Category: Croatia

“The business sector is definitely calming down in Croatia after the Agrokor scandal shocked the whole region last year,” says Partner Mario Krka of Divjak, Topic & Bahtijarevic. “Investors are regaining their confidence and the market is getting back to its old self, while the economy is being boosted by infrastructural and tourism investments already ongoing or planned for this year.”

“The restructuring and the ongoing insolvency procedures around Agrokor are still in the pipelines of the legal and the business sectors, but this is no longer the dominant topic.” says Krka. “Right now everybody is anxious to see where this huge bridge infrastructure project involving the Peljesac Bridge will go, which is the largest ongoing bridge project in Croatia. It is an EU-funded project that won’t need a lot of legal work immediately, but as with any big infrastructure project, at some point it will need lawyers on one side of the table, for it will bring many other related work,” he said. “The bridge is considered a big deal now in Croatia. The winning client was actually a Chinese corporation, whose bid beat out several European competitors, but the appeal process is ongoing. The value of the construction — their offer — was a bit under 300 million euros, and it will probably start this year,” he adds.

Another sector that is facing great investments this year in Croatia is the tourism sector. “A couple of days ago the Minister of Tourism announced that around 40 new hotels would open up this year,” Krka says. “I think it’s a lot, but last year we had really good numbers, in certain terms it was a record breaking season. Thanks to the tourism blooming and, according to our Minister of Finance, to the improved tax collection, there was a surplus in the Croatian national budget for the first time in the country’s history since our independence. The surplus I think, is just a bit under 1%, but still, it is a big step forward.”

According to Krka, “tourism, as a sector, depends a lot on the international situation, and right now, Croatia benefits from what has been happening in North Africa, the Middle East, Turkey, and even the Mediterranean. Because of the stability of this region, many tourists have chosen Croatia over the other competing destinations.” As a result, he says, there is a real need for high-end — five star, luxury, or even boutique — hotels in his country, which can offer something specific for their customers. “This is the sector where investments are probably going to continue,” he believes.

In terms of new legislation that might affect the work of lawyers in Croatia, Krka says that there is some buzz about the restructuring of the commercial registry, but nothing concrete yet. “I wouldn’t call it a reform, but there seems to be an attempt to combine and simplify the procedures for setting up new companies,” he says. Still, the results of that issue are hardly critical. “Even without new legislation, we have quite a lot of work these days. I don’t think we were this busy at any time last year, and I assume this is true for many other Croatian firms as well. Many investors were reserved last year, given the uncertainty about how the Agrokor situation would be resolved, and more importantly, how much it will affect the economy, GDP figures, etc. In the end, it wasn’t as dramatic as some were expecting, so the market is definitely getting back on its feet, people are ready to invest, to finance, and refinance.”

The main Buzz in Croatia, says Damir Topic, Senior Partner of Divjak, Topic & Bahtijarevic, remains the ballooning debt of Agrokor that resulted in the passage of a special law that saw the holding company placed under state administration in April of this year, and the ongoing ripple effect that crisis is having on the Croatian economy, which some predict could shrink by 10% or more as result.

“All the music stopped in April and the beginning of May,” Topic says, noting that it’s widely accepted by now that saving Agrokor is virtually impossible, “and that it will be a real collapse.” Still, Topic says, “the Agrokor special protection law will buy us time, so that collapse won’t be imminent, and it gives everyone time to prepare.” He says that, at the very least, “all the companies working with them are aware they’re going to have to take a big haircut.”

In addition, it’s become evident that a large number of Agrokor’s subsidiaries — the holding company is made up of some 143 firms, employing almost 57,000 people — will have to be sold, creating significant work for M&A lawyers in the country. Add to that the Agrokor suppliers who are already in bankruptcy or pre-bankruptcy proceedings and looking for strategic investors, and it’s a virtual boom for M&A and insolvency lawyers in the country. Topic says that “we are actually quite keen, preparing our troops for the end of this year and beginning of next year. Many of the subsidiaries are not so attractive, but some are among the best-performing Croatian companies, and we are already discussing how to be flexible and how to ensure we are available to assist on as many elements of this process as possible.” Topic describes the possibility of working on “two or three parallel deals simultaneously” as “quite a challenge” … and then he smiles: “but it’s a nice headache to have.”

