Private Equity 2020

Last Updated August 05, 2020


Law and Practice


Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE), and has built its reputation on a combination of unrivalled local knowledge and strong international capability. The firm opened its first office in Vienna 60 years ago, and now brings together more than 340 lawyers from a diverse range of backgrounds, working in offices in 13 countries throughout the CEE/SEE region. More than 80% of the firm's work involves cross-border representation of international clients. The team works closely with clients, through the firm's international network of offices, to help them solve problems and create opportunities. The lawyers know how to leverage clients' private equity in Austria and CEE/SEE, and make it work for their future. From fund formation to LP & GP agreements, regulatory compliance and governance, and portfolio M&A, M&A specialists facilitate and negotiate transactions, and execute other instruments such as complex financings, strategic partnerships, leveraged buyouts, cross-border M&A, carve-out transactions, IPOs and trade sale exits.

2019 was an exceptional year for the Romanian M&A market, continuing the trend from 2017 and 2018. Statistical reports highlight that 110 transactions were reported in 2019, which was the highest level in a decade, amounting to an estimated EUR4-4.4 billion in deal value. Of these 110 transactions, nine were reported as having a disclosed or estimated value of at least EUR100 million.

However, the accelerated increase of the M&A market has been disrupted by the recent COVID-19 outbreak. While the first quarter of the year showed promising M&A development, the emergency state declared by the Romanian Government together with the state measures against the pandemic put on hold or terminated many of the deals that were announced in the first quarter of the year. After an almost standstill during the second quarter, investors are again either looking for new opportunities to invest or continuing their investment plans started in the first quarter of 2020.

The Romanian Government has released an economic recovery plan with the aim of stimulating and developing Romanian companies. It remains to be seen whether this plan will indeed benefit Romanian companies in the remainder of 2020 and into 2021, or if the 2006-2008 model of the M&A market will be replicated – ie, investors will only re-enter the market when there are sufficient distressed business opportunities.

Only a few M&A transactions have been finalised in 2020, without a focus on any specific sector. The technology, real estate, energy and health sectors are regarded as trending in the outlook for the 2020 M&A market. However, given the COVID-19 outbreak and the overall slowdown of the M&A market, it is hard to predict the 2020 M&A trends for the second half of the year.

A legal amendment that raised interest among equity funds towards entering into the Romanian market is the change of the legal regime that applies to the distribution of dividends. Since 15 July 2018, Romanian companies are now also permitted to distribute dividends to shareholders quarterly, in addition to an annual distribution, based on interim financial statements. The new system facilitates the cash repatriation of locally invested funds.

Additionally, certain fiscal-budgetary measures adopted in the last few years have improved the business climate and encouraged private investment, such as:

  • the reduction of the tax rate related to dividends distribution from 16% to 5%;
  • the transfer of certain social contributions from the employer to the employee; and
  • the reduction of the VAT rate from 20% to 5% for certain sectors (eg, hotel accommodation, rental of camping grounds, restaurants and catering services, and sporting and recreational activities).

Conversely, draft amendments to various anti-corruption and independence of justice provisions have had a negative impact on the entire M&A market, including by deterring the interest of private equity funds. Through these draft amendments, the ruling Social Democrats intended to reduce the statute of limitations for certain criminal offences and to impose amnesties and pardons for corruption offences that would close some ongoing corruption trials, with the main purpose of saving some corrupt businessmen and political leaders from prison, and thereby reversing years of anti-corruption reforms and generally weakening the rule of law.

In order to respond to the negative effects of the COVID-19 outbreak, during the "emergency state" and the so-called "state of alert" the Romanian authorities adopted certain normative acts in order to protect the private sector as much as possible by providing, inter alia, deferral of tax payment, discounts for advance tax payments, suspension of the enforcement proceedings by garnishment of the budgetary debts, direct grants and state guarantees on loans provided by banks to SMEs.

In Romania, there are no specific regulators for M&A transactions or pertaining to private equity funds.

Nevertheless, in order to ensure well-balanced competition in the market, deals involving companies with turnovers exceeding certain thresholds are subject to clearance by the Romanian Competition Council. As a principle, a transaction that requires the approval of the Romanian Competition Council cannot be implemented until clearance is obtained.

