Four years after the creation of the Property Fund ("Fondul Proprietatea" in Romanian) as a means of awarding restitution to former owners of properties confiscated by the Romanian state where in-kind restitution is no longer possible, Fondul Proprietatea still does not represent an effective mechanism in awarding compensation to the victims. This is a stain on the honor of the Romanian state.

As repeatedly noted both in the Romanian media and in the law courts, the Property Fund will accomplish the purpose for which it was created only after its listing on the Bucharest Stock Exchange (in Romanian, "Bursa de Valori Bucuresti", hereinafter "BVB"). Although in 2007, in an attempt to accelerate the process of listing the Property Fund on the BVB, the Romanian Government enacted Emergency Ordinance no.81/2007 ("GEO 81"), the implementation of GEO 81 proved to be difficult, and it is still encountering unnecessary and unwarranted obstacles. (For further reference on the envisaged effects of GEO 81, please visit The Romanian Digest™ Archive at, i.e. the March 2008 article – "Property Fund Plods Towards Listing".

There is some good news – the 2nd stage of the selection process for the Fund Manager has finally been completed; it is the long-awaited necessary step in the process of listing the Fund on the BVB. But looming ahead are the difficulties associated with the worldwide economic collapse that caused a decrease in the net asset value of the Fund below the share capital of the Fund and may lead to measures that could severely affect both the shareholding structure of the Fund, and also the participations held by the Fund’s private shareholders. Additionally, the musings of certain members of the government in regard to a proposed transfer of Fund assets back to the Romanian State without just compensation has caused concern and uncertainty among shareholders and investors, brought derision and ridicule to a process that requires deference and substance, and raised the specter of litigation that could cripple the nation with billions of euros in monetary awards.

Status of the Selection Process of the Fund Manager

Almost ten months after the deadline for receiving applications for the selection of the Fund Manager, the 2nd stage of the process has finally been accomplished. On May 27, 2009, a press release from the Property Fund announced that two candidates were chosen by the selection commission to enter into the 3rd phase of the selection procedure -- the two candidates being Franklin Templeton Investment Management Ltd., and Morgan Stanley Investment Management Ltd.

The two firms, out of the 8 companies that submitted applications for selection as the Fund Manager, succeeded in persuading the selection commission that they had fulfilled the conditions required in order to become the firm that will have the significant role of actually managing and coordinating the portfolio of the Property Fund, and also of ensuring the daily management of the Fund in full compliance with Romanian law.

After many delays in the process, and many rumors in the media with regard to the lack of accuracy and transparency of the selection process, the selection commission finally fulfilled this 2nd phase of the procedure, i.e., the phase of competitive dialogue, which is a direct discussion and negotiation with the candidates concerning the activity of the Fund Manager, the objectives to be reached, and the terms of the management agreement. Indeed, during this phase, the final form of the management agreement was finalized, except for the fee. The format of the management agreement has the same terms for the two candidates selected for the 3rd phase of the procedure.

This last phase is actually a tender in which the following will occur: (i) the two candidates on the short list will transmit their final offers (i.e., their fee); (ii) the evaluation of the offers based on the most advantageous offer from an economic perspective, as described in the task book; and (iii) the announcement of the winning candidate. After the selection commission has negotiated the final form of the management agreement with the new Fund Manager, it will be submitted for the approval of the General Assembly of Shareholders of the Property Fund.

The completion of the 2nd stage of the selection procedure for the Fund Manager is an important step in the process of preparing for the listing of the Fund on the BVB, along with the previous appointments of the evaluator of the portfolio and the financial consultant, and is a prerequisite for the listing of the Fund on the BVB.

Minister Proposes Nationalization of Fund Assets

In what has to be one of the most asinine and potentially damaging actions thus far commenced in regard to the Property Fund, the Minister of Communication and Information Technology announced that an amendment to GEO 81 had been prepared based on which the shares held by the Property Fund in the National Company Posta Romana (the "Post"), i.e. 25%, would be "transferred" back into the property of the Romanian state so that it could become once again the sole 100% shareholder of the Post.

The Minister had to be officially reminded by the Supervisory Council of the Property Fund that such a proposal not only violates the Romanian Constitution, but also infringes upon the provisions of the European Convention of Human rights with respect property rights, as a blatant act of "nationalization" by the Romanian state of the assets of a private company. Obviously, the shares held by the Property Fund in the Post represent an asset of the Fund that is registered as such in its books, and consequently such shares cannot be "transferred" from the property of the Property Fund into the property of the state.

The concern raised by the actions of the Minister of Communication and Information Technology is huge. Beside this ministry, the Ministry of Economy is also a significant shareholder in many companies of great importance to the Romanian economy, and were this act to succeed, nothing could prevent any ministry from requesting the same transfers of property held by the Property Fund in the commercial legal entities in which that ministry is a shareholder.

It is beyond peradventure, that any such action is an illegal "nationalization," and would result in a flood of litigation under Romania’s many Bilateral Investment Treaties and, ultimately, at the Court of Human Rights, demanding the actual value of the claims admitted by the Romanian State, and settled with the Fund’s shareholders through the offer of shares of like value in the Fund. Reducing the value of those shares in any manner also violates the settlement agreements and is immediately actionable. One wonders how popular the Minister of Communication would be among his colleagues when a bill for billions of Euros is laid upon his table.

