Joint Ventures under Romanian law

Introduction

Beneficial business opportunities in emerging markets can be enhanced through wise affiliations. Foreign investors can benefit from the expertise of local entities and, in turn, those entities can gain from the financial resources of outside firms. Particularly, in times of global economic crisis, the capacity of businesses to cope with money shortages may be enhanced by the ability to identify a compatible business partner who can provide the missing resources.

Significant infrastructure redevelopment projects that cannot easily be developed in Romania without the close cooperation of private and public entities require cooperation among diverse enterprises and government. Such forms of international cooperation are commonly referred to as “joint ventures” (sometimes abbreviated as a JV) and mean an entity formed between two or more parties to undertake some form of economic activity together. In such formations, the parties agree to create a new entity by contributing know-how and/or equity, and then share in the revenues, expenses, and control of the enterprise.

The JV can be for a specific project, or a continuing business relationship, but is distinguishable from a strategic alliance that is a much less rigid arrangement. Most significantly, as used in the international context, the term JV generally refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture lato sensu can be a corporation, a limited liability company, a partnership or any other legal structure, depending upon a number of considerations such as tax and tort liability. Stricto sensu, under Romanian law, JVs are partnerships without legal personality. These latter stricto sensu JVs and the agreements that form their basis raise certain practical challenges which this article describes.

Joint Ventures as Private to Private Partnerships

General characteristics

As noted above, joint ventures represent a particular type of arrangement in which two or more individuals and/or legal entities, either Romanian or foreign, agree to contribute certain assets for the purposes of performing jointly a pre-determined commercial activity in order to benefit from the profit thus obtained.

Joint ventures are regulated by the provisions of the Commercial Code and the Fiscal Code, and the implementation norms. Pursuant to the Romanian Commercial Code, joint ventures do not require any specific formalities, other than a written contract, contrary to the distinct formalities required when organizing a new company under the provisions of the Romanian Company Law, i.e. Law 31/1990. The only compulsory formality is, according to the Fiscal Code, that joint ventures must be registered with the competent fiscal authority before the commencement of any activity.

As joint ventures are not in themselves distinct legal entities, i.e., they do not have legal personality, they do not have separate assets and also they do not create rights and obligations of the joint venture itself in relation to third parties.

The Functioning of the Joint Venture

The participants in a joint venture decide by way of the joint venture agreement which of them is going to undertake the leading role of actually managing the venture. Essentially, one of the participants to the joint venture becomes the manager of the partnership, while the others maintain an auxiliary role.

The parties are free to establish their rights and obligations towards one another within the agreement itself. The manager of the joint venture, however, will have the obligation to manage the business in good faith, with the same diligence as in its own business. The manager will be liable to the other participant to the joint venture for faulty management, leading to a lack of profit or losses registered due to its own fault. Furthermore, such manager must periodically inform the other participant in the joint venture about the activity performed according to the provisions of the joint venture agreement. The parties to the joint venture assume mutual obligations towards each other. Consequently, the other participant to the joint venture undertakes certain obligations in favor of the manager of the joint venture in the manner established within the joint venture agreement.

As previously noted, the lack of a legal personality of the joint venture has significant consequences in relation to third parties. Therefore, as the joint venture does not represent a distinct legal entity, it cannot undertake rights and obligations separately. Consequently, third parties will not conclude agreements with the joint venture itself, but with the manager, who is the representative of the joint venture, or a company created as part of the JV’s activities. As a result, the manager of the joint venture, as a party in the agreements with third parties, will be liable towards such third parties with his entire patrimony, and not merely with his contribution to the joint venture. In order to avoid that, a person may set up a limited liability company according to the provisions of the Romanian Company Law, for the specific purpose of participating to the joint venture; such limited liability company will hence become the manager of the joint venture – and not its sole shareholder – and consequently the limited liability company will be liable towards third parties up to the amount of the contribution of the sole shareholder to such limited liability company, and not up to the entire patrimony of the sole shareholder as would happen were the limited liability company not to have been formed.

Contribution of the Parties to the Joint Venture

There are specific issues with regard to the contribution of the parties to the joint venture, especially when such contribution is represented by the ownership over an immovable. When the contribution is represented by an ownership right over land, the owner cannot be a foreign legal entity, as Romanian law prohibits foreign legal entities from owning title to land located in Romania. In such instance, the foreign legal entity that intends to become participant in a joint venture and wants to acquire and then contribute an ownership right over a plot of land to such joint venture, may set up a special purpose legal entity in Romania which can accomplish the task. Such special purpose legal entity will then acquire the ownership of the plot of land and become the party to the joint venture. Another possible solution is for the potential parties to a joint venture to jointly form a Romanian legal entity which has the specific role of manager of the joint venture, and in such a case it will be this specific legal entity that will hold the ownership right over the plot of land where the project will be developed, according to the provisions of the joint venture agreement.

