Category: Slovakia

Following a long lasting process since 2010 the European Court of Human Rights (the “ECHR”) held that Slovakia violated right to property due to the refusal of its courts to enforce an International Chamber of Commerce (the “ICC”) arbitral award ruling that the National Property Fund of Slovakia (the “NPF”) was due to pay BTS Holding (“BTS”) approx. EUR 1.9 million plus interest. (the “Decision”)

Background

BTS was the successful bidder for the purchase of a majority share in Bratislava Airport in the process of its privatization, resulting in the conclusion of a share-purchase agreement (the “SPA”) between BTS and the NPF.

However, the NPF rescinded the SPA and returned the initial payment back to BTS, on the ground that the approval of the transaction by the Anti-Monopoly Office of Slovakia had not been granted.

Afterwards, a settlement agreement, not containing an arbitration clause, was concluded by BTS, the NPF, and one of the ministries whereby it was agreed that the NPF’s rescission of the SPA was valid and effective as of 21.09.2006 and their mutual commitments were terminated. However, matters of return of the purchase price and interests were excluded from the scope of the settlement.

In 2009 the NPF paid another amount to BTS intended to cover interest on the initial payment made by BTS in the period between rescinding the SPA and the repayment of that amount. However, a dispute arose between the parties on the nature of the repayments made by the NPF.

Bratislava II District Court ruled that; (i) there was no arbitration agreement as, arguably, the settlement agreement containing no arbitration clause superseded the SPA; and (ii) the enforcement of the arbitral award would be contrary to Slovak public policy and Bratislava Regional Court upheld said decision.

Upon the refusal of the Constitutional Court of Slovakia despite arguments of BTS that its rights to a fair hearing and protection of property had been violated, BTS finally filed a complaint at the ECHR.

Decision of the ECHR

The ECHR, in its decision of 30 June 2022, ruled that the refusal to enforce said ICC arbitration award was not justified pursuant to the Article 1 of Protocol No. 1 of the New York Convention (the “Convention”) in the light of the below;

• Since the ICC award was final and binding, and Slovakia had not initiated any challenge at the seat of arbitration, the award was enforceable under the Convention and Slovakian Arbitration Act. 
• Recission of a contract as such has no impact on the validity of an arbitration clause.
• The grounds relied on by the domestic courts were not given and/or fell outside the legal framework for denying enforcement of a foreign arbitration award allowed by the provisions of the domestic law and the Convention.
• Even if denying enforcement of the award on these grounds served a general interest, it has not been shown that it was proportionate to that aim.

 Conclusion

With this Decision, the ECHR has underlined that arbitrary and/or unjustified refusal to enforce a commercial arbitration award might lead a State to violate the European Convention on Human Rights. While it is early to tell what extent the Decision will deter the State courts from rendering similar refusals loud, it appears that aggrieved parties may beat a busy path to the ECHR’s door for enforcement of awards.

By Efe Kinikogu, Partner, and Burak Bati, Associate, Moral, Kinikoglu, Pamukkale, Kokenek

Dentons has provided pro bono legal representation to whistleblower Maria Koranova, an employee of a state-funded organization founded by Slovakia’s Ministry of Health.

According to Dentons, “Koranova, who had worked at the organization for more than 15 years, filed a criminal report with the police to draw attention to the suspicions she came across as chief economist. Her employer retaliated by trying to terminate her employment under the guise of an organizational restructuring.”

Dentons is representing Koranova in cooperation with Nadacia Zastavme Korupciu (Let’s Stop Corruption Foundation). They were “successful in obtaining a preliminary injunction in favor of the client from the District Court Kosice II and the decision was subsequently upheld by the appellate court. Koranova is now awaiting the court’s verdict regarding the invalidity of her employment termination, as well as the investigation of the allegations she reported to the police,” the firm informed. 

Dentons’ team included Partner Stanislav Durica and Junior Associate Sona Kurillova.

