The Companies' Financing Procedures
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Septembrie 2008 |
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SALANS |
Adresa
Strada G-ral C. Budişteanu, Nr. 28C
Etaj 3-4
010775 Bucureşti, Sector 1
Telefon
+40-21-312.49.50
Fax
+40-21-312.49.51
Website
www.salans.com
Introduction
It is quite common these days that for initiating and developing a business, one needs to use more than its own funds and has to raise and/or borrow money. As compared to individuals, companies require more complex and broader techniques for raising money. Companies are often structuring their business investment through a combination of share capital and shareholder loans.
It is worth to mention, that the legislation and the practice in Romania have developed substantially in the last years as to accommodate foreign investments, especially for permitting large groups of companies to enter the market.
Intra–group loans
General observations
As a general remark, the Romanian legislation does not expressly provide for intercompany loans, nevertheless such loans are made on the market, being a common practice.
Special attention must be given to the fact that such loans are not made on a recurrent basis, as the lender-company might qualify as a professional lender; in the letter case, the lender-company has to observe certain notification and authorization requirements, including observance of a specific procedure with the National Bank of Romania, otherwise it may be sanctioned by the relevant authorities.
Consideration has to be also given to the principle of “corporate benefit”, namely that a Romanian company may exercise only such rights and may undertake such obligations as corresponding to or in relation with its scope of activity and that any such activity performed by the company must be in the company’s commercial interest.
In addition to the above, potential financial implications of the envisaged loan have to be observed and previously investigated, on a case by case basis, with a financial advisor.
As a separate requirement we also recommend checking the value of such operations in order to ensure that necessary corporate approvals in this respect have been observed. For example, the Romanian Company Law provides that, within joint stock companies “the administrators, respectively the directors of the company may conclude legal transactions in the name and on behalf of the company, by which they acquire, transfer, exchange or constitute security over goods that exceed 50% of the book value of the company’s assets at the date of concluding such acts, only with the prior approval of the shareholders’ meeting.” Also, specific requirements for the valid summoning of the respective extraordinary shareholders’ meeting are provided, namely, unless the articles of incorporation do not stipulate higher majority and quorum conditions, a presence of at least a quarter of the total voting rights is required at the first summoning, whilst a presence of at least a fifth of such rights is required at the furthering summonings. Decisions are adopted with the majority of the present or represented shareholders.
Up-stream loans and guarantees; Intra group treasury operations
The Romanian Company Law 31/1990 has been amended last year (in 2007) to permit and encourage treasury operations within the groups of companies. In this context some of the former legal prohibitions were lifted as described below.
According to Article 272 of Romanian Companies Law, the founder, the administrator, the director or the legal representative of a company, are criminally liable for, among others, causing such company, or the company controlled by it or the company controlling the company it administers, to provide loans to itself or to guarantee or constitute any security for its own obligations. However, the situation where the founder, a legal person, is taking a loan from a company controlled by it or from a company that controls such, directly or indirectly, does not fall within the scope of the above mentioned sanction.
Such operations have to be previously carefully investigated with a legal consultant as to avoid situations of challenge by minority shareholders or by other general creditors (in Romanian “creditori chirografari”), when causing a decrease of the profit to be distributed or respectively affecting their general right over the assets of the company.
Financial assistance
Article 23 of the Second Companies Directive (77/91/EEC) (the “Directive”) states that “[a] company may not advance funds, nor make loans, nor provide security, with a view to the acquisition of its shares by a third party”.
Romania has transposed Article 23 of the Directive into domestic law as Article 106 of Romanian Companies Law. Thus, in Romania “a company may not extend advances, grant loans, or give guarantees for the subscription or acquisition of its own shares by a third party”. As in France and Germany, it is likely that this restriction does not apply to all types of companies, thus being probable that limited liability companies (in Romanian “societate cu raspundere limitata”) would be exempted (in addition, Article 106 is included in the section dealing with joint stock companies and regulates the shares acquisition of a joint stock company rather than of a limited liability company). Given the debatable applicability of this article, as in the former communist accession countries, lenders and investors face certain degree of uncertainty in structuring leveraged acquisitions in Romania.
The way investors structure a deal is oftentimes driven by the type of financial assistance which is dependent on the acquisition objectives of the investors. Some of them are relevant:
- pre-acquisition refinancing, followed by capital reduction and/or dividend to existing shareholders;
- asset purchase, followed by share purchase;
- buyer, special purpose vehicle borrows, acquires shares of target company, then merges with target company;
- removing the chain of ownership from the country where the target company is incorporated, etc. The peculiarities of each structuring method change in each financing structure.
In the event of a financing of an acquisition structure that is exposed to the financial assistance prohibition, the grant of security to the lender as well as the entire acquisition could be declared void. As a result, the lender financing will not enjoy the protection of the security and the repayment of the proceeds can also be questionable if the bad faith of the lender can be proved (i.e. nemo auditor propriam turpitudinem allegans, a person cannot ask the protection of its rights if acted fraudulently).
