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New rules on share transfers, opportunity or obstacle?

Alexandru Campean

The core rules related to the transfer of shares of Romanian limited liability companies (LLC) are provided by the Romanian Company Law no. 31/1990 (the Company Law). Until June 2010, the transfer of ownership over shares in a Romanian LLC became effective between the parties upon the fulfillment of two conditions, respectively the approval of the general meeting of the shareholders (GMS) of the target company and a share sale purchase agreement being signed by the parties. Subsequent registrations with the trade register and the shareholders register were made in order for the transfer to be binding on third parties.

On June 23 2010, in an effort to combat the growing issue of tax evasion, the Romanian Government adopted the Emergency Government Ordinance no. 54/2010 (the Ordinance). The Ordinance significantly amended the provisions of the Company Law regulating the transfer of shares of Romanian LLCs.

Similar to the previous legal framework the transferee must obtain the approval of the GMS of the target company prior to the actual transfer. However, under the new framework, the transfer of shares becomes effective between the parties only upon the lapse of a thirty-day period after the publication, of the GMS resolution approving the share transfer, with the Romanian Official Gazette,. The purpose of the publication is to give the creditors of the target company, or any other person harmed by the share transfer, the opportunity to file, with the Romanian courts, an opposition against such transfer, claiming damages from the company or the transferee.

Should an opposition be filed, the transfer of ownership will be further suspended, by virtue of law, until a final decision is adopted by a court in such matter.

In the Substantiation Notes issued by the Romanian Government together with the Ordinance, the changes brought to the Company Law are described as necessary to prevent abusive transfers of shares by the shareholders of LLCs, who have acted beyond their limited liability within the company and are, consequently, attempting to avoid the unlimited liability triggered by the piercing the corporate veil principle.

In the following paragraphs we will attempt to briefly show why the provisions of the Ordinance relating to share transfers are ineffective and unnecessary, and only serve to create additional bureaucratic hindrances with respect to the activity of LLCs which, not at all incidentally, are the most commonly used type of company in Romania.

Firstly, it should be underlined that any person, creditor or otherwise, harmed by a GMS resolution (including a resolution approving a share transfer) already had the right, under the Company Law, to file an opposition against such resolution and ask that its effects be suspended until the matter is settled in a court of law. The Ordinance only duplicates this already existing procedure adding, however, the automatic suspension of the transfer of shares during the thirty days opposition term.

The piercing of the corporate veil principle is vaguely defined by the Company Law, therefore making it unsuitable to be used in court by creditors attempting to prove that a certain shareholder bears unlimited liability for the debts of a company.

According to the Company Law, a shareholder having limited liability becomes unlimitedly liable when he begins to use the company resources for personal gain. However, LLC shareholders enjoy extensive management powers and are not prevented from also acting as directors of the same company. Where does management of the company's assets cease and when may one consider that these assets are used as being the shareholder's property? How does one prove, in a court of law, the intention of a shareholder to use company assets for his own benefit? Neither the Company Law nor the Ordinance provide any clarification of these queries and, as the jurisprudence on the application of this principle is nearly nonexistent, it must be concluded that the purpose of the Ordinance may prove extremely difficult to achieve, and is prone to lead to increased costs and lengthy procedures for companies.

The degree of effectiveness of a legal provision may also be determined by how difficult it is to circumvent it. The provisions under scrutiny in this article are applicable only to share transfers performed towards non-shareholders. Therefore, if the target company were to issue shares, through a share capital increase, and would offer it for subscription to a non-shareholder, who would subsequently, as minority shareholder, acquire the rest of the shares from his fellow shareholders, therefore acquiring the envisaged shareholding quota, the provisions of the Ordinance will not apply.

To conclude, the new provisions introduced by the Ordinance would translate in practice into an additional bureaucratic requirement, the scope of which is rather unlikely to be achieved.

Alexandru Campean

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