Category: Bosnia and Herzegovina

Indirect Taxation Authority of Bosnia and Herzegovina (“ITA”) conducts, among other, the registration of the taxpayers for Value Added Tax (“VAT”) purposes in Bosnia and Herzegovina. Pursuant to the applicable Value Added Tax Act of Bosnia and Herzegovina, there are two types of registration: (i) obligatory – in case the turnover in previous year exceeds or is likely to exceed the amount of BAM 50,000 and (ii) voluntary.

In the past, there were technical issues with voluntary registration of foreign legal entities for VAT purposes in Bosnia and Herzegovina which imposed problems for entities doing business there. However, it has been recently announced that all technical difficulties regarding the voluntary registration of foreign legal entities have been resolved, thus enabling straightforward and efficient registration procedure.

As a reminder, foreign legal entities are to be registered before ITA on a voluntary basis through their tax representative in Bosnia and Herzegovina, and for the purpose of conducting the registration procedure taxpayers are obliged to provide the following documentation:

• Engagement letter for the representative services concluded with the tax representative;

• Power of attorney with name data, ID number and residence, or a place of business of the tax representative with permanent residence in Bosnia and Herzegovina;

• Contract or other document as a proof that taxable turnover is performed on the territory of Bosnia and Herzegovina;

• Documents on the registration with the register of a domicile competent authority, officially translated to one of the official languages in Bosnia and Herzegovina (Bosnian/Serbian/Croatian);

• Verified copy of passport for the authorised representative of the foreign legal entity;

• Authorised signatories list verified by foreign commercial banks with opened special transaction account for the tax representative of the entity without residence in Bosnia and Herzegovina, through which transactions will be made related to business transactions;

• Notice on main transaction account determined by the authorised payment organisation.

The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.

By Branimir Rajsic, Senior Consultant, Karanovic & Partners

Squeeze-out of minority shareholders is an important concept for joint stock companies in Bosnia and Herzegovina (BiH). In the previous socialist system, many then-state-owned joint stock companies issued employee stocks as a form of partial privatization, leading to some companies having hundreds of minority shareholders with miniscule amounts of shares. This complicated the management of these companies, as majority ownership changed from state to private, since many small shareholders are unreachable, as they may be deceased or have relocated with unknown addresses. This situation often makes squeeze-outs essential for majority shareholders in order to efficiently manage these companies.

BiH is a complex state, consisting of the entities of the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS), and the self-governing Brcko District (BD). As each has competence for regulating securities in their jurisdictions, BiH has three securities regulators and three sets of laws on squeeze-outs, with application depending on the company seat.

The regulation of squeeze-outs is fairly similar in FBiH and BD, but it is substantially different in RS.

FBiH and BD regulate squeeze-outs by the Laws on Takeover of Joint Stock Companies (the “Law on Takeover”), and a squeeze-out can be conducted only within three months after expiry of the takeover bid. This can be a mandatory or voluntary takeover bid, and the necessary shareholding threshold for squeeze-out is that the majority shareholder holds at least 95% of the shares with voting rights of the target after the takeover bid.

Although RS also has a Law on Takeover, squeeze-outs are regulated by the Companies Act and are not tied to a prior public takeover bid. A squeeze-out can be performed at any time, provided that the majority shareholder holds at least 90% of the shares of the target, regardless of how they were acquired.

The regulations in FBiH, RS, and BD differ in terms of the kinds of joint stock companies to which they apply. In FBiH they apply to: (a) companies that have made an initial public offering; (b) listed companies (provided that shares were traded in the previous six months); and (c) companies with a share capital of at least BAM 2 million (approximately EUR 1 million) and at least 30 shareholders. In the BD they apply to companies whose shares are traded on regulated markets. In the RS the squeeze-out right belongs to all joint stock companies.

Moreover, in FBiH and BD, the squeeze-out is performed by the relevant securities registries following the majority’s shareholder request and based on a contract with the majority shareholder. The advantage of this approach is that it significantly reduces the ability of minority shareholders to challenge the squeeze-out. 

