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17 January 2018

Romanian m&a on trial: Translation of international standards into local m&a transactions

Romanian private m&a has constantly sought to align itself to the international standards of transaction documentation, with some distinctions in terms of scope and interpretations of traditional m&a concepts still to be considered. 

Ever since the late 1990s, when large international players arrived in Romania and began acquiring strategic assets, the private m&a market has been quick to adapt to the standards of international transactions. Nowadays, Romanian m&a transactions are almost universally founded on Anglo-Saxon-inspired documentation, juggling a wide range of concepts such as disclosures, material adverse change, representations, warranties and specific indemnities, some of which still lack proper translation into Romanian law. 

While in the case of large deals (in excess of EUR 100 million) you can still find transactions governed by foreign law (usually UK law), most private m&a transactions are governed by domestic law. Little wonder, then, that the foreign parties to these transactions often ask whether Romanian law is different from that of more traditional m&a jurisdictions. 

M&A transactions in Romania are essentially governed by the general principles of sale and purchase laid down in the Civil Code, which, like in other countries, provides for freedom of contract, the duty to negotiate in good faith, and penalties for fraudulent negotiation of contractual terms. 

While the format of Romanian transactions is similar to that of share purchase agreements under English law, not all English law concepts have the same meaning when used in local deals. Common law systems are constantly evolving and being reshaped by case law and new interpretations. Compared to the common law system, the Romanian legal system may appear more rigid and codified, but lacking the benefit of precedents. Furthermore, even where such precedents exist, they are sometimes inconsistent, and in any case, they are not formally binding to other courts called to rule on similar cases. 

A good example of this is the concept of full and fair disclosure. With the aid of jurisprudence, English law has polished the concept of "full and fair", giving its users plenty of guidelines as to how detailed the disclosure level should be for a reasonable buyer to properly understand the disclosure and its implications for the warranty in question. This further evolved towards concepts such as "disclosure letter" or "disclosure bundle" and "specific disclosure", which are practically market standard for transactions governed by English law. 

At the opposite end, an SPA under Romanian law would certainly not prohibit a contractually built concept of "full and fair disclosure", but the legal system would likely lack the examples required to add the proper content to this requirement and determine the practical implications and limitations thereto. This deficiency would need to be compensated by more elaborate drafting, setting out not only the content of disclosures (information provided through the data room, public registries, transaction process), but also the quality standard of the information disclosed. A topic closely connected with disclosure is that of representations and warranties. Under a common law system, representation and warranties arose as a reaction of the purchasers seeking to redress the consequences of the caveat emptor (buyer beware) principle (the seller having no legal obligation to provide warranties). 

From this perspective, Romanian law positions itself as more purchaserfriendly, already providing reasonable legal protection though the warranties on title and use (raspunderea pentru evictiune) and defects (raspundere pentru vicii), and allowing the purchaser to claim a reduction of the purchase price or, depending on the gravity of the breach, the termination of the agreement. International standard warranties have nevertheless been adopted into local m&a and are almost universal in private deals, although without the legal distinction between warranties and representations, but rather under the general concept of warranties. 

Where Romanian law comes closer to the equivalent Anglo-Saxon concept is on the legal sanction applicable to sellers' fraudulent actions. Romanian law penalises fraudulent misrepresentation, providing that all contractual limitations of a seller's liability cease to apply if the seller's breach is attributable to intention or gross negligence. The Romanian standard appears to be even broader, since UK law refers to intentional acts (fraud and fraudulent misrepresentation), while Romanian law applies the same sanction to both intention and gross negligence. The legal consequence is similar, ie liability cannot be contractually excluded or limited in case of a breach of contractual duties attributable to intention or gross negligence.

Further reading
Privacy-related representations in m&a agreements
Non-financial reporting in Slovenia
Mandatory registration of beneficial owners introduced for all Czech entities