Other than Agrokor, Topic says that Croatian business is doing surprisingly well, and he draws particular attention to M&A and real estate as “really vivid and growing,” particularly in the tourism and shopping mall sale/resale sectors. “The only new construction is residential,” Topic says, reporting that “the residential sector is revived and people are buying flats even before they’re constructed.” He’s not too impressed, however, describing the phenomenon as “not realistic,” as “the problem is that because of really really low interest rates in banks, people are investing their money in real property,” which he describes as “more speculative than secure.”

Still, in general, Topic says, “the economy is going well.” He reports that the country’s GDP is growing and says that “unemployment is much lower than several years ago — though a part of this drop in unemployment is because a lot of young people have left Croatia for Germany or Ireland or other countries for work.” Regardless, he says, “the mood has moved from negative to positive, and people with regards to the economy are more comfortable.”

But Topic cautions against over-confidence: “It’s great, but we have a very thin coalition in the government at the moment, and autumn is always the time of year where things get active on the political scene — and it’s already gotten started in the summer with some stupid disagreements about removing plaques with old fascist signs or things like that.” Thus, he says, “there’s a real fear that the government could fall.” Even that might not be too much of a catastrophe, he concedes with a smile: “We tend to do better in terms of GDP in times where there is no governing coalition and only a technical government, anyway, so I don’t know what’s better.”

Finally, turning to the legal marketplace, Topic says he’s surprised to report a number of spin-offs in the market. “In contrast to other markets, where we hear about consolidation, here we have spin-offs going on. We just heard of two leading firms have lost high-profile partners.” He says, “This is still surprising to me, because while the market is good, it’s still not exactly El Dorado, so I honestly don’t know how people think they can maintain the same level of work and incomes, but maybe they have no choice. It’s strange for me that there are still so many split-offs going on.”

Divjak, Topic & Bahtijarevic has advised Arriva on its acquisition of 78.34% of the Autotrans Group, making Arriva the largest private bus operator in Croatia. Mamic, Peric, Reberski Rimac advised the sellers on the deal, which closed this August upon receipt of a green light from the Croatian Competition Agency for the concentration, which gives Arriva a 25-30% market share.

According to DTB, “Arriva has operated in Croatia since 2013, and the deal with Autotrans signals the company’s commitment to improving public transport services in Croatia and is part of Arriva’s continuing expansion strategy throughout Europe. Arriva operates in 14 countries across Europe, employing around 60,000 people and delivering more than 2.2 billion passenger journeys every year.”

The MPRR team consisted of Partner Natalija Peric and Junior Partner Martina Strukic Saric. 

Editor’s Note: After this article was published, Divjak, Topic & Bahtijarevic informed CEE Legal Matters that its team was led by Managing Partner Emir Bahtijarevic and Partner Mate Lovric assisted by Senior Associate Igor Mirosevic. In addition, Partner Mario Krka and lawyer Ana Tudoric Mejovsek from the firm’s competition team advised on the successful merger clearance.

When asked what’s happening in Croatia, Dusko Zuric’s answer is simple: “Agrokor is happening.” Zuric, the Managing Partner of Croatia’s Zuric i Partneri, sighs at the extent of the liquidity fallout from the implosion of Agrokor’s landmark 2013 acquisition of Slovenia’s Mercator, which created one of the biggest food and retail businesses in Central and Eastern Europe, but also resulted in the accumulation of almost EUR 6 billion in debt, leading Agrokor’s president and 95% owner, Ivica Todoric, to seek protection from creditors and to hand control of the group to the emergency administration controlled by the Croatian state and court, all under a newly passed law — nicknamed Lex Agrokor — creating a form of pre-bankruptcy protection for systemic enterprises.

The significance of the crisis is hard to over-estimate. Agrokor employs 60,000 people in Croatia, Slovenia, Serbia, Bosnia-Herzegovina, and Hungary and supports many more jobs at suppliers. Its reported EUR 6.5 billion annual revenues are equivalent to about 15 percent of Croatia’s gross domestic product. As a result, the country’s finance minister has warned that the crisis could reduce Croatia’s economic growth this year, and many believe that a bankruptcy could have disastrous impacts on the country’s economy. “It’s our national exercise,” says Zuric. “I think everyone is involved. We’re working on the other side, for creditors, banks, and suppliers.” When asked if the crisis is demanding full use of the firm’s resources, Zuric sighs. “Not all of our time,” he smiles ruefully, “but all of our brain power.”  

