Romania and Moldova: an ideal destination for market entrepreneurs

Charles Vernon

Managing Partner, Vernon | David

Foreward by Andrew Chilvers

During the past two decades the key nations of Central and Eastern European (CEE) have grown significantly following moves to liberalise their economies. On average Poland, the Czech Republic, Hungary, Bulgaria and Romania, to name a few, increased their per capita GDP by 115% between 2004-2020. Employment was at its lowest ever at a mere 4.6% and productivity levels were catching up with the developed states of the EU.

In CEE countries growth has been the result of several factors such as the prosperity of the traditional industries, competitive exports and foreign investment, as well as the significant inflow of various funds from the EU and others.

However, this growth ground to an abrupt halt last year with the onset of the Covid-19 pandemic. As elsewhere, the pandemic hit the CEE region on several fronts, with disruptions to the regional services sector and global supply chains – this was particularly damaging to those countries with large vehicle manufacturing sectors. Nevertheless, the CEE economies are known for their economic resilience and many believe they are better positioned to cope with the aftermath of the Covid-19 crisis than their West European counterparts.

Indeed, many analysts predict that the next year or so will be only a temporary setback as CEE economies quickly find their feet again. With this gradual re-opening, the economies in the region are forecast to grow by a healthy 4.1% in 2021 from what was a severe 5.1% contraction last year, according to Moody’s Investors Services.

Overall, economic growth is expected to be more robust in the region compared with countries to the West due to the regional economies’ reliance on traditional manufacturing and heavy industry, with less exposure to hospitality and tourism. The collapse of the latter sectors has had devastating effects on countries such as Croatia and Greece but has spared the majority of CEE countries.

Romania and Moldova: an ideal destination for market entrepreneurs

Dealing with complex M&As in Romania and Moldova

With offices in Romania and Moldova, during the course of the past few years we have had the opportunity to work on some of the largest and most complex M&A deals in the region. From our experience, one of the more important elements of any deal is how to manage the employees of the acquired business. We should also note that employment issues are one of the most litigated in M&A transactions in this part of the world.

Since this can be a fairly tricky business, we set out below a few thoughts on the employment aspects of M&A transactions.

Romania

The Romanian legislation (Law no. 67/2006) is closely aligned with the Transfers of Undertakings Directive (Directive 2001/23/EC of 12 March 2001).

In brief, the aim of the legislation is to protect the employees of a business or undertaking from the new owners. In Romania, when a business or undertaking is transferred, the new employer is obliged to keep all the existing employees of the transferred business or undertaking and such transaction cannot constitute, in itself, the reason for the individual or collective dismissal of employees (by either the seller or the buyer). In addition, at least 30 days prior to the transfer date, the seller or the buyer must consult the employees’ representatives, without, however, an obligation on the side of the seller or the buyer to accommodate or in any way act in accordance with the employees’ views/desires expressed during such consultations.

The rights and obligations of the employer deriving from the individual labour contracts and the collective labour agreement applicable as of the date of the business or undertaking transfer are transferred to the new employer as matter of law. The collective labour agreement remains applicable for its entire validity period and may be negotiated and modified only after 1 year from the transfer date. Furthermore, if: 1) the transferred undertaking or business does not preserve its autonomy; and 2) the applicable collective labor agreement at the level of the transferee is more favorable, then the transferred employees shall benefit from the more favorable collective labor agreement.

It should be noted that such transfers do not impede the dismissal of employees on grounds other than the transfer of undertaking or business itself. For instance, employees may be dismissed for cause or in other cases as provided by the legislation (such as professional unfitness to the workplace) or because of the restructuring of the employer, as long as the conditions provided by the law for each such dismissal are met. For example, in the case of the employer’s restructuring, such restructuring must be “effective” and have a “real and serious cause”. As a practical matter, this is usually viewed as meaning negative changes in the employer’s financial situation which could be counteracted by way of restructuring the activity or the business model.

Although possible, we would caution companies that use collective dismissals close to or following M&A transactions (which imply a transfer of business or undertakings and related employees), since this would present a real risk of being challenged by the dismissed employees (on the grounds that the real cause for the dismissals was the transfer of business or undertaking itself). In our experience, we find that any collective dismissal done within six months prior to a transfer of business or undertaking or less than one year after the transfer of business or undertaking is more likely to be viewed suspiciously by the courts.

Moldova

Although Moldova has been working hard to modernise its legislation and to bring its rules into alignment with those of the European Union, this is one area where the “old” provisions are still in place. We do believe that Moldova will be updating and expanding on its labour code soon on a variety of issues, but, since Moldova is not an EU member state, the Transfers of Undertakings Directive is certainly not applicable here.

In general, the legislation in Moldova does provide some flexibility to the new owner/employer following the transfer of the majority of the shares of a company. It also specifically allows for the termination of certain employees. For instance, within three months following the acquisition of a majority of shares, senior management (like the CEO) and related deputies’ as well as the chief accountant’s employment agreements may be terminated by the employer as a consequence of the transfer of shares. Of course, termination conditions provided by the relevant employment agreements (like severance pay or prior notice) should be complied with. Having said this, the right to terminate applies only to the specific categories of employees provided above and may not be used to terminate other type of employment agreements.

There are also informational obligations of the seller/current employer to the employees. Under these provisions, the employer is obliged to notify the employees with at least 30 calendar days prior to change of the majority ownership of the company, as following: a) the proposed date for the change of majority ownership; b) the “procedural grounds” for the change of ownership (this obligation is mostly related to informing the employees about timing and process); c) legal, economic and social consequences for the employees related to the change of ownership; and d) the actions to be taken in relation to the employees. We should note that these obligations are related strictly to notice and information and should not cause a delay in the selling process.

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