As an international law firm based in Romania we often are instructed on issues in which conflicts of law play a prominent part. Recently we were instructed on such a case concerning foreign shareholders.

The case revolved around a shareholders dispute. The parties before they formed a Romanian company had entered into a shareholders agreement. This agreement was under a foreign law. The company involved was a Romanian company.

Our clients were the shareholders of a Romanian limited liability company. All the shareholders had entered into a shareholders agreement which governed their relationship in relation with the Romanian company and as between themselves as shareholders. The shareholders agreement was governed by the law of a country other than Romania, although it was in relation to a Romanian registered company.

Under this shareholders agreement there were various trigger events which allowed the shareholders collectively or individually to terminate the shareholders agreement as between themselves or any one of them. The shareholders agreement also provided the law of the other country was the governing law and in the event of any dispute on the agreement it would be heard and adjudicated upon by the courts of that country.

A dispute had arisen as between one of the shareholders and our clients. Our clients had under the terms of the shareholders agreement served notice terminating the shareholders agreement as between themselves and the other shareholder. Upon termination of the agreement the shareholder had to do certain actions in relation to his shares in the Romanian company. This he was refusing to do.

The question then arose as to what the shareholders who had terminated the agreement could or should do; whether the Romanian court would recognize the effect of the shareholders agreement in relation to the Romanian company.

It is well known to all international lawyers that courts are very reluctant to give up jurisdiction over their own residents and especially more so in respect of legal persons (companies) who are incorporated under their laws. The question here though was whether the relationship as between shareholders can be governed by two documents written under two different laws which had different legal effects.

The relationship of third parties in a Romanian limited liability company is in fact a very close one. Romanian limited liability companies were originally intended to be used by a small business. They were intended to copy the French small family business model that uses this type of company. Although it is designated as a company because of the limited liability of the shareholders, it is more in the nature of a limited partnership. The rules of governance are less restrictive than for a joint stock company. Romanian Companies law 31/1990 reflects this as it allows a shareholder who is dissatisfied with the running of a company to apply to the Romanian courts withdraw from a company. Such withdrawal does not necessarily cause the dissolution of the company.

So the question arose as to what happens if the foreign agreement requires the withdrawal and expulsion of a shareholder from a Romanian company.

The Romanian law and documentation does not make any provision for this. This was the question that had to be considered.

Our view is that in this case the foreign law contract will prevail as it covered the relationship between the partners as shareholders only. Their position as shareholders and the company is governed by the Romanian law. Any shareholders dispute as shareholders is dealt with clearly by the foreign shareholders agreement. If the foreign court had ordered the shareholder to do something in relation to the Romanian company, then, provided it is not contrary to Romanian law or Romanian public policy then the shareholder would have to comply and not seek protection by invoking Romanian law.

This case underlined the fact that when drawing up a shareholders agreement the question of the law has to be carefully considered. If a shareholders agreement is drawn up on the basis of the law of another country other than the law of the country where the company is incorporated then it is important to have it drawn up by a lawyer of that country who is conversant with the laws and practice of that country. The document should then be reviewed by a Romanian lawyer who must consider the effect of the foreign law agreement in Romania.

In our case the matter was resolved amicably. It would have been an interesting case had it gone to court.