In RS, however, the majority shareholder must obtain a prior decision on squeeze-out, adopted by the general assembly of the target company. After this decision is registered with the companies’ register of the relevant court, the registration with the securities registry and the transfer of the shares may occur. Minority shareholders can thus potentially challenge the decision on the squeeze-out. However, challenges from the minority shareholders based only on dissatisfaction with the amount of compensation cannot prevent the squeeze-out.

In all three jurisdictions, the majority shareholder must secure fair consideration to the minority shareholders and deposit the funds or provide a bank guarantee to conduct the procedure.

Therefore, as seen in this brief overview, within BiH three sets of laws and two different regimes on squeeze-out exist. While such regulatory differences provide challenges, they can also constitute an opportunity. For example, companies seated in FBiH or BD which cannot achieve the necessary 95% shareholding to conduct a squeeze-out procedure in these jurisdictions could potentially move their seat to RS to fall within the jurisdiction of the RS Companies Act, which allows a squeeze-out with only a 90% shareholding.

Although this would be a complex and time-consuming operation, if the squeeze-out is of strategic importance, it may offer an option to companies which would otherwise not be able to conduct a squeeze-out.

By Nedzida Salihovic-Whalen, Partner, and Zlatan Balta, Senior Associate, CMS Reich-Rohrwig Hainz, Bosnia and Herzegovina

This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Sajic has successfully represented Elektropenos BiH a.d. Banjaluka in a commercial dispute worth EUR 31 million, including interest. 

According to Sajic, the case, which lasted almost two years, resulted in a victory for Elektroprenos BiH Banjaluka. According to the firm, “the plaintiff, Elektroprivreda HZHB Mostar, initiated the court proceedings before the Commercial District Court in Banjaluka, demanding the payment of debt on the basis of investments worth EUR 31 million with interest included. Through extensive evidentiary proceedings, all the allegations were successfully disputed by the Sajic team, and the first instance court rejected the lawsuit in its entirety.” 

The Sajic team included Managing Partner Aleksandar Sajic and Lawyers Tijana Kondic and Dragan Stijak.

 

Under Bosnia and Herzegovina law, a pledge can be granted solely to a creditor of a claim. This hampers the creation of effective security for securing syndicated facilities (e.g.,  loans provided to debtor by more than one lender). In practice, this is solved by creating a “parallel debt structure” and appointing a security agent who holds pledges in favor of all lenders. Despite its broad use, this structure has not been tested before local courts. Thus, questions about its validity remain unsettled.

Parallel debt obligations (“Parallel Debt”) are claims which are created in favor of the agent, mirroring the claims of all lenders arising from syndicated facilities (“Principal Obligations”). The agent, the lenders of the Principal Obligations, and the debtor(s) of the Principal Obligations agree on: (i) the creation of debt which the debtor owns to the agent along with where such debt corresponds with the Principal Obligations and where it exists in parallel with them; (ii) the agent is a joint and several creditor (together with each lender) of each and any obligation of the debtor toward a particular lender, creating joint and several creditorship between the agent and the lenders; (iii) any payment of the Principal Obligations to a particular lender discharges the corresponding Parallel Debt and any payment in respect of the Parallel Debt to the agent discharges the corresponding Principal Obligations, which eliminates the risk that one obligation could be fulfilled twice (i.e.,  to a particular lender and to the agent).

The aim of parallel debt construction is to facilitate the establishment of efficient security for securing syndicated facilities due to the lack of an adequate legal institution in Bosnia & Herzegovina (BH) law such as the ability in common law jurisdictions for agents to hold security property in trust for all lenders.

The skeptics of the parallel debt concept find its flaws in absence of causa . To them, the agent is an “artificially created” lender, and not the “real lender” who provides financing to debtor(s). To some extent this could be true, as in practice the agent does not necessarily provide any financing. However, this does not affect the validity of parallel debt concept. Namely, causa  is a reason for the creation of an obligation. Under BH laws an agreement is null and void if the obligation does not have a causa  or if the causa  is contrary to the mandatory provisions of local law, public policy, or good practices, but the Parallel Debt has its own causa, consisting in achieving the payment of already existing obligations, i.e.,  the Principal Obligations. In legal doctrine such causa  is recognized as causa solvendi. 

