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27 April 2021
newsletter
romania

Corporate and commercial post-Covid

More than a year since the first lockdown (which was introduced in March 2020), the COVID-19 pandemic continues to shape and challenge the Romanian legal and business environment in ways difficult to predict a year ago.

The effects of the pandemic around the world were not as severe from a health point of view as was predicted early on. Still, they were and certainly continue to be severe from an economic point of view.

Over the course of just a few months, terms such as pandemic, state of emergency, state of alert, force majeure or hardship have crossed over from academia and became regular concepts, challenging both governments and businesses to rapidly adapt to the new reality.

Like other countries, in Romania the lockdown has severely impacted consumption. This in turn has affected the export of goods (especially manufactured goods and machinery). It also decreased investment and put additional pressure on the country's reserves and need for external funding.

Industries like manufacturing, retail, tourism and hospitality were stricken by the global crisis, and many of them had to face the challenge of looking for alternative ways to navigate a tenuous situation.

The Romanian government was urged to quickly adapt to these challenges and redefine their short-term priorities, with a focus on providing liquidity to the economy, in particular SMEs, revenue support to individuals and ensure fiscal stability.

The key areas of the crisis response included the following:

  • The State introduced support measures for wages (up to 75 % of the average gross salary) for employees in technical unemployment and stay-at-home parents;
  • New support schemes and State guarantees for SMEs lending were introduced;
  • Other measures were aimed to allow faster VAT reimbursement, payment holidays for taxes, flexible work schemes and loan moratoria;
  • Not least, the National Bank of Romania took an even more active role on the monetary market. This included stabilising the FX market, providing liquidity to credit institutions via repo transactions and financing public debt to support lower costs.

 

Pandemic-driven corporate and commercial measures

In direct response to the pressure on business created by the pandemic, Romania also took a series of measures on the corporate and commercial side. These measures centred around the following topics:

  1. First, the legal requirements for setting up companies were streamlined and simplified, in an attempt to increase the attractiveness of foreign investment in Romania.
    At the same time, the government took temporary measures to protect existing companies from the risk of insolvency or bankruptcy, suspending legal proceedings during the state of emergency and generally encouraging out-of-insolvency restructuring negotiations and workout agreements between distressed debtors and their creditors;
  2. Increased protectionism and tightening of foreign investment screening rules was another key corporate and commercial measure;
  3. Also, major changes included the relief in the performance of ongoing agreements and public and private moratoria on loan repayments.

 

Reducing red tape around company incorporation

Further to the legal requirements for setting-up companies, we can conclude that last year was marked by the Romanian regulator's plan to reduce red tape around company incorporation and encourage investment in Romania. In July 2020, the regulator had already introduced changes to the Companies Law, by eliminating restrictions on the shareholders of limited liability companies in terms of holding other participations and reducing HQ-related paperwork.

In the midst of the pandemic, Romania recognised that it is the European country with the most restrictive and bureaucratic regime for the transfer of shares in limited liability companies. Whereas in other European countries such transfers occur in as little as one day, in Romania the most optimistic estimate prior to these amendments was 30 days, with the process increasing to six months or even a year or more in case of opposition. Initially introduced to discourage tax evasion, the cumbersome transfer process had long proven its inefficiency and was repealed in November 2020. Other amendments passed on the same occasion eliminated the minimum share capital threshold and the minimum nominal value for an LLC share, reconfirming the LLC as the company structure of choice for investors when establishing a local presence in Romania.

The pandemic also persuaded local authorities to embrace the digitalisation of their services, so that a company can be set up almost entirely from a computer.

 

Relief measures

Pessimistic predictions about companies' ability to survive the challenges of the pandemic prompted the Government to introduce several relief measures for debtors facing insolvency. These were aimed at encouraging out-of-insolvency restructuring negotiations and workout agreements between distressed debtors and their creditors.

These changes were designed to encourage financial restructuring for those debtors who were insolvent or who were facing insolvency, and whose business has been stayed, either entirely or partially, due to the measures imposed in response to COVID-19.

Despite these relief measures, according to data from the National Trade Register Office, the number of insolvencies increased in 2020. The number of insolvent entities rose from 1,392 in April to 4,606 in October 2020.

It is obvious that in the first phases of the novel coronavirus pandemic, businesses mainly focused on preserving liquidity by drawing on the government support schemes, reducing costs and stabilising supply chains. Now, companies also need to focus on dealing with the debts accumulated during the lockdown, financial restructuring, consolidation or divestment of non-core assets.

In accordance with the protectionist trend, the immediate response in 2020 was towards preservation of State-owned goods. Hence, in August 2020 the Parliament passed a law meant to prohibit for two years any sale of shares held by the State in national companies, credit institutions, and any other companies where the State held shares, irrespective of the stake in such companies. The law also authorised the Romanian State to acquire shares in companies operating in critical sectors, such as the pharmaceutical and medical industry, auto manufacturing, food, agriculture, transport, utilities, natural resources and communications. To date, the State has not made use of its right to acquire companies in these fields.

 

New rules for foreign direct investment screening

With the pressure increasing on its economy, Romania plans to tighten its foreign investment (FDI) screening rules. FDI screening has been a hot topic for some time now across CEE, with several jurisdictions having adopted stricter measures allowing for the vetting of transactions potentially posing security risks.

In line with this trend, the Romanian Competition Council has put forward new draft legislation aimed at tightening the existing FDI screening rules. Under the current rules, foreign (and domestic) investments in sensitive sectors would fall under the scrutiny of a state defence authority, directly subordinated to the President of Romania. However, this scrutiny is limited to investments leading to a change of control and to a limited number of sectors.

The new FDI regime will broaden the scope of investment screening and will prohibit the implementation of a notifiable investment prior to its approval, under severe sanctions defined as percentages of the investor's turnover.

 

Other support measures

Lastly, Romania came to the aid of business by introducing support measures in the performance of certain commercial agreements. As such, during the initial state of emergency, SMEs were granted deferrals on the payment of utility supplies. Additionally, in an attempt to ensure the continuation of commercial relations and contractual stability, the legislation passed during the pandemic obliged the parties to first renegotiate and adapt their contractual arrangements to the new circumstances, and only if the negotiations failed to avail themselves of the protection stemming from the traditional force majeure concept.

Additional relief packages were adopted at the European and Romanian levels to support lending and ultimately keep the economy's wheels spinning.

Many regulators and legislators swiftly reacted to the pandemic, for example by introducing moratoria. In addition, many states introduced state-supported financing/guarantee schemes to fuel their economies, and Romania followed suit.

 

Conclusion

While we are still in the midst of the pandemic at the time this analysis was prepared, the marks that it has left on business and how it will shape 2021 are already visible. The pandemic has forced businesses to increase their reliance on technology and digitalisation, which in turn will generate an outpouring of investment in this field. Finally, an analysis of 2021 would not be complete without mentioning the trend of large corporations extending their remote work policies. While the long-term impact on employee behaviour is still open for debate, the legal implications of remote work – from data protection, privacy and security, to health and safety, compliance, compensation and taxes – will continue to be at the forefront of the legal profession this year and beyond.

This content piece was first published on internationallawoffice.com

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