Moldova: Avoiding the bubble

Author: | Published: 1 Apr 2012
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Despite the global economic downturn, Moldova has not experienced steep declines and turmoil, mostly due to the specifics of a small economy and less penetration into other suffering economies. One could say that Moldova had not managed to blow the economic bubble big enough and there was not much to burst when the global market plunged into recession.

This is also true for the area of mergers and acquisitions in Moldova. 2011 has been noted for growth in the M&A market as compared to 2010. The Moldovan regulator, the National Commission of the Financial Market (NCFM), reported an increase in sale offers of shares. This growth is mostly due to a number of smaller transactions, however. A high rise in the number of large M&A deals, which usually shape the market, is not envisaged; hence the prognosis for 2012 is somewhat close to restrained optimism.

On the other hand, the M&A market might grow considerably should the government finally proceed to practical realisation of the announced plan for privatisation of a number of state-owned companies and assets. Among these there are rather attractive businesses, such as Moldova's main fixed-line operator Moldtelecom, Banca de Economii (Savings Bank) which has the best branch coverage in Moldova, Air Moldova, a national airline of Moldova, and Tutun-CTC, the biggest producer of tobacco products in Moldova, with a market share of 60%, to name just a few.

Moldovan laws could be regarded as generally permissive in terms of allowing foreign investment in almost any sector of the economy. Exceptions are the lottery and gambling sectors, which are rather common. Also, foreign investors may not purchase agricultural land in Moldova.

Types of M&A

Generally speaking, an M&A transaction in Moldova can be carried out either through reorganisation, purchase of shares or fixed assets acquisition. Moldovan company law details the following relevant reorganization schemes.

Merger is an operation whereby two or more companies join their assets in one company. The legal effects of merger include winding-up of the merging companies and full conveyance of their rights and obligations to the newly-created company.

Absorption is an operation whereby the absorbed company or companies are wound-up and all of their rights and obligations pass to the existing absorbing company.

An M&A transaction may be followed by a transformation – where the original company is converted from one legal form into another: for example from a limited liability company into a joint-stock company. The company does not cease its existence and there is no split or transfer of the company's assets, rights and liabilities.

Moldovan law also provides for two de-merger schemes. Thus, a spin-off implies that part of the assets, rights and liabilities of one company will be transferred to one or more newly-formed companies according to the distribution balance sheet. Spin-off does not result in liquidation of the original company.

In a separation (split-up), one company is wound-up by conveyance of its rights and obligations to two or more newly-created companies. The shareholders in the original company typically receive shares in the new companies and the original legal entity is terminated upon such transfer.

Most businesses in Moldova are incorporated as limited liability companies (LLCs). Joint-stock companies (JSCs) form a significant share of the market particularly among larger companies or former state-owned enterprises.

The type of incorporation affects the outcome in terms of statutory requirements. Thus, if the target is a JSC the purchaser must comply with the securities regulations, whereas if the target is an LLC the pre-emptive rights should be taken into account.

The majority of M&A deals follow the standard steps starting from identification of the target, followed by due diligence examination, drafting formal agreements, obtaining required consents, pre-approvals and competition clearance, and ending with the closing of the transaction.

Letters of intent or similar documents are not legally binding unless they are formalised as preliminary agreements (ante-contract).

Legal due diligence

Basic information about a company and its assets in Moldova can be obtained from public registers maintained by governmental authorities. Thus, an excerpt from the Register of Companies informs any interested person of the full name, registered address and identification code (which also serves as a tax number) of a company.

The excerpt will further state the share capital, term of the company, the manager and, in case of an LLC, the shareholders of the company. It includes information about whether the company is undergoing reorganisation or insolvency proceedings at the date of issuance of the excerpt. With regards to JSCs, information about the shares and shareholders of the company is recorded in the electronic registry kept by licensed independent registrars.

As compared to other CIS countries, Moldova has a rather developed and advanced land cadastre and title registration system. Interested persons can obtain from a country-wide public cadastral system information about immovable property, title-holders and any encumbrances on the property. It also shows whether the property is under court ban or prohibition. There is a similar register of pledges on movable property, which should be searched in order to identify if there are any encumbrances on the equipment, receivables or stock of the target company.

Legal due diligence must not be limited to publicly available information and the acquirer is free to request from the target any information about the company or its assets. The seller usually organises a data room or parties choose to resort to reputable virtual data room solutions, which has become a normal practice for M&A transactions in Moldova.

