ASSIGNMENT OF CONTRACTS IN THE CONTEXT OF A TRANSFER OF ACTIVITY

The transfer of activity is a tool used by companies for activity restructuring or for handling economically challenging times in corporate life. Nevertheless, unlike other forms of reorganization, such as a division or a merger, the transfer of activity is not expressly defined in the law as a reorganization mechanism and has no single, unified regulation.

Although some aspects may be addressed from a tax & social perspective under the insolvency or competition law, these legal provisions are focused on the specific rules of their scope, not on rules generally applicable to the notion of activity transfer, therefore it falls to the interested party to connect the dots. The terminology is not even also: we find, in legislation, terms like “assets transfer”, “activity transfer”, “activity branch transfer”, whereas the doctrine and caselaw enshrine the notion of “business transfer”.

In practice, the transfer of activity mainly concerns assets involved in certain activities – equipment, inventory items, real estate, and similar elements that can be transferred at the discretion of the assignor. Contracts, or a part of them, may also be included, but their full transfer, with related rights and obligations, cannot be decided unilaterally by the assignor, since there is no law providing the transfer, by operation of the law, of the contracts to the assignee, except for the employment contracts.

This article aims to examine whether the activity transfer via assignment can qualify as a form of reorganization as well as the role of the co-contractor’s agreement in the transfer of the contracts and the effects of the lack thereof on the assignor’s liability.

Forms of corporate reorganization

The Civil Code¹ defines reorganization as a legal operation involving one or several legal persons which results in the establishment, modification or cessation thereof. There are three ways explicitly provided for: the merger, the division or the transformation of companies.

In these forms of reorganization, the rights and obligations of legal entities subject to merger, division or transformation are transferred by law to the assets of the absorbing or newly established legal entity as a result of the merger, of the legal entity that already exists or that is setup as a result of the division, respectively, to the assets of the newly established legal entity as a result of the transformation².

Therefore, from this point of view, the forms of reorganization provided for by the law (merger / division) are always considered a transfer of assets³. In reorganization procedures, the transfer of assets described above is carried out in exchange for allocating to the shareholders of the companies undergoing reorganisation shares in the legal entities that receive the transferred assets⁴. It follows that reorganisation processes are characterised by changes in the shareholding structure as well as in the share capital of the companies involved.

These implications do not apply to a transfer of activity carried out through an assignment, where the beneficiary company usually pays a defined price for the transferred assets.

According to the provisions of the Civil Code, in reorganization procedures, the contracts concluded by the legal entity subject to reorganization are transferred by right to the newly established legal entities resulting from the reorganization, or to existing entities that receive the transferred assets.

As a rule, contracts concluded in consideration of the legal entity undergoing reorganization do not terminate, unless the parties have expressly agreed otherwise or the continuation of the contract depends on the consent of the interested party, which has been expressly or implicitly refused (by lack of response)⁵.

In addition to the forms of reorganization provided for by the Civil Code, there are also those regulated under the Fiscal Code, namely the transfer of assets against transfer to the assignor of the participation titles representing the share capital of the beneficiary company (so, again, by modification of the shareholding).

Under the Fiscal Code, the transfer of assets is defined as the operation by which a company transfers, without being dissolved, the entirety or one or several branches of its activity to another company in exchange for the transfer of the participation titles representing the capital of the beneficiary company. The branch of activity is defined as the entirety of the assets and liabilities of a division of a company which, from an organizational point of view, constitutes an independent activity, that is, an entity capable to operate by its own means. The Fiscal Code ranges this operation among the reorganization operations such as the merger, division and acquisition of participation titles between Romanian legal entities⁶. 

The transfer of assets from a tax perspective

The most unitary description of the concept of transfer of assets is provided by the Fiscal Code⁷ and by its Enforcement Rules. From a tax perspective, the transfer of assets meeting the conditions here below, carried out by a taxpayer registered in Romania does not account for delivery of goods, therefore the operation is not subject to VAT. Since the purpose of this article is to examine the particularities of this operation from a legal perspective, we shall not insist further on tax related matters.

