“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.
“Searching for strategic investors”
Albania is making headway with a renewed push by Albanian legislators to promote local production and attract foreign direct investment into the country, according to Ekflodia Leskaj, Partner at Drakopoulos. Leskaj explains that one of the biggest legislative packages enacted recently addressed “some concerns of foreign investors such as the bureaucratic processes they face.”
In addition to several new fiscal incentives and a revised law of public private partnerships, the new Law on Strategic Investments, Leskaj reports, contains one big novelty for Albania, as the Albanian Investment Development Agency (AIDA) will now act as a one-stop-shop for investors that achieve “strategic investor” status – covering the full process from gaining the status to concluding specific agreements in the country.
Several sectors were defined as “strategic” for this purpose, including energy, oil and mines, transportation, tourism, agriculture, and technical and economic development areas (several more are likely to be added as well). The “strategic investor” status will be based on a minimum investment in one of these sectors ranging from between EUR 1 million to EUR 100 million (depending on the sector), combined with a minimum amount of created jobs, and will result in the offer of an assisted procedure or a special procedure by the AIDA, which Leskaj describes as “a unification of procedures in case the project involves applications with different institutions under normal circumstances.”
While it sounds good in theory, Leskaj says that there are still several issues which need to be worked out. Specifically, there are concerns over the lack of input by the Competition Authority during the drafting and discussion of the law. According to the law, the Competition Authority’s opinion may be requested on a case-by-case basis – which Leskaj says is considerably less ideal than having included the authority in the original discussions and factoring in its opinions beforehand.
Another point of excitement within the Albanian legal world relates to a pending reform of the justice system, which, according to Leskaj, is intended to make the judiciary more independent from the political world. Leskaj says that this will necessitate several constitutional changes, meaning that its potential implementation is still a bit further down the line.
“Bankruptcy and Tax at the top of the agenda”
According to Mario Krka, Partner with Divjak, Topic & Bahtijarevic, one of the significant bits of news from Croatia is the new Bankruptcy Act that was adopted recently and will come into force on September 1. Furthermore, there are talks in the country about bankruptcy for physical persons, a concept that, while present in most EU countries, does not exist in Croatia.
Another exciting development is related to the tax system. Krka explains that, as a result of the updated General Tax Act, taxpayers are empowered to request a “formal opinion” from tax administration agencies to clarify uncertainties which they will be able to rely on should a tax agency attempt to apply tax laws differently than is stated in that opinion. Lawyers in the market are still waiting to see the bylaws and how this will work in practice, but Krka believes it will likely fill a gap in terms of addressing what he describes as the “grey areas,” and will likely provide an added level of certainty for economic agents.
Other areas of recent interest in Croatia, according to Krka, include renewable energy and capital markets, with “an increased movement for mid-sized IPOs and SPOs in the country in the last 2-3 months.”
“Attracting investors and Estonian Airlines’ future”
The first half of the year in Estonian M&A “stayed fairly active,” Marina Tolmatshova, Partner at Cobalt, says, though she points out that the deals closing, both in terms of value and volume, were not as many as in the previous year. The main thing that has Estonian lawyers excited is the interest expressed by investors, primarily from Scandinavian countries and Poland.
In terms of recent legislation, the new Commercial Code amendments were passed earlier in the year and came into effect on July 1, bringing increased flexibility (e.g., convertible bonds and different classes of shares are now possible for private limited companies) and transparency for potential investors, particularly in the start-up scene, according to Tolmatshova. The Cobalt Partner explains that the general hope is that these changes will make the jurisdiction substantially more attractive.
At the same time, Tolmatshova says, the Estonian legal community is buzzing over the “extensive work going into establishing and developing a new Investment Act meant to increase investment attractiveness – essentially driven by the Alternative Investment Fund Directive’s implementation.” Tolmatshova explains that this primarily aims to introduce new and more flexible types of investment funds and collective investment structures – such as those common in Luxembourg or the Netherlands.
