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The financial services sector in Hungary has been fairly active in recent years. The entire Hungarian banking sector seems to be in a state of flux, mostly due to the various steps taken by the Hungarian government in an attempt to counter the effects of the global financial crisis and to the Hungarian-specific problem of widespread foreign currency-based lending arrangements. Although approximately 70% of the Hungarian banking market is foreign-owned, the government has clearly stated its intention to decrease this proportion to 50%.  

As a result, the M&A market has followed three principal trends: (1) share deals made mostly for strategic reasons, as some players leave the market and others enter it; (2) portfolio deals between existing players as some downsize and others make strategic acquisitions; and (3) the emergence of new investment from new entrants in new market segments such as payment services. 

These trends may be further strengthened by the asset quality reviews currently ongoing at Hungarian banks. The expectation is that, just like in the rest of Europe, the AQR will expedite decision-making on portfolio transfers and strategic departures from markets.

One obstacle to leaving the Hungarian market is that many major international players have converted their local subsidiaries into branches in order to benefit from home-country supervision and to free up regulatory capital. Although successful in achieving these objectives, the change creates a potential problem on exit, as the local branch of a foreign parent company may not be disposed of by share sale (although asset deals may be considered). 

The problem with asset deals, however, is that if a complex foreign exchange denominated loan portfolio is to be transferred by way of an asset deal, any litigation affecting the portfolio must remain with the transferor. Under Hungarian law, the claimant’s consent is required before a claim can be transferred to a new defendant. This creates a significant problem for foreign exchange (FX) portfolios, which are affected by significant litigation, as potential transferors will only be interested in selling their loan portfolios if they can also get rid of any litigation connected to them.

The second phase of legislation, due in September/October 2014, is expected to provide clarification for the banking sector as the new law renders certain FX claims invalid but does not fully explain how customers will be compensated once invalidity is established. Until the second phase legislation is in place, uncertainty will reign in the market. 

Another rumor sweeping the market is that the Government plans to introduce further radical changes affecting FX loan customers, perhaps even compelling the conversion of certain foreign currency denominated loans to be converted into HUF loans. At the moment, it is unclear when and how this measure would be taken and how much the financial impact of it would be absorbed by financial institutions and how much by the Government.

The net result is likely to be large losses for banks that, in recent years, have imposed on their customers forced currency conversion or unilateral margin increases (often creating unfair and invalid repayment obligations). Following such losses, a certain degree of consolidation of the Hungarian banking system is likely. 

New legislation on resolution and recovery procedures will add another layer of color to the banking sector by giving the local regulator new powers to exercise effective control over banks in financial difficulties.      

By Erika Papp and Ivan Sefer, Partners, CMS Budapest

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

When it comes to distressed M&A transactions, the Austrian market – like many other markets in the region – has increased in recent years, both in terms of volume and the number of deals being done. Not surprisingly, time is key, and transaction documents are usually prepared, negotiated, and signed within a very short period of time. Due diligence (of the legal kind) is limited to what is feasible given the tight deadline.

The liability regime in Austria is perhaps particularly complex, and investors should be aware of the various options and challenges to ensure that the transaction will be carried out successfully.  

Asset deals vs Share deals 

Any purchaser of assets in a distressed M&A deal will be keenly interested in not assuming any liabilities associated with the company it is purchasing – obviously one of the main advantages over a share deal. 

Austria is fairly unique in the region in that it has wide-reaching provisions which impose successor liability on purchasers in asset deals for pre-existing liabilities of the sold business. Hence, it is not always so easy to achieve this result through an asset deal in Austria.

Besides successor liability provisions in tax and social security law, both the Austrian Civil Code (ABGB) and the Company Act (UGB) contain provisions on purchaser liability for M&A deals which apply cumulatively. It is thus key for purchasers to be aware of the implications and interplay between these two liability successor regimes. 

Section 1409 of the Austrian Civil Code 

Under Section 1409 of the Civil Code (ABGB), a purchaser in an asset deal – generally speaking – is jointly and severally liable with the seller vis-à-vis the seller’s creditors for any pre-existing liabilities of the acquired business. The purchaser’s liability, however, is limited in amount to the value of the assets actually acquired. 

To trigger successor liability, the assets sold must represent either substantially all of the assets of the seller or at least be a separable business unit. Otherwise creditors would be better off by enforcing claims against a seller where the seller has not yet turned the assets into cash.

Further, the law assumes that the purchaser must have known or should have known of the pre-existing liabilities at the time of the purchase. In order to minimise the purchaser’s exposure, it is therefore highly recommended to perform detailed due diligence instead of relying only upon the seller’s reps and warranties. 

However, if the purchaser has agreed with the seller that the purchase price funds are to be used to pay off the seller’s debt, liability is reduced on a euro-for-euro basis. 

