One of the most controversial parts of corporate reorganization operations planning in Romania involves the use of share capital contributions or share swaps as a means to transfer company control – operations that fall into a legislative and administrative grey area.
Share contributions in kind involve the contribution of shares owned by one company or natural person to the share capital of another company at the latter’s incorporation or while undertaking a subsequent share capital increase. If the share capital increase results in a new share issuance by the receiving company, the operation is called a share swap.
The operations can be seen from two perspectives: (i) if the company undertaking the share capital increase is a Romanian company, it needs to confirm that current legislation allows capital increase through in kind share contributions and that the Romanian Trade Registry interprets the legislation in the same way; and/or (ii) if the company whose shares form the object of a share capital increase is Romanian, it needs to confirm that the current legislation and Trade Registry practice allows registration of the target company’s change of shareholders.
Controversy over the permissibility of such operations stems from the fact that, especially for limited liability companies, a part of the old doctrine and jurisprudence regarded shares as analogues of receivables, and thus some academics and Trade Registry officials applied the legal regime of in-kind contributions consisting of receivables.
Indeed, Romanian Law 31/1990 regarding companies does not allow Romanian companies’ share capital to be increased by contribution of receivables, with one notable exception: initial incorporation of companies by shares (not including public subscriptions).
Recent interpretations, however, do not equate shares to receivables, seeing that shares give rise to a complex set of rights and obligations that effectively amount to control and ownership of the target company and its potential profits by the shareholders.
Whereas Law 31/1990 regarding companies does not expressly mention in-kind contribution of shares, this method of share transfer is expressly regulated by Article 1897 of the Civil Code, which expressly refers to “the shareholder which makes a contribution consisting of shares issued by another Company.” Moreover, the same chapter distinguishes between shares and receivables as different kinds of intangible goods which can be contributed to the share capital of a company, laying to rest, from a theoretical standpoint, the notion that in-kind contribution of shares is forbidden.
However, this interpretation escapes the practice of the Trade Registry, which relies heavily on instruction guides published by its legal department, which have not focused so far on in-kind contributions in shares.
Thus, it is very difficult to ascertain, while in the transaction planning phase, what interpretation Trade Registry officials will take on such operations, and a refusal by the Trade Registry to register a share transfer by way of capital contribution would have to be contested in the court of law, potentially delaying transaction closing for more than a year.
Even if the Trade Registry were to officially admit in-kind contributions in shares as a valid means of transferring shares, their guides would need to be updated especially in regard to transactions including complex transnational elements. For example, in the case of a Romanian limited liability company with foreign shareholders, the shareholders wishing to make in-kind contributions in shares would have to know what type of contribution confirmation documents to obtain from the foreign Trade Registry and in what form (i.e., authenticated, apostilled, etc.) in order for the registration to be approved by the Romanian Trade Registry.
While legislative updates are urgently required to clarify this matter, advisors have found various workarounds. These involve transforming limited liability companies to companies by shares or using, to the largest extent possible, newly incorporated companies by shares as special purpose vehicles.
By Mihai Buciuman, Co-Head of Corporate Practice, Maravela & Asociatii
This Article was originally published in Issue 4.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.