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The Buzz: April - June

The Buzz
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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.

Turkey

"Continued Political Turmoil And Encouraging Legislative Developments"

The big news in Turkey, according to our source (who requested anonymity), was the May 5, 2016, announcement that Turkish Prime Minister Ahmet Davutoglu would be resigning from his position. Nobody’s sure what’s going to happen, our source said, who’s going to replace Davutoglu, or what the affect of the shake-up will be on foreign investors. There has been no reaction from his firm’s clients as yet, he reports, but there seems to be consensus that this is “an unfortunate development”, and his firm’s position, at the moment, is “wait and see.”

On a happier note, Turkey’s new Data Protection Law (the “Law”), passed just now, a decade after the first draft was put forward and 35 years after Turkey first committed itself to enact a national data protection law under its Council of Europe obligation. The Law – passed ultimately as part of the country’s ongoing attempt to harmonize its laws with EU law to facilitate the country’s accession to the EU – is characterized by our source as a “good thing.” Companies are finding themselves obliged to review their processes to ensure compliance with the provisions of the Law, which is creating work for firms across the market. Our source says that his firm’s data protection advisory team is working “flat out” at the moment, making the new Law “a gift from the government to the lawyers in the country.” The Law also creates a Data Protection Authority. “But,” he says, pointing to the increasing role of the Turkish government in such matters, “the question is: ‘Who’s going to run it?’” 

Finally, our source notes, a recent draft IP law – addressing a subject the Turkish government insists on calling “Industrial Property” instead of “Intellectual Property” – has a significant amount of “good stuff” in it as well, and it is expected to be passed soon as well.

Lithuania

"New Code of Ethics And Increased Visibility of The Big Four"

Irmantas Norkus, the Managing Partner of Cobalt’s office in Lithuania, describes the new Code of Ethics approved by the General Meeting of Advocates of the Lithuanian Bar Association on April 15, 2016, as “a significant move forward.” The previous Code of Ethics was created in 2005, and the rapid growth and substantial changes in the market since then required that the Code be modernized. Changes affect the rules applicable to conflict of interests and the ability of firms to represent multiple clients in matters upon informed consent, among other things.

Turning to changes in the legal market itself, Norkus refers to the recent decision by the Varul office in Lithuania to rebrand as part of Primus as part of the extended fall-out of Varul’s Estonian office deciding to leave the network in favor of Tark Grunte Sutkiene. In addition, he reports that the law firms associated with PWC, Deloitte, and Ernst & Young – and, to a lesser degree, KPMG – are increasingly promoting their legal competencies and capabilities in Lithuania in an effort to compete more effectively with the traditional law firms in Lithuania. At the moment the increased visibility seems to be related more to marketing and communications than to actual presence on deals/transactions of significance, but as the firm associated with PWC in particular has publicly announced its intention to be among the top four or five firms in the country within five years, Norkus is keeping a look out. In addition, the PWC-related firm recently successfully appealed the Bar Association’s refusal to allow it to use the PWC trademark in its official name, meaning it is now able to more prominently display the PWC brand in its marketing efforts.

In terms of practices, Norkus reports that the Real Estate and Infrastructure practices are “really hot” at the moment, particularly related to three significant ongoing privatizations, including, most significantly, the government’s plan to offer three Lithuanian airports for operation by one concessionaire for the next 25 years. That concession should be announced soon, and at the moment a number of Lithuanian law firms – and at least five larger international firms – are representing potential concessionaires participating in the tender. Other privatizations of significance include the PPP project for a new National Stadium and another PPP project for the Utena National Road.

Other dynamic practices in Lithuania at the moment are those involving the Financial Services industry, which is seeing a great deal of consolidation and loan portfolio sales, and Data Protection, as companies try to prepare for the upcoming changes in applicable EU law.

Bulgaria

“NPL Sales Provide a Glimmer of Hope in Otherwise Quiet Market”

There has not been much movement on the Bulgarian market in recent months, according to Alexandra Doytchinova, the Managing Partner of Schoenherr’s Sofia office.