Zuric notes that the Croatian government has created special legislation to address the growing crisis, after concluding that it posed “a systemic risk for the country’s economy.” It’s also having serious affects in Bosnia, “and to a small extent even for Slovenia,” he said. Zuric emphasizes that the Croatian government had acted quickly and appropriately in acting to address the matter. “Once the crisis became visible to the country, the government recognized it as a systemic risk and acted for the benefit of all stakeholders,” he says, adding that “this is one of the few occasions where most will agree the government acted in the right direction.” Zuric reports that one way or another the special administration will not linger too long, as the special administrator is required to act and reach a restructuring deal within 15 months. If the deal is not reached within this period, he says, the procedure of emergency administration will be terminated, “leaving everyone with an even more complex situation.”

Still, this is obviously no laughing matter to Zuric and his colleagues. He concedes that the crisis is providing significant business for law firms in Croatia, but insists it is not really the kind they prefer. “It’s not something we like to promote. It is fantastic for the workloads of the legal profession, but it’s too serious to discuss or think of in these terms. It will of course mean a lot of work — but it’s more serious than that. It’s a complex cross-border, cross-business exercise, with five main categories of creditors.” And with almost every leading firm in the market getting work from the deal, there is little competition for business. “Since basically everyone is involved, all the law firms are simply following their own clients. We’re not fighting for work. We’re flooded with it. Everybody is dealing with it. However, since M&A is one of our core practice group, we are looking at this a bit further and are hoping that our firm will get involved at the point when the real restructuring of Agrokor starts.  

Although it can be hard to look past the Agrokor implosion, Zuric says that otherwise things are going mostly well in his country, “We’ve had a severe crisis since 2008, but for the last two years public finances are a bit better and still improving. We’re in a growth phase. Lawyers usually see their business follow a year behind the economy. So we’re seeing that benefit now.” When asked to identify which sectors are leading the growth, he points to real estate. “Particularly commercial real estate, but we’re seeing moderate growth across all real estate sectors.” Still, Zuric insists, it’s not only the real estate sector that’s growing. “Overall business is in a good mood,” he says. “Especially now that it’s summer — summer in Croatia is like steroids. The touristic sector is doing well — and the forecasts are for it to do even better.”

In addition, Zuric continues “the public finance sector looks like it has improved. It looks we are about to exit the excessive deficit procedure required by the European Union. And it seems that the government has managed to get it under control. Normal people may not feel it, but businesses feel it. Improvements instability, access to funding and credit, even reductions in the deficit — and then of taxes. This is something, as a taxpayer, I’m really looking forward to. This was never the plan that was discussed openly, to reduce the debt. This was a surprise, and everybody’s happy. Our public debt is falling.”

Divjak, Topic & Bahtijarevic, working alongside Gide Loyrette Nouel, has advised BNP Paribas Cardif Insurance in the sale of its Croatian entity to Croatia Osiguranje, the largest and oldest insurance company in Croatia, making Croatia Osiguranje the sole owner of BNP Paribas Cardif Insurance in Croatia. The signing took place on May 24, 2017, although the transaction remains subject to final approval by the Croatian Financial Services Supervisory Agency. Croatia Osiguranje was advised by Praljak & Svic.

The Divjak, Topic & Bahtijarevic team was led by Senior Partner Sasa Divjak, supported by Senior Associate Ema Mendusic Skugor.

Editor’s Note: On October 24, after this article was published, Divjak, Topic & Bahtijarevic informed CEE Legal Matters that “the transaction received approvals from all relevant authorities,” and that the deal had closed.

Luka Tadic-Colic, the Managing Partner of Wolf Theiss in Croatia, says progress is definitely being made in the right direction.

“Living in Croatia for so long, on the one hand you’re hesitant when people talk reform, but when things actually start happening, even in little steps, it’s a good sign.” And, indeed, he says, following last September’s election of the new government, “after a few initial hiccups, reforms have started.” Tadic-Colic refers approvingly to the country’s new Minister of Economy, Martina Dalic (who also serves as the country’s Deputy Prime Minister), and Zdravko Maric, the new Minister of Finance. “When there’s a personal champion things can happen,” he says, and while nobody believes they’ll be able achieve 100% of what they propose, “if even 30-40% of it happens, that would be good.”

