Category: Slovenia

Across the globe, more and more companies are looking into ways to strengthen their environmental, social and corporate governance (“ESG”) profile as investors realise that a strong ESG profile is the key to safeguarding a company’s long-term profit and growth. Besides pressure from investors, the importance of sustainability has also been driven by public debate and consumers using spending power to signal their priorities.

With the topic of sustainability moving up the global political agenda (for example, achieving the sustainability goals set out in the EU Green New Deal has become one of the top priorities of the European Commission) and eco-credentials becoming an important feature of companies’ products, there is an increasing need for competition policy to respond.

What does competition law have to do with sustainability?

While companies can contribute to sustainability goals through their unilateral forms of engagement, most of them – trying to avoid first-mover and free-rider disadvantages – are more inclined to shift to green business practices if they can collaborate and harness their efforts and resources in support of sustainability objectives. However, concerns have been raised about competition law risks relating to uniform actions collectively introduced by market players to promote sustainability, ultimately resulting in sustainable practices not being implemented and leaving everyone worse off. But why is there a tension between competition law and sustainability? And what can be done about it?

Can competitors collaborate with a view to pursuing sustainability objectives?

Let’s consider the following illustrative example tackled in 2014 by the Dutch competition authority (“ACM”): Dutch supermarkets, the poultry processing industry, and chicken farmers agreed on “Chicken of Tomorrow” – minimum standards aimed at increasing poultry welfare (such as fewer antibiotics and more space), and to which all sector participants would need to adhere. The Chicken of Tomorrow was targeted to replace the unnatural broiler chicken but resulted in higher end-prices for consumers. 

Generally, Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) prohibits cartels, i.e. agreements between undertakings and concerted practices which may affect trade between Member States and result in the prevention, restriction or distortion of competition within the internal market. Companies can escape this prohibition provided they bring forward the efficiency defence embedded in paragraph 3 of Article 101 TFEU showing that the positive effects of the agreement outweigh its anticompetitive effects.

When determining whether a certain practice satisfies the conditions of the efficiency defence, the competition authorities predominantly rely on the legal standard of consumer welfare. This concept has been established to ensure that consumers are not worse off as a result of collusion between the market players. Currently, the consumer welfare test focuses narrowly on financial considerations and (short-term) price effects. In practice, such an economic (Chicagoan) approach to competition enforcement is tailored to rooting out collaboration between companies resulting in higher prices for consumers without considering its potential broader (positive) implications. Yet, there is no legal basis to jettison sustainability objectives in favour of economic efficiency. In fact, the general provisions of EU Treaties setting out their objectives and providing guidance on the interpretation of the rest of the articles require practitioners to take full account of sustainability (see, for example, Articles 7 and 11 TFEU).  

The agreement on Chicken of Tomorrow never got the green light because it was found to restrict competition under Article 101 TFEU. The ACM concluded that the additional costs of eco-friendly chicken would result in a EUR 0.64 negative effect on consumer surplus, and therefore blocked the sustainability initiative. On a positive note, the ACM should be applauded for embracing a wider approach to consumer welfare, including the non-economic benefits generated by the agreement. Unfortunately, those were left undervalued, and the ACM’s attempt to do the right thing felt short.

Competition law and sustainability go hand in hand

EU Commissioner for competition, Margrethe Vestager, has so far taken a more cautious approach and seems to underscore the importance of competition law by stressing on various occasions that “businesses have a vital role in helping to create markets that are sustainable [and] competition policy should support them in doing that.”

This calls for a paradigm shift. There needs to be a debate about whether an economic approach focusing too narrowly on short-term price effects should be abandoned. It has been rightly pointed out that not only does such an approach ignore negative externalities borne by society as a whole in the form of air pollution, ecological degradation and social disparity, but it is also inconsistent with the constitutional provisions of the EU Treaties. Interests wider than those of an economic nature should be considered.

As the European Green Deal and the Paris Agreement are now daily topics of discussion, there also needs to be an open debate on how competition law and policy should react and set a clear legal framework for tackling sustainability agreements and other collective sustainability practices in the future. Clear guidelines would reassure companies that are currently reluctant to collaborate due to legal uncertainty and fear of fines, and at the same time prevent cases of greenwashing (i.e. invoking sustainability to cover up anticompetitive practices).

