Introduction |
Four years after the creation of the Property Fund (“Fondul Proprietatea”
in Romanian) as a means of awarding restitution to former owners of
properties confiscated by the Romanian state where in-kind restitution
is no longer possible, Fondul Proprietatea still does not represent an
effective mechanism in awarding compensation to the victims. This is a
stain on the honor of the Romanian state.
As repeatedly noted both in the Romanian media and in the law courts,
the Property Fund will accomplish the purpose for which it was created
only after its listing on the Bucharest Stock Exchange (in Romanian, “Bursa
de Valori Bucuresti”, hereinafter “BVB”). Although in 2007,
in an attempt to accelerate the process of listing the Property Fund on
the BVB, the Romanian Government enacted Emergency Ordinance no.81/2007
(”GEO 81”), the implementation of GEO 81 proved to be difficult, and it
is still encountering unnecessary and unwarranted obstacles. (For
further reference on the envisaged effects of GEO 81, please visit The
Romanian Digest™ Archive at www.hr.ro, i.e. the March 2008 article – “Property
Fund Plods Towards Listing”.
There is some good news – the 2nd stage of the selection process for the
Fund Manager has finally been completed; it is the long-awaited
necessary step in the process of listing the Fund on the BVB. But
looming ahead are the difficulties associated with the worldwide
economic collapse that caused a decrease in the net asset value of the
Fund below the share capital of the Fund and may lead to measures that
could severely affect both the shareholding structure of the Fund, and
also the participations held by the Fund’s private shareholders.
Additionally, the musings of certain members of the government in regard
to a proposed transfer of Fund assets back to the Romanian State without
just compensation has caused concern and uncertainty among shareholders
and investors, brought derision and ridicule to a process that requires
deference and substance, and raised the specter of litigation that could
cripple the nation with billions of euros in monetary awards. |
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Status of the Selection Process of the Fund
Manager |
Almost ten months after the deadline for receiving applications for the
selection of the Fund Manager, the 2nd stage of the process has finally
been accomplished. On May 27, 2009, a press release from the Property
Fund announced that two candidates were chosen by the selection
commission to enter into the 3rd phase of the selection procedure -- the
two candidates being Franklin Templeton Investment Management Ltd., and
Morgan Stanley Investment Management Ltd.
The two firms, out of the 8 companies that submitted applications for
selection as the Fund Manager, succeeded in persuading the selection
commission that they had fulfilled the conditions required in order to
become the firm that will have the significant role of actually managing
and coordinating the portfolio of the Property Fund, and also of
ensuring the daily management of the Fund in full compliance with
Romanian law.
After many delays in the process, and many rumors in the media with
regard to the lack of accuracy and transparency of the selection
process, the selection commission finally fulfilled this 2nd phase of
the procedure, i.e., the phase of competitive dialogue, which is a
direct discussion and negotiation with the candidates concerning the
activity of the Fund Manager, the objectives to be reached, and the
terms of the management agreement. Indeed, during this phase, the final
form of the management agreement was finalized, except for the fee. The
format of the management agreement has the same terms for the two
candidates selected for the 3rd phase of the procedure.
This last phase is actually a tender in which the following will occur:
(i) the two candidates on the short list will transmit their final
offers (i.e., their fee); (ii) the evaluation of the offers based on the
most advantageous offer from an economic perspective, as described in
the task book; and (iii) the announcement of the winning candidate.
After the selection commission has negotiated the final form of the
management agreement with the new Fund Manager, it will be submitted for
the approval of the General Assembly of Shareholders of the Property
Fund.
The completion of the 2nd stage of the selection procedure for the Fund
Manager is an important step in the process of preparing for the listing
of the Fund on the BVB, along with the previous appointments of the
evaluator of the portfolio and the financial consultant, and is a
prerequisite for the listing of the Fund on the BVB. |
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Minister Proposes Nationalization of Fund
Assets |
In what has to be one of the most asinine and potentially damaging
actions thus far commenced in regard to the Property Fund, the Minister
of Communication and Information Technology announced that an amendment
to GEO 81 had been prepared based on which the shares held by the
Property Fund in the National Company Posta Romana (the “Post”), i.e.
25%, would be “transferred” back into the property of the Romanian state
so that it could become once again the sole 100% shareholder of the
Post.
The
Minister had to be officially reminded by the Supervisory Council of the
Property Fund that such a proposal not only violates the Romanian
Constitution, but also infringes upon the provisions of the European
Convention of Human rights with respect property rights, as a blatant
act of “nationalization” by the Romanian state of the assets of a
private company. Obviously, the shares held by the Property Fund in the
Post represent an asset of the Fund that is registered as such in its
books, and consequently such shares cannot be “transferred” from the
property of the Property Fund into the property of the state.
The concern raised by the actions of the Minister of Communication and
Information Technology is huge. Beside this ministry, the Ministry of
Economy is also a significant shareholder in many companies of great
importance to the Romanian economy, and were this act to succeed,
nothing could prevent any ministry from requesting the same transfers of
property held by the Property Fund in the commercial legal entities in
which that ministry is a shareholder.
