M&A Concepts: Intro

LegalBrain aims to produce a short series of articles on the use of the most common Anglo-Saxon law concepts in company acquisitions under Romanian law. What do "reps and warranties", "indemnities" or "limitation of liability" mean and how can they be understood in the light of Romanian law? How do these contractual provisions work and what purpose does each of them serve? In the series of articles "M&A Concepts", we will try to address each of these elements from the perspective of the Romanian entrepreneur (or - to use another term - business owner), who is considering selling his/her business and wants to clarify these notions before entering negotiations with potential buyers (often much more experienced in this kind of transactions).

The term "M&A"/ "mergers and acquisitions" often refers to the sale of shares/stocks or, in simpler terminology, sales of companies. In Romania, for the sale of companies, standard industry models of sales contracts inspired by Anglo-Saxon law (or in some cases, even governed by English law) are used i.e. "sale purchase agreements" or "SPAs". Some of the concepts used in M&A in English law can be found in Romanian civil law, but others require contractual technique to supplement the clarity provided by the (mandatory) case law in English law. The need to understand these standard concepts is particularly acute for those who are in the process of selling their business.

The sale of shares is governed by the Civil Code (as a general law) as well as by Company Law 31/1990 (as a special law). Therefore, the contractual freedom provided for by civil law also applies to M&A transactions, the parties having the possibility to include in their voluntary agreement any provision, within the limits imposed by law, public policy, and morality (art. 1169 Civil Code).

The Civil Code contains concepts similar to the most popular M&A concepts in Anglo-Saxon law. By way of example we could mention: (i) reps and warranties, which can be equated with the seller's warranties (title warranty and warranty for hidden defects) protecting the buyer against losing the title over the purchased asset and against potential defects in the asset being sold (defects of which the buyer was unaware at the time of sale); (ii) limitations of liability are equivalent to the conventional limitations of liability in Romanian civil law, including the nuance that the seller's liability cannot be excluded or limited by contract for material damage caused by an intentional or grossly negligent act - art. 1355(1) Civil Code).

Other concepts do not have such a clear counterpart, such as the qualification of warranties by reference to the knowledge (actual or constructive) of the seller. While in Anglo-Saxon law, the qualification (limitation) may be given by full and fair disclosure (a concept clearly explained in case law), in Romanian law the clause that removes or limits liability for defects is void in respect of defects that the seller knew or should have known at the time the contract was executed - art. 1708(2) C. civ. But what does "should have known" mean? Certainly, the case law of the Romanian courts has also touched on this subject, but without the certainty that in a future case, the solutions given previously will be repeated (with some limited exceptions, the case law in Romanian law being binding only on the parties involved in that dispute).

We will deal separately with each of these concepts typical of M&A transactions in order to try to find their correspondence in Romanian law and to discuss the problems that may arise in their practical interpretation.

New European case law in Towercast

The ECJ has decided that “the prohibition of abuse of a dominant position laid down by the Treaties permits an ex-post control, at national level, of a concentration of undertakings with a non-Community dimension” [1]

In other words, the point of view adopted by Advokate General Kokott in her Opinion – which we have discussed here – has been generally adopted by the European Court of Justice (the “ECJ” or the “Court”).

In brief, in its decision dated 16 March 2023 issued in Case C‑449/21 (the Towercast Decision), the Court notes the following:

1. The fact the EU Merger Regulation[2] constitutes a “one stop shop” for assessing concentrations within the EU ex ante (meaning prior to their completion) does not preclude Art. 102 of the TFUE from being applied by national competition authorities to concentrations which lead to an abuse of dominance ex post (meaning after they have completed) on national markets;

2. The fact the respective concentration has led to a consolidation of the acquirer’s dominance on the relevant market is not automatically equivalent to finding that an abuse of dominance has occurred. Abuse of dominance following the concentration has to manifest at least in the sense that “the degree of dominance thus reached would substantially impede competition, that is to say, that only undertakings whose behaviour depends on the dominant undertaking would remain in the market”.[3]

3. As regards the temporal effects of the Towercast Decision, the Court has clarified once again that, as a rule, its interpretation of European law produces effects for situations occurring prior to rendering of new case-law and that such effects shall be limited only for future situations only if: (i) “those concerned must have acted in good faith”; and (ii) “there must be a risk of serious difficulties” in implementing the new case law to the old facts.[4] In Towercast, the Court found none of the two cumulative conditions to be applicable.

This new case-law casts a brand-new light on how mergers and acquisitions need to be assessed from a competition law perspective by counsels and parties looking at such transactions. Assessing a proposed merger or acquisition from the perspective of notification requirements is quite straightforward and clear. How about doing an assessment by looking at what the completion of the transaction will generate – abuse of dominance by any chance? Because if this is the case, then potentially the transaction could be challenged both by the national competition authority and by competitors looking to gain benefit from such transaction being wound up. Practice will tell.

[1] ECJ press release on Towercast Decision: https://curia.europa.eu/jcms/upload/docs/application/pdf/2023-03/cp230046en.pdf [2] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation). [3] The Towercast Decision, para. 52. [4] Idem, para. 57.

Killer Acquisitions– Brief overview on concept

We mentioned the concept “killer acquisitions” in a previous article. The topic raises great interest at the moment at international level due to the impact that it may have on competition in emerging product markets (especially technology related ones).[1]

Let’s clarify: ”Killer acquisitions” refer to cases where incumbent companies with important market shares acquire start-ups or smaller players with significant business potential in terms of the products or services that they provide with the purpose to “discontinue the development of the targets’ innovation projects and pre-empt future competition”.[2]

As shown by research,[3] the extent to which a potential acquisition may be qualified as a “killer acquisition” most times escapes the scrutiny of competition authorities, because the parties involved in such acquisitions do not meet the turnover thresholds for merger clearance (by assumption, the thresholds are not met, because the acquired company is new to the market and/or has a market share well below the relevant thresholds).

In this case, the questions arise: how can competition authorities identify “killer acquisitions” and, moreover, how can it be proven from the onset (i.e. from the acquisition date) that the intention of the acquirer is to “kill” the future competitor or its product, when the result of the acquisition can actually be seen some time after its completion?

The answers to these questions appear to be yet under discussion amongst competition law experts. For the time being, however, it appears that a post-factum review would be the only tool available for competition authorities. This idea appears to be supported by a recent opinion expressed by the Advocate General with the European Court of Justice (of which we have written here). For sure this topic will gain ground as more start-ups launch into innovation and efficiencies which would benefit consumer and competition, thus attracting the appetite for acquisitions of established players.

[1] The OECD allocated a whole panel to the topic in 2020 - https://www.oecd.org/daf/competition/start-ups-killer-acquisitions-and-merger-control.htm. Also, other sources have recently evoked this concept - see: https://insights.som.yale.edu/insights/wave-of-acquisitions-may-have-shielded-big-tech-from-competition [2] Cunningham, C., Ma, S. and F. Ederer (2018). “Killer Acquisitions,” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3241707, cited in OECD (2020), Start-ups, Killer Acquisitions and Merger Control www.oecd.org/daf/competition/start-ups-killer-acquisitions-and-merger-control-2020.pdf [3] OECD (2020), Start-ups, Killer Acquisitions and Merger Control, www.oecd.org/daf/competition/start-ups-killer-acquisitions-and-merger-control-2020.pdf