Still, there’s some reason for hope. Doytchinova says that the Bulgarian NPL market – which, contrary to the markets of other neighboring jurisdictions, has been fairly dormant – is expected to pick up soon, also as a result of an asset-quality review and bank stress tests initiated by the Bulgarian National Bank, the results of which are expected in August 2016. Doytchinova expects this to be the kick-off for increased NPL sales and a source for legal business in Bulgaria for the next few years. While NPL transactions have not yet started on a large scale, pioneer transactions have already been announced. Schoenherr itself is already working sell-side on the first sizeable NPL portfolio sale for HETA, Doytchinova reports, and other Schoenherr clients are looking at other NPL portfolios for sale.

IT and start-ups are also always good for Bulgaria, though Doytchinova points out that start-ups, working with limited budgets, are rarely able to obtain the external legal advice they would need. Still, she believes many of them are becoming aware of the necessity of doing so, and the more sophisticated start-ups, seeking investment from the United States, United Kingdom, and other western countries, are increasingly looking for quality legal assistance. A number of law firms are assisting start-ups as an investment in future business, even matching their budgets in doing so.

Renewables remain a dead area in the country, Doytchinova says, with no real movement in the sector beyond occasional disputes with the regulator and off-takers who sometimes fail to pay as obligated.

As always, the overarching problem for Bulgaria is the perception of corruption in the judicial system that bedevils attempts to promote and generate investment in the country. The problem doesn’t appear to be any closer to being solved, either, Doytchinova sighs, pointing out that a recent effort to introduce a serious judicial reform widely supported by practitioners failed in Parliament – signifying that the political system is obviously fairly satisfied with the status quo and causing widely-respected Minister of Justice Hristo Ivanov to resign in frustration.

Romania

“Spotlight on Real Estate”

The real estate market is in the spotlight in Romania, according to Bogdan Papandopol, Partner at Dentons in Bucharest. Specifically, the country is “seeing the logistics area going quite well,” Papandopol explains, with new developments popping up in and around Bucharest. He notes that the capital city is not alone in registering growth, pointing to developments in other large Romanian cities as well, including Arad, Ploiesti, and Constanta. 

The office real estate market is also registering healthy growth, the Dentons Partner reports, in particular in Bucharest. Also notable is the shopping center sector, and Papandopol reports that, “while not as big as the logistics sector, we are definitely seeing some good deals in commercial real estate not only in Bucharest but also other major cities in Romania.”

Turning to residential real estate, Papandopol points to the recent so-called “Darea in Plata” (“giving in payment”) legislation, which affects credits with a value under EUR 250,000 meant to fund the purchasing, building, or refurbishing of residential real estate. The main update is intended to help consumers notify their banks and initiate a procedure that ultimately results in returning the collateral to the bank and discontinuing the loan. “We have to see the impact this will have on banks and how this will be reflected either in terms of the conditions that banks set up, the end cost of credits, durations of loans, etc.,” Papandopol reports. “Ultimately, it does look like it will make it more difficult to access such loans, which may impact the residential landscape.” As to the driving force behind the legislation, the Dentons Partner notes that “it is difficult to comment precisely as to the cause of it in an electoral year. This was a widely-discussed legislative update. We’ll see, based on how banks react, if that legislation will impact on the development of the residential projects.”

Estonia

Fallout From Legal Market Changes Includes New Emphasis on Marketing and Head-Hunting”

Martin Tamme, the Managing Partner of Varul in Estonia, says that “from my perspective, the big news is still the merry-go-round” that accompanied the recent news of his firm’s merger with Tark Grunte Sutkiene. He refers to the move as being part of the “start of the second phase” in the market that has led to the establishment of what he calls the “Big Four Baltic law firms” (referring to Tark Grunte Sutkiene, Sorainen, Cobalt, and Raidla Ellex). He also refers to the increased marketing/public relations push he’s seeing in the market in the last few months, which he says is a new paradigm. For instance, it is reported that Cobalt has been buying up front page advertisements to get their trade name out in the industry. He expects all firms to step up their efforts similarly. “Each of the Big Four will have their own personality,” he says, “and it will become more of a ‘brand’ business in upcoming years.”

As another aspect of the upheaval in the market, Tamme points to the “serious head-hunting going on now as a result.” Tamme notes that, “we want to grow, Raidla Ellex wants to grow, and Sorainen needs to fill in the gap left by four senior litigators who established their spin-off, Nove,” (see page 16) as Cobalt continues to deal with the integration process following its 2015 merger with the former Lawin office in Estonia. He agrees that it’s a good time to be a good lawyer in the market, with all the major firms competing for talent. 