Upon review of substantial or material agreements of the target company one should pay attention that above certain thresholds contracts must have been approved by the board of directors or shareholders' meeting.

One of the first steps of a due diligence includes meticulous review of the target's Articles of Association and other incorporation documents. Although Moldovan laws do not provide for a model charter that can be used by businesses, as for example in neighbouring Ukraine since 2011, in practice the registration authority offers a model charter to any newly-incorporated company. Most of the companies tend to accept the model charter, since it is drafted closely reflecting the requirements of the existing law. However, it may happen that legal counsel included specific provisions in charters upon incorporation and these should be reviewed diligently.

Acquisition of shares

It is worth noting certain particularities of share acquisition in two specific financial sectors: banking and insurance.

Moldovan commercial banks may be incorporated only as JSCs and their shares are publicly traded, except when otherwise expressly allowed by law. There are 14 commercial banks active on the Moldovan banking market. Two banks have been recently declared in the process of liquidation: Investprivatbank (2009) and Universalbank (2012).

The primary banking supervisory authority is the National Bank of Moldova (NBM), which licenses banks, regularly supervises their activity and issues banking sector regulatory acts. An issue of particular importance is the NBM's mandatory power to authorise any and all transactions with significant stakes in Moldovan banks.

According to the Moldovan Law on Financial Institutions, the purchaser of a significant stake in a bank – 5% or more of voting shares – must obtain prior authorisation from the NBM. This issue was largely discussed in 2011 due to recent raider attacks against a few Moldovan banks, when the title over significant stakes in such banks was acquired without prior authorisation of the NBM, based on court decisions. Consequently, the law was amended and any transfer of significant stakes in commercial banks without prior NBM authorisation will be null and void, even if a court adopted a decision allowing such transfer.

Additionally, as public interest companies, Moldovan banks are subject to strict securities regulations under the supervision of the NCFM. Moldovan banks must abide by the mandatory tender offer rules, corporate governance provisions and disclosure requirements. It is important to note that shares of Moldovan banks must be traded only through a stock exchange, meaning that direct sale of shares of a JSC is prohibited with some exceptions. It is possible, however, to acquire such shares during their primary placement by means of a subscription.

Similar to Moldovan banks, insurance companies must incorporate as JSCs. The main regulator of the insurance market in Moldova is the NCFM.

Shares of insurance companies ought to be transacted on the stock exchange only, except when otherwise expressly allowed by law. Transactions with significant stakes representing between 10% and 19% in the capital of insurance companies are subjected to a post-completion approval by the NCFM. When acquiring more than 20% in the capital of an insurance company, the purchaser must obtain prior approval from the NCFM.

Takeover bids

Takeover bids must be registered with the NCFM and may be either voluntary or mandatory. According to the Law on JSCs, a person who purchased individually or together with his/her affiliated persons more than 50% of the voting shares of a JSC has the obligation to make an offer to all other shareholders to buy out their shares.

Takeover bids are voluntary when a person intends to purchase individually or together with his/her affiliated persons more than 50% of the voting shares of a JSC. In both cases, the public offers must be opened for at least 30 days and the price offered cannot be lower than the average purchase price over the last six months before such offer. All shares offered for sale by the remaining shareholders in response to a public offer by virtue of takeover bids must be purchased.

Competition clearance

According to the current regulations on competition, the National Agency for Protection of Competition (NAPC) must be notified about, and clear any of, the following transactions:

  • Mergers of companies which hold or reach as a result of merger an established market share threshold (more than 35% of a certain market);
  • Creation, expansion or mergers which involve holdings, multinational corporations, financial and industrial groups;
  • Acquisition of shares in a company with a dominant position in Moldova (35% or larger market share in a sector); and
  • Acquisition by a company with a dominant position in Moldova of equity in an entity, operating on the same market.

It should be noted that Moldovan competition rules are under reform. The NAPC has developed a new draft Law on Competition, which has been modelled based on EU competition regulations. The draft law was submitted to Parliament at the end of 2011, but has not yet been approved.

Corporate governance

Moldovan companies may choose between a one- or two-tier governance structure, with the exception of banks and some other companies which are required to have a two-tier structure: a supervisory board (board of directors) and a separate executive board or a CEO. The role of the supervisory board, however, is often unclear and the management power most commonly concentrates in the hands of the CEO and the executive board.