The tax code allows the transfer of all or part of the assets upon the transfer of assets or, as the case may be, of liabilities, through operations such as sale or capital contribution, in addition to division or merger. Given that the transfer of assets is viewed as a universal transfer of goods and/or services, they are no longer considered individually, regardless of whether it is a total or partial transfer of assets. Even in the partial transfer, the assets must have been invested in a distinct branch and must technically constitute an independent structure, capable of carrying out separate economic activities.

The Methodological Norms for the Enforcement of the Fiscal Code establish three cumulative criteria for verifying the independence of the business line: the existence of an organizational structure distinct from other organizational divisions of the assignor; autonomous operation with its own clients, tangible and intangible assets, inventories and staff, other related support services: administrative, accounting service, or decentralized HR functions; the actual performance of the activity at the time of approval of the transfer by the general meetings of the two companies, assignor and beneficiary, or at the date on which the operation takes effect, if different.

It is not necessary to transfer all the assets used to carry out the activity/branch of activity intended for transfer. However, the transferred assets must allow the continuation of the activity by the recipient of the assets, who must prove the intention to carry out the economic activity or the part of the economic activity it has been transferred, and not to immediately liquidate the respective activity and, where appropriate, to sell any stocks.

The law sets no minimum period for continuing the activity, which generates uncertainties regarding the compliance, by the recipient of the activity, with the condition of continuation stipulated in the fiscal code and, consequently, the application of the tax regime of the transfer of assets, in the respective operation. We believe that de lege ferenda, this aspect should be clarified by the legislator.

In practice, we see that transfers in which the activity continued for at least one year did not raise problems, but the regime remains unclear and opened to interpretation.

Another characteristic of the transfer of assets by assignment, which brings this concept closer to that of reorganization, is that the taxable person, who is the beneficiary of the transfer, is considered the successor of the assignor, regardless of whether or not it is registered for tax purposes.The beneficiary takes over the rights and the obligations of the assignor related to the transferred assets. These legal provisions could leave the impression that taking over the rights and obligations also refers to the contracts between professionals, the subject of the transfer. However, in our opinion, in the transfer of the branch of activity by assignment, we cannot speak of a transfer by law of the contracts between professionals, unless there are explicit legal provisions in this regard.

A practical example is the takeover by the Amer Group of the ski boots manufacturing activity from Chimsport Orastie⁸ , via transfer of the branch of activity, with the takeover of the equipment and employees and the continuation of production in its own name.

The transfer of activity through the lens of labour law

The Law no. 67/2006 defines the transfer of an undertaking as the transfer from the assignor to the assignee of an undertaking, units or parts thereof, with the aim of continuing the main or secondary activity, regardless of whether or not to obtain a profit. It transposes Directive 2001/23, according to which transfer means the transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

So, we notice that the Law no. 67/2006 has a more restrictive definition of the transfer, referring to the transfer of ownership – an element not found in the Directive 2001/23. CJEU caselaw (case Strong Charon⁹ ) shows that the absence of a conventional relationship between the assignor and the assignee does not prevent the existence of a transfer in the sense of the Directive.

The transfer of undertaking can occur not only via merger, but also via assignment. As in tax law, the Labor Code refers to the transfer of a unitary activity or part of it and the continuation of the activity by the assignee. Thus, a transfer of assets that meets the criteria of independent structure and continuity of activity, provided for by the Tax Code, may also constitute a business transfer within the meaning of labor law, with the obligation to comply with the specific rules in the matter.

The transfer of undertaking, unit(s) or parts thereof to another employer, as a result of an assignment or merger must abide by the principle of protection of the rights of employees provided for in the individual employment agreements and in the collective labor agreement, provided for under the labor legislation.

