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OPPRESSION OF PRIVATE MINORITY
SHAREHOLDERS IN STATE -OWNED COMPANIES |
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Introduction
Romanian Government and the International Monetary Fund are engaged in
on-going discussions concerning the total or partial privatization or
restructuring of Romania’s remaining state-owned enterprises, almost all
of which may be of significant interest to potential investors. Under
the supervision of the IMF, these companies will be either subject to
restructuring, to complete privatization or to the sale of part of their
shares to interested parties. These state-owned companies are active in
coal, heat, energy, railway, airplane transport, and chemicals – all
industries in which potential investors may find their involvement
extremely beneficial. But potential buyers of minority interests in
Romanian state-owned companies need to beware of the foibles of greed
perpetrated by the Romanian Government.
Potential purchasers of minority stakes in state-owned enterprises must
carefully inquire as to the scope of the state’s ability to oppress them
in a numerous of ways, such as in the outrageous case of the
government-imposed Romgaz donation to the state budget (see The
Romanian Digest™ December 2010 issue at:
www.hr.ro/digest/201012).
In many instances, these state-owned companies are run by political
appointees who make political rather than business decisions that result
in less profit or, worse, no profit at all. Minority shareholders endure
such mismanagement because Romanian law permits at least some aspects of
their oppression – although no one actually believes that the theft of
Romgaz profits by the state has any chance of ultimately being upheld in
the courts. The purpose of this article is to highlight the dangers that
private minority shareholders face in state-owned companies with regard
to the profitability of those firms. |
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State-Owned Commercial Companies having
Private Minority Shareholders |
Brief presentation
After the December ’89 revolution, Law 15/1990 transformed the state
enterprises previously existing under the communist regime into
commercial legal entities with the state as sole shareholder.
Thereafter, the state began its privatization efforts with respect to
many companies in which it sold off all or most of its interests. The
Romanian state also sold minority interests in some state-owned
enterprises to private shareholders, retaining its major shareholder
position.
In 2005, the Property Fund was created based on the provisions of Law
247/2005. The Property Fund set up as a mechanism to provide
compensation to the victims of Romanian communism who were entitled to
restitution by equivalent, acquired stakes in significant state-owned
companies, thus creating private minority interests in those companies.
Romgaz is such an entity.
Another manner in which private companies became minority shareholders
in state-owned companies was through the listing of such companies on
the stock exchange, followed by the sale of minority stakes in the share
capital of such listed companies.
Legal regime
The legal regime applicable to state-owned companies with private
minority shareholders is the one applicable to all commercial legal
entities pursuant to the provisions of Law 31/1990, i.e. the Romanian
Company Law. Furthermore, where companies are listed on the stock
exchange, the special provisions established by Law 297/2004, i.e. the
Capital Market Law, and also the regulations adopted by the National
Securities Commission, must also be observed.
Additionally, there are special legal provisions applicable to
state-owned companies with private minority shareholders. For instance,
the budget of such a company must be adopted through a Government
decision and not based on a resolution of the general assembly of the
company, as in the case of other legal entities. There are also special
rules applicable to the voting mandate held by the state in the general
assembly of shareholders of the company. Moreover, there are other
significant legal provisions concerning the state’s ability to grant
financing to the company in its capacity as majority shareholder of that
company without the need to comply with state aid rules. |
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Practical Aspects |
It is not our purpose to exhaustively detail the procedure under which
state-owned companies with private minority shareholders function. But set forth
below are the main problems that arise in the course of the activity of such
companies in which private minority shareholders are, in our view, mistakenly
excluded from participation and systematically oppressed.
Approval of the Budget through Government Decision
As mentioned above, the annual budget of state-owned companies with private
minority shareholders must be adopted through a Government decision. Since the
state is the majority shareholder of such a company, it is the state that has
the major role in the elaboration of the provisional budget. For the most part,
private minority shareholders do not even participate in this elaboration
process. Consequently, the provisional budget is too often established on a
false and unrealistic basis, reflecting inflated envisaged profits expected by
the company in the upcoming year.
Unfortunately, it has proven to be a common practice for the Government to
adopt, just before the end of the fiscal year, a new decision correcting the
provisional budget of the company for the year then underway in order to rectify
the inflated provisional budget that no longer reflects any possibility of
attaining the inflated profit forecast previously by the company. On the
contrary, it now reflects losses – this being the actual situation of the
company throughout the year. By doing so, the final financial situation of the
company for that year would actually correspond to the redacted provisional
budget and, consequently, no claim could be submitted by private shareholders
against the directors of the company for their mismanagement and failure to
fulfill the provisions of the previously approved budget.
Unfortunately, the double role of the state – as a major shareholder of the
company and as the entity invested to issue the decision adopting the
provisional budget through the Government – leaves plenty of room for this
practice, which hides the real financial situation of the company behind falsely
fabricated budgets and allows the company to continue its existence on the same
ill-conceived path of debt.
Election of the Management of the Company
Another significant aspect in the business of these companies is the activity of
the persons appointed to manage the company, as well as the possibility to
trigger their liability for non-performance of their obligations.
(i) The Board of Directors of the Company
Most often, in its capacity as majority shareholder of the company, the state
chooses the board of directors of the company. In the absence of any specific
provisions included in the articles of incorporation of the company with regard
to the manner of electing the members of the board of directors, the state would
have the freedom to appoint the persons it chooses since it has the majority of
voting rights in the general assembly of shareholders. Regardless of any
contrary opinions expressed by the private minority shareholders with regard to
the directors proposed by the state, the latter has the legal right to appoint
the persons it chooses.
