Romania passes new regulations on cross-border conversions, mergers and divisions

Romania

On 23 July 2023, the Romanian parliament passed Law no. 222/2023 amending and supplementing Romanian Companies Law 31/1990 and Trade Registry Law No. 265/2022 (“Law no. 222/2023”), which creates new regulations for cross-border operations in a bid to stimulate cross-border mobility while providing protection for all involved. The new law transposes Directive (EU) 2019/2121 of the European Parliament and of the Council amending Directive (EU) 2017/1132 (the Mobility Directive) regarding cross-border conversions, mergers and divisions.

The lack of a legal framework for cross-border conversions and divisions leads to legal fragmentation and uncertainty, thus acting as barriers to the exercise of freedom of establishment. The Romanian parliament transposed the Mobility Directive, which addresses these issues, into legislation by introducing three new chapters into the Romanian Companies Law – “Cross-border mergers”, “Cross-border conversions” and “Cross-border divisions”. The new regulations provide specific and comprehensive procedures for this type of cross-border operations with the aim of stimulating cross-border mobility within the EU and providing adequate protection for a company’s employees, creditors and shareholders.

According to the newly passed Law no. 222/2023:

  • cross-border mergers are mergers between Romanian joint stock companies, limited partnership companies or limited liability companies, as well as European companies with headquarters in Romania, and other types of companies having headquarters in another European country or in a country that is party to the European Free Trade Association and operates in one of the legal forms provided for in Annex II to Directive (EU) 2017/1.132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (Directive 2017/1.132);
  • cross-border conversions, which is a new term for the Romanian Companies Law, are operations whereby a company, without being dissolved or going into liquidation, converts the legal form under which it is registered in the commercial register of a member state (i.e. the State of departure) into a legal form of company listed in Annex II to Directive 2017/1.132, governed by the law of another member state (i.e. the State of destination), and transfers its registered office to that State of destination while retaining its legal personality;
  • cross-border divisions are operations involving Romanian joint stock companies, limited partnership companies or limited liability companies, as well as European companies with headquarters in Romania where at least two of the companies involved in the division are governed by the legislation of two EU member states and operate under the form listed in Annex II to Directive 2017/1.132.

Law no. 222/2023 does not apply to certain type of companies, such as certain specifically regulated companies (e.g. those undertaking for collective investment in transferable securities, investment management companies, alternative investment funds, etc.); certain types of companies that are subject to crisis prevention measures; companies in liquidation where the distribution of assets has begun; and companies subject to insolvency proceedings or preventive restructuring frameworks, etc.

The new provisions on cross-border operations brought on by the new regulations include:

  • simplification of the process for cross-border operations, such as obtaining directly through the Registry of Commerce the information that is needed from various Romanian public authorities involved in the process in order to check the legality of the cross-border operations; posting the documents that need to be disclosed on the relevant companies’ website, subject to deadlines and specific conditions (note that this solution is already applied to internal mergers and divisions); the interconnection of the Registries of Commerce whereby the Romanian Trade Registry communicates with the relevant authorities from the other member states and thus giving third parties access to certain information, etc.;
  • exemption from the need to have the draft terms of cross-border transactions assessed by an independent expert (member of the National Association of Authorised Appraisers in Romania) in the case of limited liability companies with a sole shareholder involved in the transaction, or when all shareholders of the concerned participating companies agree to waive this formality;
  • the definition of the circumstances that may give rise to a conflict of interest between the independent expert and the company involved in the cross-border operation;
  • special provisions for the protection of employees, such as the obligation of the directors or of the relevant management bodies to notify and ensure implication of the employees during the cross-border operation; that the section of/the report prepared by the directors or the relevant management bodies and addressed to the employees needs to include the implications of the cross-border operation towards the employment relationships and the measures needed to keep such relationship, as well as any substantial change that is envisaged to be brought regarding the applicable employment relationships; and the right of employees or their representatives to provide their opinion on the report’s section setting out the implications for them in the cross-border operation, etc.;
  • special provisions for the protection of shareholders, such as the right of shareholders who voted against the approval of the draft terms to exit the company and receive cash compensation for their shares that is equivalent to the value of those shares; the need for shareholders wishing to exercise their right of withdrawal to give notice of their intention, at the general shareholders meeting at the latest, so that creditors can be informed in order to make decisions as to whether to request adequate security if they determine insufficient assets will be left in the company to satisfy their claims; the right of the shareholders who decided to exit the company to dispute the calculation and question the adequacy of the cash compensation before the competent tribunal from the headquarters of the concerned company participating to the cross-border operation;  and the right of the shareholders who did not have or did not exercise the right to exit the company to dispute the share-exchange ratio in front of the competent tribunal from the headquarters of the concerned company participating to the cross-border operation, etc.;
  • special provisions for the protection of creditors, such as adequate security for creditors who entered into a relationship with the company before the company publicly announced its intention to carry out a cross-border operation; the right of creditors to challenge the security given or proposed by the company if creditors prove reasonably that the cross-border operation affects the chances of recovering their receivable rights; the right for creditors, who have receivables prior to the date of fulfilling the publicity formalities of the cross-border operations and that are not due at that date, to address a competent court about these receivables during a period of two years after the effective date of the cross-border operation, etc.;
  • the possibility for the Registry of Commerce to revise the documentation related to the cross-border operation and not issue the pre-operation certificate where, in the course of scrutinising the legality of a cross-border operation, it becomes aware, including through consultation of relevant authorities, that the cross-border operation is being carried out for abusive or fraudulent purposes, leading or intended to lead to tax evasion or circumvention of EU or national law or for criminal purposes.  In such cases, the Registrar may refer the matter to the competent court for a ruling on the issue of the pre-operation certificate since it is important to counteract ‘shell’ or ‘front’ companies set-up for the purpose of evading, circumventing or infringing EU or national law.

In conclusion, these new legislative changes are expected to have a positive impact on Romania’s business environment. The procedural modifications are expected to reduce the costs of cross-border operations while fostering economic growth, effective competition, and productivity by creating more opportunities for people and businesses to choose their preferred business strategies and creating an environment that better adapts to changes in market conditions without weakening existing employment protection.

It remains to be seen how the provisions aimed at offering protection to employees, creditors, and minority shareholders of companies participating to such cross-border operations will be implemented in practice, and the real benefits that these types of transactions in the EU will create in the end.

This article has been co-authored by Rebeca Vladislav.

For more details and information on this topic, please contact our CMS local expert Rodica Manea.