Introduction |
In the December 2005 issue of the Romanian Digest, we summarized
preliminary information then available about the Property Fund –
Romania’s attempt to provide restitution to the victims of the wrongful
and abusive confiscations of their homes and properties by the Communist
authorities after 1945. We expressed the hope that the Fund would not
be another slap in the face to those victims as had been so much of
Romania’s prior efforts at restitution. We viewed the Property Fund as a
golden opportunity for the Romanian authorities to finally right the
wrongs imposed upon owners of pre-communist era properties where those
properties could no longer be returned in-kind under the restitution law
regime outlined under Laws Nr. 10/2001, as modified under Law 247/2005.
Under these circumstances, Government Decision Nr. 1481/2005 was enacted
to set up the Fund and provide for the possibility of compensation to
such "former owners" through grants of shares in the Fund in proportion
to the value of their successful claims. Since our last article, it
appears that Romania may, indeed, be serious about providing real
restitution to the victims of the past through a Fund whose shares have
been legitimately valued.
Although the law is fair and the Property Fund appears to be genuine,
the regulations that will bring about the reality of restitution to so
many victims has several major flaws that if uncorrected could produce
the ludicrous result that major claimants such as the heirs of Nicolae
Malaxa and Max Ausnit – the John D. Rockefeller and Andrew Carnegie of
Romania – would receive nothing. This is because, in the case of the
former industrial properties, the evidence of shareholding must be
submitted as of June 11, 1948, the actual date of the confiscations. But
in most cases, it is impossible to obtain such evidence, as the
documents were either destroyed or lost by the Romanian government. It
is curious that proof of large claims that total hundreds of millions of
Euros cannot be found by the Romanian government, while documentation
for small claims seem to abound. Consequently, the existing regulations
that apply the law must be changed to expressly provide that evidence of
shareholding can be made with any documents such as decisions of the
general assembly, older excerpts of the shareholding registry, Official
Gazettes of Romania, or other credible alternative corroborating
documentation, etc., irrespective of their date. We are dealing with
properties that no one else has claimed, that were openly and
indisputably owned by the family of the claimants, and where the best
evidence of ownership was stolen by the then Romanian government and
either cannot now by found or was destroyed. Failure to deal with these
matters on an administrative basis now will not end the claims. No one
walks away from hundreds of millions of Euros. Sadly, Romania’s failure
to remedy this injustice would result in protracted multiple
international litigations based upon what will be described as a new act
of expropriation by Romania against the victims of its past
expropriations. We hope that this can be avoided.[1]
Herzfeld & Rubin, P.C., and its Romanian
affiliate, Rubin Meyer Doru & Trandafir, spca, represent major
claimants seeking restitution, among whom are the families of
Nicolae Malaxa, Max Ausnit, and Princess Ileana of Romania, the
former owner of the Bran Castle.
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Quick Facts |
The purpose of the Fund is to create something of value that will
constitute "just and equitable" compensation to claimants whose
successful property restitution claims under Laws Nos. 10 or 247 cannot
be satisfied with an in-kind return of that property. The Fund has been
set up as a "closed-end" financial investment company which issues
shares in settlement of these claims.
Claimants seeking compensation under the restitution regime must file
claims with the Authority for State Assets Recovery (“AVAS”) (or other
institutions depending on the nature of the claim). AVAS assesses the
validity of the claims and then issues compensation awards to be
converted into shares in the Property Fund. The value of the
compensation is assessed by an evaluation commission. While this system
has allowed the authorities to begin the process of awarding successful
claimants, the Funds shares, once awarded, cannot legally be resold to
third parties without listing the Fund on the Bucharest Stock Exchange (BSE)
or an international stock exchange or without specific legal provisions
allowing transfer of the shares prior to the listing of the Fund.
