This article aims at analysing how different types of contracts are impacted by either a merger or acquisition of companies, or by a spin-off (grouped under the concept of ‘company’s transformations’). This article will expose some of the problems that may arise due to the transformation of a legal entity and will try to present specific solutions in light of the personal perspective of the author.
Firstly, there are two distinct types of legal entity transformations commonly encountered in the business world employed in order to improve the capacity of an entity to generate profit and adapt to market fluctuations (Cărpenaru, 2012):
1. The first one is the merger/acquisition (M&A), which, for the purpose of this article, is defined as the fusion of a plurality of companies, leading to a newly formed legal entity that encompasses all these firms (Schiau, 2009);
2. The second one is the spin-off, defined as the split of a legal entity into two or multiple independent entities, that each receives a different legal personality (Miff, Păun, 2005).
What both have in common is the fact that their assets and liabilities are transferred to the newly formed legal entity or entities. According to some authors (Schiau, 2009.), what differs is how this occurs: in the case of M&As, there is a total and irreversible transfer of all the goods and debts of the merging companies towards the newly formed entity. In the case of a spin-off, this transfer happens proportionally, depending on the number and dimension of each resulted company; if the transfer is total, the divided company implicitly ends its existence. (Cărpenaru, 2012)
Secondly, in what regards the definition of the contract, it is defined as a sum of rights and obligations that parties, to serve their own reasons, agree on, with or without a previous process of negotiation (Stătescu, Bîrsan, 2008). Therefore, the typology of each contract can be determined by the nature of its content. This article will further analyse the effects of companies’ transformations on the intuitu rei and intuitu personae types of contracts, based on the position of the parties towards the obligation they assume.
The intuitu rei contract is a contract in which the intrinsic motivation of the parties entering the agreement relies on the object of the contract, which usually is an asset or a specific good. Basically, what matters for each party is the execution of the contract in the agreed terms, the major consequence being that the debtor can be substituted (e.g. in case of death, the successors are obliged to secure the execution of that contract).
These contracts do not pose any problems with regards to the subject of this paper. The law explicitly mentions that all assets and liabilities are shared proportionally between the legal entities newly created as a consequence of the transformation of the former company (Article 250 of Law 31/1990). This means that whenever a company suffers a transformation, the newly formed entity inherits the execution of all legally binding contracts that the former company was part of, without impacting in any manner their existence.
On the contrary, an intuitu personae contract has a strong personal nature, meaning that the main stimulus for a person to close that deal is directly linked to the person of the other party: consequently, the other contracting party cannot be replaced in the execution of the agreement (e.g. death of the considered party leads to the impossibility for the contract to produce effects, thus the successors do not have to ensure the execution of that person’s obligations – Pop, 2012, p. 148).
Difficulties are likely to be encountered when it comes to these specific types of contracts. Although there is a plurality of contracts that belong to this category, there is a specific one more worthy of attention, as it is not only largely used in companies’ activities, but also highly representative for its category: the mandate agreement. This contract is defined as the contract through which a party is engaged to manage the affairs of the other party (Boroi, Stănciulescu, 2012). Its intuitu personae character derives from the nature of the contract in itself, as the mandator agrees to enter the contract because of the trust he has in the mandatary. Consequently, apart from the modalities of ending a contract applicable to all types of contracts, the mandate agreement also ends in some specific situations: when one of the parties dies, becomes incapacitated or declares bankruptcy; when the mandatary renounces to the contract; when the mandate is revoked (Article 2030 of the New Civil Code).
The main problem is that the law does not offer any solution for when one of the parties suffers a transformation, more specifically the mandatary, as none of the aforementioned cases of ending the contract is applicable. The hypothesis of death causing the contract coming to an end automatically is clearly out of any discussion, as the legal concept of death only refers to human beings. The question of capacity is not applicable in this situation, as the newly formed entity or entities do have legal capacity. Also, it is in the definition itself of a transformation that the former legal entity does not go bankrupt, as the process and the consequences are radically different.
As far as the renouncement is concerned, according to the legal provisions, the renouncement must be express, by sending a notification to the other party, not implicit (Article 2034 of the New Civil Code).
In the third situation, when the mandate is revoked, either expressly or implicitly, a new mandate has to be instituted, having the same object (Article 2031 paragraph (2) of the same law). The revocation cannot also happen if the mandate agreement was settled to be irrevocable by the parties. The conclusion is that there still is a plurality of situations when none of these cases apply, which this article will further expand on.
If following such a transformation the mandatary and the mandatory agree on adapting the former mandate contract according to the new organisational context, the fate of that contract does not raise any problems. The question is, however, what happens with the mandate if there is no manifestation of will from any of the parties as to what should happen to that agreement. Some may tend to believe the mandate is still in place, producing its effects as stipulated in the contract, as there is no legal ground to consider the contract has ended the same day one of the parties was subject to a transformation. However, in my opinion, this solution is utterly problematic.
The reason is derived by the mere nature of the contract. When agreeing to the contract, the mandator has imagined the future execution of the contract based on the characteristics of the mandatary at the moment when the deal was closed. Therefore, every significant change of mandatary should constitute a sufficient justification for the mandate to be ended by the mandatory. Even though the law allows the mandatory to do so by notifying the other party, I believe the notification should not be condition for the dissolution of the mandate agreement.
In the case of an M&A or a spin-off, there is no doubt that the mandatory company is not the same. The newly formed entity may have received entirely or partially the assets and liabilities of the mandatary and it may have replaced it in any agreements through an automatic legally instituted substitution, but its characteristics, dimensions and possibly object of activity have gone through radical changes, making the mandatary a completely different legal entity. It is reasonable to believe that, without an express agreement of the mandator to continue the contract, the mandate lost one of its essential constitutive elements and thus ended on the same day the mandatary suffered the transformation (Ungureanu, 2005, p. 179), even though the law does not enunciate it. We should be therefore in the presence of another case of automatic ending of the contract, alongside the already instituted cases of death of a human being or dissolution of a company, as all these are built on the same premise, which is the inner personal nature of the mandate agreement.
Therefore, if the mandator considers the new terms of agreement convenient, he or she should sign a new mandate agreement, adapted to the current context, in order to be sure that his or her interests are fully protected by the power of a legally binding contract.
The logical solution is to consider the agreement to have automatically ended when the mandatary company suffers a transformation, even though the law does not currently allow it (unless written otherwise in the mandate). This lack of provision should be covered as soon as possible by the Romanian law, as it is likely to lead to heterogeneity in the solutions pronounced by Romanian courts, thus negatively impacting the stakeholders involved in a company’s transformation.