New investment screening legislation entered into force on 1 March 2021. Under the new FDI regime the acquisition of a shareholding in certain designated entities or of the business of these entities needs to be reported and may be subject to approval of the Slovak Government.

This obligation applies regardless of whether the acquirer is a Slovak or foreign entity and also applies to indirect transactions, i.e. a change in the persons having a direct or indirect participation in the operator of critical infrastructure exceeding a 10 % shareholding or voting rights is eligible to be screened.

Legal basis

Legal basis and status of the FDI regime Act No. 45/2011 Coll., on Critical Infrastructure, as amended by Act No. 72/2021 Coll., as entered into force on 1 March 2021.

Filing requirement

The notification obligation is triggered upon the acquisition of a shareholding in certain designated entities (share deal) or the business of these entities (asset deal).

With respect to share deals, the law applies to investments exceeding 10 % (voting rights/equity) and investments that allow for the exercise of influence over the management of an operator, which is comparable to a 10 % share. In addition, the law applies to indirect acquisitions. This means that, for instance, a change in the persons having a direct or indirect participation in the operator of critical infrastructure exceeding a 10 % shareholding or share in voting rights is eligible to be screened.

Relevant sectors

The new law only applies to businesses designated as part of the critical infrastructure in the following industries:

• mining;
• electric power engineering;
• gas;
• petroleum and petroleum products;
• pharmaceutical;
• metallurgical; and
• chemical.

The secondary law names such specific companies (currently there are around 20 entities falling under this regime).

Process and timetable

Competent authority: Ministry of Economy and the Slovak Government

Mandatory filing requirement: Yes

Filing deadline: The notification must be filed without undue delay. Until the review process is finalised, the exercise of rights and obligations under this transaction related to Slovak critical infrastructure is prohibited.

Responsibility for filing: Depending on the circumstances, the operator of the critical infrastructure itself, pledgee, liquidator, insolvency administrator, enforcement officer or other person authorised to transfer the business, or the person who is to acquire the critical infrastructure.

Sanctions: No specific sanction mechanism.

Length of the proceedings: The Ministry of Economy has 60 days to review the transaction, after which it will prepare a motion to the Slovak Government on whether to grant consent, to grant consent subject to conditions (like in the case of competition law proceedings related to merger control) or to prohibit the transaction. The Slovak Government does not have a specific time limit to adopt its decision.

By Michal Lucivjansky, Counsel, Schoenherr

Havel & Partners has advised Slovenska Posta on a four-year investigation and administrative proceedings concluded with imposing commitments and no fine.

According to the firm, “the AMO suspected Slovenska Posta of abusing its dominant position in the field of delivering bulk letter consignments. The practice in question concerned differences in discounts to individual customers. The AMO was of the opinion that these differences might have put undertakings at a disadvantage in competition in the field of production of bulk letter consignments. However, after having familiarised itself with the allegation and the file, Slovenska Posta proposed commitments concerning the conditions and discounts for the customers of Slovenska Posta. After testing, the AMO accepted these commitments.”

The Havel & Partners team included Partners Robert Neruda and Lenka Stikova Gachova and Associate Tomas Varso.

Nedelka Kubac Advokati has advised Slovenska sporitelna, VUB, Tatra banka, CSOB, and 365.bank on receiving European Commission approval for a joint venture between the five banks.

The transaction was approved by the EC in the first phase.

According to the firm, “the joint venture will be active in the provision of cash processing services also beyond the banking sector.” NKA also stated that “in terms of the complexity of the market impact assessment, this was one of the most complex Slovak transactions ever notified to the European Commission in the history of Slovak competition law.”

The Slovak Republic has transposed regulations to prevent money laundering and terrorist financing. These regulations are mainly stated in the AML Act.

Besides many other regulations, many subjects are obliged to register their ultimate beneficial owners (“beneficial owners”) with public registers. There are two important registers for entrepreneurs: (1) the commercial register and (2) the register of partners of the public sector or the so-called anti-shell register. These two registers differ in those subjects that are obliged to register their beneficial owners, in their registration procedures and the consequences that a faulty or missing registration brings. The primary purpose of registration is also different.

