To enable decisions to be passed efficiently, the Companies Law (31/1990) created flexible mechanisms and procedures allowing specific shareholder powers to be delegated to a company’s management. Such mechanisms have been successfully implemented by a vast number of companies and have enabled them to expedite corporate changes concerning their main characteristics (eg, corporate seat, scope of business and share capital).
While the delegation of specific powers of extraordinary meetings of shareholders to boards of directors is common practice, the Companies Law has long since provided that only some decisions made in this regard can be subject to an annulment action. Specifically, the law excludes decisions which concern an increase in a company’s share capital from being challenged. However, the Constitutional Court recently recognised shareholders’ right to request the annulment of such board decisions in court.
Separation of powers
The corporate governance rules applicable to Romanian joint stock companies regulate two types of shareholders general meeting, which differ in terms of the applicable rights and the quorum and voting requirements.
The rights generally associated with ordinary meetings of shareholders cover matters that concern the company’s general operation, such as:
- the approval of its budget and annual financial statements;
- changes to its board of directors; and
- the appointment of a financial auditor and the approval of their remuneration
Conversely, extraordinary meetings of shareholders are called to resolve matters which will significantly affect the company’s structure and activity, such as:
- a change to its corporate seat;
- a change to its scope of business;
- an increase or decrease in its share capital;
- a merger;
- a spin-off; and
- any change to its articles of association.
The main reason for the split of such meetings is to assure that more sensitive decisions are made at an extraordinary meeting of shareholders (subject to stricter requirements regarding the quorum and minimum number of votes), while operational decisions can be approved at an ordinary meeting of shareholders (subject to more flexible requirements regarding the quorum and minimum number of votes).
As concerns a company’s management, its directors are responsible for its daily operations, including the implementation of its day-to-day activity, as well as business development and human resources matters, among other things.
The roles and rights of shareholders and directors remain separated in joint stock companies and, unless expressly permitted, there should be no interference between the decisions of these corporate bodies.
Delegation of powers to boards of directors
In order to increase flexibility and address potential time concerns, the Companies Law (Article 114(1)) permits shareholders to delegate specific powers to the board of directors, such as changing the company’s corporate seat or the scope of its business or increasing its share capital.
Possibility to claim annulment of board of director decisions
The Companies Law expressly permits claims against the validity of certain corporate resolutions with respect to shareholder decisions. Insofar as board of director resolutions are concerned, the Companies Law takes a restrictive approach and allows such claims to be filed only against decisions adopted based on the delegation of powers. For all other operational decisions, the lawmakers took the stance that such resolutions should be subject to shareholder scrutiny, as they essentially concern the mandate given to the directors by the shareholders, on appointment.
Under the previous versions of the Companies Law (until the 2006 amendment was passed), a board of directors decision approving any change to the company’s corporate seat or scope of business or an increase in its share capital could be subject to an annulment action.
However, after several amendments, the current version of the Companies Law (Article 114(3)) states that only board decisions approving a change to the company’s corporate seat or scope of business can be challenged before the courts. The law has thus remained silent for many years on the legal right to challenge the validity of a board decision regarding an increase of share capital.
Constitutional Court decision
By way of Decision 382/2018, the Constitutional Court has acknowledged that Article 114(3) of the Companies Law refers only to delegated powers covering a change of a company’s corporate seat or scope of business. Thus, an increase in a company’s share capital is excluded.
The Constitutional Court opined that denying shareholders’ right to challenge in court board decisions approving an increase of their company’s share capital violates the principle of access to justice, which is expressly recognised by the Constitution.
Therefore, the Constitutional Court upheld the exception of unconstitutionality and found that the legislative solution contained in Article 114(3) of the Companies Law was unconstitutional.
The court’s decision was published in the Official Gazette (Part I, 668) on 1 August 2018 and took effect on the same date.
The Constitutional Court reinstated in full effect the principle that boards of directors should, if empowered to rule on matters legally falling under the rights of shareholders, be subject to the same legal consequences as those applicable to the validity of shareholders’ resolutions. Hence, on considering the opportunity to delegate an increase in a company’s share capital to the board of directors, the risk of the board of directors’ decision being challenged should be considered.
Mădălina Neagu, Partner
Andra Jegan, Attorney at Law