Theoretical and Practical Aspects of Mergers&Divisions

of Companies in Romania

Abstract:
The merger and division activities are more an more present now after a period of decline after the
economic crisis, and now, due to the high number of investment funds and companies in need of
development the transaction started to multiply by the year so in this paper I will present the main
procedures in such a transaction and detailed on the concepts as follow. The first chapter will define
the terms and classify them by the type of the transaction. In the second chapter is presented the
merger as a way of restructuring any business and also an alternative way of taking over a company.
The third chapter presents the legal frameworks and procedures of mergers and divisions procedures.
In the fourth chapter is presented tj merger and its effects towards entities involved and general
asspects. The fifth and finan project is presenting the nullity of a merger or division proces

1. M&D - DEFINITIONS

1.1. Forms

A merger is the operation through which:

a) one or more entities are dissolved without going through the liquidation process and
transfers its entire patrimony to another society in exchange of the allotment of shares in the
newly created company to the shareholders of the absorbed entity and maybe even cash
payments up to 10% of the nominal value of the distributed shares (fusion by absorbtion).

b) more societies are dissolved without going through the liquidation process and transfers the
entire patrimony to a new company they create, in exchange of the allotment of shares in the
new entity to the shareholders and maybe even cash payments up to 10% of the nominal value
of the distributed shares (merger by fusion).

The division is the operation through which:

a) An entity, after being dissolved without going into liquidation, transfers to several
companies its entire patrimony, in exchange of the allotment of shares in the beneficiary
entities to the shareholders in the divided society and, if applicable, a cash payment of up to
10% of the nominal value of the shares.

b) An entity, after being dissolved without going into liquidation, transfers its entire
patrimony to several newly created companies in exchange of the allotment of shares in the
beneficiary entities to the shareholders in the divided society and, if applicable, a cash
payment of up to 10% of the nominal value of the shares.

1.2. Classification

As it can be seen in the legal doctrine, the legal regulation consists of two forms of merger
Stanciu D. Crpenaru Tratat de drept comercil romn Universul Juridic,
2012
merger by absorbtion and merger by fusion.

The division can take place also through the simultaneous transfer of the divised societys
patrimony to one or more existing entities and one or more newly created entities. The merger
and division cand also be made between societies of different forms.

As it can be seen the merger and division procedure take place in the dissolution place but the
law allows those procedures even if the companies are in the liquidation process with the only
condition that he allotment between shareholders did not began at that moment. Art 238, alin.
4.

2. MERGER A REORGANIZATION WAY FOR JURIDIC ENTITIES

2.1. Merger integration in the reorganization process

From a juridical point of view, the merger and division operations are regulated by law
31/1990 about commercial entities, the law was republished and added futher completions
articles 233 to 245.

The reorganization through merger of companies was initially a judicial creation that proved
to be usefull and therefore republished in the Civil code and the law 31/1990. The merger is a
common method of company reorganization based on various reasons and motivations:
strategic, economi, organizational.

The fusion is ussualy considers in strategic moments that have the power to influence de
development of a company or a group of companies. One thing that has to be kept in mind is
the breadth of the process and therefore the advantages have to outpower the disadvantages.

The main economic advantages of the merger are represented by the cumulation of the power
of multiple companies in one in order to become a major player in that industry, this reason is
behind the decisions in situation when on the market there is one company that has the
majority of the market share and multiple smaller companies that cand grow because of the
lack of negotiating power. One other reason behind such a procedure may be behind the
strategy of entering a new market where the absorbing company doesnt conduct any business
so it is a lot simpler for them to buy an already established company on that market and get all
its facilities, customers and credibility, so, as the process ends, the company is already
conducting its activity.

