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.