Vol. XIII No.6
June 2008



Cross-Border Mergers and European Company Rules Codified...

 Emergency Government Ordinance no. 52 published in the Official Gazette on April 30, 2008 (the “Emergency Government Ordinance”) amended Romania’s Company Law 31/1990, as well as Law no. 26/1990 regarding the Trade Registry, as republished, to introduce two new concepts mandated by the EU Aquis -- the concept of the European Company, and rules relative to cross-border mergers. In addition, a long awaited clarification with respect to the authentication of certain types of agreements was added. These amendments are meant to further integrate Romania into the internal market of the EU and bring its national legislation in line with the EU Aquis. (Additional articles concerning other amendments to the Company Law are found in the Romanian Digest™ archive at: /digest_archive.htm .)

Court Orders Government to Pay Fair Value on Restituted Properties It Leases

A year ago, the Romanian government issued Government Decision No.343/2007, which unilaterally reduced the rent that it was paying on all restituted properties leased by the government by a substantial amount.  The owners of the Bran Castle sued the government for what they regarded to be an incomprehensibly abusive act. On May 27, 2008, the Bucharest Court of Appeals rendered a decision in favor of the owners that partially cancelled Government Decision No.343/2007, and ordered the Government of Romania to pay the owners of Bran Castle the original rental amount. The Court of Appeals also rejected the intervention of the General Secretary of the Romanian Government and the National Authority for Property Restitution, both of which had sought to uphold the Government’s action. If the High Court of Cassation and Justice of Romania upholds the Court of Appeals decision, then approximately 2,500 owners of other restituted properties whose rents were also unilaterally reduced by GD No. 343/2007 will be entitled to receive rent from the government in an amount much closer to actual market value.

(The case was successfully  argued by Florentin Timoianu of Rubin Meyer Doru & Trandafir)

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Cross-border Mergers
The need for a framework within the EU to facilitate cross-border mergers has increased as a result of the European Union’s enlargement. The first proposal in the EU for a Cross-Border Merger Directive was made in 1984, but it was not adopted because European legislators encountered a social problem regarding the issue of worker participation in decision-making bodies that they needed to solve before cross-border mergers could be implemented with safeguards for the rights of workers in such mergers. The issue was clarified by the rendering of the Directive 2001/86/CE supplementing the Statute for a European Company with regard to the involvement of employees, thus clearing the way for the introduction of the concept of cross-border merger.

The EU framework for cross-border mergers was created in 2005 by Directive 2005/56/CE. Shortly thereafter, the European Court of Justice confirmed the cross-border merger regime in a case involving a German state agency handling the registration of companies that had refused to register a merger between two companies because one of them was a legal entity of a different EU Member State, i.e., Luxembourg. The reason given by the agency was that Germany’s legal framework allowed for only mergers between companies that were registered in the same Member State. The European Court of Justice ruled that cross-border mergers are a means of expressing the freedom of establishment. (The freedom of establishment is set forth in Article 43 of the Treaty and enables “an economic operator” (whether a person or a company) to carry on an economic activity in a stable and continuous way in one or more Member States.) The failure of the agency to register a cross-border merger between two companies from different countries was, according to the European Court of Justice, a form of discriminatory treatment that jeopardized the freedom of establishment. Such treatment could only be justified if made to protect the interests of creditors, employees or minority shareholders; but here, the refusal to register a cross-border merger was not done to protect the public and, consequently, German law was found to be in breach of the EU’s freedom of establishment provisions.

A newly introduced Chapter III of the Romanian Company Law regarding cross-border mergers allows for joint-stock companies, limited partnerships by shares companies, limited liability companies (forms of Romanian legal persons) and European companies (see below) to merge with companies that have their headquarters, central administration or main office in another Member State of the EU or the European Economic Area. The companies from other Member States that are subject to the merger need to be organized in one of the forms provided by Article 1 of Council Directive no. 68/151/EEC/09.03.1968, which corresponds to the aforementioned types of legal persons from Romania. Legal entities operating on a securities market are exempted from the provisions regarding cross-border mergers, and therefore cannot participate in cross-border mergers.

The Trade Registry in the locality where the Romanian company is headquartered has the power to assess the legality of an envisaged cross-border merger. Cross-border mergers are defined in the Emergency Government Ordinance as:
  1. one or more companies, of which at least two are headquartered in different EU Member States, are dissolved without being liquidated and transfer all their patrimony to another company, known as the absorbing company - the shareholders of the absorbed companies receive equity participation in the absorbing company, with the possibility of also receiving cash of up to 10% of the nominal value of such participation;
  2. one or more companies, out of which at least two are headquartered in different EU Member States, are dissolved without being liquidated and transfer all their patrimony to a newly created company - the shareholders of the absorbed companies receive equity participation in the new entity with the possibility of receiving cash of up to 10% of the nominal value of such participation; or
  3. a company is dissolved without being liquidated and transfers its entire patrimony to a company that holds all of its shares, i.e., the sole shareholder.

The merger proposal is drafted by the directors or the members of the directorate of the companies, in accordance with the management system applicable to the respective companies. The detailed procedure for the registration of a cross-merger is set forth in the Emergency Government Ordinance.

Creditors of the companies planning to merge are entitled to notice and have a right to oppose the cross-border merger project. Their opposition may suspend the merger unless the debtor company proves in court that the debt no longer exists, provides proper warranties to the creditor, or concludes an agreement for future payments. Another difficulty may be occasioned by the withdrawal of shareholders that are opposed to the merger. They have the right to ask the company to buy their shares at their nominal value. Withdrawal is possible only if the legislation of all the Member States of the merging companies allow for it as a protection for shareholders, or if the companies expressly agree to such withdrawal.