Importantly, successor liability may also apply to a share deal (!) if the shares sold represent substantially all the assets of the seller. Section 1409 ABGB will however not apply if a company or assets are acquired by way of a mandatory reorganisation or insolvency proceedings, or if the debtor is being supervised by a trustee of the creditors. 

This is justified by pointing out that in contrast to the acquisition of assets in non-distressed scenarios, company reorganisations in insolvency obviously only work if the purchaser is not liable for past liabilities. Further, the claims of unsecured creditors are limited to what is referred to as the insolvency quota in insolvency proceedings.

Section 38 of the Company Act (UGB)

In contrast to Section 1409 ABGB, Section 38 of the UGB provides for liability that is not limited to the value of the assets acquired by the purchaser. Moreover, the purchaser’s liability may not be reduced by an agreement between the purchaser and the seller that the purchase price funds will be used to pay off the debt of the business sold.

In practice, however, the purchaser and the seller may entirely exclude the purchaser’s liability vis-à-vis third party creditors if: (i) the agreement is entered into the commercial register at the time of the asset transfer; (ii) a public announcement is made that is customary in the market; or (iii) third party creditors are individually notified. 

Contractual relationships relating to the sold business are transferred by operation of law to the purchaser unless a third party objects within three months of receiving notice of the transfer. Since a third party need not justify its objection, the latter is at times used by creditors to exercise pressure, primarily in distressed deals.

Just as with Section 1409 ABGB, Section 38 UGB – including its successor liability provisions – does not apply in mandatory reorganisations  or insolvency proceedings, or the supervision of the debtor by a trustee of the creditors.

All reasons enough to start looking for a good attorney in Austria.      

By Thomas Trettnak, Partner, CHSH Cerha Hempel Spiegelfeld Hlawati

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

1) Are there any special laws regarding privatization in Moldova or are ordinary private M&A laws applicable?

Similar to all post-Soviet countries, Moldova adopted privatization laws to facilitate the transition from a planned to a market economy. The first regulation of the early 1990s allowed for privatizations to be carried out in all economic sectors, including the social sector.    

Today, all privatizations are regulated by the Law on Administration and Divestiture of Public Property of 2007, with the exception of the privatization of public newspapers, which is regulated by a law specific to it. 

2) What are the most important past privatizations of Moldova?

Despite countless efforts at demonopolization, the gas sector is still dominated by a single supplier. In 1995, the major public company Moldova Gaz was converted into a joint-stock company. Later, since gas prices did not reflect the high costs of gas provision, the state offered company shares on the basis of its public debt – a novel privatization approach. As a result, the Moldo-Russian company MoldovaGaz SA emerged in 1998, with 51% of shares owned by the Russian  Gazprom and 35% by the Moldovan state.  

Recently, state minority stakes in Hotel Jolly Alon (34.96%) and the meat manufacturer Carmez SA (0.110%) were sold.  

3) What are the assets that the state is not willing to privatize?

The Moldovan Government has established a list of assets excluded from privatization. The list, which is subject to amendments by the Parliament, includes the national Cricova SA wine manufacturer (100% state ownership), the Franzeluta SA bakery (52.51%), the MoldovaGaz SA gas supplier (35.33%), the Moldexpo SA international exhibition center (100%), the Moldova-Film SA film production studio (100%), and the Chisinau heating power stations (100%), among others.  

Notably, in February the Government suspended the privatization of 13 of the largest companies, citing a lack of transparency in the process of privatizing sizable companies. These included the national airline Air Moldova, the Moldtelecom telecom monopoly, the Tutun-CTC tobacco company, the Aroma and Barza Alba spirits companies, and the national circus Circul din Chisinau. 

4) What are the current efforts of the state in Privatization?

Large-scale privatization is over. The state currently focuses on PPPs and on developing a list of goods, services, and works to be supplied through public-private partnerships. Such projects are already underway in the healthcare sector (equipping the radiology, hemodialysis, and rehabilitation sections of medical institutions with modern technology), sports (building a multi-functional national stadium with a capacity of about 30,000 seats), new technologies (creating a technological park with at least three local companies by the end of 2014, which is to become a “smart city”) and public transportation (modernizing the bus station services offered by the public enterprise “Garile si Statiile Auto”).  

5) How can an investor keep track of privatization opportunities in Moldova?

Privatization opportunities are announced by the Agency of Public Property (“APP”) on its website: www.app.gov.md  

6) How can an investor engage in a privatization?

Foreign investors may participate in local privatizations as long as they fulfill customary legal criteria and provide the requisite information. An investor would first submit a request for participation alongside a registration certificate and the incorporation documents and financial statements for the previous year, the offered price and commitments to be undertaken, as well as a detailed investment program. In addition, the bidder must provide a bank guarantee of at least 50% of the initial price, which, for investment tenders, must cover at least 25% of the total investment value. There is also a participation fee of MDL 200,000 (about EUR 10,600) for each property/asset bid for.

The investor is entitled to carry out full financial, legal, and technical due diligence of the target. The investor also has the right to receive access to privatization documentation, visit the company, and request that management discloses all material information.  

