Introduction |
Late
in February 2006, the Ministry of Justice introduced numerous
key-amendments to the Romanian Company Law (Law 31/1990), which are
intended to bring Romanian legislation in line with EU Directives. The
proposed amendments arise from a study financed by the World Bank and
USAID, and were guided by recent European Commission reports on
Romania’s accession progress and the World Bank’s Report on the
compatibility of Romanian legislation with OECD Principles of Corporate
Governance (as outlined by the PAL II Program – the Programmatic
Adjustment Loan of the World Bank). As such, the Company Law initiative
is the result of Romania’s on-going obligations vis-ŕ-vis institutional
reform governed by a series of NGO/IFI-sponsored programs, as well as
its accession-related commitments to the EU. |
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Key-Points of the Proposed Law |
The current draft proposed by the Justice Ministry (the “Draft”) focuses
on OECD principles regarding the rights of shareholders and the
responsibilities of the board, and the guidelines established by First
and Second Council Directives. Since much of the Company Law is already
in line with these principals and directives, the proposed amendments
have mostly targeted specific matters rather than general areas
requiring change.
The major points of the Draft include:
- the introduction of the concept of
“authorized capital,” which represents the maximum level of capital up
to which the board of directors or the sole shareholder of a company
may increase a company’s existing capital within 5 years of formation.
This maximum level will be prescribed in the constitutive act, and the
shareholders’ meeting of a company will have the authority to grant
the authorization of such capital increase to the board, as well as
approve the terms and conditions of such increase. Furthermore, the
pre-emptive rights of the shareholders will no longer be restricted or
cancelled by the constitutive act, but only by a decision of the
general meeting of shareholders (the “Shareholders’ Meeting”);
- the raising of the minimum share capital
of a joint stock company to at least RON 92,500, from the current RON
87,500, (approx. €25,000 with today’s exchange rate); on a similar
note, in-kind contributions will be accepted so long as the transfer
of the actual ownership rights to the contributed asset are effected
within 5 years of the date of formation of a company;
- a reduction of the minimum number of
shareholders required to set up a joint-stock company or a limited
partnership by shares to 2, from the previous 5 (this is specifically
in-line with current EU Directives). This is intended to ease the
burden of investors looking to set up investments in Romania, allowing
them to set up joint-stock companies without the need to seek
additional “phantom” shareholders to satisfy the current 5-shareholder
requirement;
- amendments to the constitutive documents
of a Romanian company would have to be submitted to the relevant local
Trade Registry in its “restated” form (i.e., the original document
would have to be re-printed with the amendments incorporated into the
text of the restatement), instead of the current practice of filing
mere amendments (known in Romania as “Additional Acts”). This will
ease the process of accurately determining the provisions of the
constitutive documents of a company when numerous amendments have been
effected;
- the introduction of an on-line
registration procedure intended to reduce the bureaucratic burden and
time-lag of registering a Romanian entity, as well as securing
certified copies of constitutive documents already on-file with the
registry (it is still unclear how this system will be implemented
since many documents required to form a Romanian company must
currently be submitted to the Trade Registry as originals);
- the introduction of a new “one-tiered”
structure for the Board of Directors, whereby executive and
non-executive positions, and their respective fiduciary duties, are
well-defined and delineated. A distinction will be made between
individual and corporate directors. The Board would be allowed to
delegate its executive prerogatives to one or more managers, whose own
obligations and duties with respect to the company would fall in-line
with EU directives, specifically the European Commission’s
Recommendation no. 2005/162/EC of 15 February 2005, on the role of the
non-executive directors of listed companies;
-
for
the purpose of corporate governance, looser rules will determine the
quorum necessary in the Shareholders’ Meetings. Under the Draft, the
“first call” of the “Ordinary” Shareholders’ Meeting will require the
presence of voters representing at least 25% of the total voting
shares of a company in order to have a valid quorum (currently, that
level is set at more than 50%). Valid
decisions are then made by the
affirmative vote of a simple majority of the voting shares present
(currently, the requirement is a 2/3 majority). For the second call,
there is currently no requirement regarding the presence of
shareholders, and valid decisions are then made by the affirmative
vote of a simple majority of the voting shares present. The current
version of the Draft leaves these provisions unmodified. As for the
“Extraordinary” Shareholder’s Meeting, the Draft proposes that for
“first call” the presence of voters representing at least 25% of the
social capital of a company will be required (currently, this level is
75%). Valid decisions will then made by the affirmative vote of at
least 2/3 of the votes present (currently, this may be done by
shareholders owning shares representing at least half of the total
social capital in that company). With respect to the “second call,”
the Draft will require the presence of shareholders representing at
least 20% of the social capital of a company (currently, all that is
needed is the presence of over half of the voting shares). Valid
decisions will then be made by the affirmative vote of at least 2/3 of
the votes present (under current law, valid decisions require the
affirmative vote of shareholders representing at least 1/3 of the
total social capital of the company);
- similarly, any significant modification
to the structure of a company (such as its object of activity, as well
as any decision regarding the increase or reduction of the social
capital, merger, spin-off or the winding down of its affairs), will
have to be voted upon by a majority of at least 3/4 of the present
entitled voters, provided that the quorum requirements have been met;
- additional procedures governing
Shareholders’ Meetings will be simplified, such as: (i) the extension
of the notice period of a call for each such meeting from 15 to 30
days, (ii) the reduction of the number of shareholders with authority
to request a meeting, (iii) the clarification of the shareholder’s
right to add new items on the agenda, (iv) the regulation of the right
of the shareholders which hold preferred shares to attend the a
Shareholders’ Meeting (without having the right to vote), (v) the
regulation of instances under which a shareholder may vote by proxy,
and the introduction of the right of a shareholder to enter into
voting pacts, (vi) the improvement of the system of determining and
distributing dividends, and (viii) the clarification of the conditions
necessary to allow a shareholder the right to withdraw from the
business (including the requirement of a 30-day term, the existence of
new circumstances, new obligation of evaluating the price of the
relevant shares by an expert appointed by a delegate judge, etc….);
- the acquisition by a company of its own
shares will remain a very restricted procedure, but some loosening of
the rules and principles governing such a transfer will take place.
