Share capital increase and bringing in new shareholders as way of business financing

An article from the series: The Entrepreneur and their Business in Romania

#lclegalproof #legalbrain #antreprenor #societati #srl #sa #societatepeactiuni #societatecuraspunderelimitata #businesschallenges #entrepreneurship #companylaw #startup #founders #beingafounderinRomania #majorare #capitalsocial #majorarecapitalsocial #sharecapitalincrease

One of the ways to raise capital in an existing company is to increase the share capital through contributions Finanțarea unei societăți prin participarea la o operațiune de majorare de capital social poate fi atractivă pentru investitori întrucât deținerea unei participații în societatea în care au decis să investească poate reprezenta o garanție suplimentară în sensul că activitatea și rezultatele societății se îndreaptă în direcția dorită. from investors, individuals or other companies, which implies that investors will become partners/shareholders in the company in exchange for a stake in the share capital and receiving shares in return. Contributions from new (or existing) shareholders can take the form of cash, in-kind or by offsetting certain, liquid and payable claims.

According to the Companies’ Law 31/1990 ("Companies Law")[1] the increase of share capital is decided by a resolution of the extraordinary general meeting of shareholders, with the participation of the existing shareholders and those who will become shareholders. The resolution shall also provide for the additional contributions and the related shareholdings. It should be stressed that, depending on the specific situation of the company in question (e.g. if we are talking about a joint stock company with several existing shareholders) it may be necessary to take into account the observance of certain preferential rights of the existing shareholders in order to avoid their dilution. The provisions of Article 216 of the Companies Law suggest that such pre-emptive rights would only exist for shareholders in a joint stock company. However, the law does not prohibit the creation of similar rights for shareholders in a limited liability company by its articles of association.

Financing a company by participating in a share capital increase operation can be attractive to investors as holding a stake in the company they have decided to invest in can be an additional guarantee that the company's business and results are moving in the desired direction. On the other hand, the involvement of investors may mean less control of the entrepreneur over the business.

In order to establish clearly from the outset what the rights of the new shareholders are and the level of control they can exercise, the share capital increase could be accompanied by the signing of a shareholders' agreement - which we will discuss in detail in a separate article.

Carrying out a share capital increase operation requires going through certain formalities at the Trade Register Office. But this is the last stage of the whole process - what should be of particular interest is the outcome of the operation and how the company operates once the new shareholders/partners join.

[1] Article 113 letter f) of the Companies Law.

S.R.L. and S.A. Impact of the choice of company form on business development.

An article from the series: The Entrepreneur and their Business in Romania

#antreprenor #societati #srl #sa #societatepeactiuni #societatecuraspunderelimitata #businesschallenges #entrepreneurship #companylaw #startup #founders #beingafounderinRomania

The first step in conducting entrepreneurial activity is to choose a corporate form. The most commonly used are SRL (limited liability company) and SA (joint stock company). The optimal variant for a start-up entrepreneur's business should be chosen according to a number of factors, including: available capital, number of partners/shareholders, but (perhaps most importantly) the entrepreneur's intention regarding the destiny of the new company.

S.A. and S.R.L. at a glance

Probably the easiest way to understand what the common and distinguishing features of S.A. and S.R.L. are is to include them in a (non-exhaustive) picture like the one below:

Shareholding structure

Shareholding is the composition of the partners or shareholders in a company. It may be relevant for a company seeking to attract funding either from private individuals (such as angel investors) or from venture capital firms. Given that, by assumption, the company is in the early stages of its development, the importance of the people involved in realising the founders' vision is crucial.

Financing options and potential obstacles linked to the corporate form

The options available to a company to raise finance from outside the sphere of its shareholders/owners depend to a large extent on the type of company. While both limited liability companies and joint stock companies can access the services of crowdfunding platforms (which I wrote about here) or obtain loans from third parties - convertible into shares or stocks or not (which I wrote about here), other forms of financing are reserved only for joint stock companies (e.g. issuing bonds or raising finance by listing on Romanian or foreign capital markets).

