Introduction
In 2001, Romania embarked upon what was then a half-hearted effort to provide restitution to the victims of the wrongful and abusive confiscations of their homes and properties by the Communist authorities after 1945. This effort included provisions to offer restitution to the owners of pre-communist era properties where those properties could no longer be returned in-kind under restitution Law Nr. 10/2001, as modified under Law 247/2005. Government Decision Nr. 1481/2005 was enacted to set up the Property Fund (the “PF”), to provide compensation to such former owners through grants of shares in the PF in proportion to the value of their successful claims.
The PF was organized as a hybrid "closed-end" mutual fund which issues shares in settlement of restitution claims. Upon receiving the shares, the recipient becomes a shareholder in one of Europe's largest funds. The Fund currently has a portfolio of shares in some of Romania’s best-known and most valued institutions, with the total assets currently held by it estimated at about €3.9 billion ($6 billion). However, the full implementation of the Fund cannot occur until the Fund is listed on the Bucharest Stock Exchange and that listing has been inordinately delayed to the determent of the mostly elderly claimants who still await justice.
Cognizant of this problem, the Romanian government passed an ordinance last June that contains a series of measures that permit the speedy listing of the Fund with the Bucharest Stock Exchange, and created the basis for a temporary and official market for the sale of the Fund's shares until such time as the Fund is listed on the Exchange. Although it took another six months for any real progress to occur, since December 2007 an apparently genuine and purposeful effort has been made by the Fund’s Supervisory Board to bring about the listing of the Fund. But more speed and less sloth are still required. This article reviews the events chronologically since the Government’s passage of the June 2007 Ordinance (“OUG 82/2007”).
The First General Assembly of the Shareholders
Based upon statements to the media emanating from the administration of the PF, the expectation had been that immediately after passage of OUG 82/2007 in late June 2007, a request for proposal to hire evaluators of the PF’s portfolio would be issued. Instead, it seems that just about everyone at the PF went on vacation. Three months went by, but on September 25, 2007, the first meeting of the Property Fund’s General Assembly of the Shareholders (the “GAS”) took place.
The agenda of the GAS included, among other matters, consideration of the status of the Property Fund’s portfolio, amendments to the Articles of Incorporation of the PF, the appointment of the financial auditor of the PF, the approval of a future sale of shares issued by the PF on the Bucharest Stock Exchange, and a grant of dividends to shareholders. At that moment, the Romanian state, represented by the Ministry of Economy and Finance, held approximately 88% of the outstanding shares of the PF. Deloitte Audit SRL, an arm of Deloitte & Touche, was appointed as the PF’s financial auditor for a period of three years.
The shareholders also agreed that an effort to sell some shares of the fund by the government in advance of listing would help establish a market price for the shares, as well as help fund the government’s program to pay claimants who opt for it a cash payment representing a set amount of their claim.
Because of modifications to the Law on commercial companies, Law No. 31/1990 regarding the management of a joint stock company, the Fund’s shareholders had to choose one of the two types of management systems authorized by law. The shareholders of the PF approved changing the Fund’s management form from a unitary system of management to a dual one. According to the Fund’s Articles of Incorporation, as amended by Government Decision 1581/2007, the Fund adopted the dual system of management. Under that system, the management of the company is entrusted exclusively to a Directorate with the ability to take all necessary matters in the exclusive competence of the shareholders and to a Supervisory Board appointed by a general meeting of shareholders.
The Supervisory Board supervises and controls the activities of the Directorate. A member of the Supervisory Board cannot be a member of the Directorate. According to the provisions of Law 247/2005 and the Fund’s Articles of Incorporation, the PF will have this management system until a fund manager is selected.
Following the GAS, on November 1, 2007, the PF commenced distribution of dividends to its shareholders. By November 15, 2007, 191 shareholders received dividends totaling RON 31,502,679, with a remaining RON 721,021 still to be distributed. RON 28,797,328 is the amount of the dividends paid to the Romanian state for the shares owned by it.
Another meeting was held on March 5, 2008. The meeting approved the amended version of the PF’s charter and, to the credit of the government and the members of the Supervisory Board of the PF, two “independent” members will be elected, one of whom is a PF shareholder and the other the son of a prominent claimant. Dividends for 2007 are expected to be awarded by the GAS to be held in late April.