Furthermore, the fact that parallel debt as a legal concept is not explicitly recognized under BH law does not automatically mean that it is not permitted. BH law proclaims the freedom of parties to arrange their relations as they please. Such freedom is limited solely by the mandatory rules of BH law, public policy, and good practices. To the best of our knowledge, there is no limitation in any of these sources that would prohibit the creation of parallel debt.

Nevertheless, the parallel debt concept is not ideal. First, the pledge is established in favor of the agent and secures only the Parallel Debt. Thus, the lenders do not have a direct security interest and are not entitled to take enforcement actions in respect of established pledges except through the agent. Therefore, the lenders also bear the risk of the agent’s bankruptcy or insolvency.

To conclude: the parallel debt structure is currently the best legal concept for establishing effective security for securing syndicated facilities. Nevertheless, the lack of relevant court practice raises concerns that the parallel debt structure might be challenged before local courts. With this in mind, and recognizing the significance of financing through syndicated facilities, adequate interventions by BH legislators in solving this matter would be extremely welcome.

By Nina Vjestica, Partner, and Djordje Dimitrijevic, Senior Associate, Dimitrijevic & Partners

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Bosnian lawyers Natasa Krejic and Sanja Djukic have been promoted from Partner to Senior Partner at the Sajic law firm.

Krejic is a corporate lawyer with over 15 years of experience advising both corporate and institutional clients. She is a graduate of the University of Banja Luka Faculty of Law. She has been with Sajic since 2004.

Djukc is also a corporate lawyer, as well as, according to Sajic, a “recognized expert in the area of banking and labor law.” She is also a graduate of the University of Banja Luka Faculty of Law, and she has been with Sajic since 2007.

“Sanja and Natasa are both first-class lawyers and their promotion is a reflection of their ability to build strong client relationships,” said Managing Partner Aleksandar Sajic, “as well as our commitment to developing and advancing lawyers who have achieved the highest levels of professional accomplishment and who are devoted to advancing and protecting the interests of our clients and the institutional values of our firm.”

The Milosevic Law Firm has advised Bat Hotel on its sale of the Hotel Bistrica ski resort in the Jahorina mountain of Bosnia and Herzegovina to ZTC Banja Vrucica.

Financial details of the transaction were not disclosed.

Hotel Bistrica was built for the XIV Winter Olympics in Sarajevo.

ZTC Banja Vrucica is an operator of several hotels located near the town of Teslic in Bosnia and Herzegovina.

Milosevic Law Firm’s team was led by Managing Partner Vladimir Milosevic.

Dimitrijevic & Partners, Mihaj Ilic Milanovic, and Mikijelj Jankovic & Bogdanovic have successfully represented Bosnia and Herzegovina in an investment arbitration with Naveen Aggarwal, Neeta Gupta, and Usha Industries, heard by an arbitration tribunal in Paris.

According to Dimitrijevic & Partners, “these proceedings concerned a dispute over alleged violations of the claimants’ rights by the state in relation to their investment in Krajina Osiguranje a.d. Banja Luka, and alleged violations of their rights as investors in Bosnia and Herzegovina.” The firm reported that the claimants demanded USD 30.2 million from Bosnia and Herzegovina. 

Dimitrijevic & Partners’ team was led by Partner Stevan Dimitrijevic. 

Mihaj Ilic Milanovic’s team consisted of Partner Senka Mihaj and Associate Milica Volarev.

The Mikijelj Jankovic & Bogdanovic team included Partners Vladimir Djeric and Nevena Drobnjakovic. 

“The country we live in is, in many ways, just a mirage – there are indications of there being a functioning state, but in reality it is very difficult to see it,” says Maric & Co. Managing Partner Branko Maric, noting that, “for over two years now, since the last general election, we have had a technical government.”

Maric says that the structure of political parties in Bosnia & Herzegovina is such that often “divisions are created based on nationality and religion in order to get to power – only to push all important issues to the background once that power is grabbed.” 