Thus, the rights and the obligations of the assignor, arising from a contract or employment relationship existing at the date of the transfer, shall be transferred in full to the assignee, by effect of the law.The assignor loses the status of employer, and the assignee acquires it. The transfer of the undertaking, unit(s) or parts thereof cannot constitute a reason for individual or collective dismissal of employees by the assignor or the assignee, and the employment contracts are transferred by right from the assignor to the assignee within the framework of the transfer of the branch of activity. In this case, it is not necessary to terminate the employment contracts with the old employer and conclude new ones with the new employer.

In practice, it is recommended to conclude an addendum to the contract and update the employer's data and operate the transfer in REGES.

In the case of a transfer of undertaking, both the assignor and the assignee are bound to inform and to consult, prior to the transfer, the union or, as the case may be, the employees’ representatives regarding the legal, economic and social implications of the operation on the employees.

Through the lens of the competition law

Competition law uses terms such as asset transfer¹⁰ , activity transfer or business transfer¹¹ , but the essence is the same: an asset transfer may constitute an economic concentration if it leads to a lasting change of control (art. 9 of Law 21/1996). In order to determine whether an asset transfer represents economic concentration, a specialized analysis of the entire operation is necessary. Since this article is not aimed at analysing the transfer of a branch of activity via assignment from competition law perspective, we shall only underline (without diminishing the complexity of this topic) that the requirements and procedure of economic concentration apply only to economic concentration operations when, in the year prior to the operation, the cumulative turnover of the undertakings involved in the operation exceeds the equivalent in lei of EUR 10,000,000 and when at least two of the undertakings involved have achieved on the territory of Romania, each separately, a turnover greater than the equivalent in lei of EUR 4,000,000¹².

A relevant example is the Competition Council's decision no. 89/2021 regarding the takeover by Forasol of 9 oil services business lines from several companies. Although the transfers were multiple, they were treated as a single economic concentration, being interdependent and having the same economic result: the integration of the activities taken over from several companies into a single structure, that of the Forasol company.

Secondary competition legislation¹³ provides that, when a concentration raises competition concerns, the Council may request commitments, preferring structural ones, such as the sale of an activity, which, in principle, does not require long-term monitoring¹⁴. By carrying out the assignment by the parties involved in the concentration, the conditions for the establishment of a new competing entity or the consolidation of existing competitors are practically created. For this, however, the assigned items must constitute a viable activity, which, if operated by a suitable buyer, could compete effectively and sustainably with the entity created by economic concentration¹⁵.

As in tax legislation, competition rules require an activity to function autonomously, either as an existing undertaking or as a distinct activity within one. The assigned activity must include the assets needed for its current operation and the personnel required to maintain its viability and competitiveness, including any shared assets used by both the assigned activity and other activities of the parties to the concentration. From this perspective as well, the transfer of activity is treated as a distinct and independent structure meant to carry out separate economic operations. Competition rules details what such a transferred activity includes: tangible assets (e.g., research and development, production, distribution, sales and marketing) and intangible assets (e.g., intellectual property rights, know-how and goodwill), licenses, permits and authorizations, contracts, transferred personnel, and related elements¹⁶.

Through the lens of the insolvency law

The notion of asset transfer is incidentally mentioned under the Law no. 85/2014, as a unitary and independent whole, in all procedural phases – reorganization, restructuring, bankruptcy and liquidation of assets. Thus, the insolvency law refers to restraining the activity by liquidation, in part or in whole, of the asset from the debtor's estate as part of the reorganization plan, designed to pay the debts of the debtor in judicial reorganization.

Also, the sale of assets and the sale of the business or part of it as an independent unit are regulated as measures required for the implementation by the debtor in distress of a restructuring plan¹⁷.

Referring to the sale of assets in bankruptcy proceedings, the legal provisions provide that assets may be sold as a whole or individually. Any sale of assets as an independent unit, whether caried out during reorganization or bankruptcy, may be considered a transfer of assets, if it meets the conditions of art. 270 par. (7) of the Fiscal Code¹⁸.

