Legal guide for company directors and CEOs in Romania

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Day-to-day management of companies during lockdown restrictions

In light of their duties outlined below, the main issues faced by directors consist of convening and carrying out the general meetings of shareholders/meetings of the board of directors, approving the annual accounts of the company and submitting them with the relevant authorities and generally ensuring the day-to-day management of companies during the period of lockdown and various restrictions imposed by the authorities. Fortunately, there are various workarounds for directors to adapt to the new circumstances. General meetings of shareholders and meetings of boards of directors can be organised electronically to the extent this is expressly provided in the articles of association of the company. Even in the absence of express provisions in the articles, Romanian courts have already acknowledged the possibility to convene and pass general meetings of shareholders’ resolutions electronically, and there is also draft legislation currently under discussion to be adopted which would allow both board of directors’ meetings and general meetings of shareholders to be held virtually during the state of emergency (i.e. registered mail, letter digitally signed with a qualified extended electronic signature, signed and scanned letter or any other means of communication that ensures transmission of the full text). Moreover, the terms of submitting various filings (e.g. financial statements, etc.) with the competent authorities have been suspended during the state of emergency and will be resumed once the restrictions relax, with various deadlines for submissions prolonged after the state of emergency is lifted, thus allowing companies and directors the necessary time to prepare and submit them. 

Management of HR resources and employees

With many companies affected by the current restrictions during the lockdown and faced with the obligation to temporarily suspend activity, directors are likely to be faced with a number of difficult decisions as they develop their strategy for the company. During the state of emergency, the Romanian Government has proposed a series of measures in an attempt to support companies significantly affected economically by the crisis, such as the possibility for employers to temporarily suspend activity and send employees into “technical unemployment”, paying them 75% of their salary using state funds, subject to certain conditions. Directors of companies eligible for such facilities have been key in the process, as state aid has been accessible mainly subject to directors making a statement at their own liability that activity has been temporarily suspended. Directors should also address the logistical challenges which lockdown rules and social distancing create. Existing operations and internal processes should be organised in such a manner as to observe the new rules aimed at protecting the health of employees (flexibility on working from home where possible, organising employees in shifts to ensure the social distancing, etc.).

Solvency

The highest priority is to address the short- and long-term financial sustainability of the company. This will require a careful assessment of projected cash flow solvency as well as balance sheet solvency. Directors must ensure that they have up-to-date management information on which to base their decisions, together with a firm grasp on how the company’s markets and prospects are likely to be affected by the crisis. Uncertainty over the timetable for exit from current lockdown rules, and the speed of economic recovery, means that directors will have to plan for a variety of different scenario, and develop alternative plans that can be implemented as necessary, particularly if the worst case outcomes seem likely. Directors of companies threatened with insolvency should: (i) seek specialist advice, both legal and financial; (ii) ensure that all directors and key stakeholders are kept informed and onside; and (iii) keep a clear record of their decision-making and the materials available to them to review. Where the company is part of a wider group, directors must keep in mind that they owe their duties to the company itself and not to the wider group or the parent company.

2. What government relief measures have been made available to directors?

In addition to the issues highlighted above, directors need to pay attention to the legislation adopted during the state of emergency, and also to the measures announced by government authorities with an aim of supporting companies and investors through the state of emergency and during the gradual relaxation of the restrictions, in order to determine the ones relevant for the company. 

The Romanian Government adopted sweeping tax and financial measures aimed at supporting the economy in the following areas:

  • state guarantees for financing small- and medium-sized companies
  • payment deferrals for small- and medium-sized companies
  • tax and fiscal measures aiming at relieving the economic burden of the COVID-19 outbreak
  • technical unemployment aid: up to 75% of the base gross salary of affected employees is now covered by state funds, or European funds accessible through the POCU programme (Operational Programme “Human Capital”), subject to certain conditions 
  • extension of deadlines for various submissions, such as the term for submission of the approved annual accounts until 31st July 2020, and
  • suspension of the deadline for submission of the ultimate beneficial owner (UBO) statement for all Romanian companies during the state of emergency; the statement may be submitted within 3 months after the state of emergency is lifted.    

