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Knowledge is power – 5 ways to check who you are doing business with in Romania

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Do you know if the signatory of the agreement has the legal authority to represent your business partner?

How about if the asset that you wish to purchase or that may be mortgaged in your favour is owned by the prospective seller or mortgagor and is free from (other) encumbrances?

Have you checked that your prospective business partner – or the people behind it, if it is a company – are not involved in any activities that may trigger your company’s corporate liability for associated persons (Section 7 of the Bribery Act 2010)?

For more information regarding the consequences of triggering corporate liability for corrupt practices please click here.

Having accurate information regarding your business partners is essential in general, but even more so if you are considering doing business in a foreign country. Romania is no exception to this.

In the early stages of your discussions with the prospective business partner however, acquiring detailed information concerning the respective company, business or property can prove to be difficult. This is understandable (up to a point) – you would probably also not wish to provide full access to your company and its corporate and financial details to a stranger claiming a business interest.

On the other hand, proceeding to conclude the envisaged agreement is not advisable in absence of proper investigation.

If you are considering becoming a simple shareholder (or even an angel investor) or acquiring all the shares in a Romanian company, you would perform a legal and financial due diligence on the target company first. However, this is a step to take when you have already gathered enough information regarding the relevant company to justify incurring the costs for the due diligence exercise. In other words, you will not wish to spend money for legal and financial due diligence in respect of all prospective companies that you may consider entering into business with.

Alternatively, you may just be considering making an investment in the form of a loan or concluding an agreement for the purchase of assets or performance of services with a Romanian counterparty. In such situations, you will most likely not perform a full due diligence on the prospective Romanian business partner.

What is the solution then?

Having information regarding the corporate and financial standing of the relevant company from the publicly available sources will help assess whether it is advisable to proceed to the next stage of performing a legal and financial due diligence and initiating the negotiation of the envisaged transaction’s terms and conditions.

Such a measure is advisable in order to identify and then create the mechanisms to mitigate the existent risks.

Five publicly available information sources

1. THE COMMERCIAL REGISTRY

    This is a Romanian public institution similar to:
  • Companies House in the UK,
  • the Central Business Register in Denmark (Centrale Virksomhedsregister (CVR)),
  • the Chamber of Commerce in the Netherlands (Kamer van Koophandel),
  • the Common register portal of the German federal states (Gemeinsames Registerportal der Länder),
  • the Register of Commerce and of Companies (Registre du Commerce et des Sociétés) in France.

What types of information can be obtained?

Apart from the identification details (name, number of registration with the Commercial Registry, sole registration code), the information that can be obtained from the Commercial Registry refers to:

(a) the current corporate status of Romanian companies:

  • value of subscribed and paid share capital, value of shares;
  • data regarding the shareholders and their shareholdings;
  • registered office and legal basis thereof, including its respective duration;
  • data regarding the directors and date of their appointment;
  • main and secondary objects of activity;
  • secondary offices and the corresponding legal basis, including the validity thereof.

Such information is included in listings and ascertainment certificates issued by the Commercial Registry – either through their offices or online via the –e-services portal (on the basis of a subscription and against payment of a tax/search).

Specific searches may be made by reference to natural persons to find the companies in which they hold the position of director or shareholder.

(b) the history of corporate registrations that were made in respect of Romanian companies since incorporation until the date of the search.

The results of such searches mention the previous shareholders and directors of the company, the date since the current shareholding and management is in place, as well as all the other corporate changes and updates that have been made since incorporation.

To put it differently, you will know the main elements concerning the relevant corporate changes that were registered in relation to your prospective Romanian business partner or target company.

Depending upon the envisaged transaction, you may wish to have more information about the relevant company or about particular corporate elements concerning it.

In this respect, it is important to know that more details regarding specific or all the corporate changes made in respect of the relevant company may be obtained by applying for full copies of the documents submitted to the Commercial Registry in relation thereto. Such documents include: full copies of articles of association, resolutions of the general meetings of shareholders and of the board of directors or directors, agreements regarding the assignment of shares, etc.