However, he says, there are indications that this may change soon. In the November municipal elections across Bosnia & Herzegovina, ruling parties in both of the constituent entities of the country, the Federation of Bosnia & Herzegovina and Republika Srpska, won the majority of municipalities – but lost in key cities like Sarajevo and Banja Luka. “This is a strong indicator that the people have had enough,” Maric says. “The people have begun to realize that they have been played for fools for a long time and that they need a change.” According to him, the strong showing of the opposition does not necessarily mean that its ideas captivated the public, but instead reflects a “desire to change the course that the ruling parties have been taking.” 

Still, he says, this rare opportunity for change is fragile. “This is a crucial period for the country – if the opposition messes up in any way, the ruling parties will only solidify their positions and we’ll be facing another long period of absolutely no change or progress.”

There has been no significant legislation passed in recent months, Maric reports. “Because we have a technical government, legislative movement has been at a glacial pace,” he says. “No important laws have been updated, amended, or even announced to have entered a procedure for any such change or revision. There have been some indications about potentially changing certain frameworks related to investments, but this is all still puffery.”

Maric says that the infrastructure of the country is maintained by EBRD and EIB loans that seek to improve structural issues. “These loans are what keeps us afloat – all of the other economic programs have stalled.” Other reforms, he says, targeted at improving the country’s overall condition as part of the EU accession process, amount to “minor cosmetic changes,” and he says that “core change is impossible until an actual government is in place. As long as this is stalled, there won’t be a strong actor with whom the EU can work to help the country go through tough times.”

Ultimately, Maric insists that the economy of Bosnia & Herzegovina is “tough as nails,” but he says that this is almost entirely due to the “tenacity of the private sector.” According to him, “the legal and tax framework for business is rather convenient,” and he adds that the state “does not interfere in business activities and the business is habituated not to have any help of the state but at least the state does not do much harm.”

According to Maric, “structural investments in infrastructural projects, on the part of the country, are non-existent.” There have been announcements, however, of plans to initiate major projects like the C5 corridor highway towards Hungary, the 2-track speedway towards Serbia, and the possibility of having some of the South Stream pipeline go through Bosnia, but he says that nothing has been settled yet. According to him, “it is not possible to predict what will happen with any of them in the near future.”

An interview with Milan Kajtez, Head of Legal at UniCredit Bank a.d. Banja Luka about his background and best practices.

CEELM: Can you walk us through your career leading you up to your current role?

Milan: After graduating from the Faculty of Law of the University of Banja Luka in 2005, like all young people in Bosnia and Herzegovina, my job search involved sending CVs and cover letters for all open positions. After six months of searching, in the same week I received an offer to work as an intern in the City Administration of the City of Banja Luka, in the District Court in Banja Luka, and in Nova Banja Luka Bank (the legal predecessor of UniCredit Bank a.d. Banja Luka). I didn’t need to think for a long time – I decided to try my hand at banking. I was driven by pure curiosity: What does a banking lawyer do?

I started as an intern in the Legal Affairs Department, with the usual internship run-in and experience. At that time, the focus of the Legal Affairs team was on representing the bank in court proceedings mainly involving the collection of overdue receivables, so my first knowledge of banking was actually built from the end of the banking process, from the collection of bad loans.

Meanwhile, the role of lawyer in the bank started to become increasingly important in the areas of preventive action, legal risk management, and support of sales processes in the phase of their creation.

After completing my internship and several years of work in the Legal Affairs Department, I was given the chance to join the Risk Department team. I spent 12 months there, and after that I returned to Legal Affairs as the Head of the Legal Support Department for corporate clients. I spent five years in that position, after which I moved to the position of Director of Operational Support. There I had the opportunity to manage a team of 50 employees – 10% of all employees of the Bank – divided into six departments and nine functions (in that role I managed all payment processes; card, documentary, and letter of credit operations; credit and bookkeeping administration, cash banks through the central treasury; interbank settlement transactions; and so on). After 14 months of great experience in other types of back office jobs and other types of risk, I returned to the position of Director of Legal Affairs, where I am today.

