Legal Considerations for Foreign Investors

Martie 2008

EIRINIKOS PLATIS - Partner PI PARTNERS

Foreign investors coming to Romania would be well advised, before starting their business, to inform themselves about every available option to set up and carry out their activities in a profitable manner that corresponds to their business profile and investment plans. This overview provides basic information about the legal requirements for a foreign investor in Romania.

 

Choosing a form of enterprise

For a foreign investor coming to Romania to set up business, choosing a form of company, as provided by Romanian legislation, represents the first step of the investment. The most frequently used forms of companies are:

• a. Limited liability company (SRL) – the shareholders’ liability is limited to the amount subscribed as participation to the company’s share capital. The share capital of an SRL must be at least RON 200, approximatelly EUR 55 (calculated at the exchange rate of RON 3.68/EUR), divided into shares with a par value of at least RON 10 each. An SRL may be formed by a minimum of one shareholder and a maximum of 50 (fifty). These shareholders may include individuals and/or legal entities. A person, either natural or legal, cannot be the sole shareholder of more than one SRL. If a person intends to form several companies, it would be necessary for a minimum of one share to be held by another person or entity. Moreover, an SRL cannot have, as sole shareholder, another limited liability company that is also owned by a sole shareholder.
• b. Joint stock company (SA) – the shareholders’ liability is limited to the amount subscribed in the company’s share capital. Further to the amendments introduced by Law 441/2006 to the Romanian Companies Law, the minimum statutory capital for a joint-stock company shall be RON 90,000, approximatelly EUR 24,450 (calculated at the exchange rate of RON 3.68/EUR). Shares must be held by a minimum of 2 (two) shareholders, individuals and/or legal entities (there is no maximum limit), and can be open to either public or private participation. The par value of 1 (one) share shall not be less than RON 0.10.

Pursuant to the recent amendments, the shareholders may empower the administrators to increase the share capital of the company with a specified amount (the Authorized Capital). Such Authorized Capital may not exceed half of the value of the share capital.

For the administration of joint-stock companies two alternative systems may be elected: the unitary and the dualist system.

• The unitary system – the company shall be managed by one or several administrators, organised as a Board. The Board can assign the management of the company to one or several directors. For those companies whose financial statements are subject to auditing such assignment is compulsory.
• The dualist (two-tier) system – the management of the company is ensured by a Directorate and a Supervisory Board :
  • The Directorate carries out exclusively the activity and management of the company and reports to the Supervisory Board;
  • The Supervisory Board exerts the permanent control over the Directorate of the company and reports to the General Meeting of the Shareholders.

According to the latest amendments, the administrators, the members of the Directorate or of the Supervisory Board may not conclude a labor agreement with the company. A services provision agreement (management agreement) is required instead.

• c. Representative office - usually set up by foreign companies in Romania to carry out non-commercial activities such as advertising and market research on behalf of the parent company. Representative offices cannot conduct commercial activities in Romania. In order to register a representative office, company officials should apply to the General Department of Commercial Policies in the Ministry of Economy and Trade and pay an annual fee of USD 1,200 for the license.

• d. Branch of foreign company - does not have its own legal personality or share capital. Being a unit of the parent company, branch activities cannot exceed the scope of activity of the parent company.

• e. Consortium - domestic legislation allows for the conclusion of a joint venture agreement (contract de asociere in participatiune). Under this agreement, parties act together for the accomplishment of a common business goal. This form of doing business in Romania does not create a legal entity. Generally, one party is in charge of the bookkeeping of the joint venture.

Limited liability companies are the most popular vehicles among local and foreign investors for carrying out business activities in Romania because they have fewer administrative requirements and greater flexibility in operations than other types of companies. They also have a low initial capital requirement. However, the number of joint-stock companies in Romania is increasing because of their attractiveness to investors interested in equity investing. An SA must be set up whenever:

• the company wants to carry out certain types of activities (e.g. insurance, banking activities, etc.);
• entrepreneurs foresee any advantage or necessity with respect to the acquisition of its own shares by the company (for instance, offering them to the managers);
• the entrepreneurs plan to list the company on a stock exchange or on the OTC market;
• the entrepreneurs contemplate financing the company through issue of bonds or other financial instruments;
• the entrepreneurs intend to allow receivables towards third parties to be subscribed as participation in the company.

The other forms of doing business are not common among foreign investors in Romania. However, foreign investors still use representative offices if their activity involves only promoting one of their group companies in Romania. Branches are mainly used in cases where foreign investors plan for a short presence in Romania or if the investors decide, for capitalization (in the case of banks) or commercial reasons, not to legally separate the Romanian entity from the parent company.

 

Mergers and acquisitions

After completing the first investment stage – establishing a Romanian legal entity – foreign investors may, during the course of business, restructure their activities through mergers and acquisitions as stipulated by Romanian law.

Law 31/1990 (the Romanian Company Law), as amended by the Government’s Emergency Ordinance 82/2007, and the methodological norms approved under Order 1376/2004 (regarding accounting procedures for mergers, spin-offs, dissolution, liquidation of companies, withdrawal and exclusion of shareholders, as well as the fiscal regime of such operations) represent the general legal framework for mergers and acquisitions in Romania. The Romanian Companies Law regulates both merger by absorption (whereby one or more existing companies are absorbed by another existing company) and merger by fusion (whereby a new company is created by integrating two or more existing companies), as well as spin-offs. The merger/spin-off should be decided separately, by each participating company voting in the General Meeting of Shareholders. Following this, a merger/spin-off plan is prepared and registered with the Trade Registry in order to be examined by an expert and to get the approval of the delegated judge and published in the Official Gazette.

Regarding the completion of the merger/spin-off operation two situations may arise:

• where pursuant to the merger/spin-off new companies resulted, the operation takes effect upon the incorporation date of the new company or the last of the new companies.
• for the other cases (e.g. merger by absorption, spin-offs where the transfer is made to already existing companies), the operation takes effect on the date when the resolution of the last company approving the operation is registered with the Trade Registry, save where the participating companies jointly agree on a different date. However, such date cannot be prior to the end of the last budgetary year of the company/companies that transfer its/their assets and liabilities and cannot be later than the end of the current budgetary year of the absorbing or the beneficiary companies.

With regard to acquisitions, Company Law regulates the acquisition of shares in a limited liability company or in a jointstock company. The acquisition procedures are different as shares in a limited liability company are not freely transferable to third parties (a special quorum and a majority in the General Meeting of Shareholders are required), whilst shares in a joint-stock company are not subject to specific restrictions regarding their transferability to third parties, if not otherwise provided for.

There are also some instances where companies involved in a merger or acquisition are subject to certain competition regulations. However, as a general rule there are no competition issues to be considered when companies participating in a merger and/or acquisition are part of the same group of companies. Mergers and acquisitions involving at least one public company must be done in accordance with Capital Market Law 297/2004 and by observing the regulations issued by the National Securities and Exchange Commission (CNVM).

 

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