The turnovers are assessed in relation to the financial year preceding the one when the transaction was carried out. The current cumulative thresholds for merger filings are as follows:

  • a worldwide aggregated turnover of EUR10 million in Romanian leu (RON) equivalent generated by the undertakings concerned; and
  • a turnover of EUR4 million in RON equivalent generated in Romania by each of at least two of the undertakings concerned.

International deals that generate effects in Romania must be notified if the above requirements on turnover thresholds are met.

Distinct from the clearance of the Romanian Competition Council, Romanian legislation provides that the Supreme Council of State Defence (CSAT) must be notified if the transaction involves concentrations or changes of control over companies or assets in certain strategic sectors that may impose a risk on national security, such as energy security, transportation security, informatics and communication systems security, industrial security, and agricultural and environmental security. It is yet to be seen how the EU framework regulation that entered into force in the spring of 2019 will further set new rules to enable the screening of foreign acquisitions in Romania.

Depending on the type of industries in which the targets are active, certain regulators and specific legal frameworks (eg, prior notifications, obtaining consents, etc) may need to be considered. For example, certain procedures will have to be undertaken with the National Bank of Romania for transactions involving banks and financial institutions, with the National Audio-visual Council of Romania for transactions involving radio and television, with the Financial Supervisory Authority for transactions involving listed companies and entities operating in the insurance and private pensions sector, etc.

Non-EU nationals or entities may acquire real estate in Romania only in accordance with international treaties, based on reciprocity.

Private equity investors usually raise red-flag issues only as part of due diligence investigations (legal, financial, tax, technical, environmental, IT, etc). Private equity investors rarely require more descriptive, full-blown due diligence reports.

The focus of the due diligence exercise depends on the structure of the transaction and the industry. For share deals, a legal due diligence will typically investigate:

  • title to shares;
  • related parties' agreements;
  • employment matters;
  • material contracts;
  • financial arrangements;
  • real estate;
  • litigation; and
  • compliance and data protection issues (which enjoy an important emphasis since the implementation of GDPR).

For asset deals, which are less frequent mostly due to tax considerations, the due diligence will focus mostly on aspects that are strictly related to the asset, such as:

  • title over assets;
  • employment and TUPE in case of a business transfer;
  • material contracts pertaining to the assets;
  • litigation;
  • financing related to the assets; and
  • compliance and data protection.

Depending on the amount of information made available in generally structured virtual data rooms, or depending on the industry concerned (which may involve massive amounts of legal documentation, such as customer, lease or employee contracts), private equity investors would usually consider introducing materiality thresholds or a sampling approach for streamlining the review process.

Moreover, depending on the industry, due diligence exercises will also analyse specific regulatory issues, such as necessary authorisations and permits, as well as change of control clauses, consents and notifications to be made prior to the transaction, intellectual property and IT issues, such as trade marks, patents, web domains, and so on.

Another approach to due diligence in private equity deals which is seen more often these days is to split the due diligence exercise into phases, first allowing a more general review of selected areas that are relevant for the bidders’ initial valuation and then the opening of an in-depth legal review by selected preferred bidders in a subsequent phase.

Vendor due diligence is not a common practice on the Romanian M&A scene, particularly because bilateral processes are more common while competitive sale processes with multiple bidders are not typical in Romania. As the market becomes more mature and as more private equity funds penetrate or exit the market, auctions have become increasingly frequent on the M&A landscape in the last years. Accordingly, an increased trend in deploying vendor due diligence has been witnessed. Otherwise, investors conduct their own (buy-side) due diligence before proceeding with the deal.

Vendor due diligence investigations aim to expedite the sale process, but they are also encouraged in order to prepare the targets for sale, and are used to anticipate and identify any possible legal issues that may give rise to price reductions, special indemnities and/or conditions precedent being requested by the buyer.

When vendor due diligence reports are available, they tend to be more of the nature of legal fact books, and credence is not always provided by sell-side advisers. On the other hand, buy-side advisers provide reliance to private equity funds as well as their sponsors, financiers, other advisers, etc.

Small and mid-cap deals are typical in Romania; therefore, most of the acquisitions by private equity funds are carried out through private sale and purchase agreements. These provide more flexibility to negotiate the terms and conditions. Tender offers are substantially less frequent because the Romanian capital market is not so well established, while court-approved schemes are essentially non-existent.

The desire to maximise value results in auction sale processes being organised for investors, particularly if sellers are private equity funds. Sellers are free to determine the specific rules and procedures of the auction depending on the circumstances of the transaction, such as the transaction size, the number of bidders and the size of the stake in the target offered for sale. Competitive sale processes are usually co-ordinated for private equity funds by corporate finance or transaction advisory firms.

