The Buzz is a short summary of the major and relevant topics of interest in Central and Eastern Europe, provided by those best positioned to know: law firm partners and legal journalists/commentators on the ground in each CEE country.
"HETA at a cross-roads and diligence questions"
According to Erik Steger, Partner at Wolf Theiss, there are two main discussion points among lawyers in Austria. The first is the recent developments on the HETA story (see page 81). Steger explains that a recent proposal – made with the support of the Austrian Government – did not receive support from a sufficient majority of institutional bond creditors and failed. The next step was the much stronger haircut imposed by the Financial Market Authority (FMA) and, according to Steger, the question is what it will mean in practice, especially since many bonds were originally guaranteed by the state of Carinthia, which has announced that it cannot carry the debt and will thus fight to avoid liability. While those efforts are unlikely to succeed, there is a great deal of uncertainty about what’s going to happen. “Will Carinthia simply go bankrupt, and if so, how?” are big questions in the country at this point, according to Steger. And on that, he pointed out, the press has been “reporting on the opinion of law academia apparently rushing the Government to bring to light a new code for the bankruptcy of federal states and municipalities, while creditors started enforcing their claims under the non performing bonds.”
Adding to the pressure, the HETA lawsuit in Germany was supposed to be decided a month ago, but, at the request of the Austrian authorities, the German court agreed to suspend its decision for short while. If the court rules that the moratorium on HETA Debt imposed by the FMA does not apply to German creditors, Steger says, those creditors would be able to go for recovery immediately, meaning that some creditors would potentially be treated in a preferential way over others – which could force HETA into insolvency. “This would speed up everything dramatically,” he says, as it would force the winding down and sale of assets to take place under the umbrella of insolvency. “At this point, everybody wants to avoid this drama and settlement negotiations continue.”
The Panama Papers are also a discussion generator, according to Steger. He explains that the highly publicized story raises questions about lawyers and law firms, particularly: “how can you advise a client in terms of their compliance and can you, as a firm or lawyer yourself, make sure to be fully compliant yourself at all times?” He adds: “In Austria, the state of the law imposes strict rules on law firms in terms of anti-money laundering and avoidance of terrorism financing. We need to be vigilant in doing our research when accepting a new mandate and ensure that we know the ultimate beneficiary.” This type of due diligence requires a considerable amount of law firm infrastructure, Steger explains, especially when the case involves cross-border elements – and this ultimately translates into relatively high costs, which raises a question about how smaller players can afford the necessary investment.
"The market is moving again"
The main theme in the Hungarian market is the ongoing legislative developments that lawyers need to stay apprised of, according to Zoltan Nadasdy, Budapest Office Managing Partner at Noerr & Partners. As an example of this, he points to the recent so-called “Sunday Closure” issue, relating to the recent relaxation of legislation enacted in 2015 forcing large retailers to close on Sundays. “Every time a major legislative change is made,” Nadasdy points out, “all clients need to be informed of it so that appropriate actions are taken. He continued: “This specific update means that again retailers need to restructure their employment contracts, their staff size, their shifts, and so on – and all of it will require legal assistance.”
Speaking about the Hungarian economy, Nadasdy reports that, “the market is moving again and there are a lot of investors looking for assets and investment opportunities in general in the country.” Especially positive is the impact of the decreased VAT for constructions, which has led to an uptick in development projects. He notes that the positive trend is also reflected in the services industry and a bit in terms of M&A, but he says that real estate project development seems to be the big winner.
“High demand and low interest rates have led to a price increase on the market with people having the cash to invest but not wanting to keep it in the banks,” Nadasdy notes.
In terms of the legal services market, “the main players seem to be stable” and “many are searching for new opportunities to grow” but no real big changes can be pinpointed at this point other than the usual general movement in the industry, he believes.