New Tools for Concentrations in the EU Commission’s Toolbox

Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (the “Regulation”), adopted on 28 November 2022 and in force since 12 January 2023 has become applicable on 12 July 2023.[1] Amongst other matters, its provisions grant further powers to the European Commission to scrutinize EU dimension concentrations, where one of the involved parties has received subsidies from non-EU countries, thus aiming to prevent the distortion of competition on the internal market.

Main provisions

The Regulation introduces three new tools to the toolbox of the EU Commission:

1. “A notification-based tool to investigate concentrations involving financial contributions granted by non-EU governments, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the transaction involves foreign financial contributions of more than €50 million;

2. A notification-based tool to investigate bids in public procurement procedures involving financial contributions by non-EU governments, where the estimated contract value is at least €250 million and the bid involves a foreign financial contribution of at least €4 million per third country; and

3. A general tool to investigate all other market situations, where the Commission can start a review on its own initiative (ex-officio).”[2]

Applicability in time

A noteworthy aspect is the fact that the Regulation needs to be considered for past events, which nevertheless have effect on the internal market in the present. According to the transitional provisions of the Regulation,[3] (i) it shall apply to foreign subsidies granted in the five years prior to 12 July 2023 where such foreign subsidies distort the internal market after 12 July 2023; (ii) by way of derogation to the foregoing, it shall apply to foreign financial contributions granted in the three years prior to 12 July 2023 where such foreign financial contributions were granted to an undertaking notifying a concentration or notifying financial contributions in the context of a public procurement procedure pursuant to the Regulation; and (iii) it shall not apply to concentrations for which the agreement was concluded, the public bid was announced, or a controlling interest was acquired before 12 July 2023.

Relevance for M&A deals and obligation to notify

The first tool in the box appears most relevant for mergers and acquisitions, as it imposes upon the relevant parties (detailed below) notification obligations similar to those applicable in merger clearance and FDI (foreign direct investment) related procedures.

As per the provisions of the Regulation, transactions meeting the following criteria[4] need to be notified in accordance with this new special regime:

• They involve (i) an acquisition of control over an undertaking, (ii) the creation of a joint venture (JV) performing on a lasting basis all the functions of an autonomous economic entity or (iii) a merger.

• They fulfil two thresholds: (i) at least one of the merging undertakings, the acquired target or the JV is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million; and (ii) the following undertakings were granted combined aggregate financial contributions of more than EUR 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest: (A) in the case of an acquisition, the acquirer or acquirers and the acquired undertaking; (B) in the case of a merger, the merging undertakings; (C) in the case of a JV, the undertakings creating a JV and the JV.

Practical hassle

For concentrations of EU dimension (such as acquisitions of EU based companies meeting the relevant thresholds), the application of the Regulation means the need for further legal assessment prior to the signing of the deal and potentially carrying out the notification i.e. a further administrative burden as condition precedent to the implementation of the deal.[5]

Note that the draft regulation for implementing the provisions of the Regulation[6] suggests that companies who would be subject to the obligation to notify will need to disclose large amounts of information to the Commission, requiring in practice significant organisational work for the storing and making available of data on the part of the companies involved and their counsel.

In view of the Regulation, the legal assessment preliminary to the signing of a notifiable M&A deal needs also to cover the granting of foreign subsidies during the past three years prior to the relevant concentration, as well as the extent to which the internal market may have been distorted beyond 12 July of this year.

Some of the concepts used in the Regulation shall be further detailed by the Commission by way of guidelines to be adopted latest on 12 January 2026 (such as the application of the criteria for determining the existence of a distortion).[7]

[1] https://eur-lex.europa.eu/eli/reg/2022/2560/oj [2] https://competition-policy.ec.europa.eu/foreign-subsidies-regulation/about_en [3] Article 53 of the Regulation. [4] Article 20 of the Regulation contains the thresholds for notification. [5] Note the wording of Article 21 (1) (according to Article 54 (4), applicable starting on 12 October 2023): “Notifiable concentrations shall be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.” [6] The draft Commission Implementing Regulation (EU) …/... on detailed arrangements for the conduct of proceedings by the Commission pursuant to Regulation (EU) 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market is available here: https://eur-lex.europa.eu/legal-content/RO/TXT/?uri=pi_com%3AAres%282023%29842946 [7] As per Article 46 of the Regulation.