Recent statistics show that almost 1 million companies are active in Romania, of which approximately 800,000 are limited liability or joint stock companies. Further, the number of limited liability companies is reportedly double that of joint stock companies.
Although choosing between a limited liability company and a joint stock company depends on several criteria, incorporation costs continue to be a key decision driver. Limited liability companies require a minimum subscription of less than €50 (ie, a minimum share capital of Lei200), whereas joint stock companies require a share capital of at least Lei90,000 on incorporation.
Regardless of the underlying reasons for selecting a form of incorporation, limited liability companies are an important backbone of the local economy, with many becoming large enough to qualify as targets in M&A transactions.
In the context of M&A transactions, debate exists as to whether classical exit-related provisions (eg, put or call options or drag-along or tag-along clauses) may be implemented in transactions involving shares in limited liability companies.
Drag-along rights allow shareholders in a company (particularly majority shareholders) to force the remaining shareholders to accept a third-party offer to purchase the entire company where the majority shareholders have accepted the offer on the same terms. Pursuant to a drag-along clause, the minority shareholders will be dragged along into the sale and forced to sell their shares to the prospective buyer, under the same conditions as those applicable to the majority shareholders.
The drag-along right is equivalent to a squeeze-out of minority shareholders. It gives majority shareholders an easier exit route and more efficient means of increasing the attractiveness of a deal, as the reality of investing in a company with minority shareholders will often negatively affect the price.
Since the squeeze-out of minority shareholders in private companies is permitted in a limited number of cases, contractual mechanisms such as drag-along rights are essential to ensure a full exit from a company.
Share transfers in limited liability companies
As shares in joint stock companies are freely transferable, exit provisions such as drag-along rights may be easily accommodated in this type of company.
Conversely, limited liability companies are essentially intuitu personae (ie, greatly dependent on the quality and connections between the shareholders). Therefore, a share transfer in favour of third parties is subject to stricter regulations, including prior shareholder approval and the absence of creditor opposition.
Shareholder approval – absolute super majority
The transfer of shares to a third party is conditioned on the approval of at least 75% of the share capital. Such requirement is mandatory and cannot be eliminated or altered by a company's articles of association. The legal literature defines such rule as the "absolute super majority".
In line with the protection that the Companies Law affords to shareholders in limited liability companies, some scholars consider that not even court decisions can replace a shareholders' resolution approving a share transfer.
Opposition by company creditors
In addition to the above requirement of prior shareholder approval, the Companies Law premises the validity of share transfers to non-shareholders on the absence (or final dismissal) of any opposition that may be filed by the company's creditors.
Creditors or other interested parties have 30 days to oppose a share transfer. A transfer will become fully enforceable only if no opposition is filed or a court finally dismisses such opposition. Although the success rate of oppositions has traditionally been low, the closing of a limited liability company share deal transaction may be significantly affected by creditors exercising their right of opposition.
Potential hurdles in enforcement of drag-along clauses
Considering the legal restrictions surrounding the transfer of shares in limited liability companies, a question has arisen with respect to the enforceability of drag-along clauses in this type of company. This question is particularly relevant given that practitioners must qualify the legal nature of a drag-along clause based on the principles of Romanian law.
Corporations are primarily regulated by the Companies Law and the Civil Code. The Civil Code sets out general rules for the operation of companies, which complement the specific rules set out in the Companies Law. That said, the Civil Code is a newer and more sophisticated piece of legislation and its applicability extends to legal concepts on which the Companies Law is silent.
An example in this regard is the Civil Code provisions on the transfer of shares in civil companies (a different concept to that of corporations). These state that "the breach of the promise to transfer, sell, grant or waive the rights gives to the correspondent beneficiary only the right to damages resulting from such breach" and hence exclude the option of a claim for specific performance.
Although not expressly applicable to corporations organised and functioning under the Companies Law, scholars have argued that the applicability of such general provisions extends to limited liability companies. The main arguments supporting such an interpretation are centred around the intuitu personae nature of limited liability companies (a well-established theory) and the special share transfer restrictions already set out in the Companies Law for this type of company.
The impact of such an interpretation would have serious consequences on the transferability of shares in limited liability companies, as majority shareholders would be deprived of efficient means to force minority shareholders to sell their shares despite the drag-along rights previously reserved thereto. In such case, the only remaining remedy would be a claim for damages.
However, due to the lack of court cases on this matter, the extension of the above rule set out in the Civil Code remains only a theoretical risk.
The practical hurdles for limited liability companies that want to implement the drag-along provisions remain debatable. However, the enforceability of these clauses should be further strengthened by clear contractual provisions associating drag-along rights with more efficient contractual mechanisms recognised by Romanian law, such as the option agreement to sell shares or the bilateral promise to sell shares doubled by a pledge over the shares in the interest of the majority shareholder.
This article first appeared on International Law Office.
Authors: Andra Jegan, Mădălina Neagu
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