How can this information be relevant to you?

If you intend to conclude an agreement for the sale or purchase of goods or services, then a listing will give you information regarding the directors of the respective company and in some cases some elements regarding their prerogatives. In many situations the information found in a listing is not sufficient and a review of the articles of association of the respective company is necessary. Reading the provisions thereof may prove to be essential. For example, the articles of association may provide financial limitations to the prerogatives of the directors to conclude agreements on behalf of the company and that the envisaged agreement may require the approval of the general meeting of shareholders.

By getting a simple online listing you may also find out that your prospective Romanian business partner or target company is subject to the insolvency procedure. Consequently, you will need to find out if the envisaged transaction falls under the category of current operations allowed under the insolvency law, whether the respective company benefits from the self-administration right or not and various other elements related to the insolvency procedure under Romanian law to decide how to proceed further.

Of course a full legal review of all documents that may be obtained from the Commercial Registry is usually part of a full due diligence on a target company in case of a proposed purchase of shares, but a preliminary quick review of these may provide answers that will either support the decision to move forward with the potential transaction or change your mind alltogether.

Similarly, in case the proposed transaction refers to the conclusion of an agreement of sale of assets or services, it is nonetheless advisable to have a preliminary check of your prospective business partner.

To summarise, obtaining information from the Commercial Registry is a good place to start the preliminary investigations on your prospective business partner in Romania.

2. MINISTRY OF PUBLIC FINANCES

The most significant elements of the financial situations submitted by the Romanian companies can be viewed on the website of the Ministry of Public Finances.

Such available information includes the turnover, the profit or the loss registered by a company in the previous year but also the figures corresponding to the older financial situations (including in respect of 2010 – older financial situations may be requested from the Commercial Registry). You will thus be able to make a preliminary analysis of the company’s business financial elements and their recent evolution.

In addition to financial elements, you will also have the possibility to see the fiscal status of the company (VAT tax payer, payer of tax on profit or tax on income – if the company is registered as a micro-company, as well as the number of its registered employees).

3. ELECTRONIC ARCHIVE OF SECURITY INTERESTS IN MOVABLE PROPERTY (THE “ELECTRONIC ARCHIVE”)

The Electronic Archive is the Romanian national evidential system of priority and publicity of the movable mortgages and related security interests. It is organised as a sole database, structured by reference to persons and assets.

Why is it important to check the Electronic Archive?

The general principle under Romanian law is that the publicity and priority of a movable mortgage is ensured by the registration thereof with the Electronic Archive. A registered and perfected mortgage is thus opposable to the other creditors of the mortgagor, to the persons that subsequently acquire rights over the mortgaged asset and to any other third parties.

As a general rule, where several creditors registered mortgages over the same movable asset, the mortgagee that was the first to register the mortgage with the Electronic Archive benefits from a higher rank and consequently from a more advantageous position in case of enforcement upon default of the debtor.

Having the information regarding such type of movable mortgages can prove to be an ally in making prudent business decisions in a number of scenarios.

In such respect, consideration is to be given to the general rule in Romanian law that the mortgagee may follow the mortgaged asset irrespective of the owner thereof and disregarding the real rights constituted or registered after the registration of the mortgage.

What types of information can be obtained?

Searches made on the Electronic Archive may reveal that the shares that you may be interested in acquiring are mortgaged to a bank for a credit received by the shareholder(s). This does not mean that you cannot proceed with the purchase of the shares, but you will need to reach an agreement with the seller(s), so that preferably when the transaction is completed you will become the owner of the shares, free from any encumbrances.

You may also find out that the company that you are considering entering into business with, or lending money to, has registered many movable mortgages (or a movable mortgage over its fonds du commerce) in favour of other creditors, banks and/or other companies. These may have as object equipment and machinery, cars and other vehicles, bank accounts, claims, intellectual property rights, etc. of the company.