All these measures and other relevant legislation adopted by the government during the state of emergency have been covered in depth in various Law Now articles.

Directors duties and responsibilities

1. What form does the board of directors take?

Under Romanian Companies’ Law, the rules concerning the management of companies differ depending on the type of company under discussion. This guide will focus on the rules concerning directors of joint stock companies (“Societate pe actiuni” or S.A.) and to limited liability companies (“Societate cu raspundere limitata” or S.R.L.), as these are the most common types of company in Romania. The guide does not address the rules relating to other forms of companies.

Romanian joint stock companies can opt for a one-tier management structure (which is generally more common) or a two-tier system. The one-tier system consists of a single director, or a board of directors whose number must always be odd. Joint stock companies subject to mandatory auditing requirements must have at least three directors. 

The two-tier system in a joint stock company consists of a management board and a separate supervisory board:

  • the management board, which is also the executive body, carries out the management of the company on a day-to-day basis and represents the company in relation to third parties and in front of official bodies
  • the supervisory board mainly supervises the company’s activities, including those of the management board, and appoints members of the management board.

Members of the supervisory board may not simultaneously be members of the management board or employees of the company.

A Romanian limited liability company is managed by one or more directors, who can also be shareholders of the company. The articles of association of a limited liability company must include provisions with respect to the appointment of directors, the powers granted to them and the manner of exercising these powers (whether jointly or individually).

2. What is the role of non-executive or supervisory directors?

The distinction between executive and non-executive directors is more relevant for joint stock companies. In principle, directors of limited liability companies are executive directors with full representation powers (unless such powers are limited through the articles of association). 

The board of directors of a joint stock company can include both executive and non-executive directors. Should the board of directors delegate management powers to a general manager, the majority of members in the board of directors must be non-executive directors. Under Romanian law, a non-executive director does not have day-to-day management responsibilities nor any representational powers in relation to third parties. His/her responsibilities are mainly to supervise the activity of the general manager(s). 

Moreover, in the case of a two-tier management system, the supervisory board generally has no managing powers, but the articles of association may provide that certain matters require the prior consent of the supervisory board. 

3. Who can be appointed as a director? 

For joint stock companies, generally both individuals and legal entities may be appointed as directors or members of the supervisory board. However, a legal entity must designate an individual as its permanent representative. 

There are no citizenship, residency or work permit requirements for directors or for members of management or supervisory boards. However, certain restrictions are placed on who can become a director. For example, restrictions are placed on persons who have been legally declared incapable or who have been convicted of crimes of corruption, forgery, embezzlement, tax evasion and other crimes prescribed by the law. Furthermore, restrictions are also placed on persons liable for breach of Romanian Law no. 656/2002, as republished, which deals with the prevention of and sanctions for money laundering and creates certain measures for the prevention and combating of the financing of terrorism acts.

Also, it is important to note that:

  • if the directors of a joint stock company are appointed from among the company’s employees, their employment agreement must be suspended for the term of the mandate, and
  • an individual can be a director and/or a member of the supervisory board of no more than five other joint stock companies headquartered in Romania. This prohibition does not apply where the director holds 25% of the shares of the company or acts as a member of the board of directors or a member of the supervisory board of the joint stock company owning 25% of the said shares. This restriction also applies in the case of representatives of the directors/members of the supervisory board’s legal person. 

There are no residency or nationality requirements for directors of a limited liability company.

4. How is a director appointed?

For joint stock companies with one-tier management systems, directors are appointed at an ordinary general meeting of shareholders. The first directors are nominated in the articles of association of the company and their mandate cannot exceed 2 years. The mandate of subsequent directors is for 4 years. The directors may be re-elected, unless the articles of association do not allow this. 

