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Introduction |
Is there any process in Romania that has moved at a more glacial pace
than the listing on the Bucharest Stock Exchange (“BVB”) of
Fondul Proprietatea, aka the Property Fund (the “Fund”)? If there
is, this publication is unaware of it.
Tinged with indolence, and fraught with inexplicable and intolerable
indifference, the process of restitution for the victims of the former
Romanian communist regime has languished pointlessly for years through
successive Governments. The compensation afforded to the victims where
in-kind restitution is unavailable is through shares in the Property
Fund – an entity with assets that are among the finest and best
performing companies in Romania. The process to finalize such
compensation through listing the Fund on the BVB has dragged on for five
years as more and more victims succumb to old age never to obtain
justice in their lifetime. Under increasing pressure from the EU and,
most significantly, from the United States, progress at listing the Fund
is finally inching forward. Since the publication of our last article on
the subject in the Romanian Digest™ in June 2009, see:
http://www.hr.ro/digest/200906/digest.htm (“What in
Heaven’s Name is Happening with Fondul Proprietatea?”), the
agreement to retain Franklin Templeton as the Fund’s management company
was finalized and the procedure for the registration of the Fund with
the Romanian National Securities Commission (“CNVM”) was initiated.
But many months have gone by without Government action to pass the
amendments to Emergency Ordinance 81/2007 (“GEO 81/2007”) that are
essential in order to list Fondul Proprietatea. The Ordinance has been
placed on the agenda of Government meetings by the Minister of Finance
weekly but, without explanation, it was removed from the agenda as many
times. Without passage of the Ordinance as amended, the process of
providing restitution through the Fund is effectively suspended. The
original GEO 81/2007 was passed by the Government of Romania in 2007 in
order to deal with matters related to the restitution of confiscated
assets which, at the time - and rightly so - were considered as urgent
(which is why the act was passed as an "emergency" ordinance). Despite
the "urgency" of the situation, three years later, the Ordinance has yet
to be approved by the Parliament of Romania – although last week GEO
81/2007, along with the requisite amendments, was unanimously approved
(with one abstention) by the Chamber of Deputies’ Budget and Finance
Commission. The Chamber is expected to debate the matter this week,
leapfrogging the Government.
The amendments to the GEO 81/2007 are vital to the listing of the Fund
and involve: (i) the cancellation of the existing provisions of the law
according to which the listing of the Fund with the Stock Exchange would
require an initial public offering; (ii) the cancellation of the Fund's
unpaid shares -- failure to cancel the shares would require that the
Fund sue the state in a litigation that will certainly drag on for many
years before the listing could proceed; and (iii) indirectly, the
payment of the dividends for 2008 and 2009, which cannot be made because
the state (which is still the main shareholder of the Fund) has failed
to pay for all of the shares it holds. If adopted by the Chamber of
Deputies and then the Senate of Romania, the amendments would speed up
the listing of the Fund with the BVB and permit the payment of dividends
to the current holders of shares in the Fund.
The seemingly blasé and indifferent attitude of the Government of
Romania towards Fondul Proprietatea at this stage in the process is
baffling. The Fund cannot function appropriately as a restitution
vehicle until it is listed with the BVB, and the delays are costing the
Romanian budget millions of Euros arising from decisions continually
rendered by the European Court of Human Rights forcing Romania to pay
claims in cash rather than in shares in a non-functioning Fund.
Compounding the monetary cost is the fact that Romania’s capital markets
are in a virtual uproar demanding a rapid listing of the Fund, and the
CNVM desperately needs the fees to be rendered from the Fund’s listing
as well as its trading on the BVB. In addition, the restitution
claimants are dying off exponentially and the international investment
community, which has an increasing stake in the Fund, is growing angry
and ever more perturbed by the seeming inability of Romania to keep its
commitments. So what is there left to do in order to list the Fund? Read
on.
Conclusion of the agreement with Franklin
Templeton
GEO 81/2007 sets forth the main steps to be accomplished to list the
Fund with the BVB, among which are: (i) the evaluation of the assets
held by the Fund by an independent evaluator; (ii) the selection of the
management company for the Fund, which has occurred, but not fully
concluded; and (iii) the registration of the Fund with the BVB.