A greener competition policy is around the corner

The ACM has already taken steps towards a greener competition policy by introducing Guidelines on sustainability agreements offering a practical roadmap for applying competition rules on sustainability agreements. The German Competition Agency (Bundeskartellamt) has also recognised the need for competition law to step up, having dedicated this year’s annual meeting to sustainable business and competition law. It is time for other national authorities and the EC, for its part, to take action too.

In December 2022, the validity of the two Block Exemption Regulations (“BERs”) will expire. In conjunction with the Guidelines on the applicability of Article 101 TFEU to horizontal cooperation agreements,  BERs apply to the assessment of and provide a safe harbour for agreements whose positive effects are deemed to outweigh the anticompetitive ones. Should the EC decide to let the BERs be revised in light of current trends and developments, this would provide a great opportunity to include sustainability agreements among those benefiting from the safe harbour.

This is merely one of several options for embedding collective sustainability practices within the existing competition law context. The bottom line should be clear: competition law should not pose an obstacle to companies’ genuine collective sustainability initiatives. Rather, it should facilitate and encourage them, based on their ability to invest and innovate, to embrace their wider responsibilities to society by internalising negative externalities and truly contribute to a sustainable future.

By Eva Skufca, Local Partner in cooperation with Schoenherr, and Tjasa Gec, Associate, Schoenherr

The Constitutional Court of the Republic of Slovenia has decided to repeal provisions of the third and fourth paragraph of Article 68.a the Slovenian Tax Procedure Act. These provisions implemented taxation of undeclared income at 70% tax rate, which exceeds regular maximum 50% personal income tax rate and enables the taxation of undeclared income originating from the periods before January 1, 2009.

The Constitutional Court assessed that by legislating such taxation, the legislator did not pursue the aim of financing public spending or any other permissible aim of taxation according to the constitutional definition of taxes, so the said surcharge was not a tax in the constitutional sense.

In the constitutional review procedure, the Slovenian Government argued that the surcharge was, by its nature, a restitution measure intended to compensate for the loss of funds from compulsory social security contributions.

Although the Constitutional Court acknowledged the weight of the argument, it attributed greater weight to the fact that the mark-up in question did not fully have such an effect (compensation for the loss of social security contributions) and did not have the same effect for all of its addressees. The Constitutional Court rejected the remaining reasons on which the Slovenian Government tried to justify the restitution nature of the mark-up (compensation for interest due to late payment of taxes, reimbursement of costs of proceedings, etc.) because no reasonable and realistic link had been established between the measure and the objective pursued and because these reasons were too general. 

Given that the restitution aspect of the 70% tax rate was not demonstrated, the Constitutional Court ruled that the tax which exceeds the taxpayer’s maximum regular income tax rate is a surcharge, which is at least partially punitive.

The Constitutional Court clarified that procedures in which measures of a punitive character are imposed must be regulated in such a way as to ensure the constitutional rights that fundamentally apply to proceedings in all punitive matters, not only concerning criminal offences. However, the regulation of the tax procedure, in which the said surcharge may be imposed, does not provide for these constitutional rights, as it among other applies probability as the standard of proof as well as the reverse burden of proof, which are incompatible with such guarantees. Therefore, the challenged provisions, insofar as they enable the imposition of a surcharge in tax proceedings, was declared inconsistent with Article 29 of the Slovenian Constitution. 

The question of whether the mark-up on unpaid tax was a sanction of a punitive or restitution nature has already been addressed by the European Court of Human Rights (hereinafter “ECHR”), since this was relevant for deciding whether the court was dealing with a criminal charge, which must meet the requirements of Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms. The Constitutional Court explained that the positions adopted by the ECHR were also important for the assessment of the constitutionality of the challenged measure. 

The ECHR as early as in 1978 assessed the legal nature of the mark-ups imposed on the taxable person in addition to the unpaid tax based on the criteria adopted in its decision in Engel and others v. the Netherlands and reaffirmed their applicability for tax matters later on in Västberga Taxi Aktiebolag and Vulic v. Sweden and Jussila v. Finland. The first criterion is the classification of the provision defining the offence the in the domestic legal system, the second is the nature of the offence and the third is the degree of severity of the penalty that the person concerned risks incurring. In case analysis of these criteria shows that the measure has a punitive character, the fundamental rights that come into play in criminal proceedings must be applied.