2.2. Other ways of taking heritage

Another way of taking over heritage is the LBO or Leaveragen Buy-Out, this tipe of
acquisition is in fact a technique of taking over a company. This procedure can be used even
in the case of a merger because I consists in taking over through the assignment of equity or
by multiple persons through one or more holding companies by financing the takeover with a
loan that will pe further paid back with money coming from the target company, mainly
through dividend but not allways. As a result of this acquisition, the holding company will
supervise the acquired entity so that it makes it as profitable as it can and will sell its share of
the company for a price higher than the one for which it was bought

Stanciu D. Crpenaru Tratat de drept comercil romn Universul Juridic,

2012
3. JURIDICAL ASPECTS LEGAL FRAMEWORK AND PROCEDURES

The merger is an operation through which two or more commercial entities decide by
themselves the transmission of assets and liabilities to one of the entitites or setting up a new
company in order to merge the assets.

The stages a company has to go through for the merger of the companies are the following:
1. Meeting of the general assembly in order to take a decision about the merger;

2. General assemblys approval to start preparing the merger project with a majority of at least
two thirds of the voting rights held by the present or represented shareholders;

3. Preparing the merger project by the administrator of the companies that will take part in the
transaction;

4. Providing the shareholders with the documents legally requested for informing about the
merger procedure. Those have to be provided a month in advance before the general assembly
that has to take a decision about the merger.

5. Informing the general assemblies of the companies involved in the transaction of any
substantial change in the assets and liabilities incurred between the date of merger project
completion and the date the general assembly has to decide on the operation.

6. Preparing a detailed written report by the administrators of the companies involved in the
merger explaining the juridical and economical foundation;

7. Submitting the merger project to the trade registry office, the project has to be signed by the
representatives of the companies involved in the transaction;

8. Publishing the merger project, approved by the delegated judge, in the official gazette of
Romania, 4th chapter, with at least 30 days before the dates in which the general assemblies
will have to decide upon the merger

9. Assigning, by the delegated judge, o one or more experts to examine the project and
prepare a written report;

10. Adopting the general assembly merger resolutions of each of the participating companies
withing 3 months of the publication of the merger project, with a majority of at least two
thirds of the voting rights of the present and represented shareholders.

11. Performing the inventory and valuation of the assets and liabilities owned and presenting
those in financial statements.

12. Preparing before the merger financial statements by each of the participanting companies
as the law stipulates.
Stanciu D. Crpenaru Tratat de drept comercil romn Universul Juridic,
2012
13. Divising the assets and liabilities of the merging company, those are transferred to their
recipiend through handover protocols;

14. Determining the real liabilities, receivables, provisions and other items of assets and
liabilities

16. Showing in the beneficiary companys accounting the assets and liabilities received from
the companies that merged.

17. Companies that cease to exist are required to submit tax returns and pay the tax 10 days
before the registration of the termination in the Register of Trade.

The division procedure consists of the following steps:

1. The decision of each of the participating copanies on the division and the established
requirements to amend the articles of incorporation

2. Developing the company division project.

3. Publishing the division project in the Official National Gazzete or on the website of the
company and the Regiter of Trade.
4. The opposition of the creditors

5. Preparing the administrators report and informing the compays general assembly and the
managers of the other involved companies about any substantial change in assets or liabilities
thathappened between the date the division project was drafted and the date of the general
assembly that has to decide upon this project. The drafting of the report is not necessary when
all the associates and shareholders and all the voting persons agree to it but this case is not
realistic possible in large companies where the shareholders number is high and so is the
chance of them to have differen oppinion
6. Appointing the expert by the delegated judge in order to examine the division project and
draft a report in which will be mentioned if the rate shares or social parts is correct and
reasonable, if the method proposed for determining the exchange rate is an adequate one

The report will also describe any unusual difficulties in the valuation process. There wont be
necessary the appointment of the expert and drafting of the document if all the shareholders
and associates agree to do so.