Is business transfer via assignment a form or reorganization of the legal person?

As shown above, the transfer of activity has no unified regulation. Legislation addresses it differently and under various terms in tax law, labour law, competition law and insolvency. Therefore, when a block sale takes place, the first step is to establish the true nature of the transaction: a simple sale of assets or a transfer of activity. The correct classification determines the applicable legal and tax regime.

An operation is likely to be a transfer of activity when the essential elements of an autonomous activity are present: the transfer of all or part of the assets necessary for an activity, the existence of an independent structure capable to operate independently, the takeover of related employees, the transfer of any authorizations and, possibly, the transfer of clients.

In practice, there is a tendency to handle such an operation in stages, namely – sale of equipment, termination by the assignor company of some employment contracts and conclusion of new employment contracts with the same employees by the assignee company, termination by the assignor company of certain contracts and their conclusion with the same contractors by the assignee company etc. Such an approach may be erroneous and give rise to a different legal, accounting and/or fiscal treatment.

The transfer of activity via assignment is materialized by the conclusion between the assigning company and the beneficiary company of a contract that must describe at least the transferred elements – tangible assets, intangible assets, authorizations, the transferred personnel, transferred contracts etc. – the transfer price (possibly its justification), the payment terms, the date on which the transfer operates and any other elements negotiated by the parties, necessary for the completion of the respective transfer. Also, the beneficiary company must provide the declarations of continuation of the activity, according to the provisions of art. 270 paragraph 7 of the Fiscal Code.

Obviously, the transfer by a legal entity of an activity considered as an independent structure, and not of assets considered separately, leads to a transformation of its activity.

Also, from the legal provisions mentioned above, we have noted that any form of reorganization – merger, division – implies a transfer of assets within the meaning of the Fiscal Code.

However, it cannot be concluded that the transfer of activity via assignment (under its multiple names) stands for a way of reorganization of the legal entity, as long as there is no legal text in this regard¹⁹ . Art. 232 and 233 Civil Code are special and limiting provisions and do not mention this operation among the methods of reorganization of the legal entity, so we cannot extend by interpretation this legal notion of reorganization to the operation of transfer of via assignment.

We believe that de lege ferenda a unitary regulation of the notion of transfer of activity is required, both from the perspective of the legal concept's name and the general effects it produces, separate from the effects specific to each individual field of law (fiscal, social, insolvency, etc.).

Effects of the transfer of activity on contracts

Classifying a transfer of activity as a form of reorganization or not is essential, as it determines the legal effects of the operation.

Thus, as noted above, in reorganization procedures, the rights and obligations of the legal entities subject to merger, division or transformation — including the contracts involved in the operation — are transferred by operation of law to the beneficiary legal entity. Contracts concluded in consideration of the quality of the legal entity subject to reorganization do not terminate as a result of these forms of reorganization, unless the parties have expressly agreed otherwise or the continuation of the contract depends on the consent of the interested party, which was refused directly or implicitly (by lack of response).

Since it is not actually a form of reorganization, the transfer of activity via assignment does not benefit from these legal provisions, except for the employment agreements of the staff affected to the transferred activity, which are taken over by law by the beneficiary company of the transfer of activity. As regards contracts concluded between professionals, regardless of whether or not they contain clauses regarding the transfer of rights and obligations or the assignment of the contract, the provisions of common law²⁰ on the assignment of contracts must be abided by.

Thus, a party may substitute a third party in the relations arising from a contract to the extent that the performance thereof was not fully achieved, and the other party agrees thereto. In practice, this means that when a transfer of activity by assignment is contemplated, the transferor will identify the contracts that are related to the transferred activity and will analyse them from the point of view of the transfer conditions.

Some contracts may prohibit assignment, allow it only with the counterparty’s consent, or contain no provision on the matter.