Other practical difficulties exist in connection with the contribution of the auxiliary participant to the joint venture when such contribution is represented by ownership of an immovable. As the joint venture is going to be managed by the manager appointed based upon the joint venture agreement, it will be the manager who is able to perform the prerogatives of possession and use over the immovable asset, and not its actual owner, i.e., the auxiliary participant to the joint venture. In such a case, as the ownership over the immovable asset will be contributed to the joint venture for the entire duration of the joint venture agreement, it can be said that practically the auxiliary participant will not be able to exercise the prerogatives of possession and use over such immovable asset until the termination of the joint venture agreement. Furthermore, in order to avoid any potential confusion, the joint venture agreement must expressly state what happens with the assets that represent the parties’ contribution to the joint venture at the termination of the agreement, i.e., that they return into the patrimony of the parties that have initially contributed them to the joint venture.

In practice, as an alternative to the above, when intending to contribute the ownership right over an immovable to the JV, many auxiliary participants choose to sell a portion of their immovable property to the other participants to the joint venture. That way, they receive money for the sold portion of their ownership right, and contribute to the JV only with the remaining quota over the asset.

Fiscal implications

In case the participants to the joint venture are either a Romanian individual and a Romanian legal entity, or a foreign and a Romanian legal entity, there are no specific issues raised in connection with the accountancy and payment of the profit tax for the activity performed according to the joint venture agreement. In such cases, the one responsible for keeping the accounts and making the payment of the profit tax is the manager of the joint venture, i.e., the Romanian legal entity.

When the participants to the joint venture are Romanian legal entities, however, they must pay careful attention to the accountancy and payment of the profit tax. In such situations, the manager of the joint venture must keep the accounts of the joint venture by registering all the income and expenses generated by the activity performed based on the joint venture agreement. Afterwards, the manager must transmit the records corresponding to the contribution of the auxiliary participant to the latter, who must register them in its own accounts. Afterwards, both participants to the joint venture must pay the corresponding profit tax to the competent fiscal authority.

Division of benefits and losses

The parties to a joint venture are free to establish within their agreement the manner in which the profits and losses will be divided among them as a result of the commercial activity performed based on such joint venture agreement. However, it is forbidden for a party to preserve the entire profit generated by the activity performed according to the joint venture agreement, or to state that it will not take part at all in the losses registered as a result of such activities.

Moreover, in case the parties to a joint venture do not establish within the agreement a manner of dividing profits and losses, then the profit will be divided according to the quota corresponding to the contribution of each participant to the joint venture.

Termination of the joint venture

There are various ways in which the joint venture agreement may be terminated, i.e., at the expiration of the term for which it has been concluded; by the fulfillment of the purpose for which it was created; by the bankruptcy of any of the participants to the joint venture; or by the parties’ agreement. Upon the termination of the joint venture agreement, each participant to the joint venture receives back the assets that represented the contribution of each of them to the joint venture.

Public – Private Partnerships

Public-private partnerships (“PPPs”) represent another alternative for the development of major projects beneficial to the public. In recent years, PPPs have been developed in many fields. Perceived as long-term forms of cooperation, PPPs are partnerships between public authorities and private businesses concluded for the purpose of accomplishing projects or performing services that are traditionally accomplished or performed by the public sector. Such a partnership acknowledges the fact that both sectors, the public and the private ones, are equally significant, and that both have certain advantages that must be exploited for the benefit of the public interest, in an efficient economic manner. As a result, each sector grants a specific contribution to the partnership, while each bears part of the risks, and also the benefits generated by a PPP.

In Romania, the former legislation on PPPs was cancelled in 2006 by a new set of rules adopted on public procurement, i.e., Government Emergency Ordinance no. 34/2006, and on concessions, i.e., Government Emergency Ordinance no. 54/2006. For more details on the procedures put in place by these specific laws, please visit our Digest Archive at http://www.hr.ro/digest_archive.htm, for our July 2006 Digest article on “Romania’s New Public Procurement Law”, our April 2009 Digest article on “Romanian Public Procurement Law Amended”, and our July 2007 Digest article on “Romania’s New Concession Procedure”.

When PPPs need to be concluded, they must observe the provisions of these two specific pieces of legislation, by way of a public tender and in full compliance with such tender documentation. The aim is to enable all interested economic operators to tender for public contracts and concessions on a fair and transparent basis in the spirit of the European internal market, therefore enhancing the quality of such projects and cutting their costs by means of increased competition.

There is no specific legislation on PPPs at the European Union level, the provisions applicable to PPPs being the ones included in the Romanian laws regarding public procurement and concessions. However, the European Commission has elaborated certain interpretative communications on the application of the Community Law on public procurement and concessions to PPPs. More specifically, a Green Paper has been drafted, showing the need for clarification of the implementation rules of PPPs, understood under the European Commission terminology as “cooperation between public and private parties involving the establishment of a mixed capital entity which performs public contracts or concessions”.

Conclusions

Joint ventures have proven over the past years to be a significant tool for potential investors in creating important businesses. Those who had to face the formalities of establishing a new company according to the Company Law resorted to joint ventures as a flexible means of setting the parameters of their cooperation. Moreover, the freedom of the parties to establish, by means of a joint venture agreement, their rights and obligations, and the manner in which their activity will be developed, without having to comply with the restraints put in place by the provisions of the Company Law, represent another advantage of joint ventures. If well conceived and implemented, both joint ventures and PPPs would represent business opportunities with significant advantages both for the participants to the JVs, and the community in which their projects are developed.

Articolul a fost publicat cu aprobarea:

Rubin Meyer Doru & Trandafir

SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION

IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.

http://www.hr.ro