Commercial Register

The commercial register is maintained by eight district courts, each of which covers one region of Slovakia. All companies registered with the commercial register are also obliged to register their beneficial owners.

The proposal to register the beneficial owners with the commercial register is submitted by the company itself, usually through a statutory body or an attorney who has been granted power of attorney. Identification of the beneficial owner does not need to be proven by any documentation, but the company is responsible for the correctness of the data. If the beneficial owner is not stated correctly, the statutory body of the company may be fined up to EUR 3,310. However, to this date, no such fines have been imposed. Information about beneficial owners can be found in the register of legal persons, entrepreneurs, and public authorities available on the Statistical Office website.

Beneficial owners registered with the anti-shell register do not need to be registered with the commercial register.

Anti-shell register

The anti-shell register was established by Anti-shell Act. This Act did not transpose the directive on money laundering, even though it refers to the definition of a beneficial owner set by the AML Act. Its purpose was to reveal and publicly show those beneficial owners who profit from transactions with the state, municipalities and other subjects of the public sector (“public sector”). At the time of its establishment, it was unique within the European Union. This register is maintained by just one district court for the whole of Slovakia.

Partners of the public sector (“partner”) and their beneficial owners are registered with the register. Simply put, a partner is any person who supplies the public sector with goods and services, enters into agreements in public procurement, accepts money and fulfilment from public sources, provides medical care based on medical insurance and meets certain qualification criteria (e.g., the value of the fulfilment). Persons who do business in certain areas (e. g. the energy or mining industries) have to be registered with the anti-shell register.

Proposals to register can only be submitted by an authorised person, not the partner themselves. Only an attorney, notary, bank, auditor or tax advisor with a registered seat in the Slovak Republic can act as an authorised person. It is a paid activity based on a written contract. Authorised persons must act with due care, and they are not bound by a partner’s instructions when identifying the beneficial owners since this is an auditing activity in the public interest. The service fees range from hundreds of Euros in the case of a simple ownership structure, to thousands, if the identification of the beneficial owner is a complex matter with foreign elements.

The partner and the authorised person are liable for the correctness of identifying the beneficial owner.

Identification of the beneficial owner is proven by a verification document. The main part thereof consists of the ownership and management structure of the partner and the explanation of how the beneficial owner was identified by the authorised person. The volume of the verification document and other backing documents varies. In the case of partners with complicated ownership and management structures and beneficial owners in foreign jurisdictions, the document has many pages, supported by tens of other documents (affidavits, commercial register extracts, lists of shareholders, general meeting minutes, financial statements, audit reports, expert opinions on foreign law).  The verification document is made public and is often a source of information for investigative journalists, watchdog organizations and public authorities.

False registration can result in the partner and their statutory body being fined, deletion of the partner from the register, the right of the public sector to withdraw from the contract, the risk of losing licenses, and the termination of the statutory body function of the partner. The authorised person is liable for payment of the fine.

Attorney and authorised person at the same time

The authorised person shall not perform the activity as outlined in the Anti-shell Act if they inter alia have any relationship with the partner or members of its bodies, given that the relationship can undermine the authorised person’s impartiality, especially if they are personally or proprietarily connected to the partner. If the authorised person breaches this obligation, both the partner and the person can be fined.

Former doubts about whether an attorney providing long-term legal services to the partner can be the partner’s authorised person were solved by legislation. It stated that the relationship between the partner and an attorney does not per se constitute a relationship that can undermine the impartiality of the authorised person.

Even though the Anti-shell Act does not forbid an attorney from performing any legal activities as an authorised person for their client, this dual position can create some risks.

When providing legal services, an attorney is bound by the client’s instructions (within the boundaries of the law). An attorney is not allowed to check the truthfulness and completeness of any given information without the client’s consent. If the attorney has a reasonable doubt about the truthfulness or completeness of any given information, the attorney must inform the client of any possible consequences. However, the authorised person proceeds irrespective of what the interests and instructions of the partner are and is obliged to check any information given by the client, as well as to search for all relevant information. Such activity is not deemed to be legal services.

