CONTESTED OWNERSHIP TRANSFERA debatable ruling heats up the battle for the management of Electroargeş SA

GHEORGHE IORGOVEANU (Translated by Cosmin Ghidoveanu)
English Section / 04 mai

A debatable ruling heats up the battle for the management of Electroargeş SA

The case of the rejection by the Financial Oversight Authority of the public tender offer for the majority block of shares is far from over. Especially since for today are scheduled to happen the General Ordinary Shareholder Meeting and the General Extraordinary Shareholder Meeting of Electroargeş SA. Some of the items on the agenda also include the election of a new Board of Directors, as well as of the new chairman of the Board of Directors of the company.

Because, by the deadline - April 21st, 2021 15:00, no other bids had been made save those submitted by the management of Electroargeş SA, it seems the only option for shareholders is to keep Constantin Ştefan as chairman of the Board of Directors.

The company has also notified the shareholders, through the Bucharest Stock Exchange, that a group of shareholders that owns 39.3416% of the share capital of Electroargeş SA has some of its voting rights suspended for today's meetings. Specifically, Benjamins United SRL, which of the 621,000 shares owned, which represent 0.8901% of Electroargeş SA, has 100,101 voting shares suspended, which leaves 520,899 voting shares in the Ordinary and Extraordinary General Shareholder Meeting of April 26/27, 2021.

Other companies were in a similar situation: Investments Constantin SRL was only allowed to vote with 21,556,940 of the 25,699,543 shares owned, which represent 36.8375%, Amattis SA which can only vote with 267,579 of the 319,000 shares owned, and Debrocons, which can only vote with 676,917 shares of the 807,000 Electroargeş shares owned.

Of the total 27,446,543 shares owned by the aforementioned shareholders, which in total represent 39.3416% of the share capital of Electroargeş SA, 4,424,208 represent shares with suspended voting rights, meaning that the number of shares with voting rights was 23,022,335, representing 33% of the share capital of Electroargeş SA.

The company has also notified the shareholders about the fact that it has taken additional actions concerning the situation of the voting rights in the general shareholder meetings, in order to prevent any interpretations on the exercising voting rights by anyone else save the company's shareholders.

According to the legal opinion of Ph. D. lecturer Cristian Gheorghe, one specialist in trade law and stock market legislation, shareholders entitled to vote in a general shareholder meeting are identified through the lists of shareholders provided by Depozitarul Central SA (the central depository) in relation to a reference date indicated by the issuer through the notice to attend for the general shareholder meeting. Only those who are shareholders on that date have the right to participate and vote in the general shareholder meeting [art. 187 paragraph 7, ASF Regulation no. 5/2018]. Also, in the legal opinion it is shown that civil ruling no. 132/April 02, 2019 of the County Court of Galaţi is not a court ruling that transfers the right of ownership over the shares in itself (within the meaning of art. 557 paragraph 1 of the Civil Code), and the transfer of he right of ownership and implicitly the exercising of the voting right, depend, in every case, on the carrying out of the formalities stipulated by the law in the records of the Central Depository.

The quoted document also shows that the issuer - Electroargeş SA - may not allow the exercising of the vote in the general shareholder meeting by persons not present on the lists of shareholders supplied by the Depozitarul Central SA for the reference date for the shareholder meetings. In particular, the exercising of the vote by a company, (Bran OIL SA - in bankruptcy) when it is not found on any of the shareholder lists provided by Depozitarul Central SA, has no legal grounds.

Under these circumstances, in the legal opinion it is stated that Electroargeş cannot allow the vote of a person that is considered by the Central Depository and the ASF as being unfit to acquire the right of ownership over the shares of the company in question.

A debatable court ruling

Specifically, like we reported in "Anticorruption prosecutors are reviewing the Electroargeş case" (https://www.bursa.ro/former-asf-employee-to-be-investigated-by-the-national-anti-corruption-department-anti-corruption-prosecutors-investigating-the-electroarges-case-26649241) and "Preluarea Electroargeş SA blocată la iniţiativa unui fost membru al Consiliului de Administraţie al SAI Muntenia Invest - The takeover of Electroargeş SA, blocked by the initiative of a former member of the Board of Directors of SAI Muntenia Invest" (https://www.bursa.ro/asf-institutia-clanului-dragoi-preluarea-electroarges-sa-blocata-la-initiativa-unui-fost-membru-al-consiliului-de-administratie-al-sai-muntenia-invest-09131240), the decision of the ASF has mostly relied on the court rulings concerning the acquisition of 16 million shares by Constantin Relative Investments SRL, more specifically upon the canceling of that transaction requested by a company that is insolvent - Bran Oil SA - that alleged it was not paid the amount it was owed for the shares sold.

We're referring to ruling 132/April 2, 2019 of the County Court of Galaţi, which remained final through ruling 75/March 18, 2020 of the Court of Appeal of Constanţa, as the court of last instance maintained the invalidation of the trades concerning the 16 million shares of Electroargeş SA and the requirement to return the shares in question to Bran Oil SA.

Constantin Relative Investements SRL challenged the ruling of the Constanţa Court of Appeal, especially since the court has decided that the restitution should be done directly, through the Central Depository, because that would infringe upon the legal provisions concering the functioning of the stock market, as well as to the legislation of the Financial Oversight Authority (ASF), including regulation 10/2017 of the ASF.

In its defense, Constantin Relative Investments SRL states that the court ruling does not fall under the strictly defined grounds which can allow the execution of a direct transaction, as enumerated in art.70 paragraph 1 letter a-f of ASF Regulation 10/2017 and that Bran Oil SA is trying to use this avenue to generate a dangerous precedent in the interpretation of the legal provisions, and seeks to exceed the stock market-specific legislation, without grounds.

