Category: Serbia

The Serbian Parliament adopted the Financial Collateral Act (“FCA”) on 8 June 2018 (published in the Official Gazette of the Republic of Serbia, no. 44/2018). The FCA bill was proposed by the Serbian Central Bank (National Bank of Serbia, “NBS”) on 22 May 2018 and the FCA will apply as of 1 January 2019. Financial contracts which have not been enforced by 1 January 2019 will be enforced pursuant to the existing rules that were in force before the FCA started to apply.

The FCA should transpose the EU Directive on Financial Collateral Arrangements into Serbian law. Its main features are as follows:

• Title transfer type of collateral. Under the FCA, the financial collateral arrangement is an arrangement whereby, for the purpose of securing the performance of its or another entity’s financial obligation, the collateral provider undertakes to transfer title to collateral to the collateral taker or to establish a security interest (pledge) on the collateral in favour of the collateral taker, and the collateral taker undertakes to return to the collateral provider the collateral received or equivalent collateral upon and/or concurrently with the discharge of the financial obligation. The FCA finally introduced the title transfer type of collateral into Serbian law and removed re-characterisation risks (though not for corporates as counterparties, see below).
• Types of collateral. The collateral may be: (i) cash, (ii) financial instruments/securities, and (iii) credit claims.
• Eligible Counterparties. Eligible entities under Article 4 FCA are the Republic of Serbia, National Bank of Serbia, banks, broker-dealers, investment funds, insurance firms and other domestic financial sector entities, the EU, EU member states, ECB, IMF and other financial institutions. Corporates are not eligible to enter into financial collateral arrangements (and other financial contracts – financial derivatives and repo transactions) regulated by the FCA.

The FCA draft published by the NBS in September 2016 was wider in terms of eligible counterparties. It provided that any other entity and a natural person may also be a party to a financial collateral arrangement (and other financial contracts) as long as they enter into this arrangement with an eligible entity counterparty listed in the FCA. Regrettably, this provision has been removed from the final text of the FCA.

• Exchange control restrictions. Very restrictive Serbian foreign exchange law and regulations override the FCA. The FCA imposes that a cross-border acquisition and/or transfer of cash, securities and credit claims constituting the collateral between a resident and/or a non-resident entity and the establishing of a pledge on these types of collateral shall be subject to the restrictions laid down in the regulations governing foreign exchange operations.  
• Safeguards from insolvency law avoidance rules. The provision, acquisition, substitution, top-up and enforcement of collateral will be exercised freely regardless of the commencement and continuation of insolvency and liquidation proceedings in respect of the collateral provider or the collateral taker. Where the collateral was provided, acquired or substituted on the day of initiation/opening of insolvency or liquidation proceedings, but after the moment of issuance of an appropriate decision on the initiation/opening of such proceedings, the financial collateral arrangement will be enforceable if the collateral taker can prove that it was not aware, nor should have been aware, of the initiation/opening of such proceedings.
• Enforcement. Upon the occurrence of an agreed enforcement event or events, the collateral taker is entitled to enforce its claim against the collateral through out-of-court proceedings (without prior enforcement notice or warning, court decisions and public auctions), and/or claims and obligations shall be netted off between the collateral provider and the collateral taker. The collateral taker should, no later than the day following the day the claims are settled against the collateral, notify the collateral provider of the settlement of claims. 
• Close-out netting. The financial collateral arrangement may lay down that, following the occurrence of an enforcement event, the following steps will be undertaken automatically (if automatic early termination is agreed) or at a party’s request:

mutual obligations in respect of one or more financial collateral arrangements shall be considered due and expressed as a monetary obligation, or shall be terminated and replaced by a new monetary obligation, in accordance with their estimated current value and/or the value determined as set out in the financial collateral arrangement; and/or

1. mutual claims and obligations of the parties under one or more financial collateral arrangements shall be netted, so that the difference in the amount of claims (net amount) is payable by the party from whom the larger amount is due to the other party.

