Minority protection is one of the worries for foreign investors. No matter how well they are briefed about a foreign country and its laws, this is always an area of concern when working in a foreign legal environment. Attitudes are different; rules are different, even peoples reaction to minority protection is different. Romania has its own legal system, and for them, the foreign investor, they are naturally concerned.
A limited liability company (“Societate cu raspundere limitata”) commonly referred to as a SRL is a type of company used in the majority of cases in Romania for limiting liability an incorporating companies. It was originally envisaged in Romania back in 1991 as a form of company to be used in small businesses. At that time Romania wanted for large businesses joint stock companies and for a small family business they wanted a SRL.
Things did not quite turn out that way and the majority of businesses in Romania are run through a SRL. There are many reasons for this both at the practical and economic level.
A SRL is as I have said before a form of limited partnership. It usually has a limited number of shareholders and is designed for quick effective decision making. Although the law imposes certain obligations on the board of a SRL which it must observe it is true to say in many cases these legal requirements are more observed in their breach rather than the compliance with the law. This is the same in many small family companies in other countries where decisions are often taken in the kitchen over coffee at breakfast.
How then does a foreign investor, especially from a common law background cope with all of this? He immediately looks at how his position is protected in the west and instructs his foreign law firm in Romania or his Romanian lawyer to “properly protect” him.
The first question that should be asked is what he is trying to achieve and protect. As a minority shareholder he does not want the majority shareholder to abuse that position and force him as the minority shareholder to do something that is not in his best interest. The good news is that this can all be covered in the statutes of the company and in the voting rights in the general meeting. Majorities can be changed. Administrators can be protected from unwarranted removal. Safeguards can be built in.
One area that should always be carefully reviewed is the voting in general meetings. Care should be taken to ensure that voting is by number of shares rather than number of shareholders. We have experience where the major shareholder is out voted because he is one and the other shareholders are many. It is up to the lawyers in Romania of the foreign investor to carefully explain all these points to them.
Another aspect of the SRL is that as I mentioned previously it is more in the nature of a limited partnership rather than a normal share company. This means that it is not as easy to change a “social part holder” – shareholder in a SRL as in a joint stock company. The change of the social partner has to be agreed by all the shareholders unless the statutes state otherwise. So if someone agrees to sell their shares in a SRL the other shareholders can in fact block the registration of the sale. No purchaser will accept this. It is for this reason that the use of the normal clauses of tag along and drag along are inserted into the statutes so as to prevent the block on a sale.
Whilst is easy for a foreign investor to say that they want this inserted in a contract they need to understand why, rather than just insist upon it. If there are only two shareholders any transfer of the social parts can be blocked. The only reason is to ensure there is a no black mail position. Sometimes this is not necessary if the company is a one project company.
If there are many shareholders again the reason why these type of clauses are inserted needs to be considered. There is legal argument that even if drag and tag alone rights are granted a shareholder who is subject to such rules can always vote against the registration of the transfer. The draftsman has to be careful in his drafting.
Our advice to clients is always to consider the inclusion of these clauses, but at the same time we have to ensure that the Client really understand why they are inserted.