Romania: So M&Any ways to get there

Author: | Published: 1 Apr 2012
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Although it is too early for investors to assess whether the recession is over, the year to come might provide, to a certain extent, an increase in the sale of consumer goods that will probably boost consumer financing and the retail business. An important indicator for this is the number of newly-acquired motor vehicles: according to the Romanian Vehicle Registration Department, 4,937 newly-acquired motor vehicles were registered in January 2012, which, by way of comparison to the same period of 2011, represents an increase of 86.44%.

Difficult as it may be to predict the future accurately, one thing is certain: one should be able to adapt to the new environment set by the financial and economic downturn and always be ready for that turnaround. To this end, having the proper consultants and legal counsel on one's side may make the difference between a losing and a winning business plan.

Establishing a Romanian presence

Although the Romanian Companies' Law no. 31/1990 provides for several forms of companies, the most common ones are joint-stock and limited liability companies.

While the minimum share capital for joint stock is RON90,000 ($27,250), the share capital for a limited liability one is only RON200.

In case of specialised entities such as credit institutions, non-banking financial institutions and insurance companies, the minimum share capital is significantly higher, for example RON37 million for credit institutions and €200,000 ($263,700) for non-banking financial institutions; if the performance of mortgage lending activities by the non-banking financial institution is envisaged, then the minimum share capital is €3 million.

With respect to non-banking financial institutions, while they can perform lending activities, they are not allowed to receive deposits.

As regards the shareholder requirements, the minimum number of shareholders is two; in case of limited liability companies, it is permitted for the company to have only one shareholder.

With respect to reputational requirements, note that there are no such requirements for general purpose companies, except for the absence of a criminal record for certain criminal offences, such as embezzlement, fraud, money laundering and others alike.

In addition to these general requirements, the shareholders of specialised entities must be of good standing, while their directors must have adequate professional management experience of up to 10 years in case of credit institutions. Moreover, in case of insurance companies, at least one of the directors must speak the Romanian language.

While for properly setting up a general purpose company one should mainly register that company only with the local Registry of Trade in order to be able to operate, for specialised entities it is mandatory to obtain authorisation from the specific regulators: the National Romanian Bank for credit institutions and non-banking financial institutions and the Insurance Supervisory Commission in case of insurance companies.

The said authorisation may consist of a double process, one for obtaining a setting up licence (before registering the company with the Registry of Trade), but also a subsequent operating licence, in case of credit institutions and insurance companies; in the case of non-banking financial institutions, only the operating licence is required.

This authorisation process for specialised entities demands the fulfillment of several requirements, such as special registered seat requirements, existence of a single business scope of activity, implementation of IT reporting software, preparation of internal policies, feasibility studies, business plans, as well as the collection of a fairly large number of documents, such as criminal records for shareholders, management and financial records.

The legal term for obtaining the operating licence is four months for insurance companies, eight months for credit institutions and 30 days for non-banking financial institutions computed as of the moment when the complete documentation is submitted. These terms are usually extended in practice, as the regulators require additional documents supporting the licensing request.

In case of specialised entities authorised in an EU Member State, one should consider the cross-border provision of services in Romania or the establishment of a local branch, based on the freedom of establishment and provision of services.

In this case, the prior authorisation from the local regulators is not required; however, the provision of such services is preceded by a formal notification from the specific regulator in the state where the entity is authorised, addressed to its Romanian counterpart.

Now, although the process of becoming operational in Romania in this case is less complicated than authorising a local presence performing crediting/insurance activities, we underline that there are still some local requirements to be observed such as the reporting of certain elements to the Romanian regulators, consumer protection and data protection.

Acquiring an already-established local business

Acquiring participations in a Romanian company is a process which, apart from the execution of a share-purchase agreement, must be corroborated with the fulfillment of other requirements.

For example, in case of limited liability companies, the transfer of shares must be approved in advance by three-quarters of the other shareholders and further registered with the Registry of Trade.

By contrast, in case of joint-stock companies, the law does not subject the transfer to registration with the Trade Registry – for validity purposes, it is sufficient to register the transfer with the shareholders' registry kept by each company.

As regards the price of the transfer, note that such price must not be insignificant compared to the value of the shares; such assessment must be conducted on a case-by-case basis, depending on the financial status of the company.