It is beyond peradventure, that any such action is an illegal
“nationalization,” and would result in a flood of litigation under
Romania’s many Bilateral Investment Treaties and, ultimately, at the
Court of Human Rights, demanding the actual value of the claims admitted
by the Romanian State, and settled with the Fund’s shareholders through
the offer of shares of like value in the Fund. Reducing the value of
those shares in any manner also violates the settlement agreements and
is immediately actionable. One wonders how popular the Minister of
Communication would be among his colleagues when a bill for billions of
Euros is laid upon his table.
Moreover, the potential amendments proposed by the Minister are
incompatible with Romania’s position as a member state of the European
Union, and severely affect foreign investors’ confidence in the Romanian
capital markets, and the Romanian business environment in general,
through the illegal confiscation of private assets. The foreign
investors who have purchased shares in the Property Fund that already
amounts to approximately € 200 million would most certainly not sit by
and watch the Minister of Communications steal away their assets.
Lastly and as significantly, any such endeavor would render useless all
of the measures heretofore taken by the Property Fund towards its
listing on the BVB (appointment of the evaluator, the selections of the
financial consultant, and the impending appointment of the Fund Manger).
In such a context, the Property Fund would cease to represent a means of
awarding restitution. It would oblige all of its shareholders to seek
remedies in court or under the respective treaties against the Romanian
state.
One must assume that the Minister of Communication’s ill regarded
suggestion will be dead on arrival, but the very fact that a member of
the Romanian Government could be so oblivious to the law and to the
consequences of his actions as to prepare such an amendment to GEO 81 in
the first place is a matter of national disgrace. |
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Decrease in Net Asset Value of Fund Below
its Share Capital Value |
At
the end of 2008, the net asset value of the Fund was 24% less than its
share capital. According to the provisions of the Romanian Company Law
(Law 31/1991), as amended and supplemented, when there is a loss in the
net asset value of a company, the share capital has to be either
completed by new contributions, or reduced, before any distribution of
the profit to the shareholders of the company can be made.
In such context, the reduction of the share capital of the Property Fund
may be considered by diminishing the face value of each share, which
currently is 1 RON. However, in order to accomplish a decrease in the
share capital of the Fund, all the subscribed share capital must be
fully paid up. Therefore, in order for the Property Fund to actually
implement a decision regarding the decrease of the share capital, a
solution must be found with regard to the unpaid shares of the Romanian
state, i.e., almost 560 million shares, with a face value of 560 million
lei, according to an informative note posted on the web-site of the
Fund. Such a solution would be either to have these shares paid up in
cash and/or in-kind, or to have them cancelled, based on a normative act
to cancel such shares.
However, diminishing the face value of the shares is, as a matter of
principle, unacceptable to the private shareholders of the Property
Fund, and it would certainly raise even more reasons for concern. It
means that their interests have been diluted by a quarter as compared to
claimants who receive compensation in shares after the reduction, but
before the listing. And not only is the listing of the Fund still off in
the future and somehow uncertain, but the benefits of the shareholders’
participation in the Property Fund are under threat of dilution and
remain difficult to obtain -- the Fund does not yet provide the
effective compensation for which it was created, and it seems to be
unable to provide the benefits to which shareholders are entitled, i.e.
dividends, corresponding to their participation to the share capital of
the Fund.
If a reasonable solution to this dilemma is not soon found, additional
litigation will surely ensue further weakening the value of the
settlement of restitution claims already agreed upon by the State and
its former victims. |
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Envisaged Steps Before Listing the Fund on
BVB |
After the completion of the 3rd stage of the selection procedure for the
appointment of the Fund Manager, and once such Fund Manager has been
finally selected and appointed, the Fund must be registered with the
National Securities Commission (“CNVM”). The management
agreement, in its final form as negotiated with the Fund Manager, will
be part of the minimum documentation necessary in order to perform such
a registration. According to the provisions of Law 297/2004 on the
capital markets, the CNVM must issue specific rules regulating the
transitioning of the Property Fund shares on BVB. The same law also
provides that the Fund could be listed on international stock exchanges. |
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Conclusion |
The listing of the Fund on BVB continues to be the most important step
necessary to allow the Fund to accomplish the purpose for which it was
created in the first place, i.e., the award of restitution to victims of
the Romanian communist state.
The finalization of the 2nd stage of the selection process for the Fund
Manager is a very positive event which has brought hope once more to
those awaiting compensation for their stolen properties. However, many
measures still need to be taken and it is important that the timing of
the schedule be respected.
Dealing with the cancellation of the State’s unsubscribed share capital
and finding a solution to avoid the dilution of the private shareholders
in violation of their subscription settlement agreements and achieve the
payment of dividends, is of utmost importance and must be done in close
consultation and cooperation with the private shareholders.
Finally,
putting a lid on the fanciful ruminations of persons in the Romanian
government regarding the theft of Fund assets into State coffers is an
imperative. Even the potential for approval of such ill conceived and
illegal actions raises doubts as to the sincerity of the Romanian
government’s restitution program and its already executed commitments to
existing shareholders, as well as it’s commitment to the rule of law and
the future of its own capital markets. Meanwhile, the European Court of
Human Rights in Strasbourg continues to render decisions against Romania
in case after case where claimants are entitled to receive shares in the
Property Fund, on the grounds that since the Fund has not been listed
yet on the BVB, the Fund does not actually function in a manner so as to
lead to an effective award of compensation to the claimants. It is hard
to imagine that, in this context, the Romanian state could afford to
perform an act that is tantamount to the same act of nationalization
undertaken by its communist predecessors. |
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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 2009 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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