Romania: Squeeze-outs of minority shareholders

May 11, 2018 | Insight

The squeeze-out of minority shareholders in closely held companies is one of the most highly controversial topics in Romanian corporate law.

Historically, state owned companies were privatised through a management employee buy-out method whereby employees received shares in former state owned companies. From 1991 to 1996, this was the predominant form of privatisation in Romania, and statistics show that more than 5 million Romanians possibly still own shares in such companies. Employee stakes are often below 1% of a company’s share capital, and in many instances such minority shareholders are dormant or even unaware of their participation.

EXISTING LEGAL FRAMEWORK

The concept of squeeze-out exists in Romanian only with respect to publicly listed companies. Shareholder protection offered under Law 24/2017 mirrors that recognised under the EU Takeover Directive (2004/25/EC).

In closely held private companies, however, protections are weaker. Generally, the rights of minority shareholders that are currently recognised include:

• various information rights;
• the right to ask for a general meeting of shareholders to be convened (where the shareholding is above 5%); and
• the right to request an expert review of the management activity (where the shareholding is above 10%).

Shareholders have the right to leave a company in exchange for adequate compensation in a limited number of cases.

Despite this limited protection, Romanian courts often rule in favour of minority shareholders, provided that they prove that a majority shareholder abused its position and promoted shareholder resolutions to its primary benefit. Such decisions range from a damages award to the cancellation of the shareholders’ resolution adopted in disregard of the minority shareholder’s interest.

EXISTING LEGAL FRAMEWORK

Absent contractual mechanisms – such as buy-back or drag-along rights – majority shareholders must seek alternative methods to restructure their companies and eliminate dormant or troublesome shareholders should they wish to forego judicial oversight. Options include:

• an increase of the share capital (leading to a further dilution of the minority shareholders not taking part in the share capital increase);
• a decrease of the share capital by an annulment of shares;
• a squeeze-out merger; or
• a reverse stock split, in which the number of shares are consolidated without affecting the aggregate value of the share capital.

Please contact a member of our Romanian office for further information.