2. Applicability of the FCA to financial contracts. The FCA extends application of the close-out netting provision and related netting protections and insolvency safeguards of the FCA beyond financial collateral agreements to specified financial contracts, thereby displacing the current netting provision of Article 82(3) of the Serbian Insolvency Act (Zakon o stečaju). This legislative novelty is also suitably propped up by the Insolvency Act Amendments Act (Zakon o izmenama i dopunama zakona o stečaju), which was adopted together with the FCA.

• Discrimination of corporates. The FCA provides that financial collateral arrangements and financial contracts (e.g. financial derivatives and repo transactions, etc.) under the FCA may be entered only by certain specified eligible entities listed in Article 4 of the FCA. Corporates are not among these entities. After the deletion of the netting provision from the Insolvency Act and its replacement by Articles 17 and 20 of the FCA, close-out netting rules in Serbia will be improved but will not apply anymore to corporates as counterparties. If the aim is to promote hedging as a useful risk mitigation tool for all relevant market participants, the FCA selected an awkward approach by neglecting the corporates.
• Further alignment. The FCA further aligns Serbian insolvency rules by displacing a dubious Article 12 of the Act on Insolvency and Liquidation of Banks and Insurance Companies (Zakon o stečaju i likvidaciji banaka i društava za osiguranje).

By Petar Kojdic, Partner, Schoenherr

Implementation of large-scale real estate development projects almost always requires the simultaneous development of new or upgrades to existing public infrastructure necessary for the unimpeded use of the main project. Back in the old days, real estate development projects suffered, from time to time, from slow public infrastructure development since the relevant public authorities either had no interest in or had no available funds to develop the missing infrastructure.

Serbia’s Planning and Construction Act has provided investors with the opportunity to participate in the development of public infrastructure needed for their projects such as roads, public lighting, and water and sewerage networks. To achieve this, they can conclude an agreement with the municipality (or competent municipal public company) and agree on, inter alia, which works and designs the investor will procure, and what value the municipality will attribute to them. These agreements escape the rigid PPP and public procurement procedures.

In order to conclude such an agreement, the investor needs to submit a proposal for financing the public infrastructure development to the municipality, and the municipality must respond to it within 15 days. If the municipality accepts the proposal, the investor and the municipality need to conclude an agreement containing elements specified in the law.

Benefits for the investors in such arrangements are manifold. For one thing, such agreements escape the generally applicable and quite strict public procurement and public-private project procedures, thus significantly shortening the time required to commence work. For another, the investor takes control of the designing and development of the public infrastructure (of course, subject to the municipality’s approvals and supervision rights), thus securing itself the luxury of knowing when the relevant land will have the required level of infrastructural development that would enable it to implement its projects. This further allows the investor to retain an important level of control over the quality of work on the public infrastructure, which is one of the prerequisites for the proper use of its future project.

Finally, the value of the work and designs provided under such an arrangement (to the extent recognized by the municipality) would be set off against the development fee owed to the municipality – thus giving the investor a sense that the development fee is actually being invested in the development of public infrastructure that the investor, who is paying for it, can actually see and utilize.

Practice has also shown several points investors should be aware of if they opt for developing the required public infrastructure in this manner. 

First, if the investor spends more money on infrastructural development than the municipality has agreed on, it will not be able to claim back any extra money nor set off such extra money against the development fee.

Second, the municipality retains a significant amount of involvement and control over the process: designs have to be approved by it, agreements with contractors require its sign-off, work is overseen by its supervisory body, the investor is in general required to cooperate with it, and so on.

In addition, the lack of public auctions and transparency in this procedure increases the risk that the municipality/public company could impose its favored contractor on the investor for the purpose of public infrastructure development – potentially exposing the investor to corrupt activities.

Finally, since the agreement is concluded at an early stage of the process, the value of work and designs will most probably be an estimate, meaning that annexes to the agreement would be required at some point. This opens up space for stalling and additional dependency on the municipality’s will, which is an unwanted uncertainty for any investor.