Despite this competition, Tamme says legal recruiters are rarely employed in Estonia. He refers to the legal market as a “village,” and says that personal contacts are a much more common source for lateral hires.

There’s nothing very much coming in the near future in terms of political, legislative, or regulatory developments, Tamme says. Gas should be stronger for the next few years, as Estonia pursues a policy of energy independence from Russia. Many projects are in their early stages, Tamme notes, though few of them have actively started generating revenue yet.

Finally, Tamme notes that Estonia is continuing to experience a mini-boom in private sector real estate, discernible still in M&A and JVs and innovative financial schemes. He is realistic about the process, though, noting that people are “taking bets as to when it will turn to insolvency work.” He sighs. “I expect to see it happen within a few years.

Ukraine

“Unmistakable Signs of Progress”

Natalia Kochergina, the Head of Real Estate for DLA Piper in Kyiv, says that, from a business perspective, things are “absolutely” better in the country than they were six months or a year ago. The situation remains fragile, she concedes, but she insists that progress is undeniable. She points to the stabilizing hrivnya as a welcome sign.

DLA Piper’s office has expanded in the past six months as well, Kochergina reports, noting that while before the Euromaidan Revolution of 2014 the firm did most of its work for foreign clients, the ratio of foreign to Ukrainian clients now is closer to 50:50, or even swung towards the local. In terms of foreign investors, Chinese investors are more active now than their European or American counterparts, who are more risk averse. In Kochergina’s own practice, Real Estate, she has also seen a definite recovery in foreign investment, particularly in the retail sector.

The legal market has changed a great deal in the last few years, Kochergina points out, noting that Chadbourne, Clifford Chance, Gide Loyrette Nouel, and Schoenherr have all withdrawn from the country (though Gide’s office was taken over by another French firm, Jeantet). She describes a general trend in that direction, as some foreign firms lose trust in the geopolitical future of the country. Nonetheless, the market has stabilized, she believes, with local firms getting stronger, and an increasing number of boutiques doing niche work.

In terms of practice areas, Kochergina reports that litigation is very strong at the moment, as is tax restructuring. Infrastructure is also strong, as the government seeks to improve the nation’s ports with international investors.

Despite the overall positivity of her report, Kochergina concedes that corruption – while improving in small steps – remains a problem, especially in the judiciary. Still, she notes, legislation is improving rapidly, and she said that recent changes in the title registration legislation which increase transparency are “really great.” She concludes that these changes are, “definitely, positive.”

Finally, Kochergina turns to the noticeable positivity in the country as a whole, which she says was less obvious a year or two ago. She accepts congratulations on the recent victory by Ukrainian singer Jamala at the Eurovision contest with pride, and says that overall “people are very happy.” Speaking on Vyshyvanka Day – the Ukrainian holiday named for the embroidered shirt in the Ukrainian national costume, which has also become a celebration of Ukrainian identity – Kochergina comments on the number of people she sees outside her window wearing the Vyshyvanka in a display of patriotism as another positive sign.

Slovenia

Debt, Privatization, Real Estate Are Areas of Activity”

The distressed debt front is an interesting area for lawyers in Slovenia, according to Vid Kobe, Partner at Schoenherr in Ljubljana, who says, “apart from privatization and restructuring-driven M&A, it is the main type of work dominating our schedules.”

Kobe points to two main elements that follow as a natural progression to the restructuring boom of the recent past: (1) The likely refinancing of the capital structures of the large restructured corporates which have achieved stability and returned to growth (one recent example is the ACH Group’s recent refinancing of its senior debt by VTB); and (2) The repeated instances of new players buying up senior debt of those large corporates – especially those holding interesting assets – for which restructuring has not resulted in a turnaround. This year is critical for NPL portfolios in Slovenia as well, according to Kobe, who points to the recent placement of a huge portfolio by the largest Slovenian bank, with other big players likely to follow.

“Much of the big-ticket stuff has already been wrapped up, and the first round of large deals is behind us,” Kobe comments about the equity side. He adds: “By far the largest ongoing deal is the privatization of NLB – the largest Slovenian bank – which looks like it will be sold via an IPO.” Kobe notes that the market is waiting to see the State’s updated plans for disposing of large corporates in which it has a stake, with everyone “curious to see what amendments will be made to the list of companies to be sold with rumors in the market being floated that other companies will be up for sale in the near future.” Kobe also points to an increasing number of assets being sold by debt holders: “a new breed of sellers, if you will, who were not holding an asset as a strategic investor nor as a private equity investor.” This, he argues, “is a slightly different type of work, but it’s still M&A-type of work that keeps us busy.”

