Economic changes in the Romanian economy in the last nine months have pushed a restart button on the economic thinking of both employers and employees. More than ever private undertakings play an important role in opening new horizons as they can adapt to the transformations that take place nowadays, and contribute to the general development of a sound economic system. The time of easy profits seems far away while the attachment towards the employing company seems to solidify. In these difficult times for everyone, a reorganisation process is not a priori sign of failure but may be a sine qua non path towards success.
M&A can constitute an effective tool for business reorganisation. In the past few years, the Romanian M&A market was in full swing; there were many local companies with a high growth potential to invest in and foreign investors were attracted by highly qualified personnel and low payroll costs. Romania had a competitive edge because of trained and skilled personnel, a large and fast growing market, and a bridgehead for further expansion.
A few months ago, the international crisis seemed a remote menace for the Romanian economy. Now it is a cruel reality and some sectors of the legal market, such as M&A, have inevitably slowed down. According to the media, the value of M&A transactions closed in Romania in the third quarter of 2008 decreased by 60% compared with the same period of 2007, reaching a total value of only $1.22 billion, compared with $3.65 billion in 2007.
The largest transaction of 2008 was the joint venture between the Romanian state and some of the largest EU energy companies for the extension of the Cernavoda nuclear power plant, an investment estimated at €4 billion. But this was a single transaction. The average transaction value of acquisitions in 2008 ranged between €20 – 40 million. According to media information, transactions that started but which failed to complete could have increased the market value of M&A in 2008 by €700 million. In early 2008 nobody could have imagined the fall-down of the construction, real estate or cars industries.
In the first quarter of 2009 the Romanian M&A market has recorded only 46 transactions, totalling €631.55 million, a decline of approximately 82% compared with the same period last year.
But despite the gloomy figures, many market analysts are expecting things to start moving during the second part of 2009, and see the current context as an opportunity to develop a competitive business in Romania.
Reshaping the market
M&A enables companies to adjust more effectively to new challenges and opportunities.
Over the past few years while the M&A market boomed, sellers often had the upper hand in the transaction and could negotiate a better position in contracts, being aware of the value of their companies. Since the economic crisis struck the Romanian economy, sellers are finding it more difficult to identify a suitable buyer, and so tend to allow more flexibility in negotiations.
Some sellers need to sell their business now because they feel unable to run it alone, because they need capital inflows, or because they need the umbrella of a financial or strategic investor. These days bank financing for expansion plans is hard to get for local entrepreneurs that only capitalise on the revenues of their business. As mentioned above, there are solid economic reasons for the acquisitions sector to recover soon. In many cases, it seems a wait-and-see attitude, and not a real lack of liquidities, is to be blamed for the current situation of the M&A market.
The strategic economic sectors not fully dependent on bank financing are still interesting for M&A deals, for example in the energy sector. There has been an acceleration in investments in renewable energy in the last months, boosted by a favourable new legal framework. Investments in renewable energy such as wind energy, solar energy, hydropower and biomass as well as cogeneration can at the same time contribute to achieving the sustainable development targets and channel available funding towards secure investments. This seems to have been understood by the Romanian authorities, which are now trying to create an investors-friendly regulatory framework.
There have also been more frequent acquisitions of Romanian distributors by their international suppliers. Such M&A deals are beneficial for both parties: the supplier that is usually the holder of a worldwide famous brand achieves tax consolidation and entry on a new market, while the local seller can obtain cash flow for other investments.
Another noticeable trend is the sale of companies in a distressed situation as a last resort solution to avoid collapse.
There are several legal options available to facilitate the acquisition of a business in Romania:
(i) joint venture;
(ii) share deal – purchase of shares by way of sale-purchase agreement;
(iii) asset deal – purchase of identifiable assets and assignment of identifiable agreements or purchase of the entire business as a whole made up by all assets related to the business; (iv) capital increase – purchase of newly issued shares; or
(v) merger.
More joint ventures
In order to develop a business strategy or a project, companies will enter into a joint venture agreement. This allows them to spread costs and risks, to improve access to financial resources, to have access to innovative managerial practice, to benefit from advantages of size, to create strong and competitive units, and to have quick access to the market.
A joint venture presupposes a common business strategy for a Greenfield or Brownfield project. Joint ventures are very often encountered in oil and gas but we often see this type of agreement used in different sectors of the economy too. This is because the joint venture deal is a viable alternative to the acquisition of an already successful business, especially for investments in new or strategic sectors where the development of a project takes several years. Also, during crisis periods, investors are generally considering long-term investments in strategic sectors, expecting a market recovery by the time their investment projects become income producing.
