functioning under the two-tier system, an action for liability against the members of the Managing Board may also be initiated by the Supervisory Board.

The company may initiate an action for liability within three years from the date it becomes aware or should have become aware of the existence of the loss caused by the concerned director(s).

If an action for liability is initiated against the directors, their function is suspended de jure until the relevant court's ruling becomes irrevocable.

A breach of the directors' contractual duties would trigger their contractual liability. Although there is a split of authority under Romanian law with regard to the liability arising from a breach of the statutory duties of directors, we are inclined to believe that the violation of the statutory obligations that are not replicated in the agency agreement would trigger liability in tort for the implicated directors. In a case of liability in tort, the burden of proof lies with the injured party, while in a case of contractual liability, the non-defaulting party has to prove only the existence of the contract and a breach of the relevant obligation. Under the contractual liability regime, should such evidence be submitted, the culpability of the defaulting party is presumed.

Towards third parties

As a general rule, a director is not liable towards third parties. Transactions entered into by a director in his/her capacity as a representative of the company are considered to be the acts of the company itself and therefore trigger the contractual or tort liability only of the company. The company is liable towards third parties even if the operations performed by the concerned director exceeded the scope of activity of such company.

However, the company will not be bound by the acts of its directors if: (i) the company proves that the third parties knew or, depending on the particular circumstances, should have known that the company's scope of business was exceeded; or (ii) the acts concluded by the director exceeded the scope of the powers conferred upon such director.

The company has the right to bring an action against a director who is held liable in order to recover the amount paid to the injured third party.

In insolvency procedures

Under Law No 85/2006 on insolvency procedure (Insolvency Law), upon the request of a judicial administrator or an insolvency practitioner, a bankruptcy judge (judecator sindic) may decide that a portion of the liabilities of the insolvent company should be borne by members of the surveillance or administrative bodies of the company, or by any other person that caused the insolvency of the debtor, by any of the following actions: (i) use of the assets or loans granted to the company for their benefit or for the benefit of third parties; (ii) performing commercial acts for their personal benefit, using the company as a cover; (iii) deciding, for their own personal benefit, to continue pursuing an activity that would obviously trigger a cessation of payments; (iv) false bookkeeping, loss of accounting documents, or not maintaining accounting records according to the law; (v) use of the assets of the legal entity for personal purposes or hiding part of the assets of the legal entity, or misleadingly increasing its liabilities; (vi) using ruinous means to procure funds for the legal entity for the purpose of delaying the cessation of payments; or (vii) during the month preceding the cessation of payments, giving preferential treatment to a creditor, thus adversely affecting other creditors.

Certain criminal law provisions will continue to apply to the aforementioned actions, which are considered criminal offences.

The right to request, in insolvency procedures, that part of the liabilities of the debtor company be assumed by members of the company's management pertains to the judicial administrator and the insolvency practitioner and, in exceptional cases, to the creditors' committee, with the approval of the bankruptcy judge.

The Insolvency Law includes the principle of the joint liability of directors, subject to insolvency being contemporary or before the period of time when they exercised their mandate or held the function that could cause the insolvency. Directors may avoid joint liability if, in the management bodies of the respective company, they objected to the acts or facts that caused the insolvency or were absent when the decisions that caused the insolvency were approved and recorded their opposition, after the decision was passed, in the minutes of the meeting.

The liability claim described above falls under the statute of limitations period of three years from the date when the person who caused the insolvency knew or should have known the circumstances of the pending insolvency, but no earlier than two years from the date of the decision to commence the insolvency proceedings.

Criminal liability

The criminal liability of a director is mainly regulated by the Company Law, the Capital Markets Law and the Romanian Criminal Code. Criminal liability is always individual.

A criminal action may be brought against a director by the prosecutor and not by the company. However, the company may alert the competent authorities if it believes that a director has committed a criminal act and may participate in the criminal trial as a civil party for the purpose of recovering its losses.

The Company Law regulates in detail the acts and facts relating to directors that may be deemed criminal offences. Under the Capital Market Law, breaches of the duty relating to the reporting and non-disclosure of inside information are considered criminal offences.

There are also other criminal offences potentially applicable to directors, as set forth in the Criminal Code, and other special laws applicable to fraudulent management, fraud, breach of trust, forgery and embezzlement.

These rules on directors' duties and liability are part of a larger set of principles contained in the Company Law that seek to ensure the better functioning of commercial companies in Romania. Even if they may be subject to further improvement, for the time being they are the foundation of a rather efficient corporate governance system.

Author biographies

Ancuta Leach Wolf Theiss Ancuta Leach is a partner in Wolf Theiss. Her practice is principally focused on M&A, energy, privatisation, telecoms and competition. Ligia Popescu Wolf Theiss Ligia Popescu is a senior associate at the Bucharest office. Her practice is principally focused on corporate and M&A, privatisation, competition and real estate. Carmen Anghelie Wolf Theiss Carmen Anghelie has been an associate since 2006. Her main areas of practice are corporate, M&A and employment law.