Moreover, the potential amendments proposed by the Minister are incompatible with Romania’s position as a member state of the European Union, and severely affect foreign investors’ confidence in the Romanian capital markets, and the Romanian business environment in general, through the illegal confiscation of private assets. The foreign investors who have purchased shares in the Property Fund that already amounts to approximately € 200 million would most certainly not sit by and watch the Minister of Communications steal away their assets.

Lastly and as significantly, any such endeavor would render useless all of the measures heretofore taken by the Property Fund towards its listing on the BVB (appointment of the evaluator, the selections of the financial consultant, and the impending appointment of the Fund Manger). In such a context, the Property Fund would cease to represent a means of awarding restitution. It would oblige all of its shareholders to seek remedies in court or under the respective treaties against the Romanian state.

One must assume that the Minister of Communication’s ill regarded suggestion will be dead on arrival, but the very fact that a member of the Romanian Government could be so oblivious to the law and to the consequences of his actions as to prepare such an amendment to GEO 81 in the first place is a matter of national disgrace.

Decrease in Net Asset Value of Fund Below its Share Capital Value

At the end of 2008, the net asset value of the Fund was 24% less than its share capital. According to the provisions of the Romanian Company Law (Law 31/1991), as amended and supplemented, when there is a loss in the net asset value of a company, the share capital has to be either completed by new contributions, or reduced, before any distribution of the profit to the shareholders of the company can be made.

In such context, the reduction of the share capital of the Property Fund may be considered by diminishing the face value of each share, which currently is 1 RON. However, in order to accomplish a decrease in the share capital of the Fund, all the subscribed share capital must be fully paid up. Therefore, in order for the Property Fund to actually implement a decision regarding the decrease of the share capital, a solution must be found with regard to the unpaid shares of the Romanian state, i.e., almost 560 million shares, with a face value of 560 million lei, according to an informative note posted on the web-site of the Fund. Such a solution would be either to have these shares paid up in cash and/or in-kind, or to have them cancelled, based on a normative act to cancel such shares.

However, diminishing the face value of the shares is, as a matter of principle, unacceptable to the private shareholders of the Property Fund, and it would certainly raise even more reasons for concern. It means that their interests have been diluted by a quarter as compared to claimants who receive compensation in shares after the reduction, but before the listing. And not only is the listing of the Fund still off in the future and somehow uncertain, but the benefits of the shareholders’ participation in the Property Fund are under threat of dilution and remain difficult to obtain -- the Fund does not yet provide the effective compensation for which it was created, and it seems to be unable to provide the benefits to which shareholders are entitled, i.e. dividends, corresponding to their participation to the share capital of the Fund.

If a reasonable solution to this dilemma is not soon found, additional litigation will surely ensue further weakening the value of the settlement of restitution claims already agreed upon by the State and its former victims.

Envisaged Steps Before Listing the Fund on BVB

After the completion of the 3rd stage of the selection procedure for the appointment of the Fund Manager, and once such Fund Manager has been finally selected and appointed, the Fund must be registered with the National Securities Commission ("CNVM"). The management agreement, in its final form as negotiated with the Fund Manager, will be part of the minimum documentation necessary in order to perform such a registration. According to the provisions of Law 297/2004 on the capital markets, the CNVM must issue specific rules regulating the transitioning of the Property Fund shares on BVB. The same law also provides that the Fund could be listed on international stock exchanges.


The listing of the Fund on BVB continues to be the most important step necessary to allow the Fund to accomplish the purpose for which it was created in the first place, i.e., the award of restitution to victims of the Romanian communist state.

The finalization of the 2nd stage of the selection process for the Fund Manager is a very positive event which has brought hope once more to those awaiting compensation for their stolen properties. However, many measures still need to be taken and it is important that the timing of the schedule be respected.

Dealing with the cancellation of the State’s unsubscribed share capital and finding a solution to avoid the dilution of the private shareholders in violation of their subscription settlement agreements and achieve the payment of dividends, is of utmost importance and must be done in close consultation and cooperation with the private shareholders.

Finally, putting a lid on the fanciful ruminations of persons in the Romanian government regarding the theft of Fund assets into State coffers is an imperative. Even the potential for approval of such ill conceived and illegal actions raises doubts as to the sincerity of the Romanian government’s restitution program and its already executed commitments to existing shareholders, as well as it’s commitment to the rule of law and the future of its own capital markets. Meanwhile, the European Court of Human Rights in Strasbourg continues to render decisions against Romania in case after case where claimants are entitled to receive shares in the Property Fund, on the grounds that since the Fund has not been listed yet on the BVB, the Fund does not actually function in a manner so as to lead to an effective award of compensation to the claimants. It is hard to imagine that, in this context, the Romanian state could afford to perform an act that is tantamount to the same act of nationalization undertaken by its communist predecessors.

The article was published based upon approval of:

Rubin Meyer Doru & Trandafir