So far, Tadic-Colic reports, “the most significant development” is a reform to the Tax Code enacted in December of 2016 just in time to come into effect on January 1st of this year, which resulted in “significant changes in the tax landscape and a lowering of some of the key rates, which in turn resulted in more disposable income and spurring the domestic demand side of the economy, which is a healthy development.” This reform has been welcomed by the business community, Tadic-Colic reports, noting that while it’s not as good or far-reaching as it could have been, “most would agree it’s a step in the right direction, and that it will, if nothing else, improve the image of Croatia as a stable country.”

Indeed, the government seems to be pursuing a number of initiatives to improve Croatia’s reputation as a place to do business, Tadic-Colic reports. Additional changes are expected this year — from relatively minor (such as the abolishment of the need for a company stamp on every document), to more significant, such as liberalizing markets such as driving schools, “and even the legal services market itself.” On this latter note, the rather restrictive Croatian regime which forbids law firm advertising may be loosened somewhat, Tadic-Colic says, noting that it’s “on the legislative agenda.” He cautions that any such changes will need to be made in cooperation with the Bar Association, and that “nothing concrete or definite has been proposed so far,” so it’s not clear how much will actually happen, but as the country seeks to align itself more closely with the EU’s Services Directive, which provides that marketing should generally be permitted unless legitimate reasons for restricting it exist, he’s hopeful that “at some point the country will embrace this as a way of doing business.” The Wolf Theiss Partner notes that “as a regional firm it’s quite normal for us,” and he reports that “even the local Croatian firms would welcome this.”

Tadic-Colic hasn’t seen a major uptick in law firm business yet, “but people are talking transactions.” He notes that at the end of last year Croatia lost a major arbitration to MOL (as reported by CEE Legal Matters on January 17, 2017), regarding MOL’s acquisition of a controlling share in the country’s national oil company (Ina Industrije Nafte d.d.), which “spurred talks to re-nationalize the company.” In a related story, Tadic-Colic reports that the new government is “also talking about doing an IPO of the country’s national electricity company (HEP), floating approximately 25% of the company with the hope that it would be bought by Croatian pension funds or Croatian citizens and the proceeds would provide a source of cash to fund the repurchase of the oil company’s shares.” There’s little certainty about when this is going to happen, Tadic-Colic reports, and there’s some real opposition to the initiative. “I would think that the government would be inclined to do this sooner rather than later, but as it’s a political issue, it will probably not happen before the local elections later this year.

Finally, Tadic-Colic says, “one of the recent legal developments welcomed by the legal community is the December 2016 reform of the public procurement process in the country, bringing it into closer alignment with EU legislation. Price is no longer defined as the sole criterion, which is now to be made  in favor of the “most economically advantageous offer.” This definition allows the country to factor in the qualifications and experience of bidders. The process was also significantly simplified as well.

CMS has advised long-standing client OTP Group on its acquisition of Societe Generale’s Croatian bank, Splitska Banka, and its leasing and insurance subsidiaries. Jones Day Paris was lead counsel to Societe Generale, with Schoenherr Zagreb advising on Croatian matters.

According to OTP Bank, the acquisition of Splitska Banka, the fifth largest bank in Croatia, valued at an enterprise value of EUR 480 million, will increase OTP’s share of the Croatian market to about 10 percent. The deal is expected to be completed in the summer of 2017 upon receipt of all regulatory and competition approvals.

CMS’s transaction team was led by Partner Eva Talmacsi, with support from Senior Associates Zoltan Poronyi, Peter Toth, Eszter Kalman, and Anna Burchner, Senior Counsel Gabor Gelencser, Associate Szabolcs Szendro, and lawyer Jason Todd. CMS’s Zagreb team consisted of Partners Hrvoje Bardek, Jelena Nushol, and Tamara Jelic Kazic, Attorney Marija Zrno, and Associates Mia Kalajdzic and Ana Erceg.

Schoenherr’s Zagreb-based team consisted of Attorneys Ivan Einwalter, Vice Mandaric, and Dina Vlahov Buhin.