One of the key points in a joint venture for the international investor is to identify a local project manager with good local contacts and market knowledge. Such a local partner may be allowed to take an equity participation in the project company, so the negotiation of complex shareholder agreements to protect the interest of the main investor is a must. We have seen this pattern many times, for example, in the wind energy sector.
Fewer share deals
There are no restrictions on the acquisition of shares in a Romanian company listed on a stock exchange market, but a closed company may have such restrictions specified in its articles of association.
As regards the transfer formalities one may distinguish between (i) the transfer of shares in a limited liability company and (ii) the transfer of shares in a joint stock company.
In a limited liability company the shares can be traded between the shareholders, and the approval of shareholders holding at least 75% of the share capital is required to sell the shares to a third party. The transfer must be registered with the Commercial Registry and with the shareholders register.
In a joint stock company one may distinguish between (i) the transfer of registered shares through a statement registered with the shareholders' register and on the share document (in case of materialised form shares); and (ii) the transfer of bearer shares by simple delivery. Selling of shares to a third party in a joint stock company does not require any approval from the other shareholders, unless otherwise stated in the article of association of the company.
A share deal implies the transfer of known and unknown liabilities, so all the liabilities and assets of a company are transferred through a share deal. As mentioned before, buyers seem to be slowly tilting the balance of the agreement in their favour. Some buyers try to avoid the risk of taking over hidden liabilities and unwanted assets by insisting on asset deals instead of share deals.
Rediscovered alternative to share deals
Asset deals are generally more complicated than share deals. This is due to the heterogeneous nature of the assets transferred, which trigger various transfer formalities, compared to the unique and well-defined nature of shares. However, they hold certain advantages against share deals, of which the main is that the buyer can cherry-pick the assets and liabilities it wants to take over. This has its downside too: the asset deal may be risky if the seller is (nearly) insolvent. Romanian law provides for various suspect periods going up to three years before the opening of the official insolvency procedure when the creditors of the seller may request the invalidation of the asset sale for certain reasons (unbalanced obligations, for instance, or preference granted to a creditor when the buyer itself is a creditor and tries to recover in this way its receivable).
In the current economic context we have seen several transactions in which creditors were seeking to recover their receivables by acquiring (part of) the debtor's business by way of an asset deal. Such type of transaction should be carefully considered from the legal perspective of insolvency risks.
Under Romanian law, one may chose between three types of asset deals.
Sale of individual assets
This type of asset deal implies the purchase of identifiable assets and assignment of identifiable agreements of the seller. The transfer of contracts under Romanian law is normally achieved by way of two simultaneous operations: (i) novation of obligations for which consent of the creditors is required; and (ii) assignment of receivables for which special publicity formalities are required.
We therefore envisage that the transfer mechanics of the company's rights and obligations to another acquirer company will require the signing of novation and assignment agreements with each contractual counterparty of the transferring company (seller).
We note that obtaining the consent of the seller's creditors for a novation may prove to be difficult, especially if the creditors still have claims for past contractual defaults against the seller.
One of the biggest advantages for foreign investors choosing this procedure is that only the contractual liabilities accepted by the buyer should be transferred; the unknown liabilities should not be transferred even if they are subsequently discovered.
Sale of a going concern
This type of asset deal consists in the sale of an operational line of business (a going concern) where the buyer may cherry-pick the assets and liabilities transferred. This is similar to an individual assets sale (without the risk of taking over hidden liabilities) but only to the extent that the collection of transferable assets represents by itself an independent unit capable of carrying on economic activities.
Nevertheless, unlike in an individual assets sale, the buyer is obliged to take over the employees allocated to the transferred business line. The sale of a going concern is not subject to VAT (is VAT neutral) if it represents a true going concern (an independent unit, as described above).
Sale of the fonds de commerce
A fonds de commerce deal implies the purchase of the entire business of the company including all assets related to its business (a concept that is imported from the French legal system). From this perspective, it appears as a type of going concern sale, the most general one.
The concept of fonds de commerce is only vaguely referred to in Romanian law and triggers several risks for the buyer. Its regime is defined only by the Romanian legal doctrine and jurisprudence, which are dissenting on the main features. For example, there are different opinions on whether all liabilities are by operation of law transferred to the purchaser of the fonds de commerce or not. Therefore, in a fonds de commerce deal there is a risk that an unknown creditor of the seller successfully argues its receivable was validly transferred to the buyer as effect of the fonds de commerce transfer.