As of 2008, a sale and purchase agreement cannot be negotiated directly. The sale of public assets, irrespective of the method of privatization, is subject to competitive bargaining that takes place in the presence of all participating investors. Nonetheless, the APP may end the process at any stage without selecting a winner if the offered price is unsatisfying. The sale and purchase agreement shall be signed within 30 days after a winner is designated.      

By Octavian Cazac, Partner, and Diana Ichim, Junior Associate, Turcan Cazac Law Firm

This Article was originally published in Issue 3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

The energy sector in Macedonia has been one of the areas where privatization has progressed with the most difficulty. Up to 2004, the vertically-integrated and state-owned JSC Macedonian Electricity Company (MEC) exclusively provided the generation, transmission, distribution, and supply of electricity, as well as imports, transits, and maintenance of the integrity of the electricity system. In 2004, MEC was split into two independent new joint-stock companies. Its legal successor MEPSO assumed the transmission function, while ESM assumed the electricity generation, distribution, and supply functions. In 2005, ESM was further unbundled into two independent joint-stock companies:  Macedonian Power Plants (MPP), which assumed the electricity generation part of the company, and ESM, which retained the electricity distribution and supply parts. In 2006, ESM was privatized by Austria’s EVN AG and was rebranded into the EVN joint-stock company. As a result of the restructuring and privatization process, therefore, the key players in the electricity market currently are three separate and regulated monopolies: (i) generation – the state-owned MPP; (ii) transmission – the state-owned MEPSO; and (iii) distribution and supply – the privately owned EVN.  

Privatization of MPP

Recently, the Government has announced its intention to privatize the 100% state-owned MPP by increasing its share capital and offering private investors the opportunity to purchase up to 49% of newly issued shares. The process for hiring a privatization consultant is underway, and it is therefore likely that the international public call for the privatization will be published in 2015.

Why is the privatization of MPP important?

MPP generates more than 90% of the nation’s electricity. It owns and operates the main national generation facilities: (i) the thermal power plants in Bitola and Oslomej, with a total installed capacity of 800 MW; and (ii) seven large hydropower plants, with a total installed capacity of over 500 MW. It also acts as the wholesale electricity supplier for the retail supplier EVN. The estimated value of 49% of MPP’s shares is approximately EUR 750 million. Therefore, this will be the largest privatization in Macedonian history (the largest Macedonian privatization to date was the EUR 388 million sale of Makedonski Telekom to Hungarian Matav in 2001). For now, the largest privatization in the energy sector remains the sale of EVN’s shares in a transaction of EUR 225 million and an investment obligation amounting to EUR 96 million in the three-year period following the sale.

How will the privatization be organized?

The key legislation that governs the privatization process in Macedonia is the Law on Transformation of Enterprises with Social Capital (OJ 38/93) and the Law on Privatization of State-owned Capital (OJ 37/96). Both laws provide foreign investors with equal rights to domestic investors in the tendering and privatization process for sale of Government’s shares in state-owned enterprises. It is very likely that the privatization will be organized similarly to the sale of EVN, which  was organized through an international public call for a trade sale in a one-round bidding process. The ranking criteria for the received bids were the purchase price and a three-year investment commitment. In the case of MPP, it is reasonable to expect that the Government will also apply an investment commitment criterion, as it has announced that it expects the successful bidder to make additional investments in the development of electricity generation facilities.

What will be the main legal concerns?

Any attempts by the Government to “clean” or restructure MPP prior to its sale (e.g. write-off state debt, debt-to-equity conversion, and capital increases before privatization) will in many instances constitute state aid if they are not compliant with the “market economy investor principle” (i.e. if a public authority invests in the enterprise on terms and in conditions that would be acceptable to a private investor operating under normal market economy conditions, the investment is not considered as state aid). The Government’s enthusiastic efforts to attract foreign investment by providing various incentives to international corporations are well known. Therefore, it is of critical importance for the Government to organize the privatization through a well-publicized, transparent, unconditional, and competitive tendering process, to provide prospective bidders with access to all relevant information for valuation of the share package and to ensure that there is no discrimination based on the nationality of the prospective bidders.

The Government will remain the majority shareholders in MPP (51%) and will therefore retain control of management. The successful bidder will want to ensure that it has a voice in MPP’s management and that there is an effective dispute resolution mechanism in place. The memory of the dispute between the Government and EVN AG in connection with EVN’s sale is still fresh. In 2009, EVN was ordered by the Macedonian courts to pay EUR 200 million to MPP on the basis of a debt deriving from unpaid electricity bills from consumers, before the privatization. Not long after EVN AG filed a claim for arbitration against the Government alleging a breach of the Bilateral Investment Treaty between Macedonia and Austria, the parties settled.      

By Gjorgji Georgievski, Partner, ODI Law Firm

This Article was originally published in Issue 3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.