Introduction |
In 2001, Romania embarked upon what was then a half-hearted effort to
provide restitution to the victims of the wrongful and abusive
confiscations of their homes and properties by the Communist authorities
after 1945. This effort included provisions to offer restitution to the
owners of pre-communist era properties where those properties could no
longer be returned in-kind under restitution Law Nr. 10/2001, as
modified under Law 247/2005. Government Decision Nr. 1481/2005 was
enacted to set up the Property Fund (the “PF”), to provide compensation
to such former owners through grants of shares in the PF in proportion
to the value of their successful claims. The PF was organized as a
hybrid "closed-end" mutual fund which issues shares in settlement of
restitution claims. Upon receiving the shares, the recipient becomes a
shareholder in one of Europe's largest funds. The Fund currently has a
portfolio of shares in some of Romania’s best-known and most valued
institutions, with the total assets currently held by it estimated at
about €3.9 billion ($6 billion). However, the full implementation of the
Fund cannot occur until the Fund is listed on the Bucharest Stock
Exchange and that listing has been inordinately delayed to the determent
of the mostly elderly claimants who still await justice. Cognizant of
this problem, the Romanian government passed an ordinance last June that
contains a series of measures that permit the speedy listing of the Fund
with the Bucharest Stock Exchange, and created the basis for a temporary
and official market for the sale of the Fund's shares until such time as
the Fund is listed on the Exchange. Although it took another six months
for any real progress to occur, since December 2007 an apparently
genuine and purposeful effort has been made by the Fund’s Supervisory
Board to bring about the listing of the Fund. But more speed and less
sloth are still required. This article reviews the events
chronologically since the Government’s passage of the June 2007
Ordinance (“OUG 82/2007”) and supplements our previous articles on this
subject. |
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The First General Assembly of the
Shareholders |
Based upon statements to the media emanating from the administration of
the PF, the expectation had been that immediately after passage of OUG
82/2007 in late June 2007, a request for proposal to hire evaluators of
the PF’s portfolio would be issued. Instead, it seems that just about
everyone at the PF went on vacation. Three months went by, but on
September 25, 2007, the first meeting of the Property Fund’s General
Assembly of the Shareholders (the “GAS”) took place. The agenda of the
GAS included, among other matters, consideration of the status of the
Property Fund’s portfolio, amendments to the Articles of Incorporation
of the PF, the appointment of the financial auditor of the PF, the
approval of a future sale of shares issued by the PF on the Bucharest
Stock Exchange, and a grant of dividends to shareholders. At that
moment, the Romanian state, represented by the Ministry of Economy and
Finance, held approximately 88% of the outstanding shares of the PF.
Deloitte Audit SRL, an arm of Deloitte & Touche, was appointed as the
PF’s financial auditor for a period of three years. The shareholders
also agreed that an effort to sell some shares of the fund by the
government in advance of listing would help establish a market price for
the shares, as well as help fund the government’s program to pay
claimants who opt for it a cash payment representing a set amount of
their claim.
Because of modifications to the Law on commercial companies, Law No.
31/1990 regarding the management of a joint stock company, the Fund’s
shareholders had to choose one of the two types of management systems
authorized by law. The shareholders of the PF approved changing the
Fund’s management form from a unitary system of management to a dual
one. According to the Fund’s Articles of Incorporation, as amended by
Government Decision 1581/2007, the Fund adopted the dual system of
management. Under that system, the management of the company is
entrusted exclusively to a Directorate with the ability to take all
necessary matters in the exclusive competence of the shareholders and to
a Supervisory Board appointed by a general meeting of shareholders. The
Supervisory Board supervises and controls the activities of the
Directorate. A member of the Supervisory Board cannot be a member of the
Directorate. According to the provisions of Law 247/2005 and the Fund’s
Articles of Incorporation, the PF will have this management system until
a fund manager is selected.
Following the GAS, on November 1, 2007, the PF commenced distribution of
dividends to its shareholders. By November 15, 2007, 191 shareholders
received dividends totaling RON 31,502,679, with a remaining RON 721,021
still to be distributed. RON 28,797,328 is the amount of the dividends
paid to the Romanian state for the shares owned by it.