Typically, acquisitions by private equity funds are structured through new special purpose vehicles (SPVs). Private equity funds or their add-ons consider structures whereby a top company (TopCo) is in most cases incorporated in tax-friendly jurisdictions, but also in jurisdictions able to comply with financing requirements, or in jurisdictions that offer sophisticated protection for relevant liabilities, co-investments or exit possibilities (eg, Luxembourg or the Netherlands). The acquiring entity is then a NewCo/HoldCo established as a direct or indirect subsidiary of the TopCo (in the latter case a MidCo is interposed). The NewCo is usually set up as a Romanian limited liability company.

Small/local private equity funds are involved in the acquisition (or sale) of their target companies directly (acting through their fund managers), whereas the more sizeable players set up abroad are not typically involved, with a preponderance of add-on local entities of such regional or international PE funds being used for transactional purposes.

Private equity funds tend to hold majority stakes in Romanian companies. Exceptionally, larger private equity funds hold minority stakes, such as Blackstone's 2019 minority acquisition in Superbet.

The type and structure of the financing of private equity deals depends on the structure of the deal (eg, deal volume, findings of the due diligence, and the standing of the relevant private equity fund on the market). Typically, regional private equity funds are equity-financed deals, whereas deals where the buyer is an international private equity fund are partly financed by debt in the form of senior debt, mezzanine debt or institutional debt.

Commonly, small and mid-sized private equity deals are financed by senior and institutional debt, and large-cap transactions are financed by mezzanine debt.

Sellers typically seek comfort from private equity funds by requiring either the fund or another entity owned by the fund with financial means to become the guarantor of an equity commitment letter or to provide other guarantees.

The variety and combinations of parties coming together in consortia is no longer limited to traditional club deals, strategic joint ventures or passive co-investment structures. Financial investors have become increasingly willing to assume a variety of roles, ranging from lead investor through to co-investor, underwriter or passive co-investor, depending on the nature of the transaction, their resources and their expertise. Nevertheless, given the size of most deals in Romania, consortia are quite rare.

On the other hand, joint ventures between two private equity funds represent a relatively common practice, especially when both funds have a similar strategy concerning the targeted industries (real estate, pharma, etc). Bringing two financial investors together with different return requirements and timelines increases the financial resources available and also offers an alternative exit option, with one of the partners possibly acting as a captive buyer should the other want to cash out. Aside from diversification and risk-spreading considerations, partnership arrangements allow financial sponsors to pool sector or geographic expertise and jointly leverage financing relationships to obtain more attractive terms.

The Romanian M&A market is generally dominated by completion accounts transactions, which is the preferred approach of corporate buyers. However, the majority of M&A deals with PE funds involve a locked-box mechanism. This is mostly due to the fact that, when on the sell-side, PE funds wish to secure a consideration that is certain, being reluctant to accept any post-completion liability or adjustments. Furthermore, when on the buy-side and considering that 2019 was perceived as a sellers' market in various sectors (including the ones that are highly active in Romania), PE funds use the locked-box mechanism as an effective tool to compete against corporate buyers on the basis of lighter negotiation and speed of execution of the transaction documents.

Even though not a general practice, as a result of the uncertainty caused by the COVID-19 crisis and its lasting impact on the M&A market, there has recently been increased interest for earn-out elements or deferred consideration, especially in the technology and energy fields.

Private equity sellers provide the following protection(s) in connection with locked-box consideration structures:

  • a covenant setting out there will be no leakage between signing and closing (except for permitted leakage);
  • a covenant that the business of the target company will be conducted in the ordinary course; and
  • a provision that the seller will make a euro-for-euro payment to the buyer or relevant target company with respect to any leakage that is not permitted.

No significant differences have been observed in terms of protection requested by a corporate seller versus a PE seller under a locked-box mechanism.

PE buyers usually rely on the locked-box pricing mechanism, with minimal or no debate. Nevertheless, such transactions are heavily dependent on detailed legal, tax and financial due diligence, given the lack of any opportunity to adjust the price post-completion.

There has been an increased trend for the parties to attempt to negotiate (but not necessarily to agree upon) interest being charged not only on the purchase price (the "ticker"), but also on locked-box leakage.

It is common to have a dispute resolution mechanism in place for both locked-box and completion accounts consideration structures in private equity deals.

