Late in February 2006, the Ministry of Justice introduced numerous key-amendments to the Romanian Company Law (Law 31/1990), which are intended to bring Romanian legislation in line with EU Directives.

The proposed amendments arise from a study financed by the World Bank and USAID, and were guided by recent European Commission reports on Romania’s accession progress and the World Bank’s Report on the compatibility of Romanian legislation with OECD Principles of Corporate Governance (as outlined by the PAL II Program – the Programmatic Adjustment Loan of the World Bank).

As such, the Company Law initiative is the result of Romania’s on-going obligations vis-à-vis institutional reform governed by a series of NGO/IFI-sponsored programs, as well as its accession-related commitments to the EU.

Key-Points of the Proposed Law

The current draft proposed by the Justice Ministry (the "Draft") focuses on OECD principles regarding the rights of shareholders and the responsibilities of the board, and the guidelines established by First and Second Council Directives.

Since much of the Company Law is already in line with these principals and directives, the proposed amendments have mostly targeted specific matters rather than general areas requiring change.

The major points of the Draft include:

• the introduction of the concept of "authorized capital," which represents the maximum level of capital up to which the board of directors or the sole shareholder of a company may increase a company’s existing capital within 5 years of formation.

This maximum level will be prescribed in the constitutive act, and the shareholders’ meeting of a company will have the authority to grant the authorization of such capital increase to the board, as well as approve the terms and conditions of such increase.

Furthermore, the pre-emptive rights of the shareholders will no longer be restricted or cancelled by the constitutive act, but only by a decision of the general meeting of shareholders (the "Shareholders’ Meeting");

• the raising of the minimum share capital of a joint stock company to at least RON 92,500, from the current RON 87,500, (approx. €25,000 with today’s exchange rate); on a similar note, in-kind contributions will be accepted so long as the transfer of the actual ownership rights to the contributed asset are effected within 5 years of the date of formation of a company;

• a reduction of the minimum number of shareholders required to set up a joint-stock company or a limited partnership by shares to 2, from the previous 5 (this is specifically in-line with current EU Directives).

This is intended to ease the burden of investors looking to set up investments in Romania, allowing them to set up joint-stock companies without the need to seek additional "phantom" shareholders to satisfy the current 5-shareholder requirement;

• amendments to the constitutive documents of a Romanian company would have to be submitted to the relevant local Trade Registry in its "restated" form (i.e., the original document would have to be re-printed with the amendments incorporated into the text of the restatement), instead of the current practice of filing mere amendments (known in Romania as "Additional Acts").

This will ease the process of accurately determining the provisions of the constitutive documents of a company when numerous amendments have been effected;

• the introduction of an on-line registration procedure intended to reduce the bureaucratic burden and time-lag of registering a Romanian entity, as well as securing certified copies of constitutive documents already on-file with the registry (it is still unclear how this system will be implemented since many documents required to form a Romanian company must currently be submitted to the Trade Registry as originals);

• the introduction of a new "one-tiered" structure for the Board of Directors, whereby executive and non-executive positions, and their respective fiduciary duties, are well-defined and delineated. A distinction will be made between individual and corporate directors.

The Board would be allowed to delegate its executive prerogatives to one or more managers, whose own obligations and duties with respect to the company would fall in-line with EU directives, specifically the European Commission’s Recommendation no. 2005/162/EC of 15 February 2005, on the role of the non-executive directors of listed companies;

• for the purpose of corporate governance, looser rules will determine the quorum necessary in the Shareholders’ Meetings. Under the Draft, the "first call" of the "Ordinary" Shareholders’ Meeting will require the presence of voters representing at least 25% of the total voting shares of a company in order to have a valid quorum (currently, that level is set at more than 50%).

Valid decisions are then made by the affirmative vote of a simple majority of the voting shares present (currently, the requirement is a 2/3 majority). For the second call, there is currently no requirement regarding the presence of shareholders, and valid decisions are then made by the affirmative vote of a simple majority of the voting shares present.

The current version of the Draft leaves these provisions unmodified. As for the "Extraordinary" Shareholder’s Meeting, the Draft proposes that for "first call" the presence of voters representing at least 25% of the social capital of a company will be required (currently, this level is 75%).

Valid decisions will then made by the affirmative vote of at least 2/3 of the votes present (currently, this may be done by shareholders owning shares representing at least half of the total social capital in that company).

With respect to the "second call," the Draft will require the presence of shareholders representing at least 20% of the social capital of a company (currently, all that is needed is the presence of over half of the voting shares).