All in all, the option of joint infrastructural development can be seen as a sui generis public-private co-operation model, one that is already providing results in practice, both in Belgrade and in other areas of the country. As an outcome, investors, the municipality, and the general public can enjoy the benefits of this model, since they all get the new infrastructure they need in a much faster and investor-friendly manner. However, investors need to be extremely cautious when implementing this model, because if the risks are not properly weighed and managed the negative impacts may overwhelm the positive ones.

By Milan Dakic, Partner, BDK Advokati

This Article was originally published in Issue 5.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The National Assembly of the Republic of Serbia has on 20 April 2018 adopted amendments to the Foreign Exchange Operations Act (“FEXO”) in order to meet the requirements stemming from the Stabilization and Association Agreement (SAA) with the European Union.  These provisions, now allow, amongst other things, for the free movement of capital related to portfolio investments and short-term finance loans and credits.

To be more exact, the newly introduced provisions entail that resident natural persons, legal entities as well as entrepreneurs can freely perform the sale and purchase of foreign short-term securities issued not only by the Member States of the EU but by the EU as well as by the legal entities with their registered office within a Member State of the EU. Further on, both residents and subsidiaries of non-resident legal entities are now allowed to get short-term loans or credits from a non-resident, with its registered office / permanent residence in a Member State of the EU.

Yet, it seems as if there are still some crucial points on which the legislator has turned a blind eye. For instance, foreign investors have, on more than one occasion emphasized that it is more troublesome for them to invest in the Republic of Serbia given the fact that certain institutes such as cash pooling are still not allowed.

Cash pooling, which is useful for optimizing the liquidity of an international group of companies, by providing the transfer of the excess liquidity or the pulling of the needed means ultimately leads to a significant reduction of the external expenses of financing and the administration of money.  Thus, it is no surprise that foreign investors value this mechanism to a great extent.

However, when speaking about cash pooling it seems as if the Republic of Serbia has a long way to go yet. That is mostly because resident legal entities still remain subject to certain limitations when obtaining or giving loans abroad.  Such limitations consequently prevent foreign investors to freely transfer the excess liquidity or to transfer the needed means for their business.  As a result, the flow of their capital in the Republic of Serbia is limited to a certain extent.

Additionally, it is still a puzzle why the issuing of guarantees under guarantee operations is not allowed between two non-residents, albeit the fact that under credit operations there is no such prohibition.  The rationale behind this solution is certainly equivocal if we have in mind the institute of guarantees on first demand.  In such situations, the creditors activate their guarantees towards the issuer of the guarantee, upon maturity date.  Consequently, the issuer is obliged to fulfill the debtor’s obligation towards the creditor, if the debtor has no funds.  It is in that moment that the relationship between the debtor and the issuer of the guarantee factually becomes a short-term credit operation. The effect of the provision thus equals to a security under a credit operation.  Henceforth, it seems as if the prohibition on securities for issuing guarantees does not provide for the desired effect, as the end result is, either way, the same since it represents a credit operation.

It goes without saying that FEXO is one of the most criticized acts mainly because the legislator remains reluctant on the complete liberalization of capital flow. Subsequently, investors feel demotivated to start their business on the Serbian trade market.

Notwithstanding the aforesaid, it is worth mentioning that these Amendments do represent an important step towards the liberalization of capital market as well as an important step towards the abilities given to both residents and non-residents in regards to foreign exchange operations.  Nevertheless, if the Republic of Serbia intends to attract more foreign capital in its market, it should be both prepared and willing to liberalize the provisions concerning foreign exchange operations as much as possible..

By Milos Velimirovic, Partner, and Ivana Barac, Associate, Samardzic, Oreski & Grbovic

Although Serbian Constitution introduces the general principle of equality between Serbian nationals and foreigners, in certain domains it allows for this proclaimed equality to be limited through laws.