CEELM: What are the most significant changes you’ve seen in Bosnia & Herzegovina’s legal market over your career?

Milan: The most serious legal changes in the banking business took place in the standardization and implementation of the corpus of rights of financial service users. This is a very complex and demanding package of obligations on the part of banks, which enables a kind of systemic protection of individual users of financial services. Normatively, the banking system has implemented all the requirements through its acts and processes, and as a next step, I believe that we should all work together on additional financial literacy of clients, especially in the use of so-called digital business channels.

In addition, in the normative sense, we have been in need of a clearer and more supportive legal framework for digital business for several years. Banking is largely committed to the implementation of IT technologies and solutions in business processes, but in order for the legal profession to adequately consider the legal risks that this transformation will undoubtedly bring, it is necessary to know how the legislator thinks and wants to see this step in business. Until then, we consider not only the legal risks, but also, in part, the possible wishes of the legislator and the attitudes of the institutions where our open legal risks will end in the future.

In addition to innovations in the field of protection of users of financial services, in recent years, a serious normative emphasis has been placed on the protection of personal data, and the prevention of money laundering and terrorist financing.

In procedural terms, the most significant challenges of the legal environment in Bosnia and Herzegovina are the constant strengthening of legal security through the dedicated work of the country’s judicial, administrative, and regulatory institutions.

CEELM: Why did you decide to join UniCredit?

Milan: At the very beginning, I emphasized that pure curiosity took me into banking, and I was kept there by the great opportunity for development, above all, within the economic and legal fields of legal science.

I think that banking offers the broadest legal view of the life of a company. The procedure of formally establishing a company begins with the opening of a temporary bank account, and closing the company through bankruptcy proceedings always ends with closing the bank account. Between these two key points of a company’s life, we have the opportunity to socialize with our clients through total transaction operations (including domestic and foreign payment transactions and forced collection operations for third parties) and deposit, card, credit and investment activities. We go through every good development with our clients and all the bad, and everything that happens in the business of a company, in principle, will be reflected in its relationship with the bank.

Additionally, UniCredit is dedicated to developing its employees and processes through the group’s fundamental values, so you get a great opportunity to learn and develop in a field that interests you and at the same time are supported in doing the right thing, so being part of this a privilege.

CEELM: Tell us about your legal department. How big is your team, and how is it structured?

Milan: My team consists, on the one hand, of great associates, young lawyers, and bank employees, and on the other hand, equally dedicated external advisors, lawyers, and other associates. The bank’s internal resources are more focused on supporting business and other internal processes, while we use the services of external advisors and lawyers to support the bank’s interests before judicial and administrative institutions, and to make business decisions accompanied by unusual legal risks.

In this way, we have provided a diversity of knowledge and skills from a fully centralized team, as well as obtaining more specialization in certain areas, which has further strengthened the bank’s position when it comes to legal risk management.

CEELM: What is your typical day at work like?

Milan: Execution and discipline in enforcement is of paramount importance for managing the legal risks of a system such as the bank’s, so my usual work day begins with a review of the activities planned for that, or the next few days.

My focus is on supporting our business projects, and I am in constant communication with regulatory bodies in order to monitor and implement regulatory requirements, and I am committed to managing court/administrative proceedings of systemic importance to the bank on a daily basis. I dedicate most of the working day to achieving goals through activities in these areas. In parallel, I monitor the activities of the internal team, as well as open topics with external associates and lawyers.

I highly appreciate every effort to improve any existing process, so I use every free moment to support initiatives on this path.

CEELM: Was it always your plan to go (and stay) in-house, instead of spending time in private practice?

Milan: The development topics and opportunities in the bank is significant and as long as I feel satisfied both at work and in my private life, my plan is to continue working exclusively on upgrading my professional career within the framework of the previous 15 years of life and work.

CEELM: What was your biggest single success or greatest achievement with UniCredit in terms of particular projects or challenges? What one achievement are you proudest of?