 Sometimes, the state’s appointment of members of the management board proves to
be disastrous for the company as well as for the private minority shareholders
whose main interest is in the company’s profitability. Not infrequently, these
appointments are political plums given to party loyalists who do not have the
requisite professional competence to run a major enterprise. These appointees
gain hefty directors fees and salaries with neither the requisite professional
criteria nor a modicum of interest in the business or the success of the
company. Too often, the mass media has directed the public’s attention to
situations in which the members of the management board of state-owned companies
were actually involved in political schemes and in electoral games, instead of
being focused upon fulfilling their obligations in their capacity as members of
the management board of the company. Such political appointments continue to be
the rule in Romania – highlighting for all that the interest in the
profitability of these companies takes second place to the interests of the
political parties in rewarding their cronies. Indeed, there is no recorded
instance where the state has sought to obtain a recovery of damages caused to
the company by the mismanagement of one of the directors it named – although the
tales of misconduct by directors and officers in these companies fills the
media.
(ii) The General Manager of the Company
In the same manner, often the president of the management board of the company
is also the appointed general manager who is given very broad powers. Duties
which usually belong to the management board of a commercial entity are awarded
to the general manager. This transfer of power from the management board to the
general manager is detrimental to the company since it will be only one person
-- the general manger -- who will adopt strategic decisions essential for the
company, thus leaving no legal possibility for the other shareholders and
directors of the company to express their views. In such cases, the role of the
management board of the company becomes merely decorative.
Criticizing the Weak Management of the Company
When faced with weak management, the private minority shareholders should seek
to exercise all legal means available to them in order to change the management
and restore the financial viability of the company. It is the right of any
shareholder to criticize the management of the company. However, since the
majority of the voting rights still belong to the state, too often, such private
minority shareholders have been presented in the media as “enemies” of such
companies, and their actions – which only represent the exercise of indisputable
rights of shareholders – are presented as detrimental to the company in
question. A pathetic example of this is found in the reported statements of
Adriean Videanu, Romania’s former Minister of Economy, Trade and the Business
Environment, accusing Fondul Proprietatea as a minority shareholder, of acting
against the "national interest" of the state by considering only its own profit,
when expressing its opinion against the creation of the two giants in the
energetic fields, Electra and Hidroenergetica – and this is from the former
Minister charged with improving Romania’s business environment.
The “Donations” to the State – Means to Diminish the Profit of the Private
Minority Shareholders
Incredibly, state-owned companies “donate” money to the state based on
resolutions adopted by general meetings of shareholders in which the state, as
majority shareholder, imposes its will. Through such donations, the potential
profit of the company is diminished almost to zero so that the minority
shareholders receive a diminished dividend or none at all. It is nothing less
than outright theft although Romanian courts have actually validated such
donations and rejected the claims submitted by minority shareholders seeking the
cancellation of such donations. These actions appear to be outright
expropriations that violate Romania’s constitution as well as its bilateral
investment treaties, but thus far the nation’s lower courts have had a fuzzier
interpretation leading one to wonder who in their right mind would consider
buying a minority interest in a state-owned enterprise without first getting
ironclad guarantees against any such avaricious future behavior by Romania?
The “Parasite Companies” and Political Involvement
State-owned companies more often than not have a network of “parasite companies”
around them that benefit handsomely from the business of the larger state-owned
firm. There can be rather obscure relationships existing between and among the
directors and managers of the state-owned company and the owners and operators
of the private parasite firms. Not surprisingly, the small parasite firms manage
to be quite profitable, while the state-owned companies, despite their superior
access to markets and their greater marketing ability, cannot seem to duplicate
the success of their smaller counterparts. The parasite companies are not
infrequently the sole distributors of the state-owned companies’ products for
which they receive more than significant sums of money, or they act as suppliers
providing goods or services to the state-owned enterprises at inexplicably high
prices. Regardless of what the guise may be, the activity of the parasite firms
in relation to the state-owned enterprises not only damages the competitive
environment, but it substantially diminishes the financial resources of the
state-owned companies. Needless-to-say, such practices are often criminal in
nature and violate Romanian law, but how many prosecutions have there actually
been for such violations law? |
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Conclusions |
Potential minority shareholders in state-owned companies are most likely
already aware of the problematic aspects of their proposed investment.
They are interested in these companies because there is a tremendous
upside for them if they can get the firms to function properly and
profitably. Why would any investor think that they can overturn twenty
years of cronyism and bad management now? The answer lies in the
evolution of the Romanian capital markets, the increased pressure of the
IMF and the European Union to eliminate corrupt practices, and in an
emerging Romanian civil society that is young and resolved to end bad
government and poor business practices.
 Additionally,
major investors should try to consolidate their position in the company
through negotiations that seek, for example, to amend the articles of
incorporation of the company so that certain business practices may only
be performed with the vote of the absolute majority in the general
assembly of shareholders – and this would turn the vote of the minority
shareholder into a significant voice in the general assembly of
shareholders. But since many of the state-owned companies are listed on
the stock exchange, the sale of shares is done instantaneously, and
there is no possibility to make the sale itself conditional upon
obtaining any such favorable amendments of the articles of incorporation
of the company. If unable to negotiate the amendment of the articles of
association of the company in their favor, in case of potential
infringement of their rights, the only real remedy for minority private
shareholders to effectively oppose measures imposed by the majority
shareholder is to commence suit in court.
If properly assisted and counseled, and if adequately equipped with a
sound understanding of the Romanian economic environment, the
problematic aspects of minority ownership in state-owned enterprises
might also be diminished and investors may just find themselves in the
right place – where they can get a stake in companies whose activities
have remained the basic pillars of the Romanian economy and whose
prospects if run properly continue to be promising. |
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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 2011 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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VISIT OUR WEB SITE:
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