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Not as easy as making lemonade – squeezing out shareholders in Romanian unlisted companies

Thursday 7 October 2021

Carmen Peli
Peli Partners, Bucharest

Adelina Iordache
Peli Partners, Bucharest

‘When life gives you lemons, you should make some lemonade.’

This old saying has been hard to apply to company life over the past 30 years. Many companies in Romania started off as state-owned and were then privatised by listing their shares on one of the stock exchanges in the privatisation processes of the early 1990s. The shares were not sold to the shareholders, but rather issued to employees or other persons. Two decades later, many of these companies had already delisted, while continuing to have hundreds of inactive and disinterested minority shareholders. Many of these shareholders were not interested in their investment, did not update their contact details and no legal successions were made in respect of shares worth only a few euros. Sometimes these shareholders are no longer known to the company.

Other companies began as limited liability companies, formalising partnerships among friends that sometimes grew sour despite (or because of) their success.

Day-to-day business has to continue in these companies while their governing rules are no longer suited to current circumstances. Some shareholders may be idle, but amending the governing rules requires unanimity; in other companies, shareholders may refuse to withdraw and let the others continue a successful business.

Against this background, a company might repeatedly face burdensome obligations, such as more stringent rules and costs for convening general meetings of shareholders, or deadlock situations when the lack of unanimity provided in their constitutive acts either prevents a decision to be adopted at all or triggers additional constraints (eg, the need to obtain supplementary reports or approvals).

Law No 31/1990 on companies (the Companies Law) does not provide a solution for the exit of dormant shareholders, such as obliging them to divest their shares to the company itself, to other shareholders or to third parties. An agreement to divest is not an available option when the dormant shareholders simply cannot be found or do not agree on the exit. The Companies Law has not envisaged squeeze-out options regarding these dormant shareholders.

For shareholders of limited liability companies, the law provides that a certain shareholder may be excluded from the company:

  • when the shareholder fails to pay its contribution for the shares issued to it; or
  • when the shareholder is also a director and behaved fraudulently with the company’s assets or credit.

Other company forms, such as those where shareholders may retain unlimited liability, may also exclude shareholders:

  • when any shareholder with unlimited liability is undergoing bankruptcy or becomes incapable; or
  • when any shareholder with unlimited liability becomes involved without rights in the management of the company or behaves fraudulently with the company’s assets or credit.

The Companies Law is silent regarding the exclusion of shareholders in joint-stock companies. The law is also silent on why it was decided to apply the exclusion rules only in respect of companies taking the form of certain partnerships (the so called sociétés de personnes). Was it because the property over the shares in a private joint-stock company needs to be protected more than in a partnership? Was it because a minority shareholder in a private joint stock company cannot abuse its right (spoiler alert: it can)? Or was it because the life of a joint-stock company may rarely be impacted by idle and disinterested shareholders?

Joint-stock companies with shares traded on the stock markets may apply squeeze-out procedures in favour of a majority shareholder holding over 90 per cent of shares, subject to a prior public acquisition offering.

Over the past few years, scholars and practitioners in Romania have debated the possibility of a shareholder applying exclusion or squeeze-out mechanisms in respect of shareholders (dormant or not) outside of the situations provided by the Companies Law. Some relied on the application of the general provisions of the Romanian Civil Code entitling exclusion from a company (societate) based on justified reasons, to be assessed by the competent judge on a case-by-case basis. The legal doctrine and the relevant case law are incongruent, embracing both positions.

The Supreme Court of Justice has recently clarified that the courts of law cannot admit a claim for exclusion of a shareholder based on the provisions of the Civil Code. While one may debate whether this solution was sufficiently reasoned, it now reflects the position that judges must take in the future. Nonetheless, the Court has confirmed the possibility that shareholders could contractually agree on exclusion matters to the extent they factor in the general principles and reasoning of the Companies Law.

Until further legal amendments are adopted, shareholders are advised to avoid entering into constitutive acts that do not contain carefully drafted mechanisms for the situations when one or several shareholders might be excluded. Such clauses need to be clear and observe the best interest of the company. Should the founders intend to secure the involvement of the shareholders, they may consider including conventional rules in the constitutive act of the company, arguing the prevalence of the best interest of the company over the personal interest of the shareholders, as well as fair compensation due to an excluded shareholder.

For existing companies, changes of the constitutive act to include squeeze-out mechanisms may be seen as impacting on the rights of the shareholders regarding their shares and consequently might require unanimity.