In the case of disagreement on completion accounts, the parties usually agree on expert determination proceedings and, depending on the general agreed terms of governing law and disputes under the transaction documents, further arbitration or local court proceedings will apply.

A similar mechanism is used with respect to locked-box consideration structures – ie, the parties agree on an expert determination, which is further supplemented by arbitration or local court proceedings.

Acquisition agreements in private equity deals are usually subject to various conditions, with the most common being:

  • mandatory and suspensive regulatory conditions such as merger control clearance;
  • financing (eg, bank consents);
  • no material adverse change (which is not as common as in the USA but more frequent than in the rest of Europe); and
  • most critical legal, financial and/or tax issues that were identified during the due diligence need to be addressed/remedied prior to closing.

Conditions concerning third-party consents (such as key contractual counterparties) are typically encountered in transactions involving start-up businesses or SMEs, and in certain sectors, such as services and technology.

"Hell or high water" undertakings are quite uncommon in the local market, especially given that deals are not notably seller-friendly. Buyers mostly tend to agree on prompt filings, consulting with the seller (if needed) and keeping the seller informed on the approval process (if requested).

In PE acquisitions, parties very rarely (if ever) agree on break fees in favour of the seller if the buyer breaches the acquisition agreement or is unable to consummate the transaction due to lack of financing ("reverse break fees"). This usually happens only when the seller is in a strong position or agrees to offer an exclusivity period to a potential buyer when a competitive bid would have been an alternative.

There are no legal limitations on the value of break fees, but there may be contractual limitations related to situations created by actions/inactions of the party in default of fulfilling its obligations under the transaction documents (eg, for buyers obtaining financing, passing the board/shareholder approval of the transaction, exceeding the exclusivity period, etc).

Commonly, acquisition agreements are designed to exclude all rights of the parties provided under the law to terminate the contract, to the fullest extent possible. Therefore, termination rights of the parties are generally limited to what is provided by mandatory law and what cannot be excluded by agreement (such as cases of fraud, wilful misconduct or gross negligence).

Termination circumstances that may be negotiated and agreed by the parties include:

  • material breaches of warranties or covenants between signing and closing;
  • non-compliance with the obligations of the buyer or of the seller in connection with actions at closing; and/or
  • an event causing a material adverse change.

In locked-box consideration structures, which are the most customary structures in private equity transactions, the typical allocation of risk between the locked-box date and the closing date is the agreement on protection by way of ordinary course of business provisions and no leakage warranties and covenants.

Typically, the parties agree on warranties considering disclosed information to the buyer, which limits the scope of the warranties to a certain extent. PE buyers also often push to obtain a disclosure letter from the seller.

To the extent a buyer identifies a risk in the course of the due diligence, parties negotiate either an adjustment of the purchase price or an indemnity protection. Generally, indemnities are not subject to limitations other than sometimes with respect to amount and time limitations, but in any case they are not qualified by disclosures. The liability of the seller with respect to fundamental warranties, such as claims for a breach of title, is usually capped at an amount as high as the purchase price.

In recent years, and unlike transactions involving corporate buyers, warranty and indemnity insurance solutions are often applied where the liability of the private equity seller/corporate seller is mainly limited to breaches of title warranties and no authority and no leakage warranties.

Further limitations are encountered depending on the transaction, such as:

  • time limitations for bringing claims;
  • financial limits (eg caps, baskets, de minimis claim exclusions);
  • limitation to direct loss (as opposed to indirect and consequential loss); and
  • mitigation obligations.

Please see 6.8 Allocation of Risk with respect to warranties and indemnities in private equity deals. Generally, the private equity sellers wish to limit their business warranties and indemnities in order to be able to promptly distribute the proceeds of the sale to their investors, without any contingent liability.

However, structures where either warranty and indemnity insurance bridges the gap between the offered warranty/indemnity package and the requested protection needs of buyers, or where private equity sellers accept a warranty/indemnity package to a certain extent (eg, a small portion of the purchase price is kept as an escrow holdback) or where the management team provides warranties to the buyer in case they are required (and agree) to remain with the targeted business as co-investors alongside the buyer (in which case their warranties would usually match what is agreed by the private equity seller to the buyer) have been seen of late.

Full data room disclosure against the warranties is widely recognised in Romania and is generally featured in transactions where the seller is in a strong negotiation position. PE buyers' preference is usually to not allow full disclosure of the entire data room (especially if it is not well structured and includes fragmented information), but to confine the seller into specific disclosures by way of preparing a disclosure letter against specific warranties.