Another meeting was held on March 5, 2008. The meeting approved the
amended version of the PF’s charter and, to the credit of the government
and the members of the Supervisory Board of the PF, two “independent”
members will be elected, one of whom is a PF shareholder and the other
the son of a prominent claimant. Dividends for 2007 are expected to be
awarded by the GAS to be held in late April. |
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The Steps Required for Listing the Fund
Shares on Bucharest Stock Exchange |
Before the PF can be listed on the Bucharest Stock Exchange, three main
steps must be completed, each involving a contractual bid process. An
evaluation of the PF’s portfolio of shares; a financial consulting firm
needs to be retained to advise the PF and assist it in the third and
final stage of hiring a fund manager for the PF. Until all three steps
are concluded, the PF’s shares cannot be listed on the Bucharest Stock
Exchange.
From June until November 2007, no request for proposal was forthcoming
from the management of the PF for any of these appointments. Only when a
group of shareholders representing more than 5% of the outstanding
shares of the PF suggested that it might be provident to call for a
special meeting of shareholders in order to stimulate management did a
sudden change occur at the Supervisory Board leading to changes in the
management structure of the PF. This change has stirred the PF into a
measure of activity not seen in several years, although management is
still subject to an occasional lethargy that requires an outside
stimulus to correct.
The professionalism of the Supervisory Board cannot be questioned. It
has a multi-lateral political and business membership that has brought
cohesion to the PF’s objectives. The Supervisory Board has been more
transparent and open in its deliberations than one would have expected.
That makes the delays incident to the bidding process all the more
mysterious and unjustified. Whereas pre-December 2007, the PF’s listing
efforts were stagnating, it now appears that those efforts are indeed
moving ahead, albeit at the rate of two steps forward, one step back.
This may be standard operating procedure for many things in Romania, but
it is no longer tolerable in regard to the Property Fund.
Evaluators’ selection
At the end of November 2007, the PF organized the bid for the selection
of at least two evaluators to value the PF’s portfolio in accordance
with international standards and Romanian law. The evaluators’ selection
process has several stages.
The
first stage of the evaluators’ selection procedure ended in January
2008. Darian Rom-Suisse SRL was chosen to evaluate 50 firms in the
portfolio and PriceWaterhouse Coopers Romania was chosen to handle 26
companies. But an evaluator for a package of a remaining twelve firms
was not determined, thereby requiring another selection process for that
smaller bundle of companies. Those twelve entities include major
utilities such as Turceni, Rovinari and Craiova, and also Electrica
Muntenia Nord.
At the end of February, the two firms chosen as evaluators had still not
signed their consulting agreements with the PF in order to commence
work. Only after execution of these agreements can the winners of the
bid start the evaluation of the 76 companies which are included in the
PF‘s portfolio. It is unclear what is holding up the execution of the
two contracts. Once finalized, PriceWaterhouse Coopers will evaluate
such major enterprises as Petrom, Transgaz, Transelectrica and
Alro Slatina, and Darian Rom Suisse will value companies of lesser
importance.
The delay in the execution of the agreements with the two already
selected evaluators and the failure to select the evaluators of the
remainder of the portfolio that still must be valued is more than
disappointing. Because the value of the portfolio can only be estimated
prior to a proper evaluation, speculators have been offering to buy
shares prior to listing from the hapless victims of communism at
drastically discounted rates. Such deep discounted sales, which are now
permissible, as further discussed below, flaunt the intent of the
restitution scheme and are the direct result of the unwarranted delays
in listing the PF.
Financial consultant’s selection
A bid for the selection of a strategic financial consulting firm was
organized in April 2006, but the agreement with the UK company selected,
Cordea Savills, was never finalized. In early 2008, the selection
procedure for a financial consulting firm was reactivated through
competitive bid procedures.
A financial consultant is required to assist the PF’s Supervisory Board
in the selection of the fund manager for the PF, the final major step
for the listing of the PF shares on the Bucharest Stock Exchange.
Additionally, the financial consultant would evaluate the activity of
the fund manager and the investment policies selected by the manager. On
February 4, 2008, the PF announced that Schroders Investment Management
Limited, Industrie un Finanzkontor Etabl., and Independent Capital
Management are the three companies which were chosen for the second
stage of the selection procedure for the financial consultant. The
second stage of the process involves a dialogue with the selected
candidates and the submission of their final offers. The third stage of
the procedure is the final evaluation of the submitted offers and the
selection of the financial consultant with the execution of a financial
consulting services agreement.