The Constitutional Court also ruled that the impugned provisions, insofar as they enable the introduction of a tax assessment procedure for income from the year 2008 and prior years, have the effect of interfering retroactively with the legal position of a taxpayer. The previous rules allowed the tax to be levied for a maximum of the past five years and not for the past ten years, as extended by the disputed rules. Such retroactive effect of the law is permissible only exceptionally and under certain conditions if this is required in the public interest, which was not demonstrated in the present case.

By Janja Ovsenik, Partner and Head of the Tax Department, Miro Senica & Attorneys

 

The adoption of Directive 2014/104/EU (“Damages Directive“), which introduced a level playing field for the private competition law enforcement regime among EU Member States, has paved the way for private enforcement to gain more traction in the EU.

Private enforcement can be triggered by an injured party (be it an individual, a legal entity, an organisation, or a public entity) claiming to have incurred damages as a result of a competition law infringement. An action for damages can be brought before the courts either as a standalone claim or following the adoption of an infringement decision by the European Commission (“EC“), the Slovenian Competition Protection Agency (“CPA“) or any other national competition authority. 

Right to compensation

The Damages Directive was transposed into Slovenian law with the Prevention of Restriction of Competition Act (Zakon o preprečevanju omejevanje konkurence-1G), which confers a right to claim compensation to anyone who has suffered damages arising out of competition law infringements. While private enforcement actions already could be brought before the implementation of the Damages Directive (based on the general rules governing the non-contractual liability regime under the Obligations Code), the Prevention of Restriction of Competition Act now sets out a robust set of rules aimed at facilitating private enforcement actions.   

In this sense, the introduced changes alleviate the claimant’s burden of proof, facilitate access to evidence and provide for specific provisions applicable when determining the amount of damages resulting from competition law infringements.

Although the Damages Directive focused its efforts on removing obstacles to a more effective system of private antitrust litigation, the injured parties are still less likely to seek a remedy through time-consuming and costly litigation where the individual harm suffered is of low value. In turn, this leaves many injured parties without compensation.

Collective dispute resolution as an alternative to conventional litigation

The adoption of the Slovenian Collective Actions Act (the “CAA“) has offered a solution to the aforementioned private enforcement gap and further facilitates private enforcement actions by allowing the injured parties to group together to pursue collective redress.

In the realm of competition law infringements, regardless of whether the infringement procedure before the CPA or the EC was already pending or was initiated after the filing of the collective action, the CAA allows for collective redress only in the form of follow-on claims building upon the CPA’s or EC’s final infringement decision. This alleviates the claimant’s burden of proof, since the infringement of competition rules (accounting for the harmful event as one out of four conditions for the existence of non-contractual liability) is already established. 

Whatever the scenario, a collective redress requires the court’s approval. The court renders the collective actions admissible provided, inter alia, the claimant – having legal standing – acts in its capacity as representative. In this sense, the collective action may be brought either by a public authority (i.e. senior state attorney) or a private legal entity engaged in a non-profit activity aimed at pursuing the protection of rights allegedly infringed as long as it is an adequate and genuine representative of the injured parties’ interests.

Under the CAA, collective actions may operate both on an opt-in and opt-out basis, it being left to the court to determine which of these will be utilised in a particular procedure. While under the opt-out regime, parties belonging to a certain class/group automatically take part in the litigation and are bound by the court’s judgment unless they expressively withdraw, the judgment rendered on an opt-in basis is binding only upon those injured parties who have actively engaged in the litigation.

Multi-claimant disputes and litigation funding

In cases of collective redress, the claimants have the option to resort to litigation funding. Under the CAA, third-parties – seeking either profit or a non-profit aim – and the plaintiff’s attorney are free to invest in litigation in exchange for a portion of the proceeds as long as the contingency fee arrangement is in line with the limitations set out in the CAA and the Attorneys Act, respectively.

The CAA sets out a few limitations to such contingency fee arrangements, the most straightforward being the one on attorney success fees. The attorney’s share must not exceed 15 % of the awarded amount (or 30 % if the attorney undertakes to bear all the costs in case of an unsuccessful litigation). A few additional limitations apply in collective redress schemes utilising the opt-out principle, such as the amount from which the share is calculated, and the lower limit of the attorney’s award.