However, the subscription of own shares by the company will be
prohibited;
- companies with turnovers of less than RON
10 million (approx. EUR 2.8 million), will require the Trade Registry
to issue a notice confirming that the financial statements of a
company have been filed with it, as well as with the Ministry of
Finance. In order to ensure public access to such notice (and, thus,
facilitate the disclosure of relevant financial information and
encourage transparency, as called for in the OECD Principles of
Corporate Governance), the Trade Registry will be required to list the
notice on its website;
- the definition for a mergers will be
expanded, and certain terms governing a merger will be clarified (such
as, when certain compulsory provisions of a merger take place during
the allotment of shares of a company which ceases to exist, or the
disclosure of the date from which the transactions entered into by
such company are taken over by the surviving entities, along with the
protections granted to shareholders and third parties); in addition, a
new and more complex notion of a “spin-off” (in Romanian, a “desprindere”)
will be introduced under certain circumstances; and,
- the distribution of dividends will take place 6 months after the
approval of the annual financial statement of the company, instead of
the current 8 months.
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Initial Reaction from Business Circles |
Although
the general opinion related to the Draft has been positive, some of the
proposed provisions have come in for criticism. For example, the
National Union of Romanian Owners (the “UNPR”) commented to the Romanian
press that reducing the quorum requirement for the Shareholders’
Meetings will constitute an unjust relaxation of corporate formalities,
as the Draft would allow shareholders with as little as 20% of the
equity of a company to constitute a quorum in a Shareholders’ Meeting.
According to the Union, major decisions, such as those contemplated
under the Draft, should be taken with absolute majority of the
shareholders present, as per current law. If the Draft is approved, the
current reduced quorum requirement, along with the reduced decision
threshold from absolute to simple majority would eviscerate the
purpose of holding a Shareholders’ Meeting in the first place. According
to representatives of the National Council of Small- to Medium-Sized
Private Enterprises (the “CNIPMMR”), a Shareholders’ Meeting “should
establish the policies and supervise the activities adopted by a
company.” Accordingly, the participation of members holding voting stock
should be encouraged to increase, and not reduced, to ensure the
effective management of a company.
The Draft’s attempt to regulate the Shareholder’s Meetings has also come
in for criticism from representatives of the UNPR, which criticized the
increase of the notice period to call a Shareholders’ Meeting (from 15
to 30 days). In the opinion of the UNPR, the proposed change will act
against a company’s interest under extraordinary circumstances, when
urgent business must be discussed and resolved by the shareholders. The
UNPR also disagrees with reducing the dividend payments period from 8 to
6 months, as this could create imbalances taking into account the
proposed 16 per cent flat tax. Thus, if the Draft were to be approved as
is, the opinion of the UNPR is that the new dividends regulations would
actually cause a higher corporate tax burden than in 2004. |
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More Debate and Public Participation |
The Draft has been available on the Justice Ministry's website since
February 20, 2006 and was open to discussion and written comments until
March 7. By March 9, the Justice Ministry will have held public debates
on the proposed amendments, which will culminate with a press conference
on March 16, in order to finalize the results of the public commentaries
received thus far. Rumor has it that the Draft will be presented in a
final form before the Romanian Parliament on or after that date, so that
it may be debated in parliament and subject to a final vote by the end
of April. Indeed, the process allowing for commentary from interested
parties is a refreshing change in the manner in which most legislation
had heretofore been enacted in Romania. |
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Conclusion |
According to the Romanian government, one of its main goals is to create
a legislative environment which encourages transparent, efficient and
predictable business conditions in accord with EU norms and taking into
account the general and reasonable interests of this country’s business
community. By this criteria alone, the Romanian government has succeeded
in introducing public debate on a timely and important subject; one
which is as central to business life in this country as the internal
regulation of corporate entities.
Unlike the 1990’s, when laws often appeared on the scene from enigmatic
sources, frequently with little or no warning or public debate,
Romania’s business community was left in the lurch, trying to understand
the implication of what was, too often, bad law. Today’s open process of
debate, disclosure and cooperation between the Justice Ministry and
various representatives of NGO’s and the local business community is a
truly remarkable statement of progress achieved in the way Romania views
its commitments to legislative and economic reform. Irrespective of the
final outcome of the debate on the exact provisions of the Draft,
Romania has proven that it can, indeed, involve the business community
and various NGO/IFI’s to effect legislative reform in a manner that is
transparent, productive, efficient and geared to help both Romania and
local businesses adapt to the new realities of EU membership. |
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Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2006 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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