Please see 6.9 Warranty Protection.

Other protections that are included in the acquisition documentation include tax or other specific indemnities, and holdback and escrow arrangements to secure claims under the agreement.

In recent years, warranty and indemnity insurance (covering damages resulting from breaches of warranties and indemnities) have started to become a regular part of local M&A transactions. Excluded from the insurance package are usually known risks or statements where the due diligence exercise has been weak (eg, lack of information, documents, limited scope of work, etc). Such warranty and indemnity insurance may be useful to cover the gap between the seller's interest in limiting its exposure and achieving a clean exit and the protection and recourse requirements of the buyer.

Litigation in connection with private equity transactions is not so common in the local market. Nonetheless, private equity-backed parties often select arbitration for resolving their transaction disputes, so the resulting contentious proceedings remain hidden from the eyes of the market.

Notably, there have been more and more cases where various claims under the transaction documents are being raised against sellers under the transaction documents. Such claims are mostly related to consideration mechanics, breaches of warranties, indemnifications and leakage amounts. The parties usually reach settlement before moving a step further into litigation.

Public-to-private transactions are not common in Romania. There are currently only a limited number of Romanian companies listed on the main market (84 entities are listed on the Bucharest Stock Exchange, with a total market cap of EUR34.2 billion) and on the Aero market for SMEs (292 entities, with a total market cap of EUR1.7 billion). The majority of M&A transactions are therefore happening in the private sector.

Notably, only five IPOs were performed in Romania in 2017 and 2018 (Sphera, Transilvania Broker, Aages, Digi Communications and Purcari), totalling only EUR12 million, while no IPO was performed in 2019. Only one IPO was announced for 2020, for state-owned company Hidroelectrica, but due to COVID-19 it remains to be seen whether this will actually be implemented this year. Bonds issues and listings in 2019 were somewhat more active – 17 by number and reaching an aggregate value of EUR4 billion. The first quarter of 2020 saw an increase in bonds issues, notably by Norofert of EUR2.3 million, by Laptaria cu Caimac of EUR3 million, and by Agroland of EUR1.6 million, to name a few.

A shareholder acquiring or disposing of the shares of an issuer listed on a regulated market is required to notify the issuer and the Financial Supervisory Authority (FSA) of the voting rights percentage it holds following such acquisition or disposal whenever it reaches, exceeds or falls below one of the following thresholds: 5%, 10%, 15%, 20%, 25%, 33%, 50% or 75%. A similar reporting obligation is in place whenever the following applies:

  • when a person holds – directly or indirectly – financial instruments that at maturity create an unconditional right to acquire or the possibility to exercise the right to acquire shares having incorporated voting rights of a listed issuer, or financial instruments that have a similar economic effect, irrespective of whether they grant the right to a physical settlement; voting rights related to the financial instruments that have already been notified as mentioned earlier will again be subject to notification if the person acquired shares having attached voting rights and such acquisition results in a total number of voting rights of the same issuer reaching or exceeding the above indicated thresholds; or
  • when the number of voting rights held directly or indirectly aggregated with the number of voting rights attached to the financial instruments held directly or indirectly exceeds or falls below the earlier mentioned thresholds.

The issuer of shares listed on a regulated market acquiring or disposing, directly or indirectly, of its own shares, will publicly announce the percentage of own shares held as soon as possible, but not later than four business days after such acquisition or disposal, if the percentage reaches, exceeds or falls under the threshold of 5% or 10% of the total voting rights.

Any person who, following their own acquisitions or those of the persons with whom it acts in concert, holds – directly or indirectly – securities that exceed 33% of the voting rights when added to their previous holdings or those of the person with whom it acts in concert is compelled to conduct a mandatory takeover of all the target’s shares within two months of such acquisition.

Until proceeding with the mandatory takeover, all voting rights exceeding 33% of the total voting rights will be suspended, and no additional acquisitions can be made in the target company.

The mandatory takeover is not required for exempted transactions, such as the following acquisitions:

  • during a privatisation process;
  • from the Ministry of Public Finance or any other authorised entities within the foreclosure of budgetary receivables;
  • between the parent company and its subsidiaries or between subsidiaries of the same parent company; or
  • under a voluntary takeover offer addressed to all shareholders for all their shareholdings.