That said, one of the rights that foreign legal and natural persons can only enjoy to a limited extent pertains to the possibility of acquiring real estate in Serbia, an issue which is increasingly gaining prominence.  Whereas the conditions for natural persons that will not perform a business activity to acquire real estate are quite transparent and easy to understand, the situation for those who will, and for legal persons is rather vague, and to a large extent still represents a legal void.

The legal act which regulates the conditions for acquiring real estate in Serbia is the Serbian Basis of Ownership and Proprietary Relations Act (“BOPR”).  While it deals to sufficient detail with the possibility for foreign natural persons to acquire real estate they will use for residence purposes, the only conditions it sets for legal and natural persons which will perform business activity is that the property must be necessary for performing the business activity, and that reciprocity exists in terms of acquiring property between Serbia and the byer’s home country.  BOPR further stipulates that the opinion of the Ministry of Trade serves as proof of the former condition, and the Opinion of the Ministry of Justice as proof of the latter.  When coupled with the fact that BOPR states that the two opinions must be obtained as condition precedent for successful notarization of the Sale Purchase Agreement, failing to provide any further detail for the procedure in obtaining or the conditions for providing positive opinion (or at least delegating it to be determined by an act of lesser legal force), the issue of the lack of transparent procedure and guidance is even more apparent.

Such vague regime is understandable when we look at the historical development of BOPR. Namely, it was originally drafted and entered into force in the late 80’s, when there was not much interest by foreign companies to invest in Serbia. Although the interest for purchasing real estate in Serbia by foreign legal persons increased significantly in recent years, concrete steps towards creating an accessible and transparent regulatory environment regarding this issue have yet to be taken.

However, faced with the possibility set in BOPR on the one hand and the many requests on the other, the relevant sector of the Ministry of Trade has developed its own ad hoc procedure and conditions through which it processes all requests that come from potential foreign buyers. Although this procedure does not rely on any legal act, and was developed purely through the case law of the Ministry, faced with the obligatory nature of this opinion, all that foreign legal persons intending to purchase property in Serbia can do for now is to abide by it. While it is not likely that BOPR will be amended any time soon, the long awaited Serbian Civil Code, still in the drafting process, promises to devote an entire section to this issue, hopefully alleviating the legal maze that potential buyers must go through.

By Milos Velimirovic, Partner, Sanja Dosen, Associate, Samardzic, Oreski & Grbovic (SOG) 

EU’s General Data Protection Regulative (GDPR) comes into force on May 25.

As many EU-based personal data handlers count down the days until GDPR becomes effective hoping for the best, a burning question for non-EU personal data handlers remains – ‘does GDPR apply to my business or not’?

The stakes are pretty high, bearing in mind the draconian punishments GDPR prescribes for the breach of its provisions. That is why figuring out its extraterritorial application is crucial for non-EU entities.

As per GDPR, it is applicable 1) on personal data controllers/processors established in EU, regardless of whether the processing takes place in the EU or not (territorial application); 2) on personal data controllers/processors not established in the EU when processing the EU citizens’ personal data, as long as the processing activates relate to either a) offering of goods or services, irrespective of whether a payment of the data subject is required; or b) monitoring behavior of EU citizens, as far as their behavior takes place within the EU (extraterritorial application).

The latter can cause a lot of confusion when it comes to its practical application. What does extraterritorial application of GDPR actually mean in practice and how can one easily ascertain whether it is subject to GDPR?

According to Article 29 Working Party’s GDPR General Information Document, in order for GDPR to be applicable to a non-EU entity, it is necessary for such entity to target EU citizens in a way that it offers them goods and services proactively, i.e. to monitor EU citizens’ behavior taking place in EU and making decisions based on such monitoring results.

For example, if a Serbian company owns a website on German language on which it offers goods with the possibility to order it using German language and pay in EUR, accepts the offers of EU citizen’s and deliver its goods to them, than it is safe to conclude that such Serbian company targets Germans/Austrians, i.e. EU citizens, therefore, such company is subject to GDPR.