At first sight, the argumentation of Constantin Relative Investments SRL does not hold water as long the exceptions enumerated in art. 70 of Regulation 10/2017 of the ASF, concerning the manner in which the Central Depository can perform direct ownership transfers of securities, mention, at point g, the enforcement of a final court ruling. That mention in the normative act is independent of the other reasons enumerated in letters a-f of the article in question and not subordinated to them, but the legal doctrine includes several opinions which claim that the exceptions stipulated in art. 70 should not be interpreted separately, but as a whole, as they are strictly applicable in relation to the general rule of article 68 of the same regulation which stipulates that the transfer of the right of ownership over securities takes place on the date of the settlement of the transaction, in the settlement system managed by the Central Depository.

Legal doctrine: "Settlement is irreversible from the moment of the the settlement has been exhausted as determined by the Central Depository"

According to opinions in the legal doctrine (Sebastian Bodu - "Operations on the securities market", Adrian Ţuţuianu - "Capital market. Legal regime applicable to participants", Cristian Duţescu - "Shareholder rights" and university lecturer Ph. D. Cristian Gheorghe - "Legal opinion on the transfer of the right of ownership on the shares registered in the Central Depository system",), the performance of a transaction is exhausted either through settlement (the payment of the amounts or the transfer of the shares), and the definitive nature of the settlement invovles the existence of a time when settlement becomes irreversible at any time in the future. That means that the restitution of the considerations (which represent the settlement) is prohibited, as set by Directive 26/1998 of the European Commission concerning the definitive nature of settlement in the payment systems and settlement of the shares.

Or, restoring the previous situation of the parties - like the court has ruled in the case of Electroargeş SA - would violate the principle of the definitive nature of the settlement. Especially since domestic and European regulations impose the a priori setting of a time when the definitive nature of the settlement can no longer be disputed and from which point no restitution or restoration of the previous situation is possible.

Art. 319 of the rules for the regulation concerning the organization and functioning of the Central Depository sets, in paragraph 1 that a transfer order is irrevocable from the time the matching process in the T2S platform has been achieved.

The same text stipulates that a transfer order can be unilaterally revoked by the participant or by the T2S Platform, according to the T2S documentation, until the time it becomes irrevocable according to paragraph (1).

Paragraph 3 states that starting with the moment stipulated in paragraph (1), a transfer order cannot be unilaterally revoked by a participant in the Central Depository system or by a third party, as it is protected by the provisions of law no. 253/2004.

Article 320 of the same regulation on the organization and operation of the Central Depository establishes that the settlement of transfer orders becomes final and irrevocable at the time of the settlement of transfer orders as part of the T2S Platform.

Under these circumstances, in the legal doctrine it is stated that a court ruling, rendered for completely different reasons than the ones stipulated in art.70 of Regulation 10/2017 cannot intervene concerning an irrevocable settlement because it would create a dangerous precedent by introducing a new exception, not stipulated in existing legislation, or according to the principles of law the exceptions are to be strictly interpreted, as the general rule prevails in any matter.

European applicable law does not stipulate restoration of the previous state of things, if settlement is not performed decontării

Indeed, according to the norms, exceptions are of strict interpretation, save that the exception of article 70 letter g, concerning the execution of a final court ruling, as stipulated in regulation 10/2017, does not show that it should be interpreted in correlation with the other previous exceptions, even though according to the civil law stipulations in the sector, that fact should be possible. Especially since European regulations concerning the stock market are strict and take precedence over domestic law in the resolution of any court case.

And we are referring to European rules, we are considering both Directive 26/1998 and Directive 65/2014, as well as Regulation 909/2014 (concerning the improvement of the settlement of securities in the European Union and concerning the central securities depositories).

At point 17 of the preamble of Regulation 909/2014 it is stated that if the financial instruments are not delivered within four working days from the date predicted for settlement, a mandatory acquisition procedure should be initiated. Moreover, European officials claim that, in the case of illiquid securities, it is opportune for the period preceding the initiation of the acquisition procedure imposed to be increased to a maximum of seven working days. In other words, if the settlement deadline is not honored, the European regulation does not decree a restoration of the previous status quo, but a purchase within a certain delay. Aside from that procedure, the European normative act also provides sanctions for the party that failed to honor its settlement obligation.

These things are stipulated in art.7 paragraph 2 of Regulation 909/2014 of the EU, which shows: "The sanction mechanism (...) includes financial sanctions for the participants that generate situations of non-execution settlement (hereinafter called «participants that cause settlement failure»). Financial sanctions are calculated daily for every working day where a transaction is not settled after the scheduled settlement date, until the closing of the mandatory purchase procedure, but no later than the effective settlement date".

Paragraph 3 stipulates that, without infringing on the sanctioning mechanism of paragraph (2), if a participant that causes the settlement not to happen, does not deliver the securities to the recipient participant within four working days from the predicted date (hereinafter called the "extension period"), an imposed purchase procedure whereby the securities in question are made available for settlement and delivered to recipient participants, within an appropriate delay.

Aside from those sanctions, when the committing of an offense is obvious, the European regulation stipulates that criminal sanctions may also be imposed concerning certain deeds. Nowhere in the entire European legislative act does it say that if one of the parties does not carry out its settlement obligation, the parties will be restored to the previous status quo through a court ruling.

That is why the lawsuit Electroargeş SA seems legitimate as long as there is a contradiction between domestic and European legislation concerning the settlement of shares through the Central Depository. The only institution meant to solve this legal matter and decide which norms are applicable in the case concerning the public mandatory takeover bid is the High Court of Cassation and Justice.

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