The last noteworthy point on the agenda has a bit of a political flavor. Specifically, the National Airline of Estonia is “undergoing difficulties” and is expecting a final decision from the EU as to whether the loans and equity injections from the state constitute unfair state aid. The future of the airline has been discussed for the last three years, but now that an EU decision is expected in early fall, it has once again been pushed up the agenda.
“No pinch felt in Latvia”
The geopolitical issues of Ukraine and Greece are at the top of the list in terms of discussion points in Latvia, but Filip Klavins, Managing Partner of Klavins Ellex, reports that the country has yet to feel a significant pinch from either. Last year, he explains, Latvian business took a hit because of Ukraine, but the impact is felt considerably less now (with the small exception of some local producers who were focused on Russian exports and are now re-orienting towards Western clients).
At the same time, Latvia seems determined to get up to speed in terms of its NATO obligations with regards to GDP percentage dedicated to military spending, which will likely create more defense contract work in the country – something that Klavins says is reflected across the Baltics. “Even if it will come down to simple hardware purchases, it’s going to be good work next year,” he says.
Klavins also points towards projected market consolidations in some key industries such as timber and food product as well as new procurement work as a pipeline of work that has the market excited at the moment.
One last hot topic among lawyers in Latvia that the Klavins Ellex Managing Partner identifies are the ongoing discussions related to the actual legal form of law firms. He explains that Latvian firms are “not exactly a limited partnership or a limited liability company,” but rather a peculiar form created by special law. There is a concrete movement for a modernizing “mini-revolution” within the Bar, Klavins claims, and it has stirred a heated debate over potentially allowing firms to become LLPs and/or LLCs. The timeline and likelihood of this is still uncertain, as well as how taxing the profession will work as a result, but discussions are progressing gradually within the Latvian Bar Association, with the Ministry of Justice and tax revenue service being eager to push them along.
“Trending in Lithuania”
While there have not been any major legislative updates in Lithuania in the last couple of months, according to Zilvinas Zinkevicius, Partner with Valiunas Ellex, several interesting trends have started to surface in the country. The first identified by Zinkevicius exists in the M&A market, where more and more investments are done using collective investment undertakings. “There are several likely reasons for this, Zinkevicius explains, “but it basically comes down to it being a good instrument to raise funds.”
The other trend relates to litigation, in which more and more cases have appeared that involve professional liability issues for auditors, construction designers, and fund managers. While the source of the trend is unclear in Zinkevicius’ view, clients, he says, do seem to be increasingly aware of professional advisors’ duties.
Also in the litigation world, another trend relates to cases involving piercing of the corporate veil. The Valiunas Ellex Partner explains that while many companies in Lithuania are limited liability companies, some claimants are trying to employ this strategy because in many cases there are simply not enough assets to be recovered otherwise.
In terms of the legal market itself, the recent Ellex/Cobalt alliance reshuffling remains the major talking point in Lithuania and the region. Apart from that, Zinkevicius points to the relatively old trend of the claims by the Big Four that they are strengthening their legal teams in Lithuania. Aside from tax advisory, Zinkevicius feels that this remains more at the level of declarations than anything else.
“Financial institutions under scrutiny in Poland”
There are a couple of developments that lawyers are talking about in Poland, according to Malgorzata Surdek, Partner at CMS – both involving a combination of new legislation and ongoing investigations of various watchdogs in Poland. While they address two different problems they both relate to increased activity of regulators and general scrutiny of financial institutions.
The first involves insurance companies, which, according to Surdek, have been active in recent years in selling unit-linked life insurances – a type of investment insurance product. Surdek explained that these are structured such that, if a person wanted to exit the product before the 10th anniversary of the policy, he or she would have to pay a considerable surrender fee, which “is so high that even if you resign in year 1 or 2, you stand to lose all the premiums paid.” While some commentators argue that this amounts to a form of consumer trap, these policies are structured in such a way so as to cover the costs incurred in setting up the policy – a big part of which involves commissions for agents.