The general rule is that if you purchase the mortgaged asset the creditor of the seller company will have the right to enforce its mortgage against you. Therefore, if you are considering making such a purchase, searches regarding the relevant assets may be made in the Electronic Archive to verify whether these have been mortgaged or not. Also a legal review is to be made as to whether your intended purchase falls under the category of excepted transactions (where the mortgage is transferred on the purchase price).

Unfortunately, many Romanians are still not familiar with the Electronic Archive and its purpose and only find out that their car, for example, had been mortgaged by the prior owner when faced with the enforcement proceedings initiated by the creditor through the judicial executor.

Maybe you do not wish to buy anything, but just are considering making an investment in the form of a loan to a Romanian company to carry out a project. Searches made with the Electronic Archive will provide a better preliminary understanding as regards some of the most significant assets of the prospective borrower company, if these are already mortgaged in favour of banks or other companies. Or you may find out that many assets are not owned by the relevant company, as it may have concluded leasing agreements in respect of the vehicles and machinery used in its operations.

On the other hand, the existence of mortgagees with earlier registered and thus higher in rank mortgages over assets that the borrowing company may be offering as security for the prospective loan represents a risk against which you should seek protection (e.g. a first rank mortgage on other movable assets of the borrower company or a first rank immovable mortgage).

Searches with the Electronic Archive can also provide an image of the loans or lines of credit obtained by your prospective Romanian business partner or target company and in respect of which the respective creditors registered their security interests.

4. LAND BOOK REGISTRY

In Romania the publicity of ownership rights and other real rights over immovable assets is achieved by registration with the land book registry.

This evidential system is organised by reference to assets and not persons. Therefore, on the basis of the address, cadastral number and land book registry number of the immovable asset an informative extract may be obtained from the competent land book registry in relation thereto.

What types of information can be obtained?

In a situation where you are interested in purchasing an immovable asset in Romania or such a property is offered to secure the repayment of the loan, an informative extract in its respect can be obtained directly from the land book registry office in the area where the property is situated.

Such document will show who is registered as owner of the property, as well as the legal basis of such registration (sale purchase agreement, donation agreement, etc.), whether any mortgages or other type of encumbrances or any pre-sale purchase agreement is registered in relation thereto.

It is important to remember however that the registrations with the land book registry do not validate a null agreement on the basis of which these have been made.

Thus, even if a sale purchase agreement is registered therewith and the informative extract that you obtain is seemingly clear of any issues, this does not mean that the ownership title is valid or that there are no legal issues in relation thereto.

Consequently, no acquisition of a real-estate property in Romania is to be made only on the basis of checking the land book registry.

In addition, a correct check of the ownership title implies that the entire chain of ownership documents be reviewed and not only the documents corresponding to the latest transfer of ownership.

5. WEBSITES OF THE COURTS

All Romanian courts publish information regarding the cases that they are reviewing on their websites, which are all part of a web portal that may be freely accessed.

Online searches regarding companies or natural persons can be made on the website of any court in Romania. The searches can be made at the level of each court.

What you should be aware of is that under Romanian law, the general rule is that the court in the jurisdiction of which the respondent has the registered office / domicile is competent in most cases. Therefore, checking the websites of the courts in the jurisdiction of which the Romanian company has the registered office is the first step to be taken.

Such searches might reveal that your target company or prospective business partner are or have been respondents or defendants in various court cases. Depending upon the number, object and where available the outcome thereof, your negotiations should be adjusted accordingly in view of ensuring a better protection for your investment, irrespective of the form thereof.

In conclusion, all the above-mentioned sources of information can strengthen your position when you are considering doing business in Romania or with a Romanian partner. They are public and (mostly) free. Therefore, do not hesitate to use the information that they provide prior to committing yourself to a project / business that you may later find out is not in your best interest. After all, it is much cheaper in terms of both time and costs to prevent, rather than to try to fix them later.