Corporate restructuring – a possible mechanism to get back to business following Covid-19 pandemic

There is no doubt that Covid-19 pandemic is continuously creating significant challenges to which the business environment needs to respond quickly, in a manner mitigating the losses and fighting against the disruptions.  The virus threat is likely to diminish, but businesses will be affected on medium and long terms.  Therefore, the reorganization thereof may be seen as a way to help the businesses strengthen their resilience and adjust to the new environment.

In the current conditions, our opinion is that we will experience an increase of the corporate restructuring and reorganizations operations in the near future.

Please see below general remarks on corporate restructuring.

Why corporate restructuring?

First of all, corporate restructuring is an operation undertaken with the purpose to reorganize the structures of a company from legal, operational and management perspectives, so that the company becomes more profitable and organized for its current needs.

There are a number of reasons for which a company needs restructuring, these being: (i) reducing costs; (ii) incorporating new technology; (iii) focus on essential products; (iv) spin off as a subsidiary of a company; (v) merger with another company.

Which corporate restructuring mechanism is the most suitable?

  1. For companies who are in financial distress, a corporate restructuring is a way to diminish the costs, thus avoiding the filing for insolvency.  In this scenario, the company may identify its valuable assets, dispose of them and obtain thus liquidity to pay off its creditors or a secure a loan from a financial institution and avoid an imminent insolvency with all related consequences.

In this scenario, an asset sale is involved and/or a financial package in place, in which case the creditor generally requests that certain security is given by the debtor.

  1. In other cases, the financial distress is not the cause of the corporate restructuring, but the need to consolidate its market position and/or become stronger by reorganizing its debts and operations.  In this scenario, it is possible to renegotiate the terms of the debt with the creditors and/or spinning off those operations which are not at core of its business.  Therefore, the company may focus on its essential operations and/or services and/or products.
  2. The current economic and financial framework triggers one of the most dramatic consequences for the business environment, this being the “out of cash” date, where the respective company has a negative cash flow and is losing money every month as it does not have positive cash flow from its operations.  In this scenario, the management team and/or the shareholders may need to take measures to save the business by cutting costs aggressively.  As a consequence, the company may obtain loans to save the business.  This was one of the preferred ways for the technology companies to save the businesses during the tech bust in the early 2000s.

Legal framework applicable in Romania

In Romania, the equivalent of the term “restructuring” is reorganization”.  The principles of reorganization of legal entities are established by:

  • the provisions of articles 232-243 of the Civil Code;
  • the provisions of the Law 85/2014 on insolvency prevention procedure and insolvency (the “Insolvency Law”).  In this case, the reorganization of the legal person is performed through a judicial procedure only for economic reasons of the debtor.

In the hereinafter, we will provide an overview of the legal framework provided by the Civil Code in respect of the reorganization of the legal entities.

The reorganization is the procedure is the legal operation having as purpose the establishment, modification or extinction of the legal person.  The reorganisation provided by the Civil Code is not dependent upon the financial state of the company.  There are various ways to achieve the reorganisation of a Romanian company, namely: 1) merger; 2) division; 3) transformation.

General aspects pertaining to each of the three (3) are summarized below:

  1. Merger is the operation by which a company is being acquired by another company or represents the operation where several entities are merged in order to create a new company.

This operation is performed in two stages, namely

  • The first stage implies drafting a project of merger approved in accordance with the provisions of the constitutive act of the companies involved.  The merger project must comprise various elements provided by Law 31/1990 on commercial companies (“Law 31”).
  • The second stage implies the implementation of the merger by the management bodies.  The merger will be lodged with the office of commercial registry where each involved company is registered.
  • Generally, a merger as a means to reorganize a company is used when a company intends to consolidate its position on the market, or when the intention is to have a higher quota on the local market, or to expand in other regions.  One of its advantages towards other forms of reorganisation is the fact that it saves the business and the employees of the company.  The protection of the workers in the context of the transfer of undertakings is to be taken into account.
  1. By division, the entire patrimony of a legal person is divided between two existing legal persons or through legal persons who are set up through the division:
  • The division is total when the patrimony of the legal person is divided equally between the companies involved in the division, unless there is a contrary provision in the division project.
  • The division is partial when a part of the patrimony of an existing legal person is detached and is transferred to one or various existing legal entities or who are established to this extent.
  • In case of partial division, the effect of the division is the reduction of the patrimony, both from the perspective of its rights and assets on one hand and of its obligations on the other hand.
  • We emphasize that the effect of a division cannot be a legal entity with a different form than the one which is being divided (e.g. a not for profit entity like an association or foundation cannot be divided in limited liability companies).
  • The division is made when the group of companies is being reorganised or when the company intends to save costs by outsourcing support activities (such as IT, administrative) or when it closes its operations on a market for certain services in order to focus on another attractive market.
  • Whether the division is partial or total, the contracts will be transferred to all legal persons resulted from the division process so that the performance of each contract is made entirely by one legal acquiring legal entity.
  1. Transformation of the legal person is the operation by which a legal person ceases to exist, whilst simultaneously a legal person is created.  The rights and obligations of the legal person who ceased to exist are transferred to the newly created legal entity, safe for the case where the act on which the transformation was created, provides otherwise.

General aspects related to the transfer of rights and obligations pursuant to the reorganization of the legal person in Romania

It is useful to note that in all cases of reorganization of a Romanian legal entity, the transfer of the rights and obligations takes place at the date when this operation has been registered with the Commercial Registry.  Starting with the registration date, the transfer between the parties and the effects towards third parties take place.

In case the immovable assets are object of the transmission, the ownership right as well as any accessory rights are acquired only after the registration with the relevant Land Book Registry on the basis of the reorganization act concluded in authenticated form, or, as the case may be, on the basis of the administrative act on which basis the reorganization has been made.

Covid-19 pandemic. What is next in the business environment?

Maintaining businesses or putting them back on track might require them to show great resilience.

A form of reorganization could be considered, to such extent that a business might emerge stronger after such an uncertain period.