Given that the legal provisions regarding the transfer of rights and obligations, applicable to the forms of reorganization do not apply to their transfer within the framework of the activity transfer via assignment, the assigning company will have to get the consent of the other party for the assignment of the contract.

The absence of a clause in the contract regarding the assignment of rights and obligations or the assignment of the contract does not mean that the agreement of the other party is granted. If the contract expressly provides for the assignor's right to assign the contract or be substituted as a part thereof, the agreement of the other party to such assignment or substitution is considered given by the signature of the respective contract. However, the assignment takes effect with respect to the assigned other party only after notification, from which point the assignor is relieved of its obligations with respect to the assigned contractor.

The assignment of contracts that are subject to the transfer of activity via assignment without the consent of the co-contractor may lead, on the one hand, to the termination of the contract (and, consequently, to a possible termination of the activity transfer contract) and, on the other hand, to liability on the assignor’ side towards its co-contractor, according to the contractual clauses (for the full damage caused or within the limit provided for in the contract, if any).

The analysis of the contracts assigned within the transfer of activity is also of interest from the point of view of the assignee company, which will substitute the assignor in those contracts, as they are concluded and in the stage of performance at the moment of the transfer. From the perspective of the assignee, the guarantees offered by the assignor are equally important – only for the validity of its contract and its execution.

Moreover, the beneficiary company should also analyse the contracts, since there is a possibility that certain creditors of the assignor company may pursue the beneficiary company for obligations of the assignor company, if it is considered that there is economic continuity between the two entities. Relevant in this regard is the decision of the European Court of Justice according to which a Member State may decide to recover State aid obtained illegally from a company other than the one originally targeted for reimbursement of the respective aid, if this company continues the economic activity of the initial beneficiary of the State aid and benefits from the competitive advantage originally obtained as a result of the respective aid²¹.

In conclusion, the contracts that are part of the transfer of activity via assignment are not transferred by simply signing of the transfer of activity contract between the assignor company and the assignee company, but the valid assignment of the contracts may depend on the agreement of the assigned party. Failure to comply with this procedure may result in the termination of the assigned contracts, the liability of the assigning company and the calling into question of the very validity of the transfer of activity via assignment. 

Notes

1. Art. 232
2. Art. 235, 237, 241
3. The requirements set forth in this paragraph do not apply to division and merger, which are in all cases considered a transfer of assets according to art. 270 par. (7) of the Fiscal Code. Methodological Norms for the application of art. 270 par. 7 Fiscal Code
4. Art. 238 of the Companies’ Law 31/1990
5. Art. 240 Civil Code
6. Art. 32 Fiscal Code
7. Art. 270 para. 7
8. Fabrica Chimsport a produs în două decenii 12 milioane de clăpari Salomon şi Amer....
9. Ruling of February 16, 2023, Strong Charon, C 675/21, EU:C:2023:108
10. The Law no. 21/1996
11. Guidelines of 2010 regarding the commitments in economic concentration.
12. Art. 12 of the Law 21/1996
13. Guidelines of 2010 regarding the commitments in economic concentration
14. Chapter 3, point 15 of the Guidelines of 2010 regarding the commitments in economic concentration
15. Subchapter 2, Section I, point 23 of the Guidelines of 2010 regarding the commitments in economic concentration
16. Section 2, point 27 of the Guidelines of 2010 regarding the commitments in economic concentration
17. Art. 15^1 and art. 15^2 of the Law no. 85/2014
18. Art. 154 of the Law no. 85/2014
19. Unlike the transfer of assets against transfer by the assignor company of the participation titles representing the share capital of the beneficiary company, defined under the art. 32 of the Fiscal Code as a form o reorganization.
20. Art. 1315 and following of the Civil Code
21. CJUE, Judgment of the Court, Scai Srl v. Regione Campania, 16/01/2025, C-588/23; CJUE, Arrêt de la Cour, Scai Srl contre Regione Campania., 16/01/2025, C-588/23