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Introduction |
Beneficial business opportunities in emerging markets can be enhanced
through wise affiliations. Foreign investors can benefit from the
expertise of local entities and, in turn, those entities can gain from
the financial resources of outside firms. Particularly, in times of
global economic crisis, the capacity of businesses to cope with money
shortages may be enhanced by the ability to identify a compatible
business partner who can provide the missing resources. Significant
infrastructure redevelopment projects that cannot easily be developed in
Romania without the close cooperation of private and public entities
require cooperation among diverse enterprises and government. Such forms
of international cooperation are commonly referred to as “joint
ventures” (sometimes abbreviated as a JV) and mean an entity formed
between two or more parties to undertake some form of economic activity
together. In such formations, the parties agree to create a new entity
by contributing know-how and/or equity, and then share in the revenues,
expenses, and control of the enterprise. The JV can be for a specific
project, or a continuing business relationship, but is distinguishable
from a strategic alliance that is a much less rigid arrangement. Most
significantly, as used in the international context, the term JV
generally refers to the purpose of the entity and not to a type
of entity. Therefore, a joint venture lato sensu can be a
corporation, a limited liability company, a partnership or any other
legal structure, depending upon a number of considerations such as tax
and tort liability. Stricto sensu, under Romanian law, JVs are
partnerships without legal personality. These latter stricto sensu
JVs and the agreements that form their basis raise certain practical
challenges which this article describes. |
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Joint Ventures as Private to Private
Partnerships |
General characteristics
As noted above, joint ventures represent a particular type of
arrangement in which two or more individuals and/or legal entities,
either Romanian or foreign, agree to contribute certain assets for the
purposes of performing jointly a pre-determined commercial activity in
order to benefit from the profit thus obtained.
Joint ventures are regulated by the provisions of the Commercial Code
and the Fiscal Code, and the implementation norms. Pursuant to the
Romanian Commercial Code, joint ventures do not require any specific
formalities, other than a written contract, contrary to the distinct
formalities required when organizing a new company under the provisions
of the Romanian Company Law, i.e. Law 31/1990. The only compulsory
formality is, according to the Fiscal Code, that joint ventures must be
registered with the competent fiscal authority before the commencement
of any activity.
As joint ventures are not in themselves distinct legal entities, i.e.,
they do not have legal personality, they do not have separate assets and
also they do not create rights and obligations of the joint venture
itself in relation to third parties.
The Functioning of the Joint Venture
 The
participants in a joint venture decide by way of the joint venture
agreement which of them is going to undertake the leading role of
actually managing the venture. Essentially, one of the participants to
the joint venture becomes the manager of the partnership, while the
others maintain an auxiliary role.
The parties are free to establish their rights and obligations towards
one another within the agreement itself. The manager of the joint
venture, however, will have the obligation to manage the business in
good faith, with the same diligence as in its own business. The manager
will be liable to the other participant to the joint venture for faulty
management, leading to a lack of profit or losses registered due to its
own fault. Furthermore, such manager must periodically inform the other
participant in the joint venture about the activity performed according
to the provisions of the joint venture agreement. The parties to the
joint venture assume mutual obligations towards each other.
Consequently, the other participant to the joint venture undertakes
certain obligations in favor of the manager of the joint venture in the
manner established within the joint venture agreement.
As previously noted, the lack of a legal personality of the joint
venture has significant consequences in relation to third parties.
Therefore, as the joint venture does not represent a distinct legal
entity, it cannot undertake rights and obligations separately.
Consequently, third parties will not conclude agreements with the joint
venture itself, but with the manager, who is the representative of the
joint venture, or a company created as part of the JV’s activities. As a
result, the manager of the joint venture, as a party in the agreements
with third parties, will be liable towards such third parties with his
entire patrimony, and not merely with his contribution to the joint
venture. In order to avoid that, a person may set up a limited liability
company according to the provisions of the Romanian Company Law, for the
specific purpose of participating to the joint venture; such limited
liability company will hence become the manager of the joint venture –
and not its sole shareholder – and consequently the limited liability
company will be liable towards third parties up to the amount of the
contribution of the sole shareholder to such limited liability company,
and not up to the entire patrimony of the sole shareholder as would
happen were the limited liability company not to have been formed.
Contribution of the Parties to the Joint
Venture
There are specific issues with regard to the contribution of the parties
to the joint venture, especially when such contribution is represented
by the ownership over an immovable. When the contribution is represented
by an ownership right over land, the owner cannot be a foreign legal
entity, as Romanian law prohibits foreign legal entities from owning
title to land located in Romania. In such instance, the foreign legal
entity that intends to become participant in a joint venture and wants
to acquire and then contribute an ownership right over a plot of land to
such joint venture, may set up a special purpose legal entity in Romania
which can accomplish the task. Such special purpose legal entity will
then acquire the ownership of the plot of land and become the party to
the joint venture. Another possible solution is for the potential
parties to a joint venture to jointly form a Romanian legal entity which
has the specific role of manager of the joint venture, and in such a
case it will be this specific legal entity that will hold the ownership
right over the plot of land where the project will be developed,
according to the provisions of the joint venture agreement.
