Corporate benefit in upstream security
We have often encountered instances when foreign parent companies require their Romanian subsidiaries to grant security for banking transactions and conclude corresponding security agreements over their assets according to the Romanian law, also known as upstream security.
Legal background and consequences
According to the Romanian legislation (article 1 of the companies law 31/1990), the scope of the limited liability company is to obtain profit. The legal consequences of violating such rule might be the invalidation of the guarantee and the liability of the shareholders and/or administrators - (i) general civil liability, (ii) liability for the insolvency of the subsidiary, if the case, (iii) as well as, under circumstances, criminal.
Principles for determining the corporate benefit
Two general principles in establishing the corporate benefit for the subsidiary are acknowledged in practice:
- proportionality between the granted security and the obtained benefit;
- appraisal of the benefit on a standalone basis, since group guarantees are not regulated under Romanian law.
There are no criteria provided by the law for assessing the corporate benefit derived for the subsidiary from a transaction and thus the appraisal shall be done on a case-to-case basis by the court of law.
It is undeniable that on group level, there are synergies which create added value and represent indirect benefits for the Romanian subsidiary. These might include the good standing of the parent company which also extends to the subsidiary, access of the subsidiary to the group’s clients and know-how, preferential financing and contracting conditions, access to services on group level, technology, marketing etc. Since there are no established criteria for determining their value, it is therefore rather difficult to quantify such benefits and make a direct connection to the granted security. Instead, a direct benefit implies that the subsidiary receives proceeds directly out of the banking transaction. Indirect benefits have to be very well documented in order to have a chance to stand in court, since the Romanian court is predisposed to acknowledging only the direct benefits.
In the absence of a clear legal definition, criteria and relevant case law, establishing the corporate benefit is no easy task. The safe approach would be to calculate only the proceeds (direct benefit). However, this often does not do justice to the full resulting commercial benefit. In this case, depending on the context of the transaction, additional benefit in the form of indirect advantages could be considered and documented. There is unfortunately no predefined roadmap in Romania for navigating this issue. In order for a valid corporate benefit to be indeed generated, it is required that the security grantor benefits independently from the transaction and in the amount of the granted security. How this principle is achieved remains, nevertheless, at the appraisal of the security grantor and the group.