The basic obligation of an attorney is to preserve confidentiality that only the client can release the attorney from. There are some very limited exceptions set by the ALM Act or the Criminal Code. Even if a client releases an attorney from such an obligation, this obligation must be kept even when the attorney considers it to be disadvantageous for the client. The attorney, therefore, must duly consider whether acting as an authorised person (e. g. stating some information in verification documents), following a client’s wishes, may bring any harm to the client.

The attorney should carefully explain the difference in these roles to the client if the legal advice relates to mandates with the public sector or any other project requiring a partner’s registration (e. g. gaining a license). There are undoubtedly advantages to being able to access all these services at a one-stop shop, such as reducing bureaucracy and coordinating all the necessary procedures; however, the client should not be surprised if the attorney acts like a suspicious investigator.

Finally, the liability insurance of attorneys does not cover any damage resulting from the incorrect identification or registration of the beneficial owner.

By Andrej Majernik, Partner, PONTES 

The Slovak market is undergoing an ESG transformation. As in most CEE countries, ESG is not yet regulated by a specific law in the Slovak Republic. Nevertheless, the trend toward considering ESG issues has appreciably increased in the last two years.

ESG is the new GDPR. ESG requirements force Slovak companies to rethink their strategies, internal processes, and manner of reporting and collecting data, just like it was a few years ago when the topic of the GDPR popped up. When we, as lawyers, spoke with our clients about the GDPR for the first time, it was a major unknown for them and introduced many new obligations on their day-to-day agenda. Today, the GDPR is their common agenda and history is circling back wearing ESG clothes.

It is now time to raise awareness of ESG-related topics in Slovakia. The business community is creating various platforms to network, share know-how, and learn from each other on matters of ESG disclosures and reporting regulations. The financial sector is playing an important role in these endeavors, as businesses must take into account sustainability if they want to obtain external financing from banks.

Those who are still hesitant toward ESG might be caught unprepared by the planned new EU laws. The European Commission launched its proposals for a Corporate Sustainability Reporting Directive as well as a Corporate Sustainability Due Diligence Directive. After the completion of the legislative process, new sustainability obligations will affect not only large companies but also their suppliers – small and medium-sized companies. As a part of value chains, smaller market players will also have to comply, as much as possible, with the defined sustainability standards. Otherwise, they may not be able to exploit all business opportunities in the future.

The directives will impose many new reporting obligations, wherein compliance with them will require an extensive collection of data, monitoring, and change of the internal processes. It is expected that, under the new rules, by 2024, approximately 50,000 companies in Europe will have to file non-financial reports, in line with the mandatory EU Sustainability Reporting Standards. Some of the obligations will also apply to non-EU companies.

The laws under preparation will introduce mandatory corporate sustainability due diligence requirements, such as the obligation to integrate due diligence into policies, update it annually, and publicly communicate on due diligence. The planned concept of direct Director’s liability will put strong pressure on organizations. Therefore, many companies in Slovakia are already considering how they would be able to comply with the new requirements, if implemented. Many of them have discovered that they do have data available – but not in a comprehensive digital format and their collection might be time-consuming and complicated. Therefore, companies are currently putting even more emphasis on implementing adequate systems to collect data, digitalization, and automatization of processes.

Companies for which ESG has not been at the forefront of corporate thinking so far are surprised as to how complex the ESG agenda is and how many activities fall within the ESG umbrella. There are practical questions to be answered: Should implementing ESG require organizational changes in the company? Should it be the role of compliance departments, financial departments, HR departments, or lawyers? There are more ways to approach the issue. According to recent commercial surveys, there already are companies that have created a special ESG position, which is solely dedicated to the area of sustainability and ESG projects. So far, more than half of the companies only have a cumulative ESG manager function or do not have a special position. To avoid reputational damage, many companies at least created ESG task forces focusing on developing a corporate ESG due diligence checklist and procedures on how to report on sustainability claims and prevent greenwashing.