The Steps Required for Listing the Fund Shares on Bucharest Stock Exchange
Before the PF can be listed on the Bucharest Stock Exchange, three main steps must be completed, each involving a contractual bid process. An evaluation of the PF’s portfolio of shares; a financial consulting firm needs to be retained to advise the PF and assist it in the third and final stage of hiring a fund manager for the PF. Until all three steps are concluded, the PF’s shares cannot be listed on the Bucharest Stock Exchange.
From June until November 2007, no request for proposal was forthcoming from the management of the PF for any of these appointments. Only when a group of shareholders representing more than 5% of the outstanding shares of the PF suggested that it might be provident to call for a special meeting of shareholders in order to stimulate management did a sudden change occur at the Supervisory Board leading to changes in the management structure of the PF. This change has stirred the PF into a measure of activity not seen in several years, although management is still subject to an occasional lethargy that requires an outside stimulus to correct.
The professionalism of the Supervisory Board cannot be questioned. It has a multi-lateral political and business membership that has brought cohesion to the PF’s objectives. The Supervisory Board has been more transparent and open in its deliberations than one would have expected. That makes the delays incident to the bidding process all the more mysterious and unjustified. Whereas pre-December 2007, the PF’s listing efforts were stagnating, it now appears that those efforts are indeed moving ahead, albeit at the rate of two steps forward, one step back. This may be standard operating procedure for many things in Romania, but it is no longer tolerable in regard to the Property Fund.
Evaluators’ selection
At the end of November 2007, the PF organized the bid for the selection of at least two evaluators to value the PF’s portfolio in accordance with international standards and Romanian law. The evaluators’ selection process has several stages.
The first stage of the evaluators’ selection procedure ended in January 2008. Darian Rom-Suisse SRL was chosen to evaluate 50 firms in the portfolio and PriceWaterhouse Coopers Romania was chosen to handle 26 companies. But an evaluator for a package of a remaining twelve firms was not determined, thereby requiring another selection process for that smaller bundle of companies. Those twelve entities include major utilities such as Turceni, Rovinari and Craiova, and also Electrica Muntenia Nord.
At the end of February, the two firms chosen as evaluators had still not signed their consulting agreements with the PF in order to commence work. Only after execution of these agreements can the winners of the bid start the evaluation of the 76 companies which are included in the PF‘s portfolio. It is unclear what is holding up the execution of the two contracts. Once finalized, PriceWaterhouse Coopers will evaluate such major enterprises as Petrom, Transgaz, Transelectrica and Alro Slatina, and Darian Rom Suisse will value companies of lesser importance.
The delay in the execution of the agreements with the two already selected evaluators and the failure to select the evaluators of the remainder of the portfolio that still must be valued is more than disappointing. Because the value of the portfolio can only be estimated prior to a proper evaluation, speculators have been offering to buy shares prior to listing from the hapless victims of communism at drastically discounted rates. Such deep discounted sales, which are now permissible, as further discussed below, flaunt the intent of the restitution scheme and are the direct result of the unwarranted delays in listing the PF.
Financial consultant’s selection
A bid for the selection of a strategic financial consulting firm was organized in April 2006, but the agreement with the UK company selected, Cordea Savills, was never finalized. In early 2008, the selection procedure for a financial consulting firm was reactivated through competitive bid procedures.
A financial consultant is required to assist the PF’s Supervisory Board in the selection of the fund manager for the PF, the final major step for the listing of the PF shares on the Bucharest Stock Exchange. Additionally, the financial consultant would evaluate the activity of the fund manager and the investment policies selected by the manager. On February 4, 2008, the PF announced that Schroders Investment Management Limited, Industrie un Finanzkontor Etabl., and Independent Capital Management are the three companies which were chosen for the second stage of the selection procedure for the financial consultant. The second stage of the process involves a dialogue with the selected candidates and the submission of their final offers. The third stage of the procedure is the final evaluation of the submitted offers and the selection of the financial consultant with the execution of a financial consulting services agreement.
Fund Manager’s selection
Romania’s Finance Minister publicly stated that the fund manager will be selected in the second half of 2008 by a commission established through a decision of the prime-minister. The conditions for the PF’s listing on the Bucharest Stock Exchange will be set forth in a government decision in May or June, and after that, the fund manager will be selected. If this is actually what occurs, it appears that the PF will not be listed on the Bucharest Stock Exchange until December 2008.