Finally, Kobe points to activity on the real estate market: “We’re seeing new players buying up real estate (backed) assets from distressed corporate groups who, for one reason or another, are exiting the leisure sector as one of their core activities.” Kobe reports that a lot of auction sales to private individuals are being completed, with many apartment building projects that ended up in the hands of the Slovenian bad banks or private bad banks now being placed on the market.

Austria

“HETA Remains at the Forefront”

Unsurprisingly, for regular CEELM readers, the winding down of HETA remains among the hot topics in Austria, according to David Christian Bauer, Country Managing Partner at DLA Piper in Vienna, who says: “it is still a huge case with many lawyers (as well as accountants, auditors, etc.) being kept busy by it.

In a recent development, Bauer says, “the Austrian Republic has made an offer to investors to pay a specific percentage of the amount requested.” Not much has happened recently on the German front of the HETA/Hypo story, Bauer reports, as the recent court hearing in Frankfurt has not yet resulted in a decision. There is one erroneous detail being floated around that the DLA Piper Partner would like to correct: “Unlike what many are saying, it is not the case that if the German claim is successful, insolvency will automatically follow, as HETA still has a lot of defenses.” He argues that it is not possible to really enforce any claims on HETA since that enforcement would directly clash with the goal of the EU Directive on the resolution of banks, which is to avoid situations in which some investors recover their full shares while others don’t. He explains: “They all need to be treated equally, so I don’t see how that would be enforced.”

Concern about investor-state disputes are also in the spotlight in Austria, according to Bauer, both because of a current (and what he describes as a “huge”) ICSID arbitration going on in Washington resulting from a claim of the owners of Meinl Bank, and because there is a lot of “fear” over the proposed Transatlantic Trade and Investment Partnership. Bauer believes both concerns are exaggerated: “First, if the new agreement with Canada is to come into force, US companies will simply be able to use their Canadian subsidiaries to sue European states, so, really, the feared risks can happen anyway. Second, one needs to consider what the alternative is: to bring a claim in front of local courts, which is difficult for any investor, may it be a Romanian, French, or so on. I mean, if you invest in Saudi Arabia and then your investment goes bust due to unfair changes locally and you expect to be able to claim your money in Saudi courts, Good luck!” At the end of the day, he says, “what’s proposed is a well-established system that simply works, and, really, many times, if not in most cases, investors lose their case, so I find many of the concerns floated around as unfounded.”

Bosnia & Herzegovina

“New Labor Laws and Regulation on Advocacy”

New Labor Laws in both jurisdictions of Bosnia and Herzegovina are keeping lawyers and companies on their toes, according to Aleksandar Sajic, Managing Partner of Law Firm Sajic. 

The Republic of Srbska implemented a new Labor Law at the beginning of the year, but the employment community and unions have not yet agreed on a new collective agreement, Sajic reports. As the new Labor Law replaced the previous agreement, the jurisdiction is now in an “insecure situation for the companies, since there is a new Labor Law, but there is no new collective agreement in place, and every month the Government adopts a new decision to prolong the old agreement for a month.” Sajic adds: “this is naturally a problem, since there are huge differences between the old and new law in terms of holidays, working times, employee rights, procedures for canceling agreements, working on a temporary basis, and so on. This, you can imagine, is frustrating for management of companies, as they cannot predict what their obligations or rights will be for the next month.” This affects lawyers as well, Sajic explains: “The biggest problem for us, as consultants, is that our clients want to know not what they need to plan for in the next month, but what to plan for at least until the end of the year.” 

In other parts of the country, the Labor Law adopted in the summer of last year ended up being nullified by the High Court of the Federation because of some mistakes in its procedure. The new proposal for a Labor Code will hopefully make the lives of companies easier since, as, under the current regime, there are “on paper, very strong, and at times too strong, protections and rights in place for employees – a socialist heritage – which became an obstacle towards attracting new investment.” Sajic explains that “both Governments were aiming to open the door to new investors with the new labor laws, since, unfortunately, one of our advantages at the moment is a cheap workforce, but that is not as effective when you are faced with a lot of rights for employees – to such an extent that they are, at times, hard to understand even for companies coming from other former socialist countries like Poland or the Czech Republic.”