The Trade Registry Office must be notified of any new appointments and resignations of managers or directors, and these must also be published in the Romanian Official Gazette.
In the case of a two-tier system, members of the management board are appointed by the supervisory board for a term set by the articles of association of the company, but their mandate may not exceed a period of 4 years.

Members of the supervisory board are appointed at the general meeting of shareholders, but the initial members are appointed through the articles of association of the company and their mandate cannot exceed 2 years. The number of members on the supervisory board is also established in the articles of association and must be between three and eleven.

Directors of limited liability companies are appointed by the general meeting of shareholders or through the articles of association. The shareholders representing the absolute majority of the share capital may appoint one or more directors from among themselves, determining the extent of their powers, the term of their mandate and their remuneration (if applicable), unless the articles of association provide otherwise. 

5. How is a director removed from office?

Directors may resign at any time by giving notice to the company. They do not need to give a reason for their resignation. If a there is a sole director managing the company, he/she must immediately convene a general meeting of shareholders upon his/her resignation.

In principle, directors may be removed at any time by a decision of a general meeting of shareholders. Under Romanian law, directors removed without cause are entitled to claim damages.

In joint stock companies with a two-tier system, members of the management board may be removed at any time by the supervisory board, unless the articles of association provide that they are revoked by a decision of a general meeting of shareholders. Members of the supervisory board may be removed at any time by a decision of a general meeting of shareholders taken with a majority of at least two thirds of the votes of those shareholders present at the meeting.

In the case of a limited liability company, a director can be removed at any time by a decision of a general meeting of shareholders taken with unanimity of votes of all the shareholders, unless the articles of association provide otherwise.

6. What authority does a director have to represent the company?

Generally, directors are authorised to perform all acts necessary and useful for the conduct of the company’s business, other than those acts requiring the approval of shareholders at a general meeting. These acts are found in the articles of association of the company or are expressly provided for by Romanian law.

Directors with powers to represent the company cannot subdelegate such powers unless they are expressly authorised to do so. Failure to observe this may result in the company claiming any ensuing benefits from the person to whom the director delegated his/her authority. Liability in such cases is joint with the person to whom the director delegated his/her authority.

The names and specimen signatures of persons empowered to represent the company must be filed with the Trade Registry Office by the board of directors.

In the case of a limited liability company, generally, and unless otherwise provided in the articles of association, the power to represent the company is granted to each director appointed in the company. The articles of association may include limitations to such powers or may include the four eyes principle which would require double signature for certain operations.

For joint stock companies, the directors or, in the case of a two-tier system, the management board, acting in the name and on behalf of the company, can only acquire, alienate, lease, exchange or grant security over assets relating to the company, with a value exceeding half of the book value of the company’s assets on the date of entering into such act, with the prior approval of an extraordinary general meeting of shareholders. In a one-tier system, the board of directors represents the company in relation to third parties and in court. In the absence of a different provision in the articles of association, the board of directors represents the company through its chairman. Furthermore, the articles of association may appoint the chairman and one or several directors to represent the company, acting jointly or individually.

The board of directors may also delegate the management of the company to one or several managers, appointing one of them as a general manager. In the case of joint stock companies which are subject to mandatory financial audits, it is compulsory to delegate the management of the company to a manager(s). If the board of directors delegates the management of the joint stock company to managers, the power to represent the company will be in the hands of the general manager.

In a two-tier system, the management board is authorised to represent the company in relation to third parties and in court. Unless otherwise provided in the articles of association, members of the management board may only represent the company jointly. In such case members of the management board can authorise one of them to perform certain operations or certain types of operations by unanimous consent. The supervisory board represents the company in relation to the members of the management board.

7. How does the board operate in practice?

For a joint stock company, the organisation and working rules of the board of directors, management board and supervisory board are usually set out by the articles of association of the company and by the applicable provisions of the Company Law. The board of directors must appoint a chairman from among its members. The articles of association may provide for the chairman to be nominated and approved by a decision of the ordinary general meeting of shareholders. The board of directors may also set up consulting committees of at least two members, who advise the board in respect of matters such as audit, remuneration of staff or nomination of candidates for various managerial positions.

