Even though Romanian legal provisions are scarce as regards share premiums, practice shows that they may be a useful tool for companies.
Legal concept under Romanian law
The legal concept of “share premium” is vaguely regulated under Romanian law. More specifically, accounting regulations (Ordinul 1802/2014) provide a definition of this term, according to which the share premium is determined as the difference between the issue price of new shares and their par value. The Companies Law (Legea societatilor nr. 31/1990) handles this concept in the context of companies’ share capital increase opera-tions by issuance of new shares, thus excluding its applicability to similar operations by increase of the shares’ par value.
A share premium could also be seen as a cost incurred by the respective company for is-suing new shares at a specific moment in time, grounded on an increased market value of the company compared to its value at the date of incorporation/previous issuance of shares. Per a contrario and in line with the decisions of the Romanian courts, issuance of share premiums should not be interpreted as mandatory whenever these operations of share capital increases occur, as no such legal provisions impose it. Furthermore, the amount of the share premium may also be freely set at the general meeting of share-holders, with no legal provisions limiting its level.
Overall, even though not imposed by law, it is reasonable for a share premium to be set on economic grounds. When these exist, share capital increase operations with share premiums may be applied even in limited liability companies with only one shareholder or in companies where all shareholders participate in the operation.
Examples of most frequent situations involving the use of share premiums
One of the situations that would justify the use of share premiums would be the case of a considerable investment in a company in exchange for a specific level of share capital participation. If the investor were to receive shares in exchange for the entire equity injected in the company, the other shareholders would be diluted considerably or, in order to avoid dilution, would also be forced to contribute to the increase of the share capital.
Another situation involving the use of share premium is to avoid the application of a specific case of company dissolution under the Companies Law. Thus, the value of a company’s net assets, determined as the difference between total assets and total debt, should not fall below half of its subscribed share capital. Otherwise, the company’s directors are obliged to convene and inform the shareholders who, based on the details provided, will have to decide upon the company’s dissolution. In the case at hand, increasing the company’s share capital with an issuance premium would have a double benefit: (i) the value of the company’s net assets would be higher than prior to the increase, further to the addition of share premiums to the company’s total assets, while (ii) the increase of the subscribed share capital will be kept at a minimum.
Destination of the share premium
No legal restrictions are regulated as regards the destination of the amounts received by a company and representing share premiums. Thus, once the share premium is registered in the company’s accounting records, it may have various destinations, ie to cover the company’s losses, to increase the company’s share capital or to be distributed to shareholders.
Even if expressly allowed by the provisions of the Romanian Fiscal Code (Codul fiscal), direct distribution of share premiums is not common in practice, mainly for accounting reasons (ie, there is no correspondence between the debit section of the accounts related to share premiums and the credit section of the accounts specifying the settlement of share capital between shareholders).
Alternatively, the “cleanest” indirect distribution method of share premiums consists in a share capital increase by incorporation of share premiums, followed by a share capital reduction with the same amount of incorporated share premiums and the cashing in by the shareholders of their respective quotas. Even though it is one of the most risk-free indirect distribution methods of share premiums, this operation has two main disad-vantages: (i) it is a lengthy procedure, as the reduction of the share capital implies the elapse of a two-month opposition period and (ii) it may not be implemented when the company registers losses.
No legal restrictions are regulated in regard to the destination of the amounts received by a company and representing share premiums.