An investor intending to initiate any transaction in Romania faces at least one dilemma. Should the transaction be one in which the asset is purchased together with all the contracts, licences, permits and related risks (in consultant speak this is called an ‘asset deal’), or one in which a percentage of the equity interests (shares in the case of a joint stock company) or even all of the equity interests in an operating company are purchased?
In the text below, I provide a very short presentation of the legal considerations and the pros and cons of each structure (without providing an in-depth analysis and without detailing the tax implications). The purpose of this exercise is to highlight the need for both seller and buyer to seek assistance from lawyers, tax consultants and technical specialists, who in most cases, together with the parties to the transaction, will be able to provide recommendations and guide the parties towards making the right decisions.
Both transaction structures come with advantages, risks and key considerations that buyers must study carefully in order to ensure they make a safe investment.
Moreover, the interests of the seller should be aligned with those of the buyer.
In most cases, the terms and conditions are established right from the start of the business relationship between seller and buyer. However, in practice we have also encountered situations where the buyer undertakes an analysis of the type of acquisition he/she intends to make only after verification of the company/companies (the complex due diligence process) has been performed.
Comparative analysis of the two acquisition structures shows the most frequently encountered disadvantage of an asset deal to be the permits and authorisations that cannot be transferred from one entity to another. This is the case with permits and authorisations in the field of gambling, renewable energy, etc.
Another disadvantage of an asset deal has to do with contracts that are not automatically transferred. This is the case with contracts containing control limitation clauses that involve renegotiating the terms and conditions, and in some cases termination of the contract may be required in the event of a change of control. A further disadvantage are the costs relating to the transfer of the asset, especially in the case of real estate, where the associated costs (e.g. notary fees in the case of land transfers) are high.
As to the advantages of an asset deal, the greatest benefit for the buyer is that he/she is able to choose the goods to be transferred as well as the obligations transferred with them. Essentially, the buyer is able to limit his/her liability. However, buyers will never be able to fully protect themselves through an asset deal because there will always be risks that neither the sellers nor their consultants are able to anticipate at the time of the transaction.
One advantage of a share deal is the relative ease of registering the new shareholder (in the case of limited liability companies), including the fact that there are no legal terms to delay the transaction. Attention must be paid to the clauses in the seller’s articles of association relating to the transfer of shares, which may give rise to further discussion and may either oblige the buyer to buy more shares than anticipated or will mean that certain preliminary procedures are required in the relationship between the shareholders A special case is given by joint stock companies that have list of shareholders (Romanian: “cuponarii”) where the sales process can be made more difficult as a result of the clauses of the articles of association relating to the transfer of shares.
Before signing any contract of sale (whether for shares or assets), the structure of the transaction needs to be analysed and all options, both legal and fiscal, explored.
Although a share deal is most common, this does not automatically mean it is the best option for a company looking to restructure and give new prospects (through sale) to an asset or a successful part of the business.
For any diligent investor, we recommend a due diligence process be conducted in advance in which specialists (lawyers, tax consultants and specialised technical consultants) carefully study the investment risks and conditions precedent, such that the guarantees contained in the sales contract are as comprehensive as possible for the buyer. The seller should be aware of his/her liability for matters beyond his/her control. The parties should also pay attention to the law governing the sales contract, the structure of the companies, the corporate documents and the type of business subject to the transaction.
Only after a thorough process of verification taking all relevant aspects into consideration has been performed, and after the various negotiations between the parties have been concluded, can the best decision be taken regarding the type of transaction to be implemented.