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.

“Clean Team”. Concept. Use.

#mergersandacquisitions #competitionlaw #antitrust #cleanteam

In acquisitions or mergers where the turnover of the parties involved is such as to trigger the obligation to notify the concentration to the Competition Council, according to Competition Law 21/1996, there is a risk that sensitive information relating to the two (or more) businesses involved in the concentration may be exchanged between the parties to the transaction. Most of the time, such exchanges of information take place almost naturally, without the persons involved even being aware that such conduct is likely to constitute a breach of competition law, with the consequence that the competition authorities may impose heavy penalties and, potentially, with a detrimental impact on the transaction.

Avoiding this risk of course starts with awareness of it, and lawyers (in-house or external) or consultants involved in the transaction should be able to point it out to the business teams. The next step is to take concrete steps to avoid unauthorised sharing of sensitive information. One such measure - very effective, but also consistent with the need for cooperation between parties in the context of a transaction - is the establishment of a clean team, made up of individuals from each of the parties to the transaction and operating under a clean team agreement. The clean team activity effectively means that the members of this team receive confidential information from the other party to the transaction, but - being bound by strict confidentiality obligations - ensure that this information is filtered and aggregated so that it is useful to the transaction, without the people involved in the business getting to know it directly.

The "clean team" contract is concluded between the companies that are parties (or potential parties) to the intended transaction and is very similar to a confidentiality agreement. The main feature is probably that the clean team agreement specifies the list of names of individuals to be part of the clean team, with the provision that only they will receive sensitive information from their superiors/clients (the latter - if the clean team includes external consultants hired by the party) and that only they will use it for the agreed purposes.