Stock Sale
Capital Increase
Special Administration
Privatization of the Utilities Sector
Joint Ventures
Indemnification
Accelerated Proceedings
The Romanian Parliament recently passed Law 137/2002 in order to expedite the privatization process. The new law is to be read and applied in conjunction with the pre-existing legal framework which regulates the organization, implementation and completion of privatization in Romania. This is primarily set out in Government Emergency Ordinance 88/1997, approved by Law 44/1998.
When presenting the draft legislation for Parliament's approval, the Romanian government stated that the new law was intended to address the need for appropriate legal means to:
- remodel aspects of the existing privatization procedure to reflect experience gained during 12 years of privatization;
- improve the results of the privatization process through special pre-sale administration of state owned enterprises; and
- find further means of reducing the state's involvement in the private sector.
In line with these principles, the new law aims to resolve issues which have caused uncertainty and which have thus hindered efforts to arrive at an economically, socially and environmentally efficient arrangement between Romanian state/state owned enterprises and private investors, and slowed down the privatization process.
The stock sale is almost synonymous with the concept of privatization, as it is the most commonly used means of reducing the state's participation in the private sector. The new law has introduced a number of legislative amendments and clarifications to this model, as explained below.
Complex valuation of bids
Instead of assessing bids based on price factors alone, the new law encourages a more flexible understanding of the value-for-shares concept and of Romania's macro-economic priorities. It thus indicates that price should be balanced with other elements, such as the business plan, investment undertakings and social policy, when assessing bids for stock acquisition. The opportunity to complete sales under certain terms and conditions is not subject to court scrutiny.
€1 price
The new law enables the government to decide, on a case-by-case basis, that a bid should be assessed only in relation to commitments regarding the amount of investment, the number of working positions that will be created and the working capital, with the price representing a negligible component symbolically amounting to €1.
Revocation or modification of stock sale offer
The Romanian authorities in charge of privatization may only revoke or modify a stock sale offer in circumstances which could have an adverse material impact on the completion of the respective privatization process.
The new law recognizes capital increase as a viable privatization method (to be used in conjunction with other methods), to the extent that is the result of an infusion of private funds which dilutes the state's holding in the relevant entity.
This method could be applied for the privatization of companies in which the state has a holding sufficient to pass the capital increase decision, subject, however, to the pre-emption right of existing shareholders.
In addition to a capital increase, a state offer to private investors may include a call option for (part of) the remaining state owned stocks in the same enterprise.
The new law sets out a special administration procedure which applies to all state owned enterprises that are subject to privatization. The procedure aims to ensure that the following steps are completed efficiently and effectively:
- implementation of restructuring measures, such as corporate reorganization, personnel lay-offs, transfers of activities or integrated assets, and debt-to-equity conversions;
- resolution of complex financial arrangements for restructuring budgetary obligations, suspension of foreclosure procedures initiated by state creditors or release of core assets from state liens; and
- guarantee of a continuous supply of utilities, based on debt rescheduling and/or payment facilities or debt-to-equity conversion, with respect to utilities supply debt.
Privatization of the Utilities Sector
For utilities, the new law emphasizes privatization methods which aim for significant investment in the sector rather than significant revenues for the state budget. These methods take the form of capital increases and public private partnerships based on the build-operate-transfer and build-own-operate models.
The new law expressly allows the establishment of joint ventures between majority state owned enterprises and private enterprises. The resulting joint venture companies benefit from a preferential right to acquire the assets of the majority state owned companies which participate in their formation.
Pursuant to the new law, the value of the contractual indemnity to be paid by the state for undisclosed liability has been capped at 50% of the paid price. The new law's indemnity provisions must be further harmonized with the symbolic €1 price concept, the new methods for reducing state participation and the new legislation on property restitution.
The new law is tailored to accommodate the following possibilities within the existing corporate/privatization legal framework:
- swift corporate and operational restructuring procedures, whether in the form of merger, split-off, dissolution or liquidation of majority state owned enterprises, or a sequence of the above, through reducing to the minimum the terms provided by corporate law. Specific consideration must be given to protecting the rights and interests of minority shareholders in the course of such procedures;
- court actions contesting an operation or act carried out within the privatization process to be (i) time-barred after one month from the date on which the initiator of the court action had or should have had knowledge of the contested operation or act, and (ii) heard and ruled on pursuant to accelerated court proceedings; and
- share-purchase agreements concluded for the stock sale purchase to be enforced directly, without any need for judicial proceedings, with respect to pecuniary obligations or undertakings.
For further information on this topic please contact Adriana Gaspar at Nestor Nestor Diculescu Kingston Petersen by telephone (+40 1 201 1200) or by fax (+40 1 201 1210) or by email ([email protected]).