Fund Manager’s selection
Romania’s Finance Minister publicly stated that the fund manager will be
selected in the second half of 2008 by a commission established through
a decision of the prime-minister. The conditions for the PF’s listing on
the Bucharest Stock Exchange will be set forth in a government decision
in May or June, and after that, the fund manager will be selected. If
this is actually what occurs, it appears that the PF will not be listed
on the Bucharest Stock Exchange until December 2008.
According to the declaration of the government, thirty-seven major
investment banking firms have expressed an interest up until now in
bidding to be the fund manager of the PF. Among them reportedly are
Goldman Sachs, Morgan Stanley, Dresdner Bank, Deutche Bank, Nomura, and
Merrill Lynch. The reason for such wide-spread interest is the potential
annual fee which is estimated at €150 million per year. |
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Sales of PF’s Shares Prior to Listing |
The long drawn out issue of whether or not shareholders in the PF could
sell their shares prior to listing the Fund was finally resolved in
favor of such sales in the early part of 2008, pursuant to Governmental
Decision 1581/2007 and the subsequent acquiescence of the reluctant
Central Depositary to transfer such shares. A few sales have already
been reported, but they are rumored to have been made at pricing
representing significant discounts off the nominal value of the shares.
This bazaar-like environment is the direct result of the past failures
of the PF management and the government to move the listing process
along at a reasonable clip. Because there is no official valuation of
the portfolio by independent evaluators, broker dealers must
substantially discount the value of the shares in order to securitize
whatever package they might create to resell them. This leaves the
elderly victims of communism with the choice of receiving a fraction of
the value of their restitution now or waiting and hoping that at least
the evaluation of the portfolio will proceed in a somewhat timely
fashion so that the discount on sales thereafter will not be so low.
Consequently, shareholders have been strongly advised by capital market
specialists not to sell their shares at the discounted prices that they
can obtain at this time. |
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Conclusion |
Up
until recently, Romania permitted the grand effort of its restitution
scheme to falter through acts of lethargic indifference. Having created
a method to compensate the victims of its past injustice that is an
example to other European nations grappling with restitution issues,
Romania allowed bureaucratic lassitude and indolence to soil the effort.
As Romania diddled about, delaying each segment of the listing process,
the Property Fund was bludgeoned by the rhetoric of a hostile opposition
that apparently cared more about political expediency than the rights of
the victims of communism. What will without doubt be a significant
stimulus to Romania’s capital markets as well as one of the nation’s
greatest achievements in justice has languished in a swamp of
disingenuous drivel generated by political opportunists because of the
indifference of so many in Romania to the languid progress towards
listing.
Indeed, the European Court for Human Rights in Strasbourg continues to
render decisions against Romania in cases where claimants are entitled
to receive shares in the FP. The Court has recently issued a number of
new decisions whereby it once more restated its opinion that, "since the
PF is not yet listed with the Bucharest Stock Exchange, it does not
function in a manner which allows effective compensation" - see, for
example, Bretcanu vs. Romania and Suciu Werle vs. Romania.
The position of the Court is the same as in its rulings in tens of other
cases and they are expected to continue for as long as the PF is not
listed. In all of these cases, the Court condemned Romania to the
in-kind restitution of the confiscated property or, where this is no
longer possible, to provide cash compensation for the victims of
nationalizations. Unfortunately, decisions like these put Romania in an
unenviable third place on the Court's list, after Russia and Turkey, as
its worst human rights offenders.
The slow drift towards listing may almost be over. The recently
invigorated Supervisory Board has shown an inclination to move things
along. It helps that it has a multi-partisan membership which all seem
to be of one mind. But good intentions alone do not produce results.
Those charged with the responsibility to remedy the injustices of the
past through the PF must use their best efforts to move speedily towards
the culmination of Romania’s yet unfulfilled promise to the victims of
its own injustice.
If the PF’s listing is to occur in 2008, steps must be taken now to
commence the evaluation of the Fund’s portfolio. At the very least, if
shareholders had a transparent reliable valuation in hand, it could
provide the basis for reasonable offers to buy shares in advance of
listing. They would, of course, be discounted as well, but not at the
heavily discounted rates that currently prevail. Rapid movement towards
the hiring of a financial advisor and then a fund manager will further
assure that even though the listing has not yet occurred, the listing
is, indeed, coming soon, and current sales of shares by elderly
claimants will not then be at heavy discounts off their real value. The
Romanian state has the moral and legal obligation to provide effective
compensation to the victims of the injustices it generated and that can
only truly occur once the Fund is listed. |
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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 2008 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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