Romania: The Artist's Way- How to Force Out Minority Shareholders from Non-Listed Companies

Limited number of legal tools

In a rapidly growing business environment, many companies have a number of passive minority shareholders whose presence might disturb the shareholders who are actively involved in increasing the company’s profitability.

Although Romanian legal provisions offer only a limited number of alternatives for forcing out minority shareholders, a number of practical solutions leading to that result have been identified and successfully implemented.

As a preliminary note, generally, modifying the corporate structure to squeeze out minority shareholders should be carefully considered, especially since such structures are rarely without risk. One of the main obstacles is the right of the minority shareholders to challenge the corporate resolution on their exit. For this reason, planning of any such measure should begin with a thorough check to ensure compliance with corporate formalities related to shareholders’ decisions, since a breach of these formalities potentially exposes the resolution to the risk of annulment for an indefinite term.

Transformation of a joint-stock company into a limited liability company

One way to force out minority shareholders is to transform a joint-stock company into a limited liability company (“LLC”). As Romanian law sets the maximum number of shareholders in a LLC at 50, the transformation of a joint-stock company with more than 50 shareholders into an LLC will automatically lead to a corresponding reduction (exit) of shareholders. The corporate resolution on the change of the legal form requires a majority of at least two thirds of the voting rights held by the present or represented shareholders (unless the company’s articles of association stipulate a higher majority). Adopting an LLC structure would provide the majority shareholders with valid grounds to squeeze out minority shareholders so as to comply with the statutory limit of 50 shareholders. The squeezed out shareholders are entitled to fair compensation for their shares, which has to be determined based on expert valuation reports.

Consolidation of the share capital by increasing the par value of a share, without the amendment of the share capital

Another way to force out minority shareholders is to consolidate the share capital through the increase of the par value of a share to a level that is in excess of the minority shareholders’ overall participation in the share capital. Since this structure envisages only the increase of the nominal value of a share and not the share capital, no infusion of capital is required.

To preserve fair treatment of minority shareholders, the shareholder resolution should provide for the minority shareholders’ opportunity to subscribe the difference between the fraction of the share held following the consolidation process and the new par value of one share. Hence, on the theoretical level, minority shareholders may still preserve their shareholding position, but only in exchange for additional contribution to the share capital up to the new nominal value of a share.

Refusal to grant the minority shareholders the right to preserve their position by additional contribution bears the risk of a right to challenge the corporate resolution on the squeeze out for abuse of the minority shareholders on behalf and for the benefit of the majority shareholders.

Reduction of the share capital by annulment of shares

Finally, the reduction of the company’s share capital may have as a secondary effect the elimination of some minority shareholders, ie, when such reduction is made through the acquisition by the company of its own shares followed by their annulment. This operation was commonly used by joint stock companies but may also be applied to other types of companies. This corporate operation shall be registered with the competent Trade Registry Office in two phases, encompassing a period of two months (as of the day the first corporate resolution approving the reduction is published in the Official Gazette), granted to the company’s creditors for opposition purposes.

As an illustration, if the annulment is approved at a rate of 1:100, shareholders having less than 100 shares would be forced out of the company. For their participation in the company these shareholders should receive fair compensation for their shares, to be determined based on expert valuation reports.

Even though the Romanian legal provisions offer a limited number of alternatives for forcing out minority shareholders, a number of practical solutions leading to the same effect have been identified and successfully implemented.

authors: Mădălina Neagu, Anda Daniela Tufan