In order to consider a non-EU entity to be offering goods and services to EU citizens, it should be obvious that such entity targets the EU citizens in order to offer them goods and services. When it comes to monitoring of EU citizens’ behavior as the other case of extraterritorial application, monitoring of their behavior happening in EU needs to exist, meaning, a non-EU data handler needs to perform tracking and profiling of EU citizen, online, for example, so it can predict their behavior and make decisions based on such monitoring.

Therefore, it can be argued that simply processing EU citizens’ personal data without the elements of offering goods/services, targeting and monitoring, does not qualify a non-EU entity as a subject to GDPR, especially given that it is safe to assume that a vast number of non-EU entities may have EU citizen’s personal data in their data bases for many other reasons.

Regardless of whether a Serbian company qualifies as a GDPR subject, it is hard to imagine any negative effects a company may have if it becomes GDPR-compliant, even it doesn’t have to. For example, a company can be considered a more desirable partner if it is GDPR –compliant, and for Serbian entities, GDPR compliance process pretty much means being compliant with the new Serbian Data Protection Act, which draft greatly relies on GDPR and is expected to come into force in near future.

By Milos Velimirovic, Partner, Dunja Tasic, Senior Associate, Samardzic, Oreski & Grbovic (SOG) 

Bojovic & Partners has advised Nestle on the sale of its local confectionary brand, CIPIRIPI, to Paracinka AD, a member of the Silbo distribution group.

“CIPIRIPI has a long and rich history, with more than 27 years of presence in Serbia, and it is a synonym for beautiful memories and childhood. In Paracinka, which is a member of the Silbo distribution group, we have found an exceptional home for our CIPIRIPI confectionery brand, in which it will progress further,” said Yana Mikhailova, Nestle’s Regional Director of South East Europe. “ At the same time, this allows Nestle to focus more on a part of the confectionary range of its globally-recognized brands Kit Kat, Lion, Smarties and After Eight, in which we plan a strong future growth. “

The Bojovic & Partners team was led by Partner Uros Popovic. 

Bojovic & Partners has provided local merger clearance assistance to Nestle with regards to the USD 2.8 billion cash sale of its US confectionary business to Ferrero. Davis Polk and Wardwell served as advisors to Ferrero.

According to a Ferrero press release, “with this transaction, Ferrero will become the third-largest confectionary company in the U.S. market, where it is best known for Tic Tac breath mints, Ferrero Rocher pralines, Nutella hazelnut spreads, the Fannie May and Harry London chocolate brands, and the Ferrara Candy Company, which was recently acquired by a Ferrero-affiliated company and whose portfolio of brands includes Trolli, Brach’s, and Black Forest Gummies.”

In that press release, Giovanni Ferrero, Executive Chairman of the Ferrero Group, said: “We are very excited about the acquisition of Nestle’s U.S. confectionery business, which has an outstanding portfolio of iconic brands with rich histories and tremendous awareness. In combination with Ferrero’s existing U.S. presence, including the recently acquired Fannie May Confections Brands and the Ferrara Candy Company, we will have substantially greater scale, a broader offering of high-quality products to customers across the chocolate snack, sugar confectionery and seasonal categories, and exciting new growth opportunities in the world’s largest confectionery market. We look forward to welcoming the talented team from Nestlé to Ferrero and to continuing to invest in and grow all of our products and brands in this key strategic and attractive market.”

The transaction covers the US-focused confectionery brands only, and does not include Nestle’s iconic Toll House baking products, a strategic growth brand, which the company will continue to develop.

According to Bojovic & Partners, “Nestle remains fully committed to growing its leading international confectionery activities around the world, particularly its global brand KitKat.” The firm’s team was led by Partner Uros Popovic. 

The Motieka Audzevicius arbitration team has represented Serbian state company JP Srbijagas to secure enforcement of four ICC and VIAC awards in the Republic of Lithuania against the Lithuanian corporation Arvi.