“War crime trial is front and center”
The primary subject of significance for lawyers in Kosovo right now, according to Korab Sejdiu, the Managing Director of Kosovo’s Sejdiu & Qerkini law firm, is the creation of a special division of the Kosovar judiciary to rule on war crime accusations levied at ex-Kosovo Liberation Army members for conduct during the Kosovo War (the fight for independence from Serbia in the late 1990s). The tribunal is particularly significant, Sejdiu reports, because “some of the current major political figures, including some currently serving in state institutions, are potential indictees in the process.” The court will be stationed in The Hague, and the judges and prosecutors will be non-Kosovar, although it appears that Kosovo law will be applied, and it will be considered a Kosovar court.
The legal community is waiting to see what happens, Sejdiu reports, because “obviously defense counsel will be engaged by the indicted persons.” His firm is already speaking to several larger international firms with lawyers experienced in war crime trials to jointly represent potential clients. Indeed, he says, several foreign firms have already begun sending lawyers to Kosovo to try and win some of the expected business that should be generated.
Otherwise there’s not much happening in the country, Sejdiu sighs, due to a political stalemate that’s existed for some time, resulting from a long-lasting and at times violent battle between the opposition and governing parties “which has really hampered any kind of attempts to put forward any kind of legislative reform to enable the business and legal environment.” The one potential deal of significance, “which would have provided quite a bit of economic stimuli to Kosovo, would have been the privatization of the ski resort in Brezovica” – but is likely to fall through, as the French-American consortium expected to lead the process appears unable to obtain the necessary funding by the end of May.
The economy is predicted to grow at 3.5% or so this year, Sejdiu reports, but it needs about 20% growth “to make any kind of significant strides.” The only grounds for hope, he said, is the entry into force of the Stabilisation and Association Agreement (SAA) signed in October of last year with the European Union, which entered into force on April 1, 2016. The SAA provides for a transitional period, during which Kosovo will be allowed to take some protectionist measures and obtain “a substantial amount of money from EU funds to get its infant industries developed.” Sejdiu describes the opportunity as “a major development that might provide some support for the local businesses.” He says, “if the Kosovo business community can somehow take advantage of that and use the transitional benefits wisely so that they become competitive with EU companies, that’s good news. If they mess this up as they have many other opportunities in the past, then what happens is at the end of the transitional period you get these highly competitive companies coming in, and they just destroy your economy, because you can’t compete.”
“Less money leads to more litigation and more scrambling to fix structural problems”
Latvia’s a relatively small market, Vilgerts Partner Gints Vilgerts says, “which means that not much is happening but we see firms particularly active on the litigation side.” All kinds of disputes are increasing in numbers in the country, Vilgerts says. “I think there’s simply a matter of less money being in the market, which means that everyone starts suing each other over everything.” Vilgerts believes that M&A is on the rise, but says that “we see that these are different from what we’re used to seeing.” He explains: “this is not growth-based M&A activity, with a very small proportion of movement resulting from someone believing that they can grow beyond a certain point. It is more a matter of people saying, ‘we’re tired, lets get rid of it,’ and then competitors swoop in since the asking price is good.” Aside from this type of M&A work and litigation, the pipeline is slow for law firms, Vilgerts says, pointing to the heavily hyped-up data protection updates on which all firms scrambled to make a large marketing push. “The amount of work that came out of it: zero.” He concludes: “I do think this is also caused by the fact that legal departments have been growing and they’re now trying to minimize outsourcing and limit it to the risky litigation side.”
Looking at the recent Baltic law firm updates (see page 14), “I’m sitting like in a cinema watching it all unfold and I find it all very interesting. I think the core issue is what I mentioned earlier – there is less money in the market and that’s really the trigger for everything we see.” He argues that “firms are splitting up and merging left and right in hopes they’d solve the structural problems that they have.” The result, Vilgerts predicts, it that the competition between the largest 3 firms will continue to intensify but “for mid-sized firms, the realities on the ground will not really change much as a result of all of this.”
