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A Checkered Reality: Croatia Recovers in Fits and Starts

A Checkered Reality: Croatia Recovers in Fits and Starts

Legal Markets
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Whereas the leading commercial law firms in Serbia report growth and opportunity, their counterparts in Croatia demonstrate an acceptance of the stop-and-start nature of that market. In an extended lunchtime conversation about with CEE Legal Matters, Divjak, Topic & Bahtijarevic Partner Damir Topic and Wolf Theiss Managing Partner Luka Tadic-Colic displayed a resigned sense of humor about the challenges they face in Croatia and a willingness to take things as they come.

The Croatian Bar Association: A Conservative Force

The Croatian bar association claims a long history for the legal profession in the country, with the first mention of lawyers in the country appearing in the Vinodol Code of 1288, and its own history dating back to the Law on Advocates of 1929.

Perhaps consequently, the bar association remains highly censorious of modern-day law firm marketing efforts, placing it firmly on the conservative end of that spectrum in CEE. The chilling affect of its stance is powerful, as several Croatian partners invited to participate in the conversation declined out of a concern that it might put them in conflict with the bar.

DTB Partner Damir Topic notes that the Croatian bar’s restrictions are more stringently enforced than those of counterparts in some neighboring markets, which, he says, “turn a blind eye” to marketing. He points out that the bar’s position results, inevitably, in an advantage for the local offices of regional law firms, which are able to benefit from advertising and websites generated in more liberal jurisdictions. By contrast, he says, the bar association’s concern that websites constitute “misleading marketing” means that Croatian law firms are not even allowed to include information on their websites about which deals they worked on, which puts them at a disadvantage. He sighs. “But they don’t care.”

The bar’s mistrust of online presences bothers Wolf Theiss Managing Partner Luka Tadic-Colic as well. “Things like web pages I wouldn’t even consider proper advertising. It’s just like putting your name on the door. That’s clearly something that today is completely normal, not to mention things like social networks these days, which are still not allowed.” (Topic reacts in mock horror: “God forbid we ask for that: ‘Ahh! No, no!’”).

And Tadic-Colic insists that, while Topic’s point about regional firms’ ability to benefit from foreign-sponsored marketing has some merit, his office – the local office of regional powerhouse Wolf Theiss – is itself hardly immune to the bar’s scrutiny. “Certainly we can get visibility from more places than just Croatia,” he says, “but we used to have a web page which was approved by the bar association, and then for some reason they decided to disapprove it, so we took it down. Although it was the very same page that got approved before.” He waves his hand. “So there’s very little transparency in what you can and cannot do.”

Shifting subjects slightly, Topic notes that the bar’s restrictions on marketing appear to be inconsistently applied. “It’s interesting that, for example, for the commercial law firms, such marketing is considered heavily suspicious, but for criminal lawyers, not suspicious at all. They are constantly in the news, they have articles, features – because the bar understands that if they are not in the press they will not get clients. Because they live on fame. And for them it is okay. But if someone from a commercial law firm does something, if one of our colleagues has told you he had this flyer just to deliver on some presentation, then there is an immediate report and complaint to the bar.” 

Topic insists that, by wishing for a level playing field, he is not suggesting that other firms be hamstrung, but merely that all firms be treated similarly. “It is not our intention that they be scrutinized and closed,” he says. “It’s our intention to say, ‘let’s fight with all, let’s use all the tools we have, and then who is better will win.’”

Tadic-Colic sees the Croatian bar’s resistance to modern marketing as reflecting the national character: “I think in general in Croatia people tend to be very resistant to change in a lot of respects,” he says. “There’s always a resistance to anything that comes in via foreign investment, via privatization, via what might disturb the order of things as they are – even though nobody’s really happy with the way things are. I think what history has shown is that most of these influences or changes were not really, in the end, detrimental to the domestic economy. For example, a very closed market used to be the taxi market, and taxi drivers here had a monopoly for ages, and almost nobody was driving a cab. Now more competition has come in, reduced prices, and I think everybody now sort of senses that the market is more vibrant, and it’s not really otherwise affecting people that much. I think change is bound to come, because the new forms of the economy are all over, but the pace of it is arguably slower in Croatia. If you look at the tourist industry, which is very vibrant in Croatia, traditionally still I think over 50% of our tourism is private and in the form of private apartments, [and] not really maintained. You charge your rate which you have been charging for the last 10-15 years, not really investing in it, and those who have invested or who have embraced things like Airbnb and modern channels of selling are reporting that they see improvement, but still the predominant part is just, you do what you’ve been doing for the last 10-15 years and if it’s been working fine, why change?”