Upon receiving the shares , the recipient becomes a shareholder in one
of Eastern Europe's largest funds. The Fund currently has a portfolio of
shares in 114 entities, including some of Romania’s best-known
institutions, such as Transelectrica, the National Lottery, Transgaz,
Romtelecom, Posta Romania, Petrom, Romtelecom, the National Printing
House, the various “Electrica” and “Distrigaz” utilities, the Metrorex
transportation utility, as well as the Henri Coanda, Baneasa, Constanta
and Timisoara airports and the Galati and Giurgiu maritime ports. In
most cases, the portion of these entities transferred to the Fund is
between 10% to 20% of their total equity. With shares of these larger
entities already transferred, the total assets currently held by the
Fund have been estimated at almost €4 billion. In addition, the Fund is
due to receive future contributions in the form of: (i) controlling
equity interests in some smaller State-owned entities; (ii) 9.9% and 4%
of the sale proceeds from the privatization sale of the CEC and BCR
banks, respectively, as well as; (iii) some of Romania's communist-era
debt receivables from numerous African, Middle Eastern and Asian
countries. When these assets are either received, paid-in or transferred
to the Fund, the increased value to its portfolio will be effected
through additional increases to its social capital, so the Fund is
expected to hold assets whose total value will be worth several
additional billions of Euros.
The Fund is currently run by a "Supervisory Council" which responds to
the Ministry of Finance. The Council is made up of one Chairman and six
directors. Currently, the Chairman is Nicolae Ivan. The Council will run
the day-to-day affairs of the Fund until a Fund Manager is selected by
the Romanian authorities. Originally formed as of December 29, 2005, the
Fund is currently scheduled to expire on December 28, 2015.
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Recent Events |
In a move designed to increase confidence both abroad and at home, the
Council has spent the past several months nominating well-known
international firms and key individuals to leading roles in the
formation and running of the Fund.
An
international law firm has been selected to assist in the issuance of
the bid documents and will assist in holding a future tender for the
appointment of the Fund Manager, which is scheduled to take place no
later than the end of June. It will also have a leading role in devising
the rules for the selection of the manager, which will, in turn, trigger
the transfer of day-to-day management of the Fund from the Council to
the manager. Expressions of interests from prospective managers were due
in mid-March, and the Romanian authorities have disclosed the receipt of
official notifications from 3I plc, Cheynne Capital, Deutsche Bank,
Salomon Brothers, Nomura Securities, Merrill Lynch, Morgan Stanley,
Dresdner Bank, Dexia Kommunalkredit and YFM. Once selected, the Manager
will administer the Fund according to the rules established by
Government Decision and other internal rules subsequently adopted by the
Romanian authorities.
In addition to the selection of international law firm, the authorities
also selected various Romanian firms to act as local counsel, mostly to
perform the due diligence over companies whose shares are being
contributed to the Fund. Also nominated were Raiffeisen Capital and
Investment, as financial advisors for the Fund's imminent listing with
the BSE, and KPMG, to serve as its Auditor. A number of independent
directors were also placed on the Council for the purpose of increasing
transparency and institutional confidence in the Fund. All Council
members were appointed for a one-year mandate. |
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Early Success in Awarding Shares |
Initially, the Romanian State, acting through the Ministry of Finance,
managed the formation and preliminary set-up of the Fund as its sole
shareholder. However, on March 6, the first round of awards in shares in
the Fund took place amongst successful claimants. At a televised
inauguration of the Fund held at the Victoria Palace, Mr. Ivan, along
with Prime Minister Calin Popescu Tariceanu, awarded nearly $3 million
worth of shares to seven selected recipients. Amongst the seven, were
clients of Rubin Meyer Doru & Trandafir, as well as a police officer, a
factory worker, a gypsy leader and a former business owner.
Since the initial ceremony, the Romanian authorities have moved quickly
to address an impressive list of over 180,000 restitution claims which
will likely be settled by shares in the Fund. As of early April, the
Romanian authorities have approved almost 14,000 claims, with a total
nominal value of almost €400 million, or 10% of the total equity in the
Fund. |
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Lingering Doubts about BSE Listing |
While the transfer of shares in the Fund has proceeded at a brisk pace,
members of the financial community are questioning several key
parameters of the Fund and its ability to function under the current
Romanian legal regime.
The first and most immediate concern is the Fund's listing on the BSE,
without which the Fund's shares will not be freely transferable. Based
on an interpretation of the existing laws – which we do not share but is
apparently shared by a number of decision-makers -- an entity may not
become listed with the BSE before the companies in its portfolio are all
listed. Currently only 60 of the 114 companies which make up the
portfolio of the Fund are listed. In fact, some of the largest companies
in the Fund's portfolio, such as the National Lottery, the National
Printing House, Transelectrica and Transgaz are not currently listed.