“Controversial requirement for liability insurance and increased work from arbitration”
According to Octavian Cazac, Partner at Moldova’s Turcan Cazac, the most significant news for the Moldovan legal market at the moment is the proposal for reform of the Law on Advocates being put forward by the Ministry of Justice. Cazac notes that the proposal isn’t really reform in “a huge way” and won’t really affect clients much, but it is expected to clarify the inner workings of the Moldovan Bar Association somewhat. “The only element that is somewhat controversial,” Cazac says, “is that the Ministry of Justice wants to force lawyers to buy professional liability insurance,” which they have not previously been subject to. Many lawyers oppose this element of the proposal, both because it’s seen as not as necessary in Moldova as in some other markets and thus constitutes an unwanted expense – Cazac says not many clients bring such claims in Moldova, and refers to it as “basically a problem that doesn’t exist” – but also because strong and reliable insurance companies are hard to find on the Moldovan market.
In terms of the work coming to firms in the country, Cazac pointed to the increased frequency (“frequent for us,” he conceded, as “probably other countries are more frequently involved in it”), with which the Moldovan government is retaining law firms (usually as part of a syndicate with an international law firm) to defend it from various investor grievances, as “it is becoming very popular to sue Moldova before ICSID or ICC tribunals.” Just last week, Cazac said, the Moldovan government succeeded in having a 2013 arbitral award by the ICC in Paris requiring the state to pay USD 47 million annulled by the Paris Court of Appeals, which Cazac notes is “very rare.” Politically, Cazac said, this is seen as a huge success, especially following the widely reported discovery last year that USD 1 billion – equivalent to 12% of Moldova’s GDP – had been stolen from Moldovan banks over the course of three days in 2014, so “every cent counts in these arbitrations.” In addition, some claims are brought by what Cazac refers to as “very shady individuals” who claim to find old debt and find assignees to claim it.
Cazac said his firm is slightly busier than it was in 2015, “but looking at the general business climate, clients are not optimistic.” He points to “a huge political crisis,” following the fall of the previous government and its replacement by a new government, “which is still to earn the trust of the general public.” People are not very optimistic, and the situation is not very stable. Not much foreign investment is coming into the country at the moment, he says, pointing to the persistent corruption and inevitable demands for bribes companies doing business in the country face, along with other circumstances that create great uncertainty and risk. He notes that the reputation is probably worse than the reality, but he concedes that the reputation is “a huge scarecrow,” and says, “that’s why, for foreigners looking on the Internet to invest their money in Moldova, they would have to have a very compelling reason to make an investment here.” The Government has been expected to take action to improve the business climate and address the pervasive perception of corruption in the courts since pro-European parties came into power in 2009, but at this point, Cazac says, “there is general skepticism that this policy is being achieved.”
“A healthy volume of transactions”
The most commonly-discussed topic in Poland relates to the tax changes in the country, according to Agata Jurek-Zbrojska, Counsel at Hogan Lovells. One of these changes – affecting the bank tax – was introduced at the beginning of the year, but questions remain over its implementation, as well as how it will impact the sector. Other upcoming legislative changes, not yet enacted but with drafts currently under discussion, involve the retail tax and the changes in the requirements for acquisitions of agricultural land. Both are receiving a great deal of attention, and Jurek-Zbrojska is impressed that the Government has been active in discussing the potential consequences with stakeholders familiar with the relevant industries.
“Also worth noting,” Jurek-Zbrojska says: “Poland’s political landscape has been receiving a great deal of attention from abroad and there is a healthy flow of investors. A good example of this is a recently-concluded real estate transaction that was valued at over EUR 1 billion. This is something that gives us a positive read about the environment in which we operate. In contrast, at the beginning of the year, there were plenty of commentators that were pointing to perceived threats over the political situation in the country, without looking at the market realities in detail.” Jurek-Zbrojska concludes positively: “It is definitely a great sign that investors are looking at the background of the economy rather than the political discussions, and indeed, this was not just a one-off, with the year registering a healthy volume of transactions – similar to that of last year’s.”