A particularity of LLCs is that shareholders' controls against a failing general manager are rather limited; dismissal would be the last resort. The law invests the CEO with management authority and since the doctrine of separation of powers is underdeveloped, the extent to which management powers can be exercised by the CEO/executive board without interference from the shareholders still stirs some debate. The concept of directors' duties of loyalty and care is not yet settled in law and court practice. Therefore, an acquirer would be advised to appoint a trustworthy executive to manage the target company upon acquisition.

Other matters

It is important to consider an appropriate settlement scheme when undertaking an M&A transaction in Moldova. Until recently, Moldovan law and practice did not recognise escrow accounts as a tool to guarantee material safety in such types of transaction.

It is worth noting that the authors' firm elaborated and negotiated the first escrow agreement for the first time in Moldova with a reputable Moldovan bank. It was used for a real estate acquisition, and since then banks picked it up and banking escrow accounts became available as a suitable tool for M&A transactions.

In contrast to other jurisdictions, lawyers and notaries in Moldova do not act as escrow agents. Therefore buyers would usually seek adequate banking product including setting up an escrow account.

A prevailing number of cross-border acquisitions are negotiated and documented under foreign law, which in most cases is English law. Similarly, parties tend to submit their disputes for resolution to reputable international arbitration forums. Moldovan courts recognise and enforce foreign arbitral awards through a special procedure, which does not require additional litigation. Moldova is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) and the European Convention on International Commercial Arbitration (1961), and has recently ratified and became subject to the Icsid Convention (1965).

Moldova has concluded a significant number of bilateral investment treaties with various countries, which refer dispute resolution to arbitration under Uncitral Rules, Court of Arbitration of International Chamber of Commerce or the Arbitration Institute of the Stockholm Chamber of Commerce.

Igor Odobescu
  Igor Odobescu is one of the founding partners of ACI Partners. He obtained an MBA in Business Law from Leiden University (Netherlands), and is pursuing an LLM from the University of London, Queen Mary and UCL. He is fully proficient in English, Romanian and Russian.

Igor serves as an arbitrator with the International Commercial Arbitration Court under the Moldovan Chamber of Commerce. He has more than 10 years’ experience representing local and international companies in complex financial and securities transactions, corporate restructuring and insolvency, mergers and acquisitions. He has advised on challenging commercial and investment deals with international private and institutional entities, real estate privatisations and PPPs. He also has extensive regulatory expertise, being involved in drafting laws on leasing, mortgages and e-payments.

Igor is involved in an Icsid case representing the Government of the Republic of Moldova, in connection with an investment dispute brought by a French investor, which represents the first case for Moldova with this arbitration institution. He also has served as one of the lead consultants in developing and structuring the Host Investment Agreement on the International Maritime Port of Giurgiulesti successfully implemented in 2005 which, due to its nature, represented a unique and strategic project for the Republic of Moldova.

ACI Partners
IPTEH Building
65 Stefan cel Mare Blvd., of. 806
Republic of Moldova

T:  +373 22 27 93 23
F:  +373 22 27 93 37

Cristina Martin
  Cristina Martin is a founding partner of ACI Partners and engages primarily in complex international transactions. She is highly regarded for her versatility as a corporate and commercial lawyer, as well as her experience in legal structuring and arrangement of mergers and acquisitions, corporate governance and competition.

She has more than 15 years’ experience providing legal advisory services to international and large national clients. She is involved in significant foreign investment projects and corporate acquisitions, advising clients on contractual matters. Her recent experience involves assisting with a reorganisation of a large media operator, advising a multinational IT company on a share purchase and legal support of a trans-national soft drink group merger, including competition clearance of the transaction.

Cristina is actively involved in legal reform initiatives of the Moldovan government. She has participated in drafting of laws and regulations, with a special contribution to mortgage and leasing operations. She is an active contributor to World Bank, IFC and EBRD research related to the Moldovan regulatory system, doing business and judiciary reforms. She holds a PhD in leasing operations and is lecturer of Business Law at the State University of Moldova. She is a member of the Moldovan Bar and acts as an arbitrator with International Commercial Arbitration Court under the Moldovan Chamber of Commerce. She is proficient in English, Romanian and Russian.

ACI Partners
IPTEH Building
65 Stefan cel Mare Blvd., of. 806
Republic of Moldova

T:  +373 22 27 93 23
F:  +373 22 27 93 37