According to the declaration of the government, thirty-seven major investment banking firms have expressed an interest up until now in bidding to be the fund manager of the PF. Among them reportedly are Goldman Sachs, Morgan Stanley, Dresdner Bank, Deutche Bank, Nomura, and Merrill Lynch. The reason for such wide-spread interest is the potential annual fee which is estimated at €150 million per year.
Sales of PF’s Shares Prior to Listing
The long drawn out issue of whether or not shareholders in the PF could sell their shares prior to listing the Fund was finally resolved in favor of such sales in the early part of 2008, pursuant to Governmental Decision 1581/2007 and the subsequent acquiescence of the reluctant Central Depositary to transfer such shares. A few sales have already been reported, but they are rumored to have been made at pricing representing significant discounts off the nominal value of the shares.
This bazaar-like environment is the direct result of the past failures of the PF management and the government to move the listing process along at a reasonable clip. Because there is no official valuation of the portfolio by independent evaluators, broker dealers must substantially discount the value of the shares in order to securitize whatever package they might create to resell them. This leaves the elderly victims of communism with the choice of receiving a fraction of the value of their restitution now or waiting and hoping that at least the evaluation of the portfolio will proceed in a somewhat timely fashion so that the discount on sales thereafter will not be so low. Consequently, shareholders have been strongly advised by capital market specialists not to sell their shares at the discounted prices that they can obtain at this time.
Conclusions
Up until recently, Romania permitted the grand effort of its restitution scheme to falter through acts of lethargic indifference. Having created a method to compensate the victims of its past injustice that is an example to other European nations grappling with restitution issues, Romania allowed bureaucratic lassitude and indolence to soil the effort. As Romania diddled about, delaying each segment of the listing process, the Property Fund was bludgeoned by the rhetoric of a hostile opposition that apparently cared more about political expediency than the rights of the victims of communism. What will without doubt be a significant stimulus to Romania’s capital markets as well as one of the nation’s greatest achievements in justice has languished in a swamp of disingenuous drivel generated by political opportunists because of the indifference of so many in Romania to the languid progress towards listing.
Indeed, the European Court for Human Rights in Strasbourg continues to render decisions against Romania in cases where claimants are entitled to receive shares in the FP. The Court has recently issued a number of new decisions whereby it once more restated its opinion that, "since the PF is not yet listed with the Bucharest Stock Exchange, it does not function in a manner which allows effective compensation" - see, for example, Bretcanu vs. Romania and Suciu Werle vs. Romania. The position of the Court is the same as in its rulings in tens of other cases and they are expected to continue for as long as the PF is not listed. In all of these cases, the Court condemned Romania to the in-kind restitution of the confiscated property or, where this is no longer possible, to provide cash compensation for the victims of nationalizations. Unfortunately, decisions like these put Romania in an unenviable third place on the Court's list, after Russia and Turkey, as its worst human rights offenders.
The slow drift towards listing may almost be over. The recently invigorated Supervisory Board has shown an inclination to move things along. It helps that it has a multi-partisan membership which all seem to be of one mind. But good intentions alone do not produce results. Those charged with the responsibility to remedy the injustices of the past through the PF must use their best efforts to move speedily towards the culmination of Romania’s yet unfulfilled promise to the victims of its own injustice.
If the PF’s listing is to occur in 2008, steps must be taken now to commence the evaluation of the Fund’s portfolio. At the very least, if shareholders had a transparent reliable valuation in hand, it could provide the basis for reasonable offers to buy shares in advance of listing. They would, of course, be discounted as well, but not at the heavily discounted rates that currently prevail. Rapid movement towards the hiring of a financial advisor and then a fund manager will further assure that even though the listing has not yet occurred, the listing is, indeed, coming soon, and current sales of shares by elderly claimants will not then be at heavy discounts off their real value. The Romanian state has the moral and legal obligation to provide effective compensation to the victims of the injustices it generated and that can only truly occur once the Fund is listed.
The article was published based upon approval of:
Rubin Meyer Doru & Trandafir
SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION
IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.