Both lawyers conclude the subject with grace notes. Topic notes that: “It would be unfair if I don’t mention that the bar regulation and approach is improving, especially in the last year or so, but the pace of this improvement is slower, probably, than in some other countries in the region. However, this opening process is going on, and the trend is, I think, better. So I’m a modest optimist.” And Tadic-Colic concedes that some regulation of advertising is necessary: “I’ve spent some time in the US. I know ‘Call 1-800-sue-them-all’, or ‘Peterson Peterson Peterson, we’re the best, we’ll get you whatever,’ and clearly that’s something that’s not suited for this environment.” 

Stops and Starts: The Legal Market Profits from EU Accession and Suffers from Unsuccessful Governments

The legal market in Croatia is relatively stable, with the familiar cadre of regional players such as Wolf Theiss, CMS, Karanovic & Nikolic, and Schoenherr competing with well-established local firms such as DTB, Zuric & Partners, Porobija & Porobija, Savoric & Partners, and Mamic Peric Reberski Rimac. That roster hasn’t changed much in the last decade, and there are few new players of significance, though both Topic and Tadic-Colic complimented the work done by Kovacevic Prpic Simeunovic – a 2014 split-off from Zuric & Partners. 

In general, Topic reports, firms are only now recovering from the knock-on effects of the global financial crisis. “There was a big hit on most of the firms that predominantly relied on Croatian clients, because the Croatian economy was devastated, and there were many clients who still had a need for the service, but they were not able to pay. So many lawyers and law firms had great difficulty in collecting and getting their fees. And so fees went down – people just trying to get something.” 

“Now the market is picking up again,” Topic says, “starting basically from the [2013] accession to the EU. Unfortunately, now again we have this big problem of political uncertainty, and there has been about six months of ‘Who will the government be?’ and now we have, again, a government which is not functioning fully.”

Tadic-Colic says, wryly: “Well of course, this being Croatia, you cannot really exclude the possibility that everything will end up peacefully and just continue, but as it stands now it’s a pretty serious situation.” He continues: “The current situation is certainly disturbing to new investors, I think also to some of them who have partially invested and clients that are in the middle of certain processes but are now frustrated on one side and cannot be pushed on the other, probably waiting for the whole thing to be resolved. For those that are on the market, everybody’s getting used to it, so they can do business as usual – but would not think of doing serious expansion. I think the uncertainty is really what’s killing this, because things are functioning, and it’s really not bad – I mean, we don’t have the flood of new regulation at the moment that we had before, and some things are actually quite okay, but the problem will be in the long run because the message that is being sent is that the country is not functioning.” He concluded: “I wouldn’t personally invest in a market like this if I were coming from outside.”

Topic reports that “we have been involved in three deals which involved foreign investment: in two we were on the state’s side, and in one we were on the investment side, and we all get very frustrated because there was a technical government, and then no government, and now it’s a new government, with not fully equipped ministries, and we cannot get our instructions. It’s frustrating for the investors, for the lawyers, and even for the people who are on the lower level of the administration. And my guess is that at least two of these three deals will fall apart because of this. So it’s a real source of frustration.”

Tadic-Colic says his experience has been similar: “Yes, we’re also having problems with deals that are approved, things like oil-drilling tenders which are still not signed even though they were awarded a year ago, and now clients are waiting to start, and all that’s essentially needed is a signature on the contract and everything has been awarded, and it’s all fine, but ….”