Milan: My biggest individual success with UniCredit was getting UniCredit’s 2013 “Up” award, honoring “the best customer service story as well as the best product, service, or initiative representing top excellence in delivering a positive customer impact.” In 2013, I applied for the UniCredit Group competition, based on the improvement I suggested to the bylaws of the Ministry of Agriculture in the Government of Republika Srpska, which would enable beneficiaries of incentives from the ministry much easier access to funds than was at the time standard. I, on my own initiative, recognized the gap in the bylaws, proposed amendments to the act (with an accompanying analysis), and forwarded them to the competent authority for consideration. My initiative was recognized by the ministry and implemented in its acts, thus enabling a much more efficient payment of incentives for agricultural producers. Of course, the banking sector as a whole was involved in this business, not only UniCredit, but as the initiative came from UniCredit employees, at that time it was an important reputational activity on the part of the bank as well.

This initiative was recognized not only by the Ministry of Agriculture, but also by the employees of the UniCredit Group, who that year chose and gave me UniCredit’s “Up” award for my initiative.

I decided to share this story, not only because it is the highest recognition I have received as an employee of UniCredit, but also to encourage every hardworking and creative person to follow his or her inner initiative and believe in everything that seems possible. The business environment is not perfect, nor will it ever be, and we are all invited to perfect it. Try it!

CEELM: How would you describe your management style? Can you give a practical example of how that manifested itself in the legal department or helped you succeed in your position?

Milan: As Director of Legal Affairs, I would say that I manage by example. This is natural, since I grew up as a lawyer at the bank, and for years I have been part, or creator, of a significant part of its processes and changes, both internal and legislative (through participation in various working groups, teams, etc.). Many years of experience, built not only over time, but with very clear goals and supporting activities, determined the framework of my development, and ultimately the leadership style. This opportunity provides a certain comfort zone for me as manager.

This style of leadership helps me implement the bank’s fundamental values through employees, associates, and processes, and helped me as a manager strengthen my listening skills, because when working in a familiar environment you can be misled into thinking you know everything.

CEELM: What one personal best practice or strategy have you invented or developed that helps you in your role that you could recommend to others?

Milan: It is not unique, but in our business environment it is unusual. I improve my business goals, activities, and work models at regular intervals using business coaching services.

During my career, from time to time I came in contact with the concept of coaching, and after the first experience with a coach, I became convinced of the usefulness of this model of work.

Today, when I am faced with a new challenge and/or topic, I know exactly when I will provide adequate support and additional space for thinking through coaching. We’re not all coachable, and the only way to figure out if we are is to try. It’s worth a try!

CEELM: What one person would you identify as being most important in mentoring you in your career – and what in particular did you learn from that person?

Milan: I learned great things from a great man and manager, the bank’s former CEO, Mr. Ivan Vlaho, and one of the things I learned from him – often a truth that helps me in my work – is that the director must have a focus on his topics, and that not all topics are his. “

At the very beginning, as a young lawyer and a future banker, the support of my colleagues was extremely important to me.

The first year or two, you are in the learning phase, and the available support you have is very important. After that, you have enough knowledge and responsibilities to work independently, but perhaps more importantly, to take initiative. Then one enters the phase in which the system expects the energy of change from a young colleague, and a young man can start to feel like the creator of the system for the first time. This recognition of the expectations and activities between the system and the individual I think is very important for any company.

In terms of development and movement along the hierarchical ladder, in addition to the bank’s commitment to employee development and the selfless support of the CEO and other members of senior management, it is important to work independently on building your own capacities. I believe that this kind of cooperation and synergy guarantees growth, success, and mutual satisfaction.

CEELM: On the lighter side, where do you take visitors to Banja Luka? What’s the one place a visitor should make sure to visit?

Milan: Banja Luka is in the immediate vicinity of the three capitals (Sarajevo, Belgrade, and Zagreb), and has mostly borrowed its institutional capacity from them. This has allowed the city to remain clean and peaceful, bathed in positive energy and a comfortable place to live. It is this relaxed course of the day that is the most beautiful thing in our city, wherever you go. And if you have the opportunity for more, do not miss a ride on the river Vrbas, either in organized rafting tours or in the Dajak Boat. Try the Trappist cheese, which has been produced for over 100 years in Banja Luka’s Marija Zvijezda Trappist monastery according to a secret and original recipe, and refresh yourself with Banja Luka’s Nektar beer.