In fact, the only item on which both the Romanian doctrine and jurisprudence seems to agree is that goodwill is a component of the fonds de commerce (for example commercial name, reputation, favourable location to attract customers). Therefore, a fonds de commerce deal is usually preferable when the buyer is most interested in the goodwill of the seller (and using this name further).
Capital increase: an enduring tool
Capital injections may facilitate the acquisition of shares in a Romanian company by purchasing newly issued shares. Some investors, especially investment funds, prefer this type of transaction to a classical acquisition of shares. It minimises risks related to the title of the transferred shares and is a straightforward method of putting equity in the target company.
In a joint-stock company, any interested party may purchase newly issued shares if the existing shareholders did not use their pre-emption right, or if such a right was revoked by a resolution of the general meeting of shareholders. However, a share capital increase requires the favourable vote of the shareholders representing two-thirds of the share capital. In a limited liability company, third parties may subscribe a share capital increase only if the existing shareholders representing three-quarters of the share capital agree.
For a listed company on the stock exchange market, a sales prospectus must be published and the issue of new shares done through a public offering approved by the National Securities Commission. The offer price of the issued shares must be higher than the price of the shares offered to the existing shareholders, so that they may use their pre-emption right.
Going forward
During the international crisis, players in the M&A market have used the merger process to acquire other companies and to create a more competitive, cost-efficient company. Companies merge hoping to gain a greater market share, to achieve greater efficiency or to improve profitability. Also, mergers represent one of the fastest ways of improving any company's commercial and strategic position on the market and, for nearly insolvent companies, are an actual lifesaver.
Very often, the merger tool has been used in Romania as an internal restructuring process within the same group, or as way to avoid financial assistance restriction applicability. Sometimes, mergers are used between competitors to expand the market position of better-known brands.
Under Romanian law, the merger is regulated in a flexible manner. A merger can take place between different types of Romanian companies or between companies of the same type. Joint-stock companies, partnerships limited by shares, limited liability companies, Romanian legal entities, and European companies established in Romania are all also able to participate in a cross-border merger.
The existing Romanian regulations provide two options for the merger process:
(i) the merger of two or more companies resulting in a new company, where the original company(ies) will cease to exist; and
(ii) the absorption of one or more companies into another company, where only the absorbed company(ies) will cease to exist.
A merger process requires that a number of steps are followed by either of the companies involved in the merger process, including (i) the approval of the general meeting of shareholders regarding the merger process; (ii) preparing a merger plan; (iii) preparing a set of financial statements and certain reports based on which the merger will be carried out; (iv) registration of the merger plan to the relevant Commercial Registry; (v) publication of the merger plan in the Official Gazette, followed by a 30-day break allowing any creditor of the merging companies to file an opposition to the merger; (iv) the approval of the merger by the delegated judge from the commercial Registry.
For specific sectors, an endorsement from a supervisory body must be obtained for the merger to be completed. In the case of a financial institution, the approval of the National Bank of Romania is required.
| Author biographies |
Cosmin Stavaru
Bulboaca & Asociatii
Cosmin Stavaru is a partner at Bulboaca & Asociatii. Before joining Bulboaca & Asociatii, Cosmin was an associate with the corporate practice of the Bucharest office of a magic circle law firm. Cosmin advised a broad range of clients such as major international energy companies, investments funds and banks in both private and public M&A transactions (including several key privatisation deals), energy & natural resources as well as corporate and commercial. His corporate expertise includes structuring share and asset deals and renewable energy projects, advising on corporate restructuring matters, joint ventures, drafting and negotiating complex commercial contracts.
He has been also extensively involved in large real estate transactions and project finance advising both developers and banks. Other practice areas in which Cosmin has extensive knowledge are public-private partnerships as well as insurance and pensions.
Cosmin graduated from the Law School of the Bucharest University and he is a member of the Romanian Bar Association. He also holds a LLB in EU Law from Paris 1 Pantheon Sorbonne University and a degree in International and Human Rights Law from Robert Schuman University in Strasbourg. He is fluent in English and French.
Mihaela Cucurezeanu
Bulboaca & Asociatii
Mihaela Cucurezeanu is a junior associate at Bulboaca & Asociatii.
She is a member of the corporate, M&A and energy teams. She has also gained experience in real estate practice areas.
Mihaela graduated from the Law School of the Bucharest University in 2007 and became a member of the Bucharest Bar on the January 1 2008. She also holds a Master in Civil Law and Civil Procedure. She is fluent in English. |