There are several ongoing class actions started by various groups of policyholders (with Axa, Skandia, Generali, Aegon, and OpenLife, among others, as defendants), with several pending actions in preparation stages. At the same time, there is an ongoing investigation by the Office for Competition and Consumer Protection, an agency which, Surdek explains, has the ability to impose fines of up to 10% of the yearly revenue of a company. In light of all of these, the Financial Services Authority ran a series of stress tests recently to determine how insurers would cope with a drop in the surrender fees, which revealed that four or five of them would end up with negative equity, meaning that either bankruptcy or immediate capital injections from shareholders would be needed. A few more companies would have a hard time achieving the solvency margin levels that meet statutory requirements.
To make matters even more complicated, according to Surdek, a new draft insurance law looks like it will regulate unit-linked insurance products in more detail, including a lowering of the surrender charge to the levels tested by the FSA – a discussion that is also influenced to a great extent by the fact that it is all taking place right before the October 25 general elections.
Similar patterns were highlighted by the CMS Partner related to the continuing fallout of the drop in Swiss francs and the challenges posed by it to banks which were granting mortgage loans denominated in or indexed to CHF. Pending class action suits, investigations from authorities, and draft legislation influenced by the same elections are looming, making it a particularly interesting period for lawyers working in the financial services sector.
“NPLs – an Austrian recipe in the Romanian market”
Nonperforming loan portfolios is the name of the game in Romania, according to Bryan Jardine, the Managing Partner in Bucharest of Wolf Theiss. The main example he identifies was the so-called Project Neptune, a portfolio put out by BCR that had all firms in the local market scrambling to get involved, with a number of international consortia initially expressing an interest to acquire it as well. Local media are using the EUR 3.5 billion heading when reporting on the portfolio (though Jardine believes that some skepticism should be applied to that evaluation), but it is definitely a project that has the market excited. The Wolf Theiss Managing Partner points out that it is not the only such project ongoing in the market, with even more activity in the area being anticipated, primarily as a result of both regulatory pressure to clean up balance sheets and banks looking to rationalize portfolios.
According to Jardine, similar trends can be observed in other CEE jurisdictions, with noticeable activity in Slovenia, Croatia, the Czech Republic, and, recently, Poland. What sets the Romanian market a bit apart is the fact that the Romanian banking sector tends to be dominated by Austrian banks, meaning that they benefit from an “advantage of scale” when it comes to such matters. He explains that while there are definitely some local nuances to be considered, it helps these Austrian banks that they can transfer a great deal of manpower and know-how from Vienna in terms of packaging and marketing loans and negotiating with potential buyers. He points out that, in many instances, portfolio cross-border transactional documents also tend to be drafted under Austrian law, which makes it a particularly exciting period for a regional CEE firm such as his.
“Making sense of deoffshorization (still) and new Civil Code concepts”
Deoffshorization continues to be on the tip of the tongue for lawyers in Russia, according to Mikhail Kazantsev, Partner at Egorov Puginsky Afanasiev & Partners. According to Kazantsev, a third iteration of the deoffshorization law was passed a month ago, and the business world is still trying to figure out how to best comply with the new amendments – i.e., through their existing corporate structures or by developing new ones. He reports that while many clients have already made changes internally, others are still waiting, betting on future amendments and wishing to avoid incurring more restructuring costs than necessary. While some expect further updates in the law, the general feeling seems to be that no other “huge changes” are realistic.
Another big development that has the legal community buzzing are the recent updates to the civil code, which, according to Kazantsev, have introduced many “nice things that Russian law did not have” – primarily drawing from common law. Kazantsev explains that many are familiar concepts – especially for those who have operated with common law for a few years – but that there are still pending questions revolving around a few provisions, since some of the new concepts do not represent a 100% adaptation of English law. Kazantsev says that he expects it will take up to a year for the Russian market to get accustomed to it all, especially since it is a matter not just of adapting these new concepts into business agreements, but also of developing court practices to provide predictability for lawyers.