By its final ruling on interim measures, the Lithuanian court applied additional interim measures and prohibited the Arvi from issuing promissory notes by the shareholders, adopting decisions on amending the articles of association, and adopting any decisions determining the extent and value of the rights and obligations of the companies.

Motieka Audzevicius had already secured an arrest of the shares of Arvi valued at approximately EUR 50 million.

Motieka Audzevicius’ Senior Associate Rimantas Daujotas represented JP Srbijagas in the dispute.

The Serbian Minister for Mining and Energy recently stated that Serbia will manage to fulfill its obligation and reach the target of 27% of total energy consumption from renewables by 2020. The statement followed a stream of positive news in relation to development of several large-scale wind power projects in Serbia, such as Cibuk I, Kovacica, and Alibunar. 

However, the latest information from the Energy Community suggests that that optimism may be misplaced. According to the latest progress report on the promotion of renewable energy, Serbia’s share of renewable energy consumption currently stands at approximately 21%, and  it should reach between 23.4% and 24.1% by 2020. It is certain that once the current feed-in tariff system expires, at the end of 2018, an entirely new renewables support scheme will need to be developed and put in place in Serbia. In parallel, Serbia’s Ministerial Council of the Energy Community initiated the process to determine the 2030 targets for renewable energy consumption.

Anxious renewable energy developers may already be looking back at the regulatory history of the currently existing support scheme. It took almost seven years of tweaking and negotiating the support scheme between the Serbian Ministry for Mining and Energy and representatives of international finance institutions before the first large project financing schemes for development of renewable energy capacities were put in place.

This time around, however, it seems that the international finance institutions have taken a different approach. Instead of directly negotiating the details of the renewables support scheme for each member country of the Energy Community, the EBRD has teamed up with the Energy Community in an effort to create bankable yet EU-acquis-compliant renewable energy support mechanisms across the region.

The Energy Community is an international organization established by means of a 2005 treaty. Its primary goal is to connect the European Union with its neighbors in the energy sector and create an integrated pan-European energy market. The organization has been working for quite some time on its approach to the renewable energy support mechanisms. Serbia’s Ministerial Council of the Energy Community has set up a Renewable Energy Coordination Group to work on the reform of the support schemes for renewable energy producers so that renewable energy targets can be reached by 2020. In December 2015 the Energy Community Secretariat published Policy Guidelines on Reform of the Support Schemes for Promotion of Energy from Renewable Sources (the “Guidelines”), a document prepared based on the European Commission’s guidance for the design of renewables support schemes. 

The Guidelines introduce several principles which member countries are supposed to follow in structuring support schemes, such as having the support schemes approved by state aid enforcement authorities, granting support to renewable energy producers through a competitive bidding process, introducing feed-in premium support schemes (as opposed to feed-in tariffs), establishing a renewable energy operator to manage the support scheme, introducing balance responsibility for large renewable energy producers, and adopting a shallow approach for grid connection fees. The Guidelines are not binding per se but are a good starting point for developing a new regulatory framework. 

The Energy Community–EBRD cooperation promises to take the principles elaborated in the Guidelines as a starting point in developing a full set of best practice documents, including draft bidding documentation and contracts which could be readily used by all member countries.

This joint initiative makes sense given that the Energy Community has a track record of supporting member countries in developing their regulatory frameworks in the energy sector and aligning them with EU Energy law. 

The question is whether this novel approach will be more efficient, as Serbia has a history of non-compliance with the obligations arising from its membership in the Energy community. One clear example is Serbia’s persistent failure to comply with the requirements of the Third Energy Package – and, for that matter, the Serbian Energy Law – in the gas sector. Therefore, one cannot be certain that the draft support scheme and the best practice documents to be prepared under the auspices of the Energy Community and EBRD will be readily and fully accepted by the Serbian Ministry for Mining and Energy.

By Dragoljub Cibulic, Senior Partner, BDK Advokati  

This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.