Cristiana I. STOICA – Is Romania a real market for mergers and acquisitions?

The fundamental condition for a merger and acquisition process to take place is the internal and external corporate growth. Almost 20 years ago, Kenichi Ohmae described the growing realization that the world business and economic community is truly a triad, managed by the industrial complexes of Japan, North America and Western Europe.

The destiny of most corporations is influenced by the interaction of these industrial masses shapes. Romania had at that time a “closed” economy, state owned, with a centralized management, integrated in the Eastern communist block.

The collapse of the communist system by 1990 has included the Central and Eastern countries in an emerging market, open to great transformations, followed, after over 10-15 years, by the integration, of the majority of them, into the European Union.

Romanian economy has been strongly restructured since 1990: transformation of the state owned companies into private companies; privatization of the state owned companies; participation of the foreign investment to the creation of new companies or to the privatization; developing of the capital market and creation of a new banking system.

The various sectors of the Romanian economy started to develop: construction materials, oil and gas, power, pharmaceuticals, food and beverages, motor vehicles, IT, transportation.

The Romanian economy was merely built in these years either by investing in the existing formerly state owned companies or by starting up new business. A large variety of laws and regulation has supported this development but also made difficult its progress due to their inconsistent implementation or lack of institutional experience in providing a suitable support for the Romanian and foreign private investors from the state both in the administrative and judicial sectors.

The accession of Romania in the European Union was the most important achievement of the last 18 years. This determined Romania to adopt new concepts and include new pieces of legislation, harmonized with the western countries experiences and regulation.

Looking to mergers and acquisitions, indeed Romania offered some interesting examples, related to either 100% Romanian investment or with the participation of foreign actors. Usually an acquisition may take the form of a share purchase, asset purchase, or merger.

When deciding to make an acquisition, the process could be more structured and organized if the investor is a foreign one, this later bringing a useful experience in performing a process of this kind. Here are some steps which have to be observed when pursuing a M&A operation:

Regulatory framework

In some cases, an approval, clearance or consent may have to be obtained in advance of the acquisition, or, in other cases, it has to notify an appropriate governmental authority. In the absence of such governmental approval, the acquisition is either void or voidable.

Multinational acquisitions may impose that a closing is delayed until the necessary approvals are obtained from the government. The need for prior clearance with the Competition National Office is also imposed under particular circumstances, when the acquiring company and the target meet certain financial thresholds.

If the combined market share of the parties prior to the acquisition is less than 20 percent, there will not normally be a problem. However, experience says that in M&A deals, even not suspected to impose a governmental approval or notification, it is better to check in advance and prevent surprises.

Also, employment and labor law must be considered since in Romania the employees receive a greater protection from the state, particularly in case of dismissals. Sometimes when unions are organized, there have to be verified if an agreement from their side is or not required.

Structuring the acquisition

The western experience and models are adopted in Romania and thus cash is the normal consideration used in an acquisition of a target. Shares or other securities are rarely used. An acquisition vehicle is almost all times considered, in particular when the acquisition interferes with many jurisdictions.

Shares in joint stock companies or social units in LLC companies could be acquired. Closed companies are offering much simple acquisition process since when the target is public, its shares being listed with an exchange (Bucharest Stock Exchange, e.g.), it has to be considered the specific capital market rules.

Buying assets is sometimes more difficult than buying just the shares of the target owner, in particular when the asset is a real estate property-land or land with buildings having either residential or industrial purpose. When buying the shares, the transfer of ownership over the assets belonging to the target is automatically.


Letter of intent and acquisition agreement are considered by both the buyer and the target. Letter of intent is rather seen as a non-binding document. A sophisticated buyer might impose a sophisticated acquisition agreement.

When a multinational is involved on the buyer side, it is probably practical to have a master agreement governing the transaction as a whole and a local agreement to govern the transaction in the country of acquisition. All liabilities have to be included in the local acquisition agreement and this should provide about the indemnification, by the seller, of the buyer, against certain liabilities (e.g., those that at closing are undisclosed or contingent).

Representation and warranty is a statement which ahs to be included in the acquisition agreement along with covenants which have to take place between the signing and the closing, as well obligations relating to postclosing period. Among the conditions to closing issuing a Romanian legal opinion is common.

Due diligence

The buyer should independently verify as much as possible about the target, with the assistance of local attorneys and consultants. A register for shareholders should be checked with respect of the shares and their status as of the date of the signing and closing.

Special registration of movable security by shares is advisable to be verified with the Electronic Archive register or with other specific registers. Listed shares of the target are registered in independent registers kept by the central depositary. The corporate organization and authority is another piece of verification by the buyer.

The good standing principle is rather understood in the sense that the seller may state that there are no conditions or circumstances which would permit the dissolution of the company without further administrative action or notice with regard to the shareholders, creditors or local court. Employment structure and labor agreements are of much interest for a buyer in particular when the target is a medium or big size company.

Compliance with the law

Environmental regulation, licenses and permits to operate the business of the target, product liability, tax liabilities or other liabilities are also part of the legal examination to be performed by the buyer.

Material assets

The buyer would want to be certain that there is title to any buildings or real estate owned by the seller or by the target company. Title insurance is not applying in Romania even there are companies acting on the buyer side, especially from US which are trying to get such insurance. Real estate is transferred via notary deed and with the notary support it is obtained an official document stating that there are no material encumbrances on the property. Transfer taxes are of significance. Intellectual property with respect to trade mark or patent proper registration could be of interest from the buyer prospective as to the verification of the target.

As we may see, Romania is not an isolated isle within the global economy. On a contrary, more and more, foreign practices from other jurisdictions (in particular from EU countries and from US) were imported and adopted in the Romanian legal and economical environment. A good professional lawyer is an important player in the M&A game, in order to identify the relevant Romanian legislation combined with EU rules and norms which represent the legal framework to be observed in case of an M&A.

Cristiana I. Stoica – Founding Partner STOICA& Asociatii, Bucharest (May 27, 2008)