ROMANIA Law and Practice Contributed by: Ileana Glodeanu, Andreea Cărare, George Ghitu and Delia Dumitrescu, Wolf Theiss
However, although less common, there are situations where equity funds invest in small or medium-sized companies that may lack the resources or internal capacity to manage complex business functions. In such cases, private equity funds may agree to apply their own compliance policies to ensure legal compli - ance and ultimately support the growth and stability of the investment. 9.2 Shareholder Liability Under Romanian law, private equity funds and their managers are generally not held liable for the actions or obligations of their portfolio companies, provided they act in a typical shareholder capacity and do not interfere in the day-to-day management of the com - pany. However, there are certain exceptions under which liability may be extended to a fund or its affili - ates in exceptional circumstances. 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/liq - uidation. 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 that, in this manner, the company will not be able to fulfil its obligations. Separately, the tax and insolvency legislation also pro - vide that a shareholder can be held liable, together with the target company, if the shareholder has trig - gered a 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 practice, Romanian courts have been cautious in applying these exceptions and will only disregard the corporate form in exceptional circumstances involving fraud, abuse of rights or asset-stripping behaviour. Accordingly, while the default rule protects the fund’s limited liability, sponsors must remain attentive to gov - ernance and conflict-of-interest issues, particularly in distressed scenarios.
10. Exits 10.1 Types of Exit
The typical holding period for private equity transac - tions is five years. The exit is usually made through a competitive sale process. The most common form of private equity exit continues 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 (IPOs) and 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 trans - actions. Depending on a number of factors, including the opportunities available on the market, private equity sellers may decide to reinvest in Romania. 10.2 Drag and Tag Rights Equity arrangements usually contain drag rights in favour of 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 percentage needed to trigger its drag right will also most likely become the threshold to trigger the minor - ity shareholder’s tag right. Management shareholders usually enjoy tag rights when the private equity fund is selling its participa - tion, especially if such shareholder arrangements otherwise contain drag mechanisms for the benefit of the controlling shareholder. A sale of at least 50%
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