“Disputes and the legal profession under a microscope”
One of the most discussed topics in Russia, according to Vyacheslav Korchev, Senior Partner of Integrites, is the new arbitration law due to come into force on September 1, 2016. Korchev explains that the law aims to provide a “comprehensive regulation of internal and international arbitration. It will replace two current laws (the law on arbitration courts in the Russian Federation and the law on international arbitration) and will also provide for detailed regulations on matters which have not been subject to statutory regulation.” Among the most notable updates, he says, are “a requirement for licensing of the arbitration courts, provisions on arbitrability of corporate disputes, and new rules on the scope of state courts’ assistance in arbitration.”
Korchev also points to further changes in the disputes world, with amendments to the Russian procedural laws due to come into force on June 1, 2016 implementing an obligatory pre-trial settlement for commercial disputes, and simplified/fast-track court proceedings for small amount cases involving amounts up to approximately EUR 5000. Market realities are also shaping disputes, with the devaluation of the national currency being a constantly contentious aspect, according to Korchev, as cases involving contractual price provisions with prices fixed in a foreign currency and the recovery of unjust enrichments receiving conflicting judgments in Russian economic courts. Another worthwhile aspect to mention, Korchev believes, is the Supreme Courts position on the recovery of legal expenses from the losing party. Korchev argues that the Courts are taking a conservative approach with regards to a “long-going discussion, with the courts promoting recovery of legal fees based on the average market rates for services without taking into account ratings or other legal services’ market benchmarks – which, in turn, means there is an added risk for clients of big law firms to get compensated from the losing party.”
Lastly, Korchev points to the topic of “advocate monopoly” as a particularly important debate, involving the question of whether only “registered advocates” will be allowed to represent clients in court (giving them an effective “monopoly” on the right). Korchev explains that in April 2014, “the State Program of the Russian Federation ‘Justitia’ was enacted by the Government of the Russian Federation. Although the document did not contain specific provisions on the ‘advocate monopoly’ within the Russian legal community, it is considered to precede the enactment of a special law which will prohibit legal professionals who do not have the status of advocate from representing the interests of clients in court.” He adds: “In order to understand the profoundness of the controversy, it is necessary to note that nowadays there are no specific qualifications that need to be met by a representative in court in civil procedure. In the status quo, a legal representative does not even need to have a legal education to represent clients in civil and commercial proceedings in Russia. The proponents of the reform point out that the ‘advocate monopoly’ would improve the quality of legal proceedings as litigators will assist the court. Opponents insist that such ‘monopoly’ would only increase the costs of legal services without bringing any improvements due to low qualification standards set for the advocates nowadays.”
“Exciting potential in terms of Serbia’s attractiveness”
PPP is still the hot discussion point in Serbia, according to Marija Bojovic, Partner at Bojovic & Partners. She reports that the country is making real efforts to improve its PPP image, noting that “We amended the laws and are now trying to find consultants for the Belgrade Airport – a really attractive project nowadays due to the expansion of the national carriers – and we’re likely looking at a PPP for it.” In terms of specific legislative updates, Bojovic explained that the aim of the amendments to the PPP legislation was to make it more attractive for all sorts of projects, including some in smaller municipalities where local projects do not require the Finance Ministry’s opinion, creating a decentralized decision-making process. “For example, amendments abandoned the requirements to provide for securities at the signing of the PPP contract as it was stipulated before,” she explained. “They can now be obtained at the closing.”
Another trend highlighted by Bojovic is that of Serbia’s increased attractiveness for outsourcing services: “We see more and more companies trying to set up here – and not just call centers but all sorts of shared service centers and product assistance services.” Bojovic explains that one result is the increase in legal work: “we contribute data protection, labor laws, corporate work, tax, regulatory, if the industry warrants it – for us there’s a lot of work on these since they’re usually greenfield-type projects.”
Also exciting is that there is a high interest in the financial institutions sector in the country. “We have a new law on payment services that allows non-banking institutions to do some forms of financing now,” Bojovic explains. “Serbia is adapting to the EU and all these things that came in CEE a few years ago are now being established in Serbia as well. We still have some obstacles such as data protection and anti-money laundering laws that need to be adapted to fully benefit from the potential,” she concludes, “but the signs are definitely positive.”
