Corporate / M&A

Romania: Shareholders' Agreements Governed by Foreign Law: Common Pitfalls

Business ventures often carry a degree of commercial risk for the parties involved. As such, shareholders should take an active approach in mitigating the potential for disputes between shareholders and be alert to practical challenges involved in their choice of foreign law governing the shareholders’ agreements.


Business ventures often involve a degree of commercial risk for the parties involved. It is a commercial reality nowadays that shareholders may want to exit their investments and seek adequate remedies, if the relationship between the shareholders has deteriorated or if the business objectives of the ventures have failed to reach the desired result. Hence, in order to mitigate this risk as much as possible, shareholders should attempt to anticipate and avoid common pitfalls of business and corporate agreements. Nevertheless they should also be alert from the outset to the practical challenges they might face should the relationship deteriorate.

From time to time foreign investors acquiring minority stakes in established Romanian businesses seek to subject the shareholders’ agreements to the laws of different countries with better track records in dealing with shareholder disputes. The parties’ freedom of choice of law governing their agreements is expressly acknowledged by the Romanian Civil Code (principle of lex voluntatis). However, if the parties, in addition to a foreign law, further agree on a non-Romanian venue for the resolution of a dispute, the implications regarding enforceability may be unforeseeable, ranging from prohibitive costs to unintended conflicts between the principles of foreign and Romanian corporate law.

Practical challenges

The selection of a foreign law in a shareholders’ agreement regulating the corporate governance of a Romanian-established entity may raise legal uncertainty when a court is called upon the interpretation and enforcement of the agreement. This is primarily due to the fact that, in a potential litigation scenario, the provisions of the shareholders’ agreement and of the foreign law must be construed and applied by the foreign courts or arbitral tribunals in conjunction with the mandatory provisions of Romanian corporate law regulating matters such as transfer of shares, convening obligations, and terms.

Moreover, the governance of the shareholder agreement by the law of a foreign jurisdiction may implicate supplementary rights and obligations, in addition to what has been negotiated and expressly stipulated, due to the possible applicability of general common legal norms of the foreign legal framework, thus depriving the parties of some of what had been expressly made a part of the agreement itself. Hence, the uncertainty which may arise from such a conflict can manifest itself in the nature of the remedies available to an aggrieved shareholder, who may find that the scope of the remedies available to it may be narrower than anticipated.

Accordingly, depending on the specifics of the foreign law that has been selected, for example, arbitral or foreign legal courts may supplement or limit the legal effects of the agreement’s provisions in light of legal principles such as fairness and reasonableness, may mitigate any contractually agreed penalty amount to an amount the court considers reasonable (even if the parties had agreed on an “unmitigable” penalty in the shareholders’ agreement), and may assume jurisdiction if a plaintiff seeks provisional measures in preliminary relief proceedings despite an arbitration clause in the shareholders’ agreement.

Prospective parties to a shareholders’ agreement should also consider the procedural risks entailed by initiating and pursuing proceedings in front of foreign courts or arbitral proceedings with foreign venue, as well as the potentially prohibitive costs (eg, foreign advisors’ fees, fees for Romanian law experts who may be asked to address certain Romanian law-related issues, as well as administrative costs and logistic efforts imposed by litigating or arbitrating in foreign courts/venues). These may be viewed by a shareholder as a factor deterring him from initiating legal proceedings against other shareholders for alleged breaches of the shareholders’ agreement.

The incidence of a foreign law over a shareholders' agreement regulating the corporate governance of a Romanian-established entity, may raise legal uncertainty when interpreting and enforcing the rights and obligations of either party to such agreement.

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schoenherr attorneys at law /