Romania now has had a plethora of mergers and acquisitions. The share sale-purchase agreements, although governed by Romanian law, have in many cases been based on documentation and concepts imported from other jurisdictions.
For investors and advisers used to other jurisdictions especially from the UK and the US the use of common expressions, concepts and provisions in a Romanian transaction can lead to confusion. Representations, Warranties, indemnifications and liability and related limitations are familiar concepts in the Romanian Civil Code and this can produce different results. For example, a party purchasing shares may obtain increased legal protection under Romanian law where for instance special warranties are deemed to be incorporated by default into the agreements.
According to Code, agreements are interpreted in favour of the party owing a debt under a particular obligation. However, an exception applies to share sale-purchase agreements: the Code states that unclear clauses are to be interpreted in favour of the buyer. This is based, on the seller’s duty to explain clearly to the purchaser all the obligations which the purchaser undertakes under the agreement, and that all agreements must be concluded and performed in good faith.
The seller has an obligation expressly to inform the purchaser of everything that might influence the purchaser’s decision to buy shares or pay a certain price for them. This means that failure to inform the purchaser of such things such as the existence of encumbrances over a significant portion of the company’s assets or the existence of significant debts, may amount to bad faith and trigger the annulment of the agreement, the restitution or reduction of the price paid and/or require the purchaser to be compensated for the damages incurred.
This has extended to representations and information provided by the management of the target company and the sellers have been found liable for not checking the statements made by management.
Careful analysis and drafting are essential in preparing transaction documents. The purchaser may receive substantial legal protection in view of the obligation to act in good faith and provide clear information. A clause stating that the seller makes no representations other than those expressly provided in the share sale-purchase agreement may be ineffective. The buyer should be put on notice that there may be matters which should be disclosed.
According to the code, the seller is liable to the purchaser for the asset sold
According to the code, the seller is liable to the purchaser for the asset sold based on a warranty of good title (eviction) and hidden defects.
A restrictive interpretation is that as far as the sale of shares is concerned, the warranty against eviction applies exclusively to losses or encumbrances relating to such shares, whereas a loss of, or encumbrance on, the company’s assets would have an impact on the ownership of the asset sold.
The seller is legally obliged to provide the purchaser with a warranty against hidden flaws in the asset if (i) the asset cannot be used for its intended purpose, or (ii) its use is reduced to the extent that the purchaser would not have bought it or would have paid a lesser price had it known of the flaws.
Generally, the seller’s liability under the above warranties may be increased, reduced or eliminated in the transaction documents. All modifications of the legal warranty obligations must be agreed expressly and in clear terms by the parties. However, the legal limits to such modifications must be taken into consideration when drafting transaction documents.
There are no limitations on the extension of the seller’s liability in respect of eviction. A warranty against eviction through the seller’s actions or as a result of a matter of fact for which it is responsible may not be reduced or eliminated by agreement as such a contractual provision would be void under the code. A seller may limit its liability for the actions of a third party, but the seller is obliged to refund the price of the transaction.
There are no limitations on the extension of the seller’s liability for hidden flaws. The limitation of or exemption from such liability depends on two factors.
First, it is valid only if the seller acted in good faith and secondly the one-year warranty term, may be reduced or even eliminated,
In practice, the share sale-purchase agreements based on other jurisdictions are widely used and include representations and warranties on a wide range of matters relating to the target company’s activity, assets and liabilities. Such clauses do not necessarily provide greater protection to purchasers than the warranties against eviction and hidden flaws in the code. Lawyers should be prepared to advise clients if the latter go beyond their legal obligations to supply information or if, on the contrary, the seller may be deemed to have failed to provide adequate information to the purchaser.
The standard documentation is insufficient?
The standard documentation used in many countries may be insufficient to protect the buyer’s interest and may not protect the sellers. If a warranty against either eviction or hidden flaws is deemed to apply, the consequences may include court-ordered annulment, rescission, a reduction in the purchase price and liability for damages.