 Although
the GEO was adopted in June 2007 as an urgent matter, two years later,
in June 2009, not even the selection of the Fund manager had been
finalized. In our June 2009 Romanian Digest™ article, we noted that the
finalization of the second stage in the selection process of the Fund
manager was a positive step demonstrating the commitment of the Romanian
authorities to eventually move the Fund towards its listing and turning
it into a functional mechanism for restitution. We did, however, express
our concerns that each such positive step was taken only after
incredibly long delays. In 2009, the third and last stage in the
selection process for a Fund Manager was realized, i.e.: (i) the
submission by the two candidates selected on the short list of their
final financial offers; (ii) the evaluation of the offers based on the
criteria of the most advantageous offer from an economic perspective;
and (iii) the announcement of the winning candidate. Out of the two
candidates that had remained after the finalization of the second stage
of the selection process, a commission especially created for the
purpose of selecting the Fund manager chose the internationally
recognized firm of Franklin Templeton Investment Management Ltd.
Because the Fund manager is the entity called upon to perform the actual
management of the Fund and administer its portfolio, the finalization of
the selection procedure was perceived as a very significant step in the
process of listing the Fund with the BVB. However, in order to perform
its role, the agreement between Franklin Templeton and the Fund had to
be signed, the Fund manager had to be formally appointed, and the
articles of association of the Fund amended accordingly. After a
tortuous process of seemingly endless duration that included an effort
by private shareholders to force approval of the agreement in a General
Assembly of Shareholders, and a vote against it by the Romanian
Government, finally, on February 25, 2010, Franklin Templeton Investment
Management Ltd. became the Fund manager and its agreement was executed
by the Fund’s representative.
But unbeknownst to many, there is still another step to be taken in
order to allow the Franklin Templeton to actually perform its functions.
Current law requires that any amendment of the articles of association
of the Fund must be made based upon both a General Assembly decision,
and a Government decision approving the GA’s aforementioned decision.
Therefore, the formal appointment of the Fund manager and the amendment
of the Fund’s articles of association that will allow it, await and
still require a Government Decision. None has been forthcoming from the
Government. If, however, the proposed amendments to GEO 81/2007 are
adopted, there will be no need for that Government Decision. According
to the proposed amendments, the amendment of the articles of association
of the Fund will be just be made on the decision of the General Assembly
of the Fund, with no need for a Government Decision. Consequently, the
formal appointment of the Fund manager and the amendment of the articles
of association of the Fund that are still required would then be
achieved based only upon the vote of an Extraordinary General Assembly
of Shareholders of the Fund. The proposed amendment conforms to the
provisions of the Romanian Company Law in that any amendment of the
articles of association of a company set up pursuant to the provisions
of the Company Law must be made based on the decision of the general
assembly of that company. Indeed, the current provisions, according to
which the amendment of the articles of association of the Fund must be
approved by a Government decision, actually represent an aberration in
which a public authority intrudes into the operations of a private
company set up in accordance with the Company law.
Registration Procedure with CNVM
The execution of the agreement between the Franklin Templeton and the
Fund allowed for the initiation of the Fund’s registration procedure
with the CNVM. The registration of the Fund with the CNVM is a
compulsory condition for the listing of the Fund at the BVB pursuant to
the provisions of the Romanian Capital Market Law, i.e. Law 297/2004. As
an executed agreement was one of the requisite documents which needed to
be submitted to the CNVM, the registration procedure for the Fund with
the CNVM was likewise delayed by the postponement in the execution of
the agreement with Franklin Templeton. One month after its execution, on
March 25, 2010, the Fund submitted to the CNVM the documents requesting
registration of the Fund as “another undertaking for collective
investment”, as defined in the Capital Market Law. Under current law,
the Romanian state must, within 90 days from the registration of the
Fund with the CNVM, initiate a public sale offer for part of its shares
in the Fund. However, the proposed amendments to GEO 81/2007 eliminate
the obligation for the public sale offer and, consequently, would speed
the listing of the Fund with the BVB.
Valuation of the Assets of the Fund
Another significant step which is to be completed before the listing of
the Fund with the BVB is the valuation of the assets of the Fund. On
April 15, 2010, the tender for the selection of the company that would
perform the evaluation of the assets of the Fund was announced. There
were ten valuation and audit firms which initially expressed their
interest. The winners are: KPMG Romania SRL, Darian DRS SA and JPA Audit
& Consultanta SRL. These three firms will perform the valuation of the
assets of the Fund according to international valuation standards. The
execution of the agreement between these companies and the Fund is
another significant step because, after the signing, the evaluators will
have 60 days to finalize the valuation of the assets of the Fund, as
required by the provisions of the tender.
