Corporate / M&A

Benefits and Guarantees: A Romanian Perspective

The notion of corporate benefit has not been clearly defined by statute or case law, with Romanian law and precedent yet to provide a test of what fact, situation or circumstance would constitute a corporate benefit.

The question of corporate benefit typically arises when the benefit flowing from a “core” transaction passes not to a company itself but to a member of a group. In the case of a loan, this is often supported by upstream, downstream and/or cross-stream security arrangements from group companies.

Under Romanian regulations, the existence and operation of a company is justified only to carry out commerce for profit.

The concept of corporate benefit has not been clearly defined by statute or case law, with Romanian law and precedent yet to provide a test of what fact, situation or circumstance would constitute a corporate benefit. The Romanian courts have given different interpretations, in some cases ruling in favour of the possibility of a company to guarantee the obligations assumed by another group company, and in others ruling that a company cannot guarantee the obligations of another company, considering such guarantee as an ultra vires deed.

In the context of corporate guarantees (the most common case where the doctrine of corporate benefit manifests), the appreciation of the corporate benefit is generally assessed on a case-by-case basis. But it is different depending on whether the guarantor is issuing a downstream, upstream or cross-stream guarantee.

A guarantee issued by a parent or grandparent company to a subsidiary is generally easier to justify as being within the guarantor’s corporate benefit, as the fact that the parent company receives dividends from its subsidiary may be viewed as an indirect benefit given also the parent company’s interest that the subsidiary be solvent and profitable.

But for such an interpretation, certain specific matters should be considered: the value of the security guarantee should be subject to reasonable limits (ie, so it would not raise concerns from the parent’s creditors), the parent company should be up-to-date with its payments, and the loan contracted by the subsidiary should not affect the profitability of the company.

On the other hand, up-stream security interests granted by a company in order to secure debt of its shareholders may qualify as hidden repayment of capital, violating capital maintenance rule, unless provided at arm’s length and against corporate benefit. Any transaction violating capital maintenance rules is (at least partially) null and void.

How is corporate benefit protected by law

Most challenges to corporate actions rely primarily on misappropriation of corporate funds if, acting in bad faith, shareholders or directors have knowingly used the company’s property or credit contrary to the interests of the company or for personal ends (Art. 272 (1) b of Companies Act). The term “company’s interest” is generally read as equal to the more modern and international concept of “corporate benefit”. A violation of this prohibition is a crime sanctioned with six months’ to three years’ imprisonment or a fine.

Elements of the crime

The elements of the crime are cumulatively as follows.

  • Specific subject: Only founders, directors, general managers, managers, members of the supervisory or executive board or persons acting in a representative capacity for the company may be prosecuted for this crime. The only quality that raises issues is that of a “founder” since it is not clear whether the legislator aimed to punish only founders who engaged in the prohibited act, or confers a “founder” status to any shareholder who, by the number of shares held in the company, has the power to influence the actions of the company.
  • The act must be in bad faith: Applied to this crime, bad faith presupposes knowledge and acceptance by the person acting in the required quality that his acts are contrary to the corporate benefit of her company.
  • Use of company’s assets or credit: Only actions of misappropriation of corporate funds or credit are relevant for this crime.
  • Act contrary to the company’s benefit: The bad faith action must be contrary to the company’s benefit (or interest).

The Romanian law and doctrine confer standing to sue or file criminal complaint to any person showing a valid interest; that is, any person with some ability to show present or prospective harm from director’s actions.

“Group exception”

The Companies Act attempts to provide an exception to the above prohibition by de-criminalising certain conduct. The use of a company’s assets or credit, albeit in bad faith and non-beneficial to the company, is not prohibited if engaged in the course of effectuating “treasury operations” between a company and other companies controlled by the company or between the company and other companies that control the company, in both cases directly or indirectly. The legal doctrine considers cash-pooling agreements to constitute an application of such exemption.

The rules governing the giving of guarantees by companies are historically complex, the most challenging of which (in many jurisdictions including Romania) concern the consideration that must be given to decide whether the guarantor is benefiting (economically or commercially) from giving the guarantee. Nevertheless, given the lack of uniform case law on this topic, corporate guarantors should consider their actions closely before deciding to grant a guarantee.