Romania: Pricing Trends: Negative Purchase Prices in M&A Transactions
Sellers seeking to exit distressed investments may be forced to bring money to the table to secure the prospects of a deal. Investors, on the other hand, looking at acquisitions in a restructuring M&A ambit, may argue opportunity costs with further restructuring efforts to back nominal, or even negative values of purchase prices. In a distressed market, with inherent risks and benefits, proper planning is key in agreeing on a deal structure and ensuring contractual protection for both parties.
Companies with high levels of debt (negative net asset values) are generally priced at nominal values of the purchase price (symbolic amount) or even a negative value. In the latter case, a price following its adjustment with debt is no longer paid by the purchaser.
Is this permissible under Romanian law? So long as the parties can substantiate the economic rationale of such a structure, the validity of such a share sale should not raise concerns.
The validity of sale-purchase agreements is premised on the following price conditions:
- the price must consist of money (otherwise the transaction would be qualified as an exchange);
- the price must be determined or determinable – a condition which is met by the consideration clause in the transaction documents;
- the price must be real (ie, with the intention of payment) – in a nominal/negative purchase price scenario, a purchase price exists, but its adjustment with debt is so high that only a symbolic amount will be paid, or it will no longer be paid by the purchaser;
- the price must be serious, ie, sufficiently high to indicate a fair balance between the seller’s duty to deliver the subject matter of the transaction and the purchaser’s duty to pay.
Romanian courts have consistently dismissed challenges alleging lack of seriousness of share sales prices, in case of companies registering significant financial losses where prices were set by reference not only to the company’s assets, but also by reference to its debts, as evidenced in the company’s accounts. Hence, for as long as there is a sound economic reason – ie, parties may substantiate the economic rationale of a low or nega-tive purchase price – courts should not invalidate such transactions.
In a distressed environment, purchasers may argue the economic soundness of a sym-bolic purchase price on the cost of acquisition and the further cost of restructuring that may be required to keep the company “alive” (eg, the cost of dismissing certain employ-ees and of obtaining regulatory licences). This is all the more true in regulated industries, where sellers must mandatorily divest the non-performant entity, liquidation not being an option, and where the cost of post-closing restructuring remains high.
In a distressed scenario, sellers are required to bring money to the table in the form of capital injections, usually between signing and closing, to normalise the level of the com-pany’s net asset value. The reinstatement of the net asset/equity ratio is also dictated by an imperative norm, according to which if net assets fall below half of the value of the subscribed share capital, the respective entity is bound to undertake corporate measures to remedy the situation.
Structure-wise, if dealing with limited liability companies, parties may wish to consider the corporate limitations that condition the validity of share transfers upon undergoing a 30-day opposition period. Parties should aim to capture under the publicity formalities the sale of both existing and “new” shares issued as part of the share capital increase to mitigate the risk of any potential subsequent challenges.
Lastly, there is always the matter of the arm’s length principle, which dictates that all transactions between related parties (including the sale of shares) must be priced at market rates. In some situations, this rule may prevent parties from agreeing on a sym-bolic price for the transfer of shares, unless that price can be backed up by the valuation of the underlying business, and implicitly of the shares. It may very well be that a target entity with a “zero” net asset still has some value on the market.