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.