In terms of quorum requirements, the resolutions of the board of directors (in a one-tier system), management board or supervisory board (in a two-tier system) require the presence of at least half of the number of members of each of these bodies to be valid, unless the articles of association provide a higher number. The decisions of the board of directors, the management board or the supervisory board are taken by a simple majority of the votes of the members present at the meeting, unless otherwise provided in the articles of association of the company. Decisions regarding the appointment and revocation of the chairmen of such bodies are taken by the vote of the majority of the board’s members. Members may only be represented by other members. A member present at the meeting can only represent one absent member.

Unless otherwise provided in the articles of association, the chairman of the board of directors or of the supervisory board has a casting vote in the case of deadlock. This does not apply if the chairman of the board of directors also acts as a manager.

If the current chairman of the board of directors, management board or supervisory board cannot vote or is barred from voting within the relevant body, the other members may elect a chairman who will have the same rights as the current chairman. In the case of deadlock, and if the chairman does not have a casting vote, the motion is considered denied.

The articles of association of a company may also approve participation at board meetings by means of electronic communication. Also, the articles of association can limit decisions to be taken in such situations and can also provide for a right to object to the manner of holding the meeting in favour of a certain number of members of the relevant body.

In the case of a limited liability company, if the articles of association provide that the directors must work together, the relevant decisions must be taken with the unanimous vote of the directors. In the case of deadlock, the shareholders representing the absolute majority of the share capital (50% plus 1) will decide.

8. What contractual relationship does the director have with the company?

In the case of a joint stock company, the legal relationship between directors and the company is regarded as a commercial mandate. Throughout the term of the mandate, directors of joint stock companies cannot enter into employment agreements with the company. Directors may therefore be retained on the basis of management or mandate agreements, specifying their duties and remuneration/benefits, and including, inter alia, confidentiality and non-compete provisions.
The remuneration of board members and, in the case of a two-tier system, of supervisory board members, may be set by the general meeting of shareholders or through the articles of association.
In the case of a limited liability company, directors may be retained on the basis of management agreements/mandate agreements, or of employment agreements. Romanian law provides that a sole shareholder can be an employee of the limited liability company of which he/she is the sole shareholder. Generally, in practice, management agreements are more common for management positions as they offer more flexibility than employment agreements (e.g. termination provisions, non-compete clauses, etc.). 

9. What rules apply in respect of conflicts of interest?

The directors of a joint stock company must exercise their mandate with loyalty and in the interests of the company.

Any director who has a conflict of interest relating to a transaction must inform the board of directors and the auditors of such a conflict and abstain from voting in respect of that transaction. The same obligations apply in cases where the conflict of interest relates to the director’s relatives or affiliates. Failure to observe this obligation may render the director liable to compensate the company for any damage sustained by the company as a result of such failure.

A director may enter into transactions with the company for his/her own benefit, subject to such transactions receiving prior approval from the shareholders at an extraordinary meeting, if the value exceeds 10% of the net assets of the company.

Managers of joint stock companies (in a one-tier system), as well as members of the management board (in a two-tier system), cannot hold the position of managers directors, members of the management board or supervisory board, censors or internal auditors or shareholders in other competing companies or companies with the same object of activity, nor can they carry out the same trade or competing trade without prior approval from the board of directors or supervisory board, respectively. Moreover, a person can be a director/member of the supervisory board in no more than five Romanian joint stock companies.

Similarly, directors of limited liability companies are not allowed to act as directors in competing companies or companies having the same object of activity, nor may they carry out the same trade or competing trade on their own behalf or on behalf of another natural or legal person, without the prior approval of the general meeting of shareholders, otherwise they may be dismissed and/or be liable for damages.