In terms of the legal profession itself, Sajic says that there is a new regulation on advocacy, which “for the first time, means there is a new structure within which you can provide legal services: that of a limited liability company.” He adds: “Until now, lawyers could work as solo practitioners, gatherings of two lawyers, or law firms that had to be organized as general partnerships – meaning full liability of its private individual members.” According to Sajic, that structure had merit: “The reason is related to the relationship we have with our clients – we have a huge and important right to represent our clients, many times in important or potentially expensive cases, and I think this type of personal liability incentivizes us to be particularly careful and committed to the better interests of our clients.” In contrast, he points out, “now you can establish an LLC law firm with 50 cents of social capital. This could be useful but I am unsure it is healthy in our profession, especially in the situation of a country like Bosnia and Herzegovina where we have a lot of legal reforms ahead of us and where we see a lot of problems in our profession, which is rather saturated, with not all lawyers being particularly concerned with providing a high quality of service.” As to the driving force behind the implementation of the LLC option, Sajic explained that it was primarily pushed through by a couple of lawyers who lead the professional association, and he added: “It was not an update that was included in the draft circulated to the national assembly – rather, it was included in the law almost overnight, as far as I know, due to some private interests.” He added that the update also included “a number of problematic articles” (for example, a “sudden” limitation on lawyers dealing with bankruptcy procedures, “introduced without any good reason”) and that a group of lawyers has already initiated a claim with the Constitutional Court challenging the update. 

Croatia

“Government upheaval causing uncertainty”

Unsurprisingly, for regular CEELM readers, the winding down of HETA remains among the hot topics in Austria, according to David Christian Bauer, Country Managing Partner at DLA Piper in Vienna, who says: “it is still a huge case with many lawyers (as well as accountants, auditors, etc.) being kept busy by it.

In a recent development, Bauer says, “the Austrian Republic has made an offer to investors to pay a specific percentage of the amount requested.” Not much has happened recently on the German front of the HETA/Hypo story, Bauer reports, as the recent court hearing in Frankfurt has not yet resulted in a decision. There is one erroneous detail being floated around that the DLA Piper Partner would like to correct: “Unlike what many are saying, it is not the case that if the German claim is successful, insolvency will automatically follow, as HETA still has a lot of defenses.” He argues that it is not possible to really enforce any claims on HETA since that enforcement would directly clash with the goal of the EU Directive on the resolution of banks, which is to avoid situations in which some investors recover their full shares while others don’t. He explains: “They all need to be treated equally, so I don’t see how that would be enforced.”

Concern about investor-state disputes are also in the spotlight in Austria, according to Bauer, both because of a current (and what he describes as a “huge”) ICSID arbitration going on in Washington resulting from a claim of the owners of Meinl Bank, and because there is a lot of “fear” over the proposed Transatlantic Trade and Investment Partnership. Bauer believes both concerns are exaggerated: “First, if the new agreement with Canada is to come into force, US companies will simply be able to use their Canadian subsidiaries to sue European states, so, really, the feared risks can happen anyway. Second, one needs to consider what the alternative is: to bring a claim in front of local courts, which is difficult for any investor, may it be a Romanian, French, or so on. I mean, if you invest in Saudi Arabia and then your investment goes bust due to unfair changes locally and you expect to be able to claim your money in Saudi courts, Good luck!” At the end of the day, he says, “what’s proposed is a well-established system that simply works, and, really, many times, if not in most cases, investors lose their case, so I find many of the concerns floated around as unfounded.”

Thank you!

We thank the following for sharing their opinions and analysis on the news:

  • Aleksandar Sajic, Managing Partner of Law Firm Sajic 
  • Aleksej Miskovic, Partner at Glinska & Miskovic
  • Alexandra Doytchinova, Managing Partner of Schoenherr
  • Bogdan Papandopol, Partner at Dentons 
  • David Christian Bauer, Country Managing Partner of DLA Piper 
  • Irmantas Norkus, Managing Partner of Cobalt
  • Martin Tamme, Managing Partner of Varul
  • Natalia Kochergina, Head of Real Estate at DLA Piper
  • Vid Kobe, Partner at Schoenherr
  • Erik Steger, Partner at 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.

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