In the immediate vicinity of Banja Luka, you can enjoy the great outdoors, especially if you are a fan of hiking or riding mountain-bikes, appreciate swimming in mountain lakes and rivers, distinguish edible from inedible mushrooms, or simply want to treat yourself to a significant amount of negative ions.

In any case, for any variant you choose, the UniCredit Bank ATM network is at your disposal.

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

There is an interesting legal tool in the Competition Law of Bosnia and Herzegovina (originally adopted in 2005), that is seldom seen in other jurisdictions. Per the legal framework, the governing body of the local competition authority, the Competition Council, consists of six members appointed in order to reflect the complex ethnic structure of the country: two Bosnians, two Croats, and two Serbs.

In order to ensure that ethnic interest is protected, the local competition law has a specific decision-making tool: the “ethnic veto.” Specifically, for any decision to be adopted, at least one member of each ethnicity needs to be in favor. If both members appointed from the same ethnic group are against, a decision cannot be rendered, irrespective of the procedure undertaken up to that point or the facts in question. Usually, ethnic considerations have little to do with ensuring a level playing field and market competition; but in Bosnia, an ethnic veto can effectively override an antitrust enforcement.

The European Commission, in its opinion on Bosnia and Herzegovina’s May 2019 application for membership in the European Union, explicitly underlined this structure as problematic to the state’s accession aspirations. The EC pointed to the Competition Council as one of the administrative bodies that operates “on the basis of ethnic decision-making procedures, in which at least one representative from each constituent people needs to support a decision for it to be valid,” in concluding that this is “neither compatible with the [the Stabilisation and Association Agreement] nor with the obligations resulting from EU membership.” As a result, the EC recommended that Bosnian decision-makers “ensure that all administrative bodies entrusted with implementing the acquis are based only upon professionalism and eliminate veto rights in their decision-making, in compliance with the acquis.”

Indeed, the ethnic veto has been a serious cause of concern, as in numerous high-profile cases, whether involving abuse of dominance or restrictive agreements, the Competition Council failed to act due to its exercise. In a recent case, even a procedural decision on evidence collection was deemed to run afoul of a critical national interest, although it was mandated by the competent court. The Bosnian judiciary has in the past annulled “vetoed” decisions as depriving interested parties of their right to a fair trial, but this does not seem to have lessened its use. Considering the EC’s clear remarks, this mechanism seems to draw Bosnia further away from EU accession, a stated priority for many political actors.

Indeed, competition law is intended to be impartial and not related to ethnic, national, or religious interest; market competition and free trade does not (or at least, should not) care about the ethnicity of an undertaking. While legitimate concerns of specific stakeholders and the broader effects of the decisions are routinely used to scrutinize competition law-related cases, an independent enforcer should not get a free pass based on an undefined, ethnically-based deliberation mechanism, but needs to ground its decisions on solid legal and economic analysis. A certain act, on balance, ultimately either will or will not be beneficial for market competition, and it is difficult enough for regulators to confidently predict the future effects of their actions. But with an ethnic veto, the authority is sending a message that, although a certain behavior might infringe competition law, it should not be sanctioned since it is in the interest not even of the state but of a specific ethnicity. Arguments based on the “raison d’etat” ultimately never work well, and are more likely to breed resentment than smooth issues over.

Where the veto will go is difficult to say for now. In June, 2020 the Bosnian presidency initiated activities to harmonize the local legal framework with the recommendations of the EC. Furthermore, the Bosnian lawmaking process is not entirely famous for its efficiency. While it can reasonably be expected that reorganization of the Competition Council will be a hotly debated topic, one can only speculate on the potential competition infringements which might go unpunished in the name of (a) people. Vox populi, vox dei.

By Nihad Sijercic, Partner, attorney at law in cooperation with Karanovic & Partners

This Article was originally published in Issue 7.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.