In an investment environment where the vast majority (if not all) the publicly traded companies are issuing new shares at par value, which in most (if not all) cases is a small fraction of their market value, the existence and the solidity of the pre-emption rights held by the shareholders are critical to the quality of the shares traded in the market.
Not only that these rights are an effective protection against both the investment dilution and the erosion of the control power, but they have a monetary value too. Any shareholder that does not want to exercise the rights can sell them in the market for a price that is theoretically equal to the decrease in value of his shares caused by the dilution.
Thus, when it comes to lifting the pre-emption rights in the case of publicly traded companies, the legal provisions must be quite restrictive in order to avoid any abuse. This was the case with the Romanian Capital Markets Law no. 297/2004, which provided in the first paragraph of Article 240 that such a drastic measure must be approved by the general meeting convened in equally drastic conditions. Thus, the quorum for the meeting was 3/4 of the total number of the shareholders. So even if in theory any company could lift the pre-emption rights, for all practical reasons, it was impossible.
This provision was in effect for a decade or so, until December 2014 when the Government has issued GEO no. 90/2014 that has relaxed the quorum and the majority conditions necessary for a resolution suspending the pre-emption rights to be approved by the general meeting to unacceptably low levels: a quorum of 3/4 of the total number of votes and a majority of 2/3 of the total number of votes.
Besides the numbers that enable any shareholder that owns 2/3 of the outstanding shares to lift the pre-emption rights very easily, the legal text approved by the Government has two more big issues.
First, the ”3/4 – 2/3 of total number of votes” rule was meant to be applicable only in the case of the increase in subscribed capital with contributions in cash. In the case of in-kind contributions the even more relaxed ”3/4 – simple majority of votes present” rule set by The Companies Law no. 31/1990 was left in effect.
Second, there was no condition set regarding the persons supposed to subscribe the newly issued shares, leaving the door wide open to abuse. Any majority shareholder could lift the pre-emption rights leaving the entire amount of newly issued shares to be subscribed by himself, with the sole purpose to dilute the rest of the shareholders.
Moving forward, before it landed on my desk for analysis, Article 240 suffered only a minor modification in the Senate, where the quorum was raised from 3/4 to 80% of the total number of shares.
So it was only logical to me that the first paragraph of Article 240 needs two more amendments, that I have actually submitted to The Budget, Finance And Banking Commission of the Chamber of Deputies:
1. The quorum and majority conditions for the general meeting called to lift the pre-emption rights set by the first paragraph of Article 240 must be applicable also in the case of increases in capital with in-kind contributions. This closes the gap left by the GEO regarding the applicability of the Companies Law in case of in-kind contributions to the subscribed capital of publicly traded companies.
2. If the general meeting decides to lift the pre-emption rights, then the entire share issue must be offered to the general public. This way, any of the existing shareholders, including the majority shareholder, are supposed to subscribe the newly issued shares on equal footing with outside investors.
Both have been approved by the Commission and submitted for approval to the Chamber of Deputies