“NPLs with a (Slovenian) twist”
Like Bryan Jardine in Romania, Uros Ilic, the Managing Partner of the ODI Law Firm, points towards Nonperforming Loans as the big topic of conversation in Slovenia. According to Ilic, the trend developing in Slovenia is that traditional claim holders (banks) are now moving away from “Plan A” – restructuring – and contemplating “Plan B”: selling their non-performing loan portfolios to the highest bidder. Ilic points to the Hypo Group (through its internal bad bank HETA) and BAMC (the Slovenian bad bank) as the two financial institutions that started this type of deal, only to be followed by two banks in liquidation. Ilic explains that they were successfully selling not only claims towards one company, but also bigger portfolios. Other banks have started following suit, including the biggest national banks, such as NLB.
One Slovenian-specific aspect (NPLs are a hot discussion topic in many CEE jurisdictions) is that banks with claims towards the same company are these days making consortium sales in order for the best bidder to buy majority claims which – as Ilic explains – provides them with a broader scope of options. He clarifies that if a bidder were to buy only a minority of a company’s exposure, legal advisors to the bidders would not have a lot of options in terms of strategy. Enforcement of security rights could be limited, since a majority of creditors in the restructuring agreement is often required. Such a buyer would also not be able to block all decisions made by other creditors from the restructuring agreement if the buyer did not agree with them (usually the agreement envisages 2/3 majority to pass a decision). “When 75% of the exposure is owned, however, there are a lot of other options that become available, such as compulsory settlement (since you have the quorum not only to start those proceedings but also to confirm them),” Ilic explains. “In the process you can convert part or whole of that loan to equity without shareholder consent and simultaneously delete present shareholders, which means you are becoming not only economic but also legal owner of the company.” This translates in a higher purchase price, which in turn means lower losses incurred on the bank side. Ilic points to the recently reported York Capital acquisition of Istrabenz Bank claims as an example of such deals in the country. [As reported by the CEE Legal Matters website on June 16, 2015, ODI advised an affiliate of York Capital Management and Elements Capital Partners on the purchase of receivables and obligations against Istrabenz in the amount of EUR 46.7 million from BAWAG and banks in the Erste Group, while the sellers were being advised by Wolf Theiss and Houlihan Lokey].
In terms of who is looking to make purchases in the NPL world in Slovenia, Ilic points towards (primarily US-based) private equity funds and hedge funds as the likely suspects, while also pointing out that there is an increasing tendency for local-international joint venture efforts to put together strong bids.
“On leaving or surviving in Ukraine”
The big news in Kyiv these past two months is Clifford Chance’s announcement that it intends to close its Ukrainian office, according to Andriy Stelmashchuk, Managing Partner of Vasil, Kisil & Partners. His impression is that, in contrast with the other internationals that have been “surviving in the market,” Clifford Chance was not that active in Ukraine. Stelmashchuk argues that the firm’s decision was also likely because its main areas of focus tended to be antitrust and M&A work, but the latter has dried up in Ukraine in recent months. The Vasil Kisil Managing Partner points out that Clifford Chance did not have a dispute resolution team, unlike the international firms that have managed to survive in the country, which worked hard to build up such teams, especially in the financial, insurance, and real estate sectors that feed many of the lawyers in Ukraine at the moment.
On dispute resolution, on top of the sectors already mentioned, Stelmashchuk says that law firms are also actively pitching for work from Ukrainian companies potentially suing Russia for losses incurred as a result of Crimea’s annexation.
We thank the following for sharing their opinions and analysis on the news:
- Andriy Stelmashchuk, Managing Partner, Vasil, Kisil & Partners
- Bryan Jardine, Managing Partner – Bucharest, Wolf Theiss
- Ekflodia Leskaj, Partner, Drakopoulos
- Filip Klavins, Managing Partner, Klavins Ellex
- Malgorzata Surdek, Partner, CMS
- Marina Tolmatshova, Partner, Cobalt
- Mario Krka, Partner, Divjak, Topic & Bahtijarevic
- Mikhail Kazantsev, Partner, Egorov Puginsky Afanasiev & Partners
- Uros Ilic, Managing Partner, ODI Law Firm
- Zilvinas Zinkevicius, Partner, Valiunas Ellex
This Article was originally published in Issue 2.4. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.