In the context of Romania's accession to the European Union and in response to the World Bank's reports on the compatibility of the country's legislation with the principles of the Organization for Economic Cooperation and Development (OECD), which indicated a number of deficiencies in Romania's corporate governance regulations, the government introduced major changes to the Company Law (31/1990) with effect from December 1 2006. As most of the changes concern joint stock companies, this update considers the implications for this form of company.

Following the introduction of one-tier and two-tier management systems, there are now four categories of person who can play a role in the management of a company: the members of the board, the executive officers, the members of the supervisory board and the members of the directorate. All such persons are referred to collectively as 'managers'.

1 Management and the Company
Before the amendments were introduced, employment and fiduciary relationships overlapped, making it difficult to assess liabilities, duties and conflicts of interest and resolve issues relating to the dismissal or replacement of managers, especially with regard to executive officers who were also employees. The new provisions emphasize that managers act on the basis of a mandate granted by the company, without which they may no longer be employees of the company. However, this provision can be interpreted as applying only to the board of directors and the executive officers delegated by the board to perform management duties.

The reason for this new approach seems to be that a mandate encompasses all of the characteristics of such a relationship, including the duty to act in good faith and in accordance with the corporate purpose, and the duties of care and skill, disclosure and confidentiality. A relationship based on such a mandate is also more consistent with the business judgement rule, which defines the liability of managers for decisions taken on the basis of their business judgement. Business decisions are assessed with regard to the standards of knowledge, skill and competence that a manager should apply; a manager taking a business decision on the basis of
sound business judgement should not be held liable for the consequences - even in the event of an obvious mistake - unless certain exceptions apply.

In light of the OECD's 2004 recommendations, which partly inspired the latest amendments, it could be argued that such
exceptions include:
- fraud;
- conflicts of interest;
- actions outside the company's corporate purpose; and
- failure to exercise due care and diligence in the basic responsibilities of a board member, which include:
- attending meetings;
- making an adequate effort to remain informed of the company's activities; and
- making decisions on the basis of sufficient knowledge and deliberation.

However, the following practical implications should be considered:
- A mandate can be terminated more easily than an employment relationship. The revised law states that all managers may be removed without cause by the general meeting; they may have a right to compensation, but not to reinstatement. An employment relationship can be terminated only through a complex procedure based on objective grounds; abusive termination may result in the employee's reinstatement.
- A mandate is more fiscally advantageous for the company, as there are no taxes to be levied.
- Companies must inform the local employment authorities if they intend to suspend employment agreements previously concluded with managers in order to establish mandate agreements.

2 One-Tier and Two-Tier Management Systems
Another significant change concerns management structure. Mirroring the developments taking place in other EU member states, the new law offers a choice between two administrative systems: the one-tier and two-tier systems. The one-tier system is based on a board of directors and its executive officers. The board members are appointed and replaced by the general meeting and the executive officers are appointed and replaced by the board. Members of the board may be executive officers; however, the majority of the board members must be non-executive members if the company is legally obliged to have its financial statements audited, in which case the board must delegate most of its management duties to the executive officers. In the event of such delegation, the board has
exclusive competence to make a limited number of strategic decisions as provided for by law, the company's articles of association and the decisions of the general meeting. However, the vast majority of management decisions will be undertaken by the executive officers, with the board taking a supervisory role.

The company is represented in court and in its relations with third parties by the president of the board or, where authority has been delegated to the executive officers, by the chief executive officer. The president of the board has representative powers in relation to the executive officers. The two-tier system is based on a supervisory board and a directorate, with the members of the supervisory board being appointed and replaced by the general meeting and the members of the directorate being appointed and replaced by the supervisory board. However, this system does not allow members of the supervisory board to be part of the directorate. Pursuant to the new law, the management of the company is delegated exclusively to the directorate, with the supervisory board retaining only supervisory powers.

The company is represented in court and in its relations with third parties by a member of the directorate chosen unanimously by the other directorate members and by the supervisory board. A comparative reading of the legal provisions governing the two systems reveals the differences in the liability of board members in the one-tier system as opposed to the directorate members in the two-tier system. On the question of supervisory duty, the law states that board members are liable to the company for losses caused by the actions of the executive officers or staff if such actions could have been prevented had the board discharged its supervisory duty
correctly. Given the general principles of liability - and in the absence of provisions to the contrary - the board's liability for the actions of company staff appears to be subsidiary (ie, it applies only if the individual responsible cannot be held liable) and several (where the
supervision of the individual in question was the responsibility of a certain member of the board). However, the directorate has exclusive responsibility for the management of the company and the chapter of the law on the two-tier system includes no provisions corresponding to those for executive officers in the one-tier system. Therefore, it appears that the directorate is always directly liable for managerial actions, even if it has delegated responsibility for such actions to executive officers or employees - it is a general principle that, in the event of unauthorized substitution, the principal is liable for the acts of the agent.