Despite their frustrations, both Tadic-Colic and Topic report seeing signs of real hope, with Tadic-Colic saying that, “I think by the very nature of it people are more certain about the country and at least long-term developments.” Indeed, both experts insist that they have “more work than ever,” and that M&A work is up over a few years ago. Still, Topic says, “I mean, in deals and in transactions it’s frustrating that the percentage of unsuccessful deals is still so high. I expected that by this time we would have, let’s say, 50 or 40 successful deals, but we still have only 20-30% of that.”

Tadic-Colic points to other, busier, practices. “for us personally litigation is a part that’s growing – both the arbitration side and also the pure litigation side. I think some of the investors have simply given up waiting and are now looking to recoup or recover from what they’ve suffered. And then for us it’s also employment law side is always very active.” He elaborates: “It’s a relatively constant level of engagement, there’s always issues to be resolved. There was a big spike when the new labor legislation took place, and that required a lot of adjustment, and now it’s also some of the EU developments that are getting shifted. For us, always, there’s a component of original clients that need advice in several countries, and then often consider restructuring their operations, which is not as sexy as M&A transactions, but certainly provides work for people.”

Privatizations

Neither Topic nor Tadic-Colic puts much hope in the possibility of privatization as a source of stimulus. Tadic-Colic is dismissive: “Privatization is really a buzzword, I think, for the previous government, and for the one before it, but when you look at it, what was really privatized in the course of the last 5 or 6 years is very little.”

Topic agrees. “They try now with the sale of minority stakes in some companies which are, let’s say, a bit attractive, and then immediately they have huge protest from the workers’ unions, whoever. Even in the companies where they hold 5% or 10% of shares which are not bringing basically anything, so privatization is really, as Luka said, a buzzword, but it’s not really happening.”

According to Topic, the ever-changing government poses an obstacle to effective privatizations as well. “There is a time for new monetization of Croatian motorways because the first attempt fell apart, and now they are trying with a different approach,” he says. “They just initiated a tender, but who knows what will happen with the government? So that’s one of the deals where you see these uncertainties impacting heavily with this.” What’s more, even where privatizations are completed in Croatia, that’s not always the end of the story. “Every big privatization had or has some loose ends,” he says, rolling his eyes. “The last was the Croatian insurance company, which was privatized by the former government. Now the new government said, ‘Ah, but there were some problems.’” He sighs. 

Luka Tadic-Colic nods. “It’s also, I think, easier for the public to swallow if it’s purchased by a domestic buyer, so it’s not sold off to foreigners, and all the banks, all the evil’s going to come and all that, but still there are loose ends because the minister who was pushing this privatization essentially was removed from the government weeks after it was completed, so …” He leaves the conclusion unspoken beyond agreeing with Topic: “There are always loose ends.”

The Upshot

Ending the conversation, Luka Tadic-Colic sums up the state of affairs in Croatia nicely: “In my personal view, after the crisis really hit Croatia, which was maybe one and a half or two years later than it hit the rest of the world, it looked pretty gloomy. I mean we were all, before that, used to working on very nice big financing transactions, the M&A transactions, where you could really focus on this one thing, and then at some point transactions like that died out, sort of left us dry and trying to find something else. Then it slowly came up, by the first restructuring projects and things like that, now I’m very happy that bigger deals like that are happening, but in that time I think we as law firms learned that we need to be able to adapt, and it’s unrealistic to have lawyers who are 100% dedicated to doing only one thing. You need to be able to shift to anything that’s available. The lesson learned by many lawyers was that when the financing work stops you need to find something else, when the real estate work doesn’t happen you need to shift to something else that you can do, and I’m glad that we see now all these things coming back but maybe more in a more sustainable manner, so it’s not overwhelming, so I’m not sure we will have three shopping centers being developed at the same time anytime soon or that we will be working for 15 different banks chasing to put in money in projects like that, but certainly there will be developments over time and there will be work. The scale will be changed, probably, but I think, through the process, we learned to be more efficient, and maybe more attuned to what the clients expect and wish, and that in my view has improved the level of service. Anyway, we’ve lost a lot of this year already because the government is not really functioning, and the state is a very important player in this market, and for a lot of things you need some sort of state approval, and all these things you cannot really get.”

By Damir Topic, Partner, Divjak Topic & Bahtijarevic

This Article was originally published in Issue 3.3. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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