Introduction

In today's challenging business environment, an increasing number of companies on the Romanian market are struggling with low net assets to total asset ratios. Creditors and investors assess the level of a company's net assets when deciding whether to grant a loan to or invest in that company. Further, the Companies Law (31/1990, as republished and amended) requires companies to maintain a certain level of net assets (ie, the value of a company's net assets should be at least equal to half of its registered share capital).

Romanian companies failing to observe the abovementioned requirements under the Companies Law can redress their situation through a share capital increase. This is a straightforward procedure, as outlined below.

Net asset-related requirements

Under the Companies Law, if a company's net assets decrease to a value that is less than half of the company's registered share capital due to financial losses as set out in the company's financial statements, the company's management must promptly:

  • convene the shareholders' assembly, which will decide whether the company should be dissolved or continue its activity; and
  • present the above shareholders' assembly with a report on the company's financial situation, together with the auditor's comments.

If the shareholders' assembly decides not to dissolve the company, one of the following options must be implemented by the end of the financial year following the year during which the losses were incurred:

  • the company's net assets must be reconstituted up to a value that is at least equal to half of the company's registered share capital; or
  • the company's registered share capital must be reduced by an amount that is at least equal to the losses that could not be covered, ensuring that the minimum capital requirements under the law are observed.

If the shareholders' assembly does not pass a resolution or implement one of the above required options in a timely manner, any interested party can file a court claim requesting the company's dissolution.

Nonetheless, the court may grant the company a grace period of up to six months to address the matter and take appropriate measures. Further, the company will not be dissolved if the reconstitution of the net asset value occurs before a court decision on the company's dissolution becomes final and binding.

Hence, even in the worst case scenario where a third party requests a company's dissolution, there are sufficient mechanisms allowing it to reconstitute its net asset value and avoid dissolution.

Reconstitution of net assets via share capital increase

A practical solution for reconstituting a company's net asset value to meet the levels prescribed by the law is to increase its share capital. This may, in principle, be performed through:

  • a contribution in cash or in kind; or
  • a debt to equity swap.

As companies are often financed through shareholder loans, the conversion of a shareholder loan into equity is a practical solution which, in principle, requires minimum effort, as no additional cash need be injected into the company.

However, a debt to equity swap will deliver the required result (ie, reconstitution of the net asset value) if:

  • a shareholder loan is in place and shareholders are willing to convert it into equity; if the lender under the inter-company loan agreement is not the direct shareholder, but another group company, the loan could be assigned to the company's direct shareholder so that it could be converted into equity; and
  • the new share capital amount resulting from the share capital increase is sufficiently high so that the net asset value reaches at least half of the subscribed share capital.

To ensure this, new shares may be issued with a share premium. A share premium represents the difference between a share's issuance value (ie, the real market value of a share) and its nominal value. The Companies Law imposes no restrictions regarding the issuance of new shares with a premium, leaving it to shareholders to decide how to proceed (ie, with regard to whether the new shares should be issued with a premium, the amount to be allocated to registered capital and the amount to be allocated to share premiums).

In practice, when a share capital increase is performed with the aim of reconstituting the company's net asset value, shareholders often opt for the alternative to perform the share capital increase with a premium. By allocating a small part of the shareholders' contribution to the share capital and the rest to a share premium, the company's net asset value will be increased, but the level of the registered share capital (against which the net assets value is measured) will not increase significantly. Hence, there is a greater chance of the company meeting its requirements under the Companies Law (ie, that the value of its net assets amount to at least half of its registered share capital). Further, by performing a share capital increase with a premium, the amount that shareholders must contribute should, in principle, be lower than in the scenario in which the increase would be performed without a premium.

Comment

A company's level of net assets has always been used as a reference for assessing its economic standing. Further, under the law, Romanian companies are required to maintain their net asset value at a certain level or face the risk of dissolution. The adoption of timely and adequate measures that enable a company to maintain its net assets at the minimum level required by law is essential for ensuring that it can continue to carry out its business.

For further information on this topic please contact Monica Cojocaru or Sabrina Fetea at Schoenherr by telephone (+40 21 319 67 90) or email (m.cojocaru@schoenherr.eu or s.fetea@schoenherr.eu). The Schoenherr Attorneys at Law website can be accessed at www.schoenherr.eu.

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