Moreover, an additional rule applies if the 33% threshold is exceeded by "unintentional operations" that result from:

  • a share capital reduction through the buy-back by the company of its own shares, followed by their cancellation;
  • exercising a preference right, subscription or conversion of rights originally granted, as well as the conversion of preference shares into ordinary shares; or
  • a merger/spin-off or inheritance.

In the case of such unintentional transactions, shareholders may choose between conducting a mandatory takeover and selling the shares in excess of the 33% threshold.

By far the most common consideration for takeovers is cash, even though Romanian law allows the bidder to establish the price in cash or securities, or a combination of the two. There are generally no minimum pricing regulations or cash requirements to be observed; however, certain specific pricing rules are applicable to mandatory and voluntary takeover offers.

The legislation in force does not expressly regulate the possibility of putting forward conditional takeover offers. However, a voluntary takeover may be conditioned by, for example, reaching a maximum targeted shareholding in a voluntary takeover bid or obtaining the clearance of the relevant competition authorities. However, any condition must comply with the principle of granting equal treatment to all shareholders.

A bidder may choose to amend the initial offer terms (price, closing date, etc) provided that the FSA approves such amendment, the amendment would not entail less advantageous terms than the initial one, and the amendment is publicly announced, similarly to the initial offer.

If a private equity bidder does not seek or obtain 100% ownership of a target, the governance rights with respect to the target outside of the bidder's shareholdings very much depend on the rights granted to such bidder by law and under the target's existing articles of association.

The shareholder should carefully review the articles of association of the company, as special corporate governance rules may be in place. If that is not the case then the law will apply, particularly regarding basic minority shareholders' rights such as information rights, the right to call a shareholders' meeting, voting requirements in connection with corporate and capital restructurings, and the entitlement to dividends.

Following a takeover offer, if the bidder obtained less than 100% of the voting rights, Romanian law allows the bidder to undertake a squeeze-out procedure.

The bidder is entitled to require those shareholders who have not subscribed to the offer to sell all their shares at an equitable price, if one of the following conditions is met:

  • the bidder holds at least 95% of the total number of shares that provide voting rights and at least 95% of the voting rights that can effectively be exercised; or
  • the bidder has acquired, within the takeover offer addressed to all shareholders for all their holdings, shares representing 90% of the total number of shares that provide voting rights and at least 90% of the voting rights targeted in the offer.

The conditions, price and procedure for the exercise of these rights are strictly regulated. The squeeze-out right must be exercised within a maximum of three months of the finalisation of the takeover offer. The end result of the squeeze-out exercise is the de-listing of the target company.

Obtaining irrevocable commitments to tender or to vote by the target company's main shareholders is very rare in Romania. Agreements to vote upon the instructions of the target or its legal representatives are null and void under Romanian law.

Romanian law does not specifically regulate hostile takeover offers, nor distinguish between hostile and friendly takeover offers. As such, the same provisions will also apply to hostile takeover offers. While there have been a number of takeovers that have been advertised in the media as "hostile", the concept is nevertheless uncommon in Romania. Such was the case of a negative opinion from a target’s board of directors on the takeover (as per law, its opinion needs to be submitted to the FSA and the market) and from a target’s employees/trade union (hence creating in the company an environment hostile to the bidder).

In the majority of cases, when a private equity buyer acquires a company, a key concern is ensuring that the management team, with all its knowledge and experience, remains in the company to support its continued growth. This can make the difference between a great investment and one with only a small return. Hence, it has become critically important to create incentive compensation plans that align the management with the new owners by giving them a meaningful stake in the company.

Private equity investors generally look to give management incentives in order to minimise transition risk by ensuring the company runs smoothly after the change of ownership, to retain critical knowledge and relationships of key executives, and to ensure that the management team is aligned with the new owner’s goals and long-term objectives.

In roughly one-third of private equity deals, up to 5% of equity is set aside as incentives for managers. The practice, however, is not to grant the 5% in the first year, but rather to grant amounts over a few years, in order to maximise retention.

Most commonly, the private equity fund allows the management to invest in preference shares without any voting rights. However, ordinary shares are also used if the investment is made in companies that do not issue preference shares (such as limited liability companies). Management shares are sometimes subject to vesting schedules, typically up to five years or even longer.

Non-equity incentive schemes are less common but are seen in smaller deals or in programmes with many participants in which the equity structure is too burdensome. Non-equity schemes have a broad range,. from bonuses to cash-settled options programmes.

