The acquisition by a joint-stock company of its own shares, also known as share buy-back, is permitted under Romanian law, as provided by Articles 103 – 109 of the Companies Law no. 31/1990 (“Companies Law”). The operation is, however, limited by certain conditions, based on reasons such as the goal to avoid speculation by the company on the price of its own shares or the difficulty to accept that the company can be, at the same time, a shareholder (being thus both debtor and creditor)[1].
Conditions
As such, the following conditions must be met cumulatively:
- the acquisition must be decided by the extraordinary general meeting of shareholders, which shall mainly determine the methods of acquisition, the maximum number of the shares that will be acquired, the period of time required for carrying out the operation, which may not exceed 18 months from the date of publication of the decision in the Official Gazette, Part IV, as well as the minimum and maximum consideration for the shares;
- the total value of own shares (including those already in its portfolio) must not exceed 10% of the subscribed share capital;
- only fully paid-up shares may be acquired and only if the subscribed capital is fully paid-up;
- the payment for the shares so acquired may be made only out of the distributable profits and available reserves of the company, as shown in the last approved balance sheet, except for legal reserves.
Consequences and possible sanctions
It is important to note that shares redeemed by the company in breach of the conditions listed above, irrespective of the number of conditions breached, must be disposed of within one year from the date of their acquisition. If this does not happen, the shares that the company acquired will have to be cancelled, with the effect of also reducing the share capital, corresponding to the percentage of the share capital represented by the cancelled shares.
Therefore, in such a situation, the law imposes two obligations for the company:
- to dispose of the shares within one year from the date of their acquisition;
- if the transfer of the shares has not been completed within one year, to cancel the shares.
If the amount of share capital resulting after the reduction falls below the legal minimum share capital amount, the company will have to replenish its share capital or go into liquidation.
Even if the special conditions imposed by the Companies Law are fulfilled, there are two other possible negative outcomes, granted by the general remedies provided by the law:
The annulment of the GMS Resolution which approves the transfer of the shares
When shares are redeemed by way of transfer, the acquisition is, in principle, made proportionally from all existing shareholders. Therefore, the participations remain the same and no shareholder is affected by a share dilution as a result.
However, the acquisition can also be performed from only one or some of the shareholders. In this case, the interests of the shareholders whose shares are diluted following the transaction can be affected, as they no longer have the same voting rights or dividend rights – naturally, through such a transaction, some shareholders are preferred to others. The remedy that the law provides for them is the possibility of requesting the annulment of the General Meeting of Shareholders (GMS) Resolution[2], on the grounds of article 136^1 of the Companies Law, which states that shareholders must exercise their rights in good faith, respecting the rights and legitimate interests of the company and of other shareholders.
What is more, the interests of the creditors of the company can also be harmed through such a GMS Resolution, especially if the transaction leads to the annulment of the shares and the reduction of the share capital, as such operation might prejudice them.
The legal mechanism set by the Companies Law for the creditors’ protection is the opposition provided by article 61. As such, the company’s creditors affected by the decisions of the shareholders which led to the amendment of the articles of association may be subject to the opposition of the creditors, through which they may request the court to order the company or the shareholders to pay compensation for the damage caused.
The company’s tort liability
Besides the possibility of annulling the GMS Resolution which approves the transfer of the shares, the company may potentially remain liable in tort for the damage caused to the shareholders, because of the transaction.
Nonetheless, it remains debatable how this liability could be triggered, since it concerns the same shareholders who have voted for the acquisition of the company’s own shares in the general meeting of shareholders in the first place. In this case, the ones who would most likely have interest in triggering tort liability are the shareholders who voted against the transfer, those who did not participate in the GMS and the minority shareholders, who can act under article 136^1 of the Companies Law, which states that shareholders must exercise their rights in good faith, respecting the rights and legitimate interests of the company and of other shareholders, including the rights and legitimate interests of the minority shareholders.
Exceptions to the special conditions provided by the law
The aforementioned conditions are not applicable for all cases of redemption of the company’s own shares, as there are certain situations where such conditions become superfluous or unnecessary. Therefore, the restrictions do not apply if:
- the acquisition of the company’s own shares is followed by their annulment, as a result of a shareholders’ resolution to reduce the share capital;
- the shares are acquired following a transfer by universal title – for instance, a merger or a de-merger where the resulting company is a subsidiary of the company which ceases to exist;
- fully paid-up shares are acquired by virtue of a court judgment in enforcement proceedings against a debtor who is also a shareholder of the company;
- fully paid-up shares are acquired through gratuitous legal acts, such as donation or will.
In these cases, the company can acquire its own shares without any limitation or restriction provided by the law.
The first situation occurs when the purpose of the redemption is to reduce the share capital. Since the reduction is the declared purpose of the acquisition itself, in this case, applying the sanction provided by the law – the annulment of the shares – would be futile, as the reduction of the capital will be made either way, by cancelling the shares thus acquired.
As regards the second case, the universal succession is the result of a merger by absorption where the acquiring company was, prior to the merger, a shareholder of the company being absorbed. Being part of the assets of the company that is acquired, the shares become part of the assets of the acquiring company, which thus becomes the owner of its own shares.
The third situation is that of a court judgment in an enforcement procedure against a shareholder who is equally a debtor of the company. This particular case concerns the situation where the pursuing creditor is the issuer of the shares (i.e., the company), while the pursued debtor is the owner of those shares. Since the shares represent the object of the enforcement, as a result of the court judgment, the company’s interest of collecting its debt is prioritized, hence the lack of any restrictions in this case.
The fourth situation is where the shares are acquired gratuitously. Since the transfer is free of charge, there is no counterpart from the company, which means that there is no decrease in the assets of the company and therefore the shareholders or the creditors cannot be harmed in any way.
The legal status of the shares thus acquired
According to Article 105 of the Companies Law, during the period of their ownership by the company, the redeemed shares do not entitle either the company itself or any of the shareholders to any dividends. Moreover, the voting rights corresponding to the same shares are suspended as long as the shares are owned by the company. This is a logical consequence, since the purpose of a general meeting of shareholders is to determine the company’s best interests and will. As such, it would be a legal nonsense for the company’s will to be determined, at the same time, by the votes exercised by the shareholders in their own name and by the votes corresponding to the shares owned by the company itself.
The same reasoning applies to the impossibility of receiving dividends for the company’s own shares. In fact, in this case, there is an inherent incompatibility between the two notions: since the dividends represent the part of the profit that is distributed to the shareholders, by their very essence, they cannot be attributed to the company itself. It is important to note that these rights over the shares do not cease to exist but are merely suspended for a certain amount of time, since it is presumed by the law that, at some point, this status- quo will change, as the shares will either be transferred or annulled. Therefore, this status is, essentially, temporary ope legis.
[1] CĂRPENARU St.D., PIPEREA Gh., DAVID S., The Annotated Companies Law, edition 5, C.H.Beck publishing house, 2014, page 332.
[2] BODU Sebastian Valentin, THE ACQUISITION BY A COMPANY OF ITS OWN SHARES, Romanian Journal of Business Law no. 1 of 2004.
By Razvan Vlad, Partner, and Daria Anghel, Associate, NNDKP