On the other hand, no financial arrangement limitations are in place for third-party funding. However, to steer clear of criticism for lack of transparency, the claimants are under a procedural obligation to disclose the source of funding to the court. In revealing the existence of a funder, the court will only approve the collective redress case going further provided there is no conflict of interests and that the third party has sufficient funds to repay the defendant’s litigation costs should the collective action fail.

Alternative to litigation funding also available outside class action regime  

In addition to litigation funding, which is still in its infancy in Slovenia, there is another mechanism helping claimants to navigate the obstacles associated with the ever-higher costs of litigation.

The concept of fiduciary assignment allows claimants who lack sufficient funds to assign their claims to a third party (i.e. an assignee) for the sole purpose of collection, while retaining a right vis-à-vis the assignee to claim the recovered proceeds. However, for such an arrangement to benefit both sides, the assignee will generally only be willing to invest in litigation in return for a fair share of the proceeds.

By Eva Skufca, Local Partner in cooperation with Schoenherr, and Tjasa Gec, Associate, Schoenherr

As it is in many other countries, the reemergence of Covid is the dominant issue in Slovenia. “With restrictive measures on movement and businesses back in place, everybody is trying to just make it through the whole thing,” says Kavcic, Bracun, & Partners Partner Aleksandra Mitic. “Everything else has taken a backseat – all the politicizing and bickering have faded into the background.” 

To address the continuing effects of the virus, Mitic says, the “sixth stimulus package aimed at helping out businesses is currently before the parliament and is expected to be passed soon.” According to her, the package “will provide loans to companies, extend moratoria for repayment of loans, provide subsidies to companies for part-time workers, and the like.”

Another Covid-inspired measure comes in the form of proposed changes to the Slovenian Companies Act. Mitic says that it will be now easier for companies to set up and organize their general assemblies via video conferencing, a move that will “let them make some decisions and get some things done despite the entire situation. This is a big step forward for the way business is done.” 

Mitic says that there is an ongoing debate over the proposed changes to the set up of regulatory agencies in Slovenia. According to her, “insurance, financial markets, competition, telecommunications, energy, infrastructure – each has its own independent regulatory body conducting oversight.” Mitic says that there is a “legislative proposal being considered that would streamline all of these into two larger regulatory oversight bodies: one dealing with competition and consumers and one dealing with the financial system.” She says that the current debates on this issue deal with whether or not this grouping will impair the work of regulatory bodies and whether complete political independence can be maintained.

Finally, Mitic says that, following a booming summer, the number of transactions has dropped a little bit recently. “Some M&A transactions have halted, and some have continued at a glacial pace,” she says, “but the important thing is that there is activity.” She reports that “areas such as infrastructure are doing rather well,” pointing to a long-running railroad project connecting the heart of the country with the port, which has entered the stage of selecting private partners to build the line. In addition, she says, there is “strong investment activity from foreign investors in domestic tech and pharma companies.”

Due to considerable variations in the prices of medicine within the EU, parallel trade –  cross-border resale of trademark-protected pharmaceutical products by a third party without the authorisation of the IP rights holder – is common in the pharmaceuticals market.

Although any restrictions on free movement of goods are generally prohibited, certain activities by parallel traders (such as repackaging, relabelling, co-branding, etc.) may sometimes conflict with the rights of trademark owners and prompt opposition to further commercialisation of the product.

So what activities by parallel traders are considered permissible from the point of view of trademark protection and when can a trademark owner rightfully assert their rights?

BMS conditions and repackaging of pharmaceutical products

Parallel trade is closely connected to the exhaustion principle, according to which the trademark owner is no longer able to oppose or control the further commercialisation of its trademark-protected goods once they have been put on the market in the EEA, unless it has legitimate reasons for doing so.

In the context of parallel trade, the repackaging of pharmaceutical products can be seen as such a legitimate reason. To avoid potential opposition to the further commercialisation of the repackaged product, a parallel importer must be able to prove the existence of the following five conditions (the so-called BMS conditions):

• the repackaging is necessary to market the product in the state of importation;

• the original condition of the product is not affected by repackaging;

• the new packaging clearly identifies the manufacturer and the importer;

• the presentation of the repackaged product is not damaging to the reputation of the trademark or its owner; and

• the importer gives notice to the trademark owner before the repackaged product is put on sale and supplies a sample of the repackaged product, if requested.