When considering a merger, the companies must take into account the manner in which the merger may affect their employees, and seek means to have them represented on the decision making bodies of the company. Consequently, in order for the employees to be protected, the new company or the absorbing company must develop methods to include employees in the decision-making process, providing a mechanism for their participation in the decision making process in the former companies, pursuant to the provisions of EU Directive 2001/86/CE regarding the involvement of employees and any national legislation in the field. Such mechanisms of participation of employees in the decision making process may take the form of consultation and the proper distribution of pertinent information.

A merger has the following consequences:

  1. the transfer of all of the assets and liabilities to the new /absorbing company;
  2. the shareholders of the former companies become shareholders in the absorbing/new company as per the merger plan; and
  3. the absorbed/former companies cease to exist.

A merger becomes effective on the date of its registration with the Trade Registry except for absorption mergers where the parties can provide for a different, later date, for the merger to become effective. When the merger becomes effective, the rights and obligations of the absorbed companies regarding the employees are duly transferred to the new or absorbing companies.

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The European Company
The EU has determined that for the proper organization and function of the internal EU market and to improve the economic and social environment throughout the European Union, trade barriers needed to be diminished, if not eliminated completely. Production facilities should be adapted to a community dimension in order for commerce within the internal market to be able to develop and thrive. Consequently, the EU deems it essential that companies which develop a business that is not limited to satisfying purely local needs should be able to easily expand their activity beyond national borders. A new means was needed for such companies to be able to plan and carry out the reorganization of their business at the level of the European Union. In 2001, Council Regulation 2157/2001 was enacted regarding the creation of a European Company. The provisions of the Regulation were meant to allow for the creation and management of companies with a European dimension, free of any obstacles arising out of the territorial enforcement of national company laws. This European Company is known in Romania as Societas Europea or an SE. They are companies that can be incorporated within the territory of the European Union in the form of European public limited-liability companies under the conditions and in the manner described in the Regulation. The main advantage of an SE is the fact that the registered office of an SE may be transferred from the Member State in which it has been incorporated to another Member State. Such a transfer does not result in the winding up of the SE or in the creation of a new legal person as it does for national companies.

The new Emergency Government Ordinance amends the Romanian Company Law so that it now contains provisions with regard to an SE and its enforcement in Romania. Because of its importance, this subject is treated separately, having its own title – Title VII, in the Romanian Company Law.

While SE’s with headquarters in Romania are subject to the Council’s Regulation 2157/2001, the Emergency Government Ordinance provides for the means by which SE’s are to operate within the Romanian legal environment. SE’s registered in Romania can transfer their headquarters to any other of the Member State by way of a transfer proposal which needs to be submitted and approved by the Trade Registry. The transfer proposal is also published in the Official Gazette so that all interested persons can have access to it. Consequently, the creditors of such an SE may submit their opposition to the transfer of the headquarters and, in such case, the transfer will be suspended until an irrevocable Court decision is rendered with regard to the opposition. The transfer is not suspended if the debtor company proves in court that the debt no longer exists, provides proper warranties to the creditors, or concludes an agreement for future payments with the creditors. The right to withdraw from the company is granted to shareholders that did not vote in favor of the transfer within 30 days from the date the general assembly of the shareholders was held. They also have the right to ask the company to buy their shares at the nominal value.

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General Amendments to the Company Law
Another important amendment to the Romanian Company Law effectuated by the Emergency Government Ordinance is a long awaited clarification of the corporate approvals necessary for a company to enter into an agreement that needs to be notarized. Until now, there have been two opinions and two trends with regard to what is necessary in terms of corporate approvals for a company seeking to conclude notarized agreements. In accordance with the first trend, the provisions of the Company Law as to the mandate of the directors corroborated with the relevant provisions on notarized deeds, were interpreted so that there was no need for a resolution of the general assembly of the shareholders’ of a company for the approval of the execution of an agreement needing to be notarized to also be notarized. Such resolution needed to be notarized only if the Articles of Incorporation of the respective company provided for it. But many public institutions, notaries, and lawyers, interpreted the abovementioned provisions concluding that agreements that required notarized deeds, required corporate approvals that also needed to be notarized. This was, quite frankly, a narrow-minded and red tape oriented conclusion that merely led to the consumption of unnecessary time and money. The new Emergency Government Ordinance puts an end to this confusion by providing that the corporate approvals appointing the directors of a company to sign notarized deeds do not also need to be notarized as long as they abide by the law and the Articles of Incorporation of the respective company. This will spare all the time that was until now lost by procuring unnecessary notarizations and apostilles.

The Emergency Government Ordinance also provides for several other amendments of a general nature such as those concerning the distribution of profits in case of a loss, mandates of the board of directors when it comes to accounting policies, the dissolution of a company, the plans for future mergers or de-mergers of a company or the nullity of mergers and de-mergers.

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Romania has fulfilled yet another of its obligations to maintain its national legislation in line with the EU Aquis. By adopting some important aspects of EU law into Romanian law, the Government has allowed for the creation of a framework for registering and utilizing in Romania the concepts of cross-border mergers and a European Company. Romanian companies are no longer restricted by territorial limitations and have a chance to compete with multinational companies that long ago expanded beyond their borders. Romania, therefore, takes another significant step towards its membership in the internal EU market, and becoming fully European.

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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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