Long-term incentive plans – "stock option plans" – based on which the investor grants equity in the company to the relevant management, in certain conditions, are one of the most preferred instruments in Romania. Tax incentives are the main benefits for such equity plans, since taxation occurs when the employee sells the shares and obtains a capital gain, and not when the employee actually receives the options/benefit, as is typically the case with other types of benefits.

Good/bad leaver provisions are common provisions, typically found in the shareholders' agreement or the articles of association of the target company.

A standard "good leaver" clause would include the following circumstances:

  • termination of the employment of the manager other than for a material breach of his/her mandate/employment agreement;
  • resignation by the manager for specific reasons, such as a material reduction in the compensation of the manager or a material reduction in the responsibilities of the manager;
  • a material breach by the company of the terms of the management agreement;
  • death or incapacity;
  • the retirement of the owner manager at an agreed age; or
  • if the manager is otherwise determined by the private equity fund to be a "good leaver".

The standard definition of a "bad leaver" would include circumstances such as:

  • the termination of his/her position within the management structure for a material breach of his/her agreement;
  • the resignation of the manager shareholder for reasons other than those specifically agreed with the private equity fund; and
  • if the manager shareholder breaches specific restrictive covenants included in the shareholders' agreement.

The leaver provisions for the management shareholders will vary, depending on how the transaction is negotiated and structured.

Good leaver provisions usually allow the management members concerned to retain their favourable pricing (and even vesting) terms. Bad leaver provisions substantially deteriorate from the favourable good leaver terms.

Regarding the vesting provisions, it is becoming more common in the market for private equity funds to reward top managers with performance stock options, rather than time-vested ones. This means managers are rewarded only if they reach certain indicators, such as specified revenue growth. Furthermore, it is a market standard to impose certain restrictions in the articles of association of the target companies in relation to the disposal of equity by the management shareholder (eg, board approval before selling their shares).

Post-termination restrictive covenants are fairly common in Romanian transactions for top managers and other key personnel. The most common covenants are non-compete, confidentiality and non-solicitation clauses.

Romanian law provides a limit on enforceability only for non-compete clauses mentioned in the employment agreement of management shareholders, with such clause being valid only for a period of up to two years following the termination of an employment agreement. If the non-compete clause is provided in the transactional documentation or in the management agreement of a manager shareholder, there is no time limitation under the law. Even though Romanian law does not set out any time limits for the enforceability of such provisions and theoretically such can be imposed for an unlimited time period, in practice the parties agree for these covenants to be applicable only for a period of two to five years, on a case-by-case basis.

In most private equity transactions, the manager shareholders often try to insert certain typical minority rights in the transactional documentation (eg, share purchase agreement or shareholders' agreement), such as the tag right, the preference right and good leaver provisions. The most used protective measures are the tag right and the good leaver clause; depending on the bargaining positions of the parties, anti-dilution protection may also be inserted.

Depending on the sector and the involvement of the private equity fund in the activity of the acquired business, it is possible for the manager shareholder to hold some veto rights in relation to certain matters that are directly linked to the business. It is not customary for the management shareholder to influence the exit of the private equity fund, especially when the private equity fund is the majority shareholder.

The level of control adopted by a private equity fund over its portfolio very much depends on the size of its investment in the target company and the overall strategy of the private fund in the industry in which the target company is active.

In most cases, PE funds intend to use all leverage possible in order to make sure that their investment is well protected and under their control as much as possible. In this respect, PE funds ensure that the transactional documentation includes the following:

  • investment and shareholders' agreements through which the investors appoint all or a part of the members of the board of directors or the relevant statutory body in order for the ordinary business decisions to be in line with their fund strategy;
  • the obligation for the board of directors of the target company to make information regarding the financial status of the company available on a regular basis, including any forecast operational and investment budget;
  • for the purposes of establishing a stable shareholding and investment structure within the target company, assurance that there is a lock-up period in which no shareholder is allowed to proceed with an exit/transfer of participations; and
  • certain reserve matters in respect of which any decisions will be passed only with the affirmative vote of the representatives of the private equity fund. Such matters in principle refer to:
    1. amendments to the share capital or the issuance/transfer of shares;
    2. mergers or spin-offs involving the target company;
    3. the sale of a business or a division of the target company or its subsidiaries;
    4. mortgaging, pledging, or permission to create a security interest over the target company's shares;
    5. approval of investments and of the business plan; and
    6. any amendment or change of the rights, preferences, privileges or powers of – or restrictions provided for the benefit of – the company's shareholders.