Even before going public, a company must secure a valid decision of the
shareholders to go public, change its by-laws, audit its financial
statements, and undergo the time-consuming and expensive process of
preparing a company for a public offer. Even under optimum
circumstances, it will take anywhere between 6 months to 12 months to
list a single company on the BSE. Under less than optimum circumstances,
the process will be time-consuming and will lead to conflict. In recent
press reports, Mr. Ivan of the Fund has indicated that the Fund is
currently involved in litigation with at least 10 of the 114 companies
in the Fund's portfolio. Given these portentous early signs, there is
some justifiable concerns that it is unlikely that the Fund's listing
will take place prior to mid-2007.
Under
the current circumstances, Senator Varujan Vosganian, the president of
the Finance-Budget Commission of the Senate, recently declared that "the
Property Fund has been established, but without the proper legal basis
for operations; and, as such, the Fund will remain an object of
curiosity….either we change the law and we adapt it to the Fund in its
current form, or we resign ourselves to a dysfunctional institution."
Specifically, Senator Vosganian has indicated that his Commission will
soon propose that the Romanian authorities adopt a series of measures to
reduce the burden placed on the Fund in order to be listed with the BSE,
or impose a temporary and official market for the sale of the Fund's
shares until such time as the Fund is listed on the BSE. According to
Senator Vosganian, the Romanian authorities should also adopt reduced
listing requirements for the shares of companies in the Fund's
portfolio. If these measures can be adopted by the Government, with the
agreement of the Romanian Securities Commission, Romanian officials
believe that the Fund could be listed on the BSE by the middle of 2006.
Another problem mentioned in our December Romanian Digest was one of
evaluating the winning claims of Fund recipients. While Law No. 247
attempts to eliminate any subjectivity from the process of evaluating
property restitution claims, the same legal regime also indicates that
the evaluators will have to be retained and paid by the Romanian
authorities. Accordingly, the apparent conflict of interest of
government-retained evaluators has not been lost upon interested
parties. On the flip side, the evaluation of the assets to be held by
the Fund also presents substantial problems. While there is a basis for
judging the market price for many of the shares of these entities, many
entities which make up the Fund's portfolio may not benefit from
adequate market measures of value. |
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Conclusion: Will the Fund get off the
Ground? |
Currently, almost 70 claimants have received shares in the Fund, and
another 14,000 thousand claimants are well on their way to the same.
More importantly, some of the Fund's advisors have been named, and the
all-important Fund Manager will be named by the end of June. The
measurable progress achieved since the beginning of this year has done
much to boost confidence in the Property Fund's short-term prospects.
On other fronts, however, the Fund is still an open question. The lack
of a favorable legal regime to assist it with its BSE listing serves to
confirm lingering doubts about its long-term viability. Without any
near-term BSE listing, Fund recipients will not have a clear market for
their shares. Public confidence will suffer, and increased doubts about
the long-term prospects of holding shares in the Fund will merely
encourage shareholders, many of whom are now retired and who lack
in-depth knowledge of the capital markets, to sell their shares on a
nascent black market for less than their nominal value. Something
similar occurred in the mid-1990's during Romania's previous
mass-privatization scheme with respect to the Private Ownership Funds.
If the government is to avoid the mistakes of the past, it must present
viable alternatives (namely the real prospect of long-term capital gains
and dividend payments) over the understandable desire to sell one's
shares in the Fund immediately and at any price. If the Fund fails to
deliver "value" to its shareholders, it will have failed in its central
objective of resolving the very real and moral dilemma of property
restitution.
If Romania credibly dispenses shares of genuine value to the claimants,
timely resolves the BSE listing issue, and fairly compensates the former
owners of its industrial properties by amending its regulations to
reflect reality, Romania will deserve to be held up to Europe as the
archetype for just restitution. |
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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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RUBIN MEYER DORU & TRANDAFIR
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Str. Putul cu Plopi, Nr.7, Sector 1
Bucharest, Romania
Tel: (40) (21) 311 14 60
Fax: (40) (21) 311 14 65
E-Mail:
office@hr.ro
VISIT OUR WEB SITE:
http://www.hr.ro
The Romanian Digest Archive
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