Valid decisions will then be made by the affirmative vote of at least 2/3 of the votes present (under current law, valid decisions require the affirmative vote of shareholders representing at least 1/3 of the total social capital of the company);

• similarly, any significant modification to the structure of a company (such as its object of activity, as well as any decision regarding the increase or reduction of the social capital, merger, spin-off or the winding down of its affairs), will have to be voted upon by a majority of at least 3/4 of the present entitled voters, provided that the quorum requirements have been met;

• additional procedures governing Shareholders’ Meetings will be simplified, such as: (i) the extension of the notice period of a call for each such meeting from 15 to 30 days, (ii) the reduction of the number of shareholders with authority to request a meeting, (iii) the clarification of the shareholder’s right to add new items on the agenda, (iv) the regulation of the right of the shareholders

which hold preferred shares to attend the a Shareholders’ Meeting (without having the right to vote), (v) the regulation of instances under which a shareholder may vote by proxy, and the introduction of the right of a shareholder to enter into voting pacts, (vi) the improvement of the system of determining and distributing dividends, and (viii) the clarification of the conditions necessary to

allow a shareholder the right to withdraw from the business (including the requirement of a 30-day term, the existence of new circumstances, new obligation of evaluating the price of the relevant shares by an expert appointed by a delegate judge, etc….);

• the acquisition by a company of its own shares will remain a very restricted procedure, but some loosening of the rules and principles governing such a transfer will take place. However, the subscription of own shares by the company will be prohibited;

• companies with turnovers of less than RON 10 million (approx. EUR 2.8 million), will require the Trade Registry to issue a notice confirming that the financial statements of a company have been filed with it, as well as with the Ministry of Finance.

In order to ensure public access to such notice (and, thus, facilitate the disclosure of relevant financial information and encourage transparency, as called for in the OECD Principles of Corporate Governance), the Trade Registry will be required to list the notice on its website;

• the definition for a mergers will be expanded, and certain terms governing a merger will be clarified (such as, when certain compulsory provisions of a merger take place during the allotment of shares of a company which ceases to exist, or the disclosure of the date from which the transactions entered into by such company are taken over by the surviving entities, along with the protections

granted to shareholders and third parties); in addition, a new and more complex notion of a "spin-off" (in Romanian, a "desprindere") will be introduced under certain circumstances; and,

• the distribution of dividends will take place 6 months after the approval of the annual financial statement of the company, instead of the current 8 months.

Initial Reaction from Business Circles

Although the general opinion related to the Draft has been positive, some of the proposed provisions have come in for criticism.

For example, the National Union of Romanian Owners (the "UNPR") commented to the Romanian press that reducing the quorum requirement for the Shareholders’ Meetings will constitute an unjust relaxation of corporate formalities, as the Draft would allow shareholders with as little as 20% of the equity of a company to constitute a quorum in a Shareholders’ Meeting.

According to the Union, major decisions, such as those contemplated under the Draft, should be taken with absolute majority of the shareholders present, as per current law. If the Draft is approved, the current reduced quorum requirement, along with the reduced decision threshold from absolute to simple majority would eviscerate the purpose of holding a Shareholders’ Meeting in the first place.

According to representatives of the National Council of Small- to Medium-Sized Private Enterprises (the "CNIPMMR"), a Shareholders’ Meeting "should establish the policies and supervise the activities adopted by a company." Accordingly, the participation of members holding voting stock should be encouraged to increase, and not reduced, to ensure the effective management of a company.

The Draft’s attempt to regulate the Shareholder’s Meetings has also come in for criticism from representatives of the UNPR, which criticized the increase of the notice period to call a Shareholders’ Meeting (from 15 to 30 days).

In the opinion of the UNPR, the proposed change will act against a company’s interest under extraordinary circumstances, when urgent business must be discussed and resolved by the shareholders. The UNPR also disagrees with reducing the dividend payments period from 8 to 6 months, as this could create imbalances taking into account the proposed 16 per cent flat tax.

Thus, if the Draft were to be approved as is, the opinion of the UNPR is that the new dividends regulations would actually cause a higher corporate tax burden than in 2004.

More Debate and Public Participation

The Draft has been available on the Justice Ministry's website since February 20, 2006 and was open to discussion and written comments until March 7. By March 9, the Justice Ministry will have held public debates on the proposed amendments, which will culminate with a press conference on March 16, in order to finalize the results of the public commentaries received thus far.

Rumor has it that the Draft will be presented in a final form before the Romanian Parliament on or after that date, so that it may be debated in parliament and subject to a final vote by the end of April. Indeed, the process allowing for commentary from interested parties is a refreshing change in the manner in which most legislation had heretofore been enacted in Romania.


According to the Romanian government, one of its main goals is to create a legislative environment which encourages transparent, efficient and predictable business conditions in accord with EU norms and taking into account the general and reasonable interests of this country’s business community.

By this criteria alone, the Romanian government has succeeded in introducing public debate on a timely and important subject; one which is as central to business life in this country as the internal regulation of corporate entities.

Unlike the 1990’s, when laws often appeared on the scene from enigmatic sources, frequently with little or no warning or public debate, Romania’s business community was left in the lurch, trying to understand the implication of what was, too often, bad law.

Today’s open process of debate, disclosure and cooperation between the Justice Ministry and various representatives of NGO’s and the local business community is a truly remarkable statement of progress achieved in the way Romania views its commitments to legislative and economic reform.

Irrespective of the final outcome of the debate on the exact provisions of the Draft, Romania has proven that it can, indeed, involve the business community and various NGO/IFI’s to effect legislative reform in a manner that is transparent, productive, efficient and geared to help both Romania and local businesses adapt to the new realities of EU membership.