Last updated: 13 August 2018
In this week’s article, we present to you the main legal aspects concerning mergers by acquisition, given the propensity manifested in Romania for this type of operations.
This propensity does not cease to grow, and investors - financial and strategic - are interested in placing funds in Romania. Thus, mergers and acquisitions market was estimated, in the first quarter of 2018, at 500-600 million Euros.
Merger is often used by companies in order to expand their market share, to acquire new production facilities, with qualified staff. In other words, mergers ensure the development and sustainability of the company benefiting from this operation.
The general legal framework of mergers in Romania is represented by Law no. 31/1990 on companies, more precisely Articles 238-251. Romanian law recognizes two types of mergers: merger by acquisition and merger by the formation of a new company, without providing specific standards for mergers between limited liability companies or joint stock companies.
Merger by Acquisition – Essential Elements
In accordance with the law, a merger by acquisition is a transaction by which a company, the acquired company, is dissolved without going into liquidation and transfers its assets to another company, the acquiring company.
As a general rule, as a result of the universal transfer of the assets of the acquired company to the acquiring company, the contracts of the acquired company are transferred by law to the acquiring company, without further formalities.
In this respect, the acquiring company has to comply with, in particular:
Exception: “intuit personae” contracts that prohibit their transfer/assignment or that condition the transfer by the approval of the other contracting party.
A special situation occurs when the companies with which the acquired company has concluded contracts are in insolvency, in which case the acquired company holds only receivables to be recovered. By the effect of the merger, the acquiring company will take-over, actively and passively, the rights and obligations of the acquired company, thereby having the possibility to recover the VAT corresponding to non-performing receivables resulting from the contracts concluded between the acquired company and the companies in insolvency.
The shareholders of the acquired company, which will cease to exist as a result of the merger, will receive shares in the acquiring company and, if applicable, an maximum amount of 10% of the par-value of the shares thus distributed.
As far as the merger procedure is concerned, in Romania it involves several stages. For a better understanding, we have structured them into two main phases.
The first phase: According to the corporate rules of the acquiring company and of the acquired company, the General Meeting of the Shareholders of each company must be summoned, within the legal and statutory deadline, to decide on the merger.
This first decision is of a preliminary nature; the general meetings of shareholders gather to express their agreement in principle for the start of the merger negotiations, for the preparation of the merger project by the directors and to mandate certain persons to take the necessary steps with the relevant authorities for the registration and completion of the merger.
After the decision is taken and before the merger project is drafted, several accounting operations must be performed. Such operations are subject to special regulations (patrimony inventory and valuation of the assets and liabilities of the companies involved in the merger, the preparation of the financial statements prior to the merger for each of the companies involved, the exchange rate of shares, allowing the conversion of the shares of the acquired company into shares of the acquiring company etc.)
The directors of the merging companies will sign the merger project, which must contain at least the following elements:
It should be noted that the merger project concluded as a private deed by the authorized representatives of the merging companies has the legal value of a merger contract.
The authorized representatives of the companies involved in the merger will have to submit to the Trade Register where each company is registered the following documents:
After the publication of the merger project, creditors who have a certain, of a fixed-amount and previous receivable at the time of publication of the merger project – receivable which is not due at the time of publication of the merger project - and whose execution is threatened by the merger may raise objections within 30 days from the date of publication of the merger project in the Official Journal.
The National Trade Register Office shall send to the National Tax Agency, within 3 days from the submission of the merger project, a notice regarding the submission of such project. This procedure allows the Tax Agency to oppose the merger, if the above conditions are met.
The existence of an opposition does not have the effect of suspending the merger, but, if accepted (if the above conditions are met), the debtor company or, where applicable, the company that has taken over its rights and obligations (if the merger has become effective) will be required to pay the claim immediately or within a certain period, taking into account the amount of the claim and the liability of the debtor company or, where applicable, of the company that has taken over its rights and obligations.
The second phase: The directors of the merging companies must prepare a detailed written report, explaining the merger project and specifying the legal and economic bases of the merger, in particular the share exchange rate. Thus, the obligation to inform the general meetings of the companies, as well as their shareholders, as the case may be, regarding the merger project, is complied with.
Within three months from the date of publication of the merger project, the general meeting of each merging company must decide on the merger (except for specific cases, where no such approval is required) and approve the new company's statutes.
These documents, together with the other documents proving compliance with the formalities provided for in the first phase, shall be filed with the Trade Register, which forwards them to the Court. Then, the Court verifies compliance with the legal provisions, approves the merger and the deregistration of the acquired company.
IMPORTANT! In practice, mergers may often be very complex, depending on the number of companies involved in the operation, the number of assets, the number of shareholders and the potential opposition of the creditors. Particular attention should also be paid when a shareholder exercises the right to withdraw from the company after the approval of the merger project, but prior to the approval of the merger by the judge. In practice, such a situation may raise issues that make the procedure longer and/or that lead to other legal operations within the absorbing company (e.g. a reduction in the share capital).
Depending on these elements, merger operations may take between five months and approximately one year.
It should also be noted that Competition Law no. 21/1996 stipulates the obligation to notify the merger to the Competition Council when the cumulated turnover of the parties involved in the operation exceeds the equivalent in Lei of 10 million Euros and when at least two of the companies involved have each earned in Romania a turnover of over 4 million Euros (the equivalent in Lei).