The section of the law which covers criminal and administrative offences has not been amended in light of the introduction of the two-tier system, which gives rise to ambiguity in the application of certain legal provisions. The law enumerates the parties which may be held liable for criminal or administrative offences, identifying "founders, administrators (ie, board members), executive officers, executive managers or... legal representatives", but does not mention members of the directorate or the supervisory board.

The courts may interpret the term 'executive officer' - the Romanian word literally means 'director' - as covering members of a directorate, even though such an interpretation might be considered inconsistent with the terminology used in the rest of the law (in which members of a directorate are referred to as such). However, members of a directorate act as representatives of the company and are therefore covered by the legal norms which regulate criminal liability. As members of the supervisory board are not listed among the parties which may be held liable for criminal offences under the terms of the law, it may be concluded that they cannot incur such liability.

The choice of two management systems gives a company greater flexibility to choose a structure which is appropriate to the size of its business, the spread of its share capital and other practical needs. However, as large companies will be subject to legal auditing obligations in almost every case, it is reasonable to assume that only small and medium-sized companies will be able to choose the one-tier system without delegating management functions to executive officers.

3 Quorum and Voting Requirements
The new provisions introduce changes to the quorum and voting requirements for general meetings and extraordinary general meetings. The quorum for general meetings at first call is reduced from 50% of the voting rights to 25%; there is no minimum requirement at second call. Decisions are made by majority. The quorum for extraordinary general meetings is reduced from 75% to 25% at first call and from 50% to 20% at second call. Most decisions are made by majority; however, a two-thirds majority (ie, two-thirds of the voting rights of the meeting) is required for decisions on issues of particular importance, namely:
- a change in the company's corporate purpose;
- a decrease or increase in share capital;
- a change of legal form; and
- a merger, division or dissolution.

A party wishing to acquire overall control of a company must control at least two-thirds of the shares in order to ensure that the necessary decisions are adopted. Voting rights have replaced share capital as the yardstick for measuring shareholders' interests, which is a logical approach, especially as a company may issue preference shares with no accompanying voting rights. Lowering the quorum requirements will undoubtedly result in quicker decision-making processes, but companies with widely dispersed shareholding structures should pay particular attention to the fact that one-fifth of the shareholders may constitute an extraordinary general meeting.
 
4 Authorized Capital
Pursuant to the provisions of the EU Second Company Law Directive (77/91/EEC), the law also introduces a new concept: authorized capital. A company's articles of association may authorize the board or directorate to increase the company's share capital up to a predetermined value (ie, the authorized capital) within five years. In the one-tier system, the board retains exclusive competence in this area and may not delegate it to the executive officers; this is the only way in which an increase in capital may be initiated by the board.

5 Minority Shareholders
The revised law gives minority shareholders more rights and greater protection. Amendments to the agenda of the general meeting can be made by shareholders representing - individually or jointly - at least 5% of the share capital. Furthermore, the general meeting must be summoned whenever shareholders representing at least 5% of the share capital so request; the previous threshold was 10%. As a result, shareholders in companies with widely dispersed share capital will find it easier to call a general meeting.

However, not all of the changes favour minority shareholders. Previously, any shareholder could file a claim - in its own name, but on the company's behalf - against a director or manager for damages incurred by the company if the company (as represented by the general meeting) did not initiate legal action. Under the new law, if the general meeting does not initiate a claim for damages against the founders, directors, executive officers, supervisors or financial auditors, or support such a proposal by one or more shareholders, only shareholders representing at least 5% of the share capital may file a claim against such persons on the company's behalf.

6 Shareholders' Agreements
Previously, the law strictly prohibited voting agreements. It now prohibits agreements to vote according to the company's instructions or proposals; however, any other voting agreement is considered valid and binding. This welcome development brings Romanian commercial law into line with legislation in most other EU member states. Restrictions regarding the transfer of shares, including preferential rights held by existing shareholders, must be expressly mentioned in the company's articles of association.