Other practical difficulties exist in connection with the contribution
of the auxiliary participant to the joint venture when such contribution
is represented by ownership of an immovable. As the joint venture is
going to be managed by the manager appointed based upon the joint
venture agreement, it will be the manager who is able to perform the
prerogatives of possession and use over the immovable asset, and not its
actual owner, i.e., the auxiliary participant to the joint venture. In
such a case, as the ownership over the immovable asset will be
contributed to the joint venture for the entire duration of the joint
venture agreement, it can be said that practically the auxiliary
participant will not be able to exercise the prerogatives of possession
and use over such immovable asset until the termination of the joint
venture agreement. Furthermore, in order to avoid any potential
confusion, the joint venture agreement must expressly state what happens
with the assets that represent the parties’ contribution to the joint
venture at the termination of the agreement, i.e., that they return into
the patrimony of the parties that have initially contributed them to the
joint venture.
In practice, as an alternative to the above, when intending to
contribute the ownership right over an immovable to the JV, many
auxiliary participants choose to sell a portion of their immovable
property to the other participants to the joint venture. That way, they
receive money for the sold portion of their ownership right, and
contribute to the JV only with the remaining quota over the asset.
Fiscal implications
 In
case the participants to the joint venture are either a Romanian
individual and a Romanian legal entity, or a foreign and a Romanian
legal entity, there are no specific issues raised in connection with the
accountancy and payment of the profit tax for the activity performed
according to the joint venture agreement. In such cases, the one
responsible for keeping the accounts and making the payment of the
profit tax is the manager of the joint venture, i.e., the Romanian legal
entity.
When the participants to the joint venture are Romanian legal entities,
however, they must pay careful attention to the accountancy and payment
of the profit tax. In such situations, the manager of the joint venture
must keep the accounts of the joint venture by registering all the
income and expenses generated by the activity performed based on the
joint venture agreement. Afterwards, the manager must transmit the
records corresponding to the contribution of the auxiliary participant
to the latter, who must register them in its own accounts. Afterwards,
both participants to the joint venture must pay the corresponding profit
tax to the competent fiscal authority.
Division of benefits and losses
The parties to a joint venture are free to establish within their
agreement the manner in which the profits and losses will be divided
among them as a result of the commercial activity performed based on
such joint venture agreement. However, it is forbidden for a party to
preserve the entire profit generated by the activity performed according
to the joint venture agreement, or to state that it will not take part
at all in the losses registered as a result of such activities.
Moreover, in case the parties to a joint venture do not establish within
the agreement a manner of dividing profits and losses, then the profit
will be divided according to the quota corresponding to the contribution
of each participant to the joint venture.
Termination of the joint venture
There are various ways in which the joint venture agreement may be
terminated, i.e., at the expiration of the term for which it has been
concluded; by the fulfillment of the purpose for which it was created;
by the bankruptcy of any of the participants to the joint venture; or by
the parties’ agreement. Upon the termination of the joint venture
agreement, each participant to the joint venture receives back the
assets that represented the contribution of each of them to the joint
venture. |
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Public - Private Partnerships |
Public-private partnerships (“PPPs”) represent another
alternative for the development of major projects beneficial to the
public. In recent years, PPPs have been developed in many fields.
Perceived as long-term forms of cooperation, PPPs are partnerships
between public authorities and private businesses concluded for the
purpose of accomplishing projects or performing services that are
traditionally accomplished or performed by the public sector. Such a
partnership acknowledges the fact that both sectors, the public and the
private ones, are equally significant, and that both have certain
advantages that must be exploited for the benefit of the public
interest, in an efficient economic manner. As a result, each sector
grants a specific contribution to the partnership, while each bears part
of the risks, and also the benefits generated by a PPP.
In Romania, the former legislation on PPPs was cancelled in 2006 by a
new set of rules adopted on public procurement, i.e., Government
Emergency Ordinance no. 34/2006, and on concessions, i.e., Government
Emergency Ordinance no. 54/2006. For more details on the procedures put
in place by these specific laws, please visit our Digest Archive at
/digest_archive.htm , for our July 2006 Digest
article on “Romania’s New Public Procurement Law”, our April 2009
Digest article on “Romanian Public Procurement Law Amended”, and
our July 2007 Digest article on “Romania’s New Concession Procedure”.
When PPPs need to be concluded, they must observe the provisions of
these two specific pieces of legislation, by way of a public tender and
in full compliance with such tender documentation. The aim is to enable
all interested economic operators to tender for public contracts and
concessions on a fair and transparent basis in the spirit of the
European internal market, therefore enhancing the quality of such
projects and cutting their costs by means of increased competition.
There is no specific legislation on PPPs at the European Union level,
the provisions applicable to PPPs being the ones included in the
Romanian laws regarding public procurement and concessions. However, the
European Commission has elaborated certain interpretative communications
on the application of the Community Law on public procurement and
concessions to PPPs. More specifically, a Green Paper has been drafted,
showing the need for clarification of the implementation rules of PPPs,
understood under the European Commission terminology as “cooperation
between public and private parties involving the establishment of a
mixed capital entity which performs public contracts or concessions”. |
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Conclusion |
 Joint
ventures have proven over the past years to be a significant tool for
potential investors in creating important businesses. Those who had to
face the formalities of establishing a new company according to the
Company Law resorted to joint ventures as a flexible means of setting
the parameters of their cooperation. Moreover, the freedom of the
parties to establish, by means of a joint venture agreement, their
rights and obligations, and the manner in which their activity will be
developed, without having to comply with the restraints put in place by
the provisions of the Company Law, represent another advantage of joint
ventures. If well conceived and implemented, both joint ventures and
PPPs would represent business opportunities with significant advantages
both for the participants to the JVs, and the community in which their
projects are developed. |
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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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