10. What other general duties does a director have?

The duties of directors of a joint stock company vary depending on which governance system is adopted:

  • in a one-tier system, members of the board of directors are entrusted with the fulfilment of all acts necessary and useful for the conduct of business activities of the company including: (i) the establishment of accounting policies and financial control systems; (ii) the supervision of managerial activities; and (iii) the drawing up of an annual report.The shareholders at a general meeting may also delegate certain actions to members of the board of directors, such as changing the headquarters of the company and increasing its share capital. (In this case, for a period of maximum 5 years, the board of directors/management board is authorised to increase the subscribed share capital of the company up to a specific nominal value, by issuing new shares, provided that the nominal value of the share capital does not exceed half of the subscribed share capital of the company as at the date the authorisation is granted.)
  • in a two-tier system, the management board has executive powers, while the supervisory board has only a supervisory role.

The directors of a limited liability company are entrusted with taking all measures or acts necessary for the conduct of the business activities of the company, except for matters reserved by law or by the articles of association to the general meeting of shareholders.

The main responsibilities of a director of a limited liability company include organising the general meetings of shareholders and implementing the resolutions adopted at these meetings, drawing up a shareholders’ register, keeping the accounting records and financial statements of the company and participating in all of the company’s internal meetings.

The legal representatives of a Romanian company must submit a statement on own their responsibility in order to identify the UBO of the company, according to the Anti-Money Laundering Directive. 

11. To whom does the director owe duties?

The directors are held responsible directly to the company for the non-fulfilment of their obligations that derive from the articles of association of the company, the decisions of a general meeting of shareholders or the law. Under Romanian law, directors are jointly liable to the company for any breach of their obligations. 

An action for damages may be brought by the general meeting of shareholders, with a majority required either by the articles of association or by law. 

12. How do the director’s duties change if the company is in financial difficulties?

Under Romanian Law, if the directors find that, following losses established by the annual financial statements, the value of the net assets of a joint stock company has decreased to less than half of the value of the subscribed share capital, they should immediately convene an extraordinary general meeting of shareholders to decide whether the company should be dissolved or how to remedy the situation.

The articles of association may establish that the extraordinary general meeting of shareholders be convened even in the case of a decrease in net assets less significant than the one provided by law, establishing the minimum level of net assets in relation to the subscribed share capital. The directors shall present to the extraordinary general meeting of shareholders a report on the financial situation of the company, accompanied by observations of the auditors. This report must be submitted at the company’s registered office at least 1 week before the date of the meeting in order to be consulted by any interested shareholder. 

Also, if a company is threatened with insolvency, directors will need to give increased attention to the interests of creditors. In particular, once directors know (or ought to know) that the company is likely to become insolvent, they must consider the interests of the creditors as paramount and take those interests into account when carrying out their duties to the company. The liquidator of an insolvent company has the power to review the conduct of the directors in the period leading up to the insolvency.

13. What potential liabilities can a director incur?

Directors are liable towards the company for the non-fulfilment of their obligations which are set forth in the articles of association of the company, the decisions of a general meeting of shareholders or by law.

Under Romanian law, directors are jointly liable to the company for any breach of obligations relating to: the contributions made by shareholders, the actual existence of paid dividends, the accuracy and existence of the company’s registers, the strict implementation of resolutions of the general meetings of shareholders, and the strict fulfilment of the duties imposed on them by law and by the articles of association of the company.

Directors’ liability may also be triggered by creditors of the company (subject to the opening of insolvency proceedings) or by any third parties who incur a loss as a result of their unlawful actions. As directors act on behalf of the company, personal liability towards third parties may be triggered only if they act beyond the scope of their powers. Directors are also subject to criminal liability under Romanian company law. A director’s liability for intentional wrongdoings vis à vis third parties may not be limited by the company.

14. How can a director limit his/her liability?

Romanian company law does not contain specific provisions permitting the limitation of a director’s liability. However, general principles of law restrict agreements limiting the liability of a debtor to cases when the debtor acted negligently or imprudently and not with intentional wrongdoing.

Horea Popescu
Horea Popescu
Managing Partner
Bucharest
Image of Raluca Ionescu
Raluca Ionescu
Senior Associate
Bucharest