7. Making available to the associates and shareholders of the following documents: division
project, managers report, annual financial statements for the last 3 financial years, financial
statement not older than the first day of the 3 rd moth before (if it is the case), auditors report,
out contracts over 10000 with at least one moth before the general assembly in which they
will have to decide upon the division project
8. The decision of each of the participanting companies general assembly upon, the general
assembly has to take place no more than 3 months after the publishing of the division project.
9. In the case of a division by creating one or more new companies, will also be drafted the
memorandum of each of the new companies for its approval in the general assembly
10. The dissolution without liquidation of the divised company and the transfer of its
patrimony to the beneficiary or newly created companies.
11. The formation of a new company as a result of the division.
Stanciu D. Crpenaru Tratat de drept comercil romn Universul Juridic,
2012
4. MERGERS EFFECTS

The merger produces effects:

a) In the case of the creation of a new company at the date the company is registere in the
register of trade.
b) In other cases, from the date of registration of the decision of the las general assembly that
approved the operation, with the expetion of the situation in which, through the agreement of
both sides, it is stipulated that the operation will take effect at a certain date that cant be after
after the end of the financial year of before the date of the last ended financial year.

4.1. General aspects

The merger and division are procedures through which the restructuring of the companies is
realized in order for the company to best fit the companys need. The law 31/1990 from article
238 to 251 is regulating the merger and division of comercial companies

4.2. Taking effect

The article 244 of the law 31/1990 imposes a certain procedure in order to adopt the
approving decisions of the merger/division, that involve making available to the shareholders,
with 30 days before, of different documents related to the merger/division. Having in mind
this text that refers also to a general assembly, the 30 days deadline is the same with the one
for convocation detailed in art 117. There is also a coordination with the article 242 paragraph
2 that imposes the project of merger or division to be made public 30 day before the date of
the general assembly that decides upon the merger/division and also the deadline for
opposition in paragraph 243.

Paragraph 240 out of the law 31/1990 is setting a rule in terms of the dates when a merger or
division procedure takes effect. This way, the rule is differen because as a result of the
operation here are new companies and then the date the procedure takes effect is the date of
the registration in the register of trade, if not, it will take effect on the date when the general
assembly approves the procedure, the law allows the shareholder to understand and set a date
when the merger or division takes effect.

Such an action is firstly aplicable to a merger by fusion and also to a total or partial division
as long as the patrimonial rights are transfere to a company already existent
Practic, o asemenea posibilitate este aplicabil primordial n cazul unei fuziuni prin absorb ie,
dar i al unei divizri totale sau pariale, n msura n care prile de patrimoniu se transmit
numai ctre societi deja existente.

4.3. Effects towards the persons involved

Shareholders
Many companies by shares have in the shareholders structure e number of minority
shareholders that are passive because of their lack of interest, because of their death. The
presence of such shareholders in the structure can create problems to the majority shareholder.
A good thing is the existence of legislative ways to get rid of them when the active
shareholders cant initiate the procedure to act on their squeeze-out rights.
In some ways, the mergers and divisions can be used to get rid of such individuals by taking
Stanciu D. Crpenaru Tratat de drept comercil romn Universul Juridic,
2012
them out of the shareholder structure or by moving/letting them in a company resulted fro a
division procedure, and, in some case, it cant be known if it was made by intention or it is
just the result of such a procedure.
Employees
The effect of merger toward the employees has only a morale effect because of the
reorganization process they have to go through. That transition is hard because of the need of
collaboration between two companies with different organizational culture

Third parties
The absorbing society becomes the debtor of debts toward the third parties the absorbed
company still had obligations toward. The substitution of company doesnt make the
absorbing company get rid of the absorbed company debts. Because of that, its wrong to
modify the contracts through addendums of the contracts the absorbed company had before in
order to change the name with the name of the new company.

5. Mergers nullity

The nullity of a merger and division can only be declare by court decision and in no way lead
to leads to the modification of the validity of the resulted obligations of the absorbing
company. The procedure of annulment and declaration of the mergers or divisions nullity
cant by made after the end of the 6 months period from the date when the merger or division
took effect.
As in the case of companys nullity, the merger or division nullity can be pronounced only in
the case the the cause of nullity cant be resolved in the term established by the court.

Stanciu D. Crpenaru Tratat de drept comercil romn Universul Juridic,

2012