Romania: Cross-Border Conversions: A Realistic Way To Expand Companies' Restructuring Possibilities?

Background

In recent years, companies have consistently attempted to extend the scope of their structuring possibilities by trying to cross the borders into other member states for various reasons ranging from a more flexible legal framework to a better market environment and investment climate. However, the possibilities for cross-border restructuring measures were rather limited, as companies in the EU and EEA had essentially three possibilities to effect cross-border transformations. One option available to all member states was and still is the cross-border merger, which however presents the disadvantage that the absorbed company is dissolved and the transfer of assets into a different member state may generally trigger real estate transfer tax. Depending on the theory embraced by the member states (the incorporation theory or the real seat theory), a further possibility for those states which have adopted the incorporation state doctrine consisted in the relocation of companies administrative seats in a different member state without having to wind-up the company in the home member state, while the company continued to be governed by the law of the original country. Last but not least, a company could (and still can) be converted into a Societas Europea and have its registered office transferred within the EU, since a Societas Europea is by law allowed to relocate its seat while preserving its commercial and legal entity. This has nevertheless proved to be rather cumbersome and hence not often used in practice, as it requires several stages of transformations and, among other measures, alignment to higher capital requirements.

Hence, until recently, moving a company's registered office to another member state would have implied the winding-up of the respective company in one country and its re-incorporation in the other member state, as no EU rules enabling corporations to transfer their registered seat into another member state while preserving the companies' legal personality existed.

With its decision in the "VALE" case (and previously in "Cartesio"), the European Court of Justice (ECJ) has recognised cross-border changes of form which simultaneously preserve a company's identity, hence removing further barriers against transnational mobility of companies within the EU, premised on the freedom of establishment. As such, according to the ECJ judgement in the "VALE" case, the transfer of a company's registered seat into another member state through simultaneous conversion into a company governed by the national law of the host member state must be allowed to the extent the host member state recognises a national conversion. In other words, the aim of the "VALE" decision was to align the effects of cross-border conversion to those of changes of form performed according to the national rules of the member states, having as a consequence that the legal relations of the company as such (ownership of assets by the company, contractual relationship with third parties) remain unaffected.

Romanian approach

Romanian company law has traditionally been reluctant to advancing the international mobility of companies within EU, instead embracing -- alongside countries such as Germany, France, Belgium, and Italy -- the so-called real seat doctrine, which determines the applicable law by reference to the country in which the company has its real seat (centre of its administration). Unlike the incorporation theory dominant in the UK, the Netherlands, Switzerland, Liechtenstein and Scandinavia, the real seat theory was seen by ECJ in its Überseering decision of 2002 as incompatible with the principle of freedom of establishment, as it denied legal capacity to foreign corporations that had moved their "real seat" there. Corporate laws of the countries traditionally following the real seat theory, including Romania, did not have reincorporation provisions and even generally interpreted such decisions by shareholders as resolutions to liquidate.

In line with the above, the Romanian courts have ruled on the topic of transfer of registered seat outside Romania by reaffirming a member state's right to impose certain restrictions on a company wishing to transfer its administrative seat into a different member state with the simultaneous preservation of the national legislation. In other words, the country's courts have upheld a member state's right to deny a company regulated by its national law the right to preserve its nationality if it intends to reorganise itself in a different member state.

On the other hand, the transfer into Romania of the registered seat of a company organised and functioning under the rules of a different member state, with the corresponding preservation of the company's legal personality, has been unanimously settled by the courts to the effect of rejecting the registration with the Romanian commercial registers of the transfer of seat, in the absence of documents evidencing the winding-up of the respective company in the member state of origin. In their rationale, the courts have argued that the community law did not allow, at that stage, to give up to the jurisdiction of one member state in order to gain the nationality of a different member state, without losing its legal personality in the member state of origin (this, without considering the cross-border mergers and the incorporation of Societas Europea). The courts' further arguments in overruling the registration of the transfer of seat with the Romanian commercial register by preserving legal capacity were that, in the absence of a convention for the mutual recognition of companies and the preservation of their legal capacity in case of transfer of seat from one member state to another, the community law recognised only a secondary right of establishment within the EU, without restrictions or discriminations, by reference to the companies established according to the law of the member state where they plan to register their subsidiaries.

Following the ECJ's judgement in the "VALE" case, a first indication of the approach taken under Romanian law was given by the Tribunal of Brasov. The Tribunal ultimately rejected the registration of the general shareholders meeting resolution to transfer the registered seat of a Romanian company from Brasov into Gibraltar, without losing the company's legal capacity, due to insufficient proof evidencing the shareholders' will to effect a corporate transformation. However, the Tribunal has among other things also acknowledged that "the transfer of the registered seat of a company from one member state into another member state, with a simultaneous change in the national legislation applicable to the respective company, is possible, even in the absence of a provision in the national law, if the laws of the host member state allow such a transformation, and without the member state of origin having the ability to impose the winding up of the respective company".

Practical challenges

Although the Romanian court's acknowledgement of a primary community right of establishment, namely a company's right to freely relocate its activities from one member state to another and continue its business in a legal form recognised in the host member state without this affecting its existence and legal relations, is salutary, the reincorporation into another law is still paved with difficulties, as no uniform procedural provisions for the effective implementation of a cross-border conversion were laid down in the ECJ decision.

In the "VALE" decision, the ECJ has held that a host member state may also apply its national laws governing the conversion of companies to cross-border conversions. Therefore, until the enactment of a uniform European regulation under the form of a European Directive on cross-border conversions, practical issues remain unsolved as to how two legal systems with non-harmonised legal provisions have to be taken into consideration in implementing a cross-border transformation.

Also, questions as how to ensure an adequate protection of a company's stakeholders, not only existing shareholders, but also minority shareholders, creditors, and employees who cannot directly influence the choice of law decision, have currently received no answer.

Until then, in practice, although not in numerous cases, cross-border mergers seem to have become the favourite practical vehicle for a transfer of seat within the EU, mostly due a harmonised legislation framework across the member states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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