During the last few years, an increasing number of Slovak companies have changed their strategies to outperform competitors and to show that the topic of sustainability is the crucial driver at the heart of their business. The popularity of ESG is further enhanced by the generational shift of wealth to millennials, who are much more concerned about climate change and social issues. They are increasing the pressure on the business community to reflect their values.

However, there is still a high demand for educating the business community about all the benefits of ESG implementation as a tool for increasing financial returns, protecting investments, and as a part of a broader approach to risk management.

Sona Hankova, Partner, CMS

This Article was originally published in Issue 9.7 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Taylor Wessing has advised Slovakia’s GA Drilling on an EUR 8 million investment from US-based Nabors Industries.

GA Drilling is a Slovak technology startup operating in the field of geothermal energy. US-based Nabors Industries is a drilling company.

According to Taylor Wessing, “under the investment agreement, Nabors Industries will support GA Drilling’s activities by making a financial investment and also by providing professional services in connection with the development of the Plasmabit technology, in return for which Nabors Industries will have the right to acquire equity shares in GA Drilling.”

Taylor Wessing previously advised GA Drilling on its 2017 investment round (as reported by CEE Legal Matters on October 12, 2017).

Taylor Wessing’s team included Partner Juraj Frindrich, Senior Associate Peter Kanuch, and Junior Associate Kristina Kesnerova.

Taylor Wessing did not respond to our inquiry on the matter.

Hugh Owen was appointed to the role of Head of Legal at PwC Central and Eastern Europe.

Taking over from Karl Paadam, Owen will be covering 27 countries in his new role. He first joined PwC as an Of Counsel on September 1, 2021 (as reported by CEE Legal Matters on September 2, 2021). He was previously a Partner with Allen & Overy, having joined the magic circle firm in 1994. He was the Head of the SEE Desk and, since early 2016, head of the Ukraine Desk. He set up A&O’s Slovak office in 2000 and established A&O’s associated office in Romania in 2008. At the end of 2018, Owen established his own consulting firm, called Go2Law.

Former PwC Legal Central and Eastern Europe Managing Partner Paadam announced: “The time has come for me to step aside from PwC and join the ranks of Estonian founders and leave the business in the hands of exceptionally driven Partners who are passionate about our clients, people, and solving complex business problems that go beyond law.”

“I am really excited about this amazing role, where I will work with several hundred talented PwC lawyers and other professionals and staff across the region in 27 countries (and more),” commented Owen. “Our team can, together with their PwC colleagues who are absolutely at the top of their game in their respective fields, offer unique capabilities to help our clients. I have lots of plans, and plenty of energy and enthusiasm, and I am really looking forward to rolling my sleeves up and embracing the challenges and successes that lie ahead.”

In 2021 the Slovakian legal framework was set to be updated with a new FDI screening mechanism, echoing the wave of similar legislative updates throughout the European Union. However, after almost a full year, the proposed draft act has not yet come to pass. CEE Legal Matters spoke with Ruzicka and Partners Banking & Finance Partner Jan Hanko about the process, the draft itself, and its potential consequences on the Slovakian market.

Strong Reactions

“Generally speaking, the process has been quite slow,” Hanko begins. The draft of the legislative act which is poised to overhaul the foreign direct investment screening procedures in Slovakia has been stuck in the public comments and consultation phase since June 2021. “The draft act received many comments – more than 300 – including from the general public, business associations, as well as other regulatory bodies and authorities.” He points to the fact that “top companies in Slovakia, those at the very summit of the business world in the country, top employers – most of whom are usually silent when it comes proposed legislation – were quite vocal now.” At the same time, “some of the comments came from other ministries, so there’s the extra weight of that as well, meaning we could see a redraft eventually.”