“Real estate in the driving seat”
With its growing young population and consumption trends Turkey continues to be an appetizing market for foreign investors, according to Vefa Resat Moral, Managing Partner of Moral Law Firm. “The most important development for the sector in Turkey last year were the urban renewal projects which have dominated the local real estate sector, particularly in the metropolitan cities such as Istanbul, Ankara, and Izmir,” explains Moral. As a result of this development, “it seems that urban renewal projects will not stay limited to metropolitan cities and will be put into practice throughout Turkey.” He is also buzzing over the huge investments into mass housing and shopping malls in Turkey, and he adds: “The new Regulation on Shopping Malls brings out the principles and procedures which effect shopping malls – which are the key players in the real estate and retailer industry. In line with such sector dynamics, Real Estate Investment Funds seem to be the new investment model.”
Another more recent development in Turkey that Moral points to is the enactment of the “long-awaited” Personal Data Protection Code. “Having entered into force during the second week of April this year, it mainly implies rights and competence of data subject whose personal data was processed versus liabilities and obligations of data processors by means of administrative authorization,” he explains. With this Code, almost all companies will be required to renew their personal data processing methods and commercial policies and reorganize their operations.
“Furthering reforms in Ukraine”
Privatizations are “definitely at the top of the agenda in Ukraine,” according to Vladimir Sayenko, Partner of Sayenko Kharenko. He points to recent amendments of privatization laws that “remove obstacles to the launching of the long awaited privatization of major state-owned companies.” Specifically, these amendments simplify the procedure, permit the government to engage external advisors for strategic privatizations, and prohibit the participation of certain bidders in the privatization (including those registered in low-tax jurisdictions or “aggressor states,” as well as companies under sanctions and their affiliates). Importantly, according to Sayenko, the law now permits the use of international arbitration in privatization disputes. This is a wise move, as many potential investors “not keen on the prospect of litigating against the Government in a Ukrainian court.” These changes are driven by the State Property Fund of Ukraine, headed by Igor Bilous – a former UBS investment banker “who definitely knows how to sell businesses to foreign investors.”
Although it’s still early, there’s also quite a bit of discussion around the need to update the legislation governing the operation of limited liability companies, which, Sayenko explains, is the most popular corporate form. The Ukrainian Ministry of Economy is working on a draft law that will introduce wider discretion for shareholders to establish the most appropriate corporate governance rules for private companies, and improve the protection of minority rights, liability of directors, transferability of shares, the proper framework for shareholder agreements, and exit rights. “The approach/spirit in which it is being drafted is also important to keep in mind,” he notes, adding: “The Soviet approach was full of mandatory rules, whereas the new one is a lot more oriented towards a freedom of contract and greater flexibility for the shareholders to decide how to run the company.”
Another interesting update that Sayenko points to is the long-awaited increase of merger control thresholds that enter into force in May 2016. Coupled with an improvement of nexus requirements, this eliminates most merger filings, which did not have any impact on competition in Ukraine but nonetheless had to be cleared by the Ukrainian Antimonopoly Committee under the old regime. “This is a great relief for multinational companies, which also received an option to report their past violations in the quasi-amnesty procedure to clean up corporate history. Taking into account greater transparency, predictability of fines, and other the practical improvements introduced by the Ukrainian competition agency, the recent reforms in the competition law area can really be viewed as a success story.”
We thank the following for sharing their opinions and analysis on the news:
- Marija Bojovic; Partner; Bojovic & Partners
- Agata Jurek-Zbrojska; Counsel; Hogan Lovells
- Vyacheslav Korchev; Senior Partner; Integrites
- Vefa Resat Moral; Managing Partner; Moral Law Firm
- Zoltan Nadasdy, Budapest Office Managing Partner; Noerr & Partners
- Octavian Cazac; Partner; Turcan Cazac
- Vladimir Sayenko; Partner; Sayenko Kharenko
- Korab R. Sejdiu, Managing Director; Sejdiu & Qerkini
- Gints Vilgerts; Partner; Vilgerts
- Erik Steger, Partner; Wolf Theiss
This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.