Proposed Amendments to the GEO 81/2007
For an overview of the provisions of GEO 81/2007, please visit the
Romanian Digest™ Archive at
http://www.hr.ro/digest/200803/digest.htm , for the March 2008
article “Property Fund Plods Towards Listing”.
 Credit
goes to the Commission of Budget-Finance of the Chamber of Deputies for
taking the bull by the horns and debating and voting on the proposed
amendments to GEO 81/2007 last week without waiting for the Government
to act. The amendments have been sent to the floor of the Chamber of
Deputies to be debated this week. It is vital for all to understand that
the proposed amendments, when adopted, will facilitate the listing
process of the Fund, and finally turn this mechanism, five years after
its formation, into a viable functioning entity that will save the
Romanian state millions of Euros, infuse the Romanian capital markets
with substantial and needed activity, and bring justice to the victims
of communism.
Among other things, under the proposed amendments to GEO 81/2007, the
Fund would have the obligation to submit within 30 days from the
effective date of the law, a list of documents to the CNVM, in order to
register the Fund as “another undertaking for collective investment”.
The legislation currently in force does not provide for such term and,
considering the delay in accomplishing the mandatory steps put in place
by GEO 81/2007, the creation of such a time period would undoubtedly
speed up the entire listing process.
Another significant feature of the proposed amendments involves the
reduction of the share capital of the Fund. At the creation of the Fund
in 2005, the Fund had 14,240,540,675 nominative shares and,
consequently, a share capital of 14,240,540,675 lei because a nominal
value of 1 share in the Fund equals 1 leu. As the share capital of the
Fund was set up by in-kind contributions consisting of interests in
various legal entities and since there had been no evaluation of these
assets at the time that the Fund was formed attesting to the individual
value of each asset contributed to the share capital, as well as the
entire value of the assets, such value was to be established at a future
date. On February 4, 2010, the value of the assets composing the initial
share capital of the Fund was established at 13,744,810,876 lei, smaller
by 495,729,799 lei than the value of the initial share capital, the
difference representing 3.4811% of the share capital of the Fund. In
instances where there is a loss in the net asset value, the share
capital is required to be enlarged or the nominal value of the shares
reduced, before a distribution of profit by dividends is possible.
Therefore, in order to be able to perform the distribution of dividends
to the current owners of shares in the Fund, it is necessary to diminish
the share capital of the Fund. Therefore, the passage of the proposed
amendments would allow for the reduction of the share capital of the
Fund from 14,240,540,675 lei to 13,744,810,876 lei, by canceling
495,729,799 shares that are unpaid and currently held by the Romanian
state. The unblocking of the distribution of such dividends is extremely
important. The dividends due to the Romanian state resulting from its
participation in the Fund represents one of the cash sources for
compensation payments in lei to restitution victims. The dividends are
also of great significance to the private shareholders who have seen
little but unfulfilled promises since Law 10/2001 was enacted nine years
ago.
In addition, the proposed amendments to GEO 81/2007 state that the Fund
can be listed on the BVB without the necessity of performing a public
offer as previously discussed, which means that the listing process will
be considerably shortened. Indeed, in light of the fact that 40% of the
capital of the Fund is now in the hands of private owners, and not with
the state, such a solution seems logical and achievable. |
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[ Up
to Contents ] |
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Conclusion |
 Virtually
anyone following Fondul Proprietatea in any capacity fervently
anticipates the approval by the Chamber of Deputies of the proposed
amendments to GEO 81/2007, and the subsequent approval by the Senate.
There is simply no good reason not to proceed swiftly with the listing
process. It is not just because the elderly claimants continue to die
off waiting for justice – but the listing of the Fund is an extremely
significant event for the Romanian capital market which, after listing,
will become much more attractive to foreign investors, create new jobs
and new business opportunities, and add significant and needed fees for
the CNVM and the BVB. Moreover, listing will finally put an end to the
enormous costs which the Romanian state must bear from the decisions of
the European Court of Human Rights. Most importantly, a principled and
praiseworthy plan to compensate the victims of Romanian communism will
finally see the light of day. So when will the Property Fund finally be
listed – hopefully before the end of 2010. |
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[ Up
to Contents ] |
Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2010 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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