Even though not expressly regulated, there are certain provisions under Romanian Company Law No 31/1990 that might be used as support for the application in practice of the legal doctrine of piercing the corporate veil, especially in relation to companies that undergo dissolution/liquidation. Such provisions set out that the shareholder who abuses the limited nature of his/her/its liability and the distinct legal personality of said company to the detriment of creditors is held liable (without limit) for the liabilities of the dissolved and/or liquidated company. Furthermore, the liability of said shareholder becomes unlimited under such terms, especially when the shareholder disposes of the company assets as if they were his/her/its own or diminishes the company assets to his/her/its own personal benefit or for the benefit of third parties, knowing or having to know the fact that in such way the company will not be able to perform its obligations.

Separately, the fiscal and insolvency legislation also provides that a shareholder can be held liable together with the target company if the shareholder has triggered the state of insolvency of the company through acts such as disposal of, or hiding in bad faith, in any form, the target company's assets, or has decided to continue an activity that was obviously leading the company towards cessation of payments, for personal interests.

In most transactions, private equity funds intend mainly to impose their corporate governance rules in order to protect their interest and to oversee the general activity of their portfolio companies without trying to necessarily impose compliance policies applicable internally within the fund.

However, even though not so common, there are situations in which equity funds invest in small or medium-sized companies that lack resources and the capacity to handle complex business management. In this scenario, private equity funds often agree to apply their own compliance policies in order to ensure the observance of the law and the growth of the investment.

The typical holding period for private equity transactions is five years. The exit is usually made through a competitive sale process. The most common forms of private equity exits continue to be trade sales (ie, sales to strategic investors) and secondary transactions (ie, sales to other financial investors). Other typical forms of private equity exits, such as initial public offerings (IPO) or dual track transactions (ie, an IPO and a sales process running concurrently) are practically non-existent. As mentioned, IPOs are quite rare on the Romanian market and are usually implemented by strategic players and not in private equity transactions.

Depending on a number of factors, including the opportunities available on the market, private equity sellers may decide to reinvest in Romania.

Equity arrangements usually contain drag rights in favour of the private equity funds. A sale of at least 50% of the portfolio company would constitute the typical drag threshold, but the exact percentage will depend on the portfolio company’s actual ownership structure as well as the parties’ relative bargaining power. The private equity owner obviously needs to consider that the same percentage to trigger its drag right will most likely become the threshold to trigger the minority shareholder’s tag right.

Management shareholders usually enjoy tag rights when the private equity fund is selling its participation, especially if such shareholder arrangements otherwise contain drag mechanisms for the benefit of the controlling shareholder. A sale of at least 50% of the portfolio company would constitute the typical tag threshold, but the exact percentage will depend on the portfolio company’s actual ownership structure as well as the parties’ relative bargaining power.

IPOs are not common on the Romanian market, mainly because the large majority of companies and businesses in Romania are not organised as publicly traded companies. Businesses are usually set up as (non-listed) limited liability companies or joint stock companies, and investors usually buy the entire participation or a majority stake in such companies. Therefore, it will be hard to pinpoint any specifics for exits by way of IPO on the Romanian market. Notably, there were only five IPOs in total in Romania in 2017 and 2018, and none in 2019. Only one IPO is expected in 2020, but it remains to be seen whether this will actually happen in the current COVID-19 climate.

Wolf Theiss Rechtsanwälte GmbH & Co KG

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010639 Bucharest

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Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE), and has built its reputation on a combination of unrivalled local knowledge and strong international capability. The firm opened its first office in Vienna 60 years ago, and now brings together more than 340 lawyers from a diverse range of backgrounds, working in offices in 13 countries throughout the CEE/SEE region. More than 80% of the firm's work involves cross-border representation of international clients. The team works closely with clients, through the firm's international network of offices, to help them solve problems and create opportunities. The lawyers know how to leverage clients' private equity in Austria and CEE/SEE, and make it work for their future. From fund formation to LP & GP agreements, regulatory compliance and governance, and portfolio M&A, M&A specialists facilitate and negotiate transactions, and execute other instruments such as complex financings, strategic partnerships, leveraged buyouts, cross-border M&A, carve-out transactions, IPOs and trade sale exits.

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