“If you take a closer look at the comments themselves,” Hanko highlights, “you notice that a lot of them don’t relate to specific provisions but focus more on the philosophical approach the act takes.” For example, “the American Chamber of Commerce in Slovakia was quite critical of the proposed draft, indicating that far too many investments could be targeted – which was not the raison d’etre of the mechanism, to begin with.”

To Protect or Impede Busines

However, such gatekeeping has not been, at its core, perceived as a bad idea. “Don’t get me wrong, it is not that the idea of such a screening mechanism is frowned upon. Indeed, the need to defend strategic industry sectors from predatory investments is felt as very real in Slovakia,” Hanko says. Much like in other EU member states – especially amidst the COVID-19 pandemic-induced economic crisis – “there was a palpable desire among the citizens of Slovakia to defend against potentially malign and predatory investments from Russia and China. Even more in the current tense geopolitical situation,” Hanko adds.

Additionally, Hanko clarifies the types of investments susceptible to being screened, per the new draft act. “Firstly, there are critical infrastructure sectors where such screening will be mandatory. This is a good take, seeing as how it is prudent, of course, to keep sensitive sectors secure and protected,” he says.

“The main concern,” Hanko says “is that the proposed act goes far beyond what the EU legislation proposes. The general standards that the draft act sets are quite wide and seek to establish a mechanism that would have a huge reach.” He believes this regulatory approach could impede the normal flow of business.

Reversing Gears?

Hanko says that the initial proposal came as a surprise, given the “background of the liberal party SaS, which spearheaded the effort. For the past 15 years that it has been in politics, it has been trying to create a rather liberal environment for businesses, getting rid of unnecessary bureaucratic procedures and excess paperwork – the draft act proposal goes against the grain on that front.” He feels that “the proposed draft, in a way, undermines efforts made by the government in 2021 to attract more FDI.”

The draft act, Hanko explains, would establish an environment in which it would be too easy to seek the initiation of screening and control procedures. “The draft act would establish an international investment threshold of a 10% equivalent of the registered capital of the target company as the limit that would allow for screening and control procedures to occur,” he says. “This is quite low and would mean that even minor foreign investors would be susceptible to screening – which would, ultimately, give too much power to state authorities, especially the Ministry of the Economy as the body that would be in control of the process.”

Hanko believes that such a low threshold would present a significant obstacle to foreign investments, with “the regulatory authorities and the Ministry being in the position of sole gatekeepers to FDI in Slovakia.” Additionally, he highlights that “failure to cooperate and provide all information and data required – be it from the target or from the investor – is sanctioned with fines as steep as 1% of global turnover. Substantial fines, coupled with a far reach – this could be another impediment to smooth business operations on the market.”

Ultimately, “the draft act is constructed in such a way that it allows for almost anybody to submit a request for control,” Hanko explains. “This means that, for example, it would not be unimaginable for market competitors to wish to use the screening regime to impede each other’s business transactions.”

Please Tread Softly

Hanko ultimately feels that, when it does get enacted, the FDI screening mechanism should not be used frequently. “Honestly, it shouldn’t be used more than once or twice a year, regarding specific investments, from specific investors, in specific sectors – it should not be a daily occurrence by any measure,” he says.

He predicts the FDI screening mechanism would make legal work all the more complicated. “As a lawyer, I believe that in its current form the draft act would present a significant obstacle for investment deals – it’s a whole new aspect we would all have to take into account at every turn,” he says. Not only would it make it more complicated for lawyers to give a green light on the legality of a deal, but Hanko believes that the investors themselves could alter their behavior in such a way as to lead to a slowdown. “It is not at all difficult for me to imagine a diligent investor seeking to do everything by the book and opting to have the investment cleared in this aspect as well,” he says.

It remains to be seen in which direction the FDI screening mechanism implementation goes since “authorities have been silent regarding the draft for a while now – which is not a surprise given the overall situation of the pandemic. At present, all we can do is watch and wait,” Hanko concludes.

This Article was originally published in Issue 9.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.