Apart from the above-mentioned conditions, it should be noted that, in the case of credit institutions and insurance companies, the process must be approved in advance by the specific local regulator, and the acquirer must meet all of the requirements applicable to shareholders. In the case of non-banking financial institutions, such provision is not applicable; however, the National Bank of Romania will assess the reputational requirements of the acquirer after the execution of the transfer and, from this perspective, an informal prior consultation with the said regulator is recommended.

Reorganising your local businesses

The reorganisation of existing businesses may be conducted through three main basic methods or a combination of any of them: merger, spin-off or sale of assets.

Unlike other European legal frameworks, the concept of transfer of business as a going concern is not expressly regulated under Romanian law as a distinct legal transferring mechanism entailing a universal succession. The transfers of business as a going concern are, however, quite common in practice, due to their tax advantages (among others, not being VAT-taxable), being implemented based on several separate operations of sale-purchase, novation and assignment of assets, contracts and liabilities.

As regards the merger and spin-off processes, such operations must be approved by the shareholders of all of the participating companies. Moreover, the administrators of the involved companies must draft a merger project comprising, among others, the exchange ratio and merger/spin-off premiums. The operations are subject to the registration with the Registry of Trade and also to the approval of the courts of law.

In the case of a merger of specialised entities, the process is allowed mainly between the same types of entities. Also, the process is subject to prior approval from the specific regulators.

As regards the transfer of assets, depending on the nature of the assets, the execution of the transfer agreements must be made in a notarised form for validity purposes, as is the case for real estate assets; in this case, additional notary fees must also be taken into consideration. Another aspect to be considered is the price of the agreements, as between related parties, either residents or non-residents, transfer pricing rules are applicable. This implies that the price of the transactions must be set at fair market value, requiring that the computation of this value shall also be properly documented.

Financing your business

The most common operations for supporting a local business are share capital increases through cash injection or shareholder loans.

Share capital increases must be based on prior shareholders' resolutions and subject to the registration of the operation with the Registry of Trade. Also, in case of joint-stock companies, pre-emption rights of the other shareholders must be observed, unless previously revoked.

As regards the shareholder loans provided by non-residents, these must be reported to the National Bank of Romania for statistical reasons, if the reimbursement term exceeds one year. As regards subsequent available options, the shareholder loans may be converted into borrower's share capital through a debt to equity swap operation.

From a tax perspective, one should know that any waiver of the reimbursement obligation of the shareholder loans creates a taxable income for the debtor, as part of its overall incomes.

Bogdan C Stoica
  Bogdan C Stoica is head of Popovici Nitu & Asociatii’s healthcare and pharmaceuticals practice and co-head of the mergers and acquisitions and banking and finance practices.

He has wide experience in advising both public and private companies, private equity funds and strategic investors, in relation to mergers and acquisitions, particularly in fields such as healthcare and pharmaceuticals, and IT and telecoms.

In the past five years, Stoica has advised on the majority of high-profile M&A deals in the healthcare, pharmaceuticals and IT industry and also on some of the largest M&A transactions in Romania in other industries, including privatisations. He has advised on the largest number of M&A deals in Romania from 2010, according to the rankings prepared by Forbes Romania.

He is also experienced in banking and finance, acting for corporations, banks and non-banking financial institutions on a broad range of lending, investment and credit instruments activities.

International legal directories have recognised Stoica for his "impressive ability to find solutions", "excellent practice and market knowledge" and for "diligence, expertise and solution-oriented-approach".

Popovici Nitu & Asociatii
239 Calea Dorobanti, 6th floor
Bucharest, 1st District
Postal Code 010567, Romania

T: +40 21 317 79 19
F: +40 21 317 85 00 / 317 75 05

Alexandru Ambrozie
  Alexandru Ambrozie is co-head of the firm’s banking and finance, capital markets and tax practices.

He has extensive experience in banking and finance and capital markets, assisting leading financial institutions, private equity firms and institutional investors on a broad range of finance, regulatory, securities and derivatives transactions. He has particular experience in asset-based finance and leasing and real estate financing, regularly advising the world’s most prestigious leasing institutions and real estate developers.

Ambrozie has a deep understanding of tax matters in various industries, with a focus on IT and electronic communication, automotive, healthcare, real estate, banking and finance.

He has been recognised by international legal directories for being "fully comprehensive and responsible in his decision making" and for his "excellent service both in terms of industry knowledge and responsiveness".

Popovici Nitu & Asociatii
239 Calea Dorobanti, 6th floor
Bucharest, 1st District
Postal Code 010567, Romania

T: +40 21 317 79 19
F: +40 21 317 85 00 / 317 75 05