Since the ECJ favours a broad interpretation as to when a presentation of the product could damage the reputation of the trademark, parallel traders must also be cautious when using methods such as “de-branding” or “co-branding”, although this is a question of fact and ultimately for the national courts to decide on a case-by-case basis (C‑348/04).

Rebranding of pharmaceutical products and effective access to the market

In practice product manufacturers often use different packaging or different trademarks for a single product in different Member States. As a result, parallel importers often seek to replace the trademark used by the proprietor in the state of export by the trademark which the proprietor uses in the state of import.

However, replacing the original trademark with a different one means that the trademark owner has not placed or consented to the placement of the goods in question on the market under that specific trademark. The ECJ has already established that in such cases the exhaustion principle does not apply (C-379/97). As a result, because the rights of the trademark owner have not been exhausted, the trademark owner is in such cases free to oppose the further commercialisation of the goods in question, as long as such opposition does not lead to the artificial partitioning of the EU Member States’ markets (Article 36 TFEU).

In such cases, the national courts must assess whether it was objectively necessary for the parallel importer to replace the original trademark in order to market the product in the state of import (C-379/97). In particular, the ECJ indicated that rebranding could be permissible, if effective access to the market would be impaired otherwise. 

Rebranding of generic medicine to originator brand name and joint cases Novartis vs. Impexeco and PI Pharma

In June this year the court of appeal of Brussels referred two requests for a preliminary ruling to the ECJ, both concerning the controversial issue of whether a parallel importer is allowed to market a generic pharmaceutical product after repackaging and rebranding that product with the brand name of the originator.

The facts of the cases revolve around two Belgian undertakings, who imported the generic medicine (Letrozol Sandoz® 2.5 mg and Methylphenidate HCI Sandoz® 10 mg) from the Netherlands into Belgium after repackaging and rebranding the medicine with the trademark of the originator (Femara® 2.5 mg and Rilatine® 10 mg, respectively).

The ECJ’s decision will focus on whether the opposition to rebranding the generic medicine to the originator brand name could lead to artificial partitioning of the market. If the answer is yes, the ECJ is also asked to answer whether in such a case BMS conditions should be applied.

The cases are characterised by the fact that (i) the composition of generic medicines at issue is identical to their originator counterpart, and (ii) both – generic and originator medicine – are put on the market by undertakings, part of the same group. Although having the same therapeutic effect, the generic and original medicine are distinct from the point of view of regulatory, pricing, medical and public perception. What is also significant is that the generic medicine Letrozol Sandoz® 2.5mg is marketed in Netherlands as well as in Belgium, so the parallel importer could have accessed the market without rebranding the imported generic product.

It will surely be interesting to see if and how this will impact the ECJ’s decision. As indicated, however, finding the balance between the free movement of goods and protection of IP rights is not always straightforward.

Stay tuned!

By Eva Skufca, Local Partner in cooperation with Schoenherr, and Lea Avsenik, Associate, Schoenherr

In addition to the effect of the newly introduced FDI rules, the upcoming post-epidemic period in Slovenia will see extensive efforts to revive the economy. On May 29, 2020, Slovenia’s Parliament adopted the Intervention Act to Remove Obstacles to the Implementation of Significant Investments to Start the Economy After the COVID-19 Epidemic to restart economic activity and growth in key investment sectors.

Pursuant to the act, all significant investments will be deemed to be for the public benefit and must be addressed by the competent authorities as a matter of priority. This applies regardless of the source of an investment’s financing – whether it comes from public sources, private funds, or a combination of the two. The act sets out criteria for determining what is a significant investment and contains measures designed to speed up the coordination and operation of public authorities in procedures for obtaining certain permits, opinions, approvals, and decisions under sectoral laws (collectively, “Rulings”), as well as other measures designed to remove obstacles to significant investments, including the creation of a special group (the “Coordination Group”) within the Ministry of the Environment and Spatial Planning that will coordinate procedures for obtaining Rulings related to significant investments.

On the basis of the act, the Slovenian Government compiled an initial list (which can be amended until December 31, 2021) of 187 future investments across the environment, energy, transport and regional development fields that are considered to be significant, with an aggregate value of EUR 7.7 billion. Some of these projects are small, and clearly and narrowly defined (such as a school redevelopment project), while others are larger and broader (such as the construction of a new nuclear power plant, construction of several motorway and railway sectors, construction of several residential community complexes, etc.). Some projects will likely need merger control approval by the Slovenian Competition Protection Agency (the “Agency”), as they either include the establishment of joint ventures or result in a change of control.

The act foresees that the Coordination Group will not make any Rulings itself nor opine on the Rulings, but rather only coordinate the competent administrative authorities, who will in turn make the actual Rulings. It is unclear how this “coordination of procedures” will work, as the general principles of legality and the autonomy of administrative authorities limit interference in administrative proceedings. Moreover, specific provisions grant some public authorities, such as the Agency, an even higher degree of independence and protection from ministerial interference.

The Agency is an independent administrative authority responsible for enforcing antitrust and merger control rules. Its autonomy is essential to its effective operation and is therefore guaranteed by law. Moreover, the Agency’s predecessor (the Competition Protection Office) was affiliated with the Ministry of Economy and its lack of organizational independence cast doubt on its impartiality, particularly in proceedings involving the State. During Slovenia’s accession to the EU and the OECD, it became clear that more effective protection of competition was required. Specifically, the OECD emphasized the need for appropriate changes concerning matters around funding and prioritizing between cases and decisions in specific cases. Consequently, the Agency was established in 2012 as a more autonomous and independent regulator. Under the amended legal framework, only the Government and the Parliament may give general guidance to the Agency regarding its work and operations, suggesting that a ministry may not do so. Moreover, the explanation of the 2012 draft legislation explicitly stipulated that a ministry will not be allowed to give guidance to the Agency.

The applicable competition legislation therefore prohibits the Coordination Group (as part of a ministry) from offering any instructions or guidance to the Agency, no matter how general or abstract they might be and regardless of their purpose. Any such interference with the Agency’s work could be considered an interference with its independence, as well as a breach of Slovenia’s pre-accession commitments to the EU and OECD. On the other hand, the scope of the Coordination Group’s activities appears to include a degree of control over certain activities of the Agency –  for instance in prioritizing of cases. The apparent incompatibility of these legislative provisions may prove difficult to resolve in practice. If the situation is not remedied, the confusion could delay – rather than accelerate – those significant investment projects that involve merger control procedures.

By Natasa Pipan Nahtigal, Partner, and Miha Hocevar, Associate, Selih & Partnerji

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.

Although, like many other CEE jurisdictions, Slovenia experienced major COVID-19-related market turbulence in the first half of 2020, the market has nonetheless seen some interesting developments as well – and more activity is likely to follow in Q3 and Q4.

Looking Back: The COVID-19 Shock of Uncertainty

Undoubtedly, the key factor shaping the M&A landscape in the first half of 2020 was the onset of the COVID-19 pandemic which, in terms of immediate consequences, translated into a practical standstill of public life (in the form of a lockdown) and economic activity in several industries – in particular, tourism and leisure – and, from a broader perspective, into a shock of uncertainty for both private market players and the public/legislative sector.

As a result, most M&A transactions pending at the time, especially those in a pre-signing phase, were put on hold or aborted altogether. On the legislative side, the Slovenian state was fairly quick to adopt a slate of measures aimed at tackling the immediate effects of the COVID-19 shock. In addition to various forms of temporary subsidies of employment and tax/social contribution costs for undertakings, the package notably introduced (i) amendments to the insolvency legislation which temporarily suspended the obligation to file for insolvent reorganization or bankruptcy (which, in practical terms, prevented – or, rather, postponed – a wave of insolvency petitions), (ii) a compulsory moratorium for bank debt (essentially forcing Slovenian lenders to prolong repayment terms upon request from eligible borrowers), and (iii) a framework state guarantee for COVID-19 liquidity support provided by banks to Slovenian undertakings.

Despite the circumstances, a few sizeable deals were closed in the first half of 2020 (notably within the financial, automotive/distribution, and technology sectors). Indeed, according to recent figures published by the Slovenian Central Bank, the quantum of foreign direct investment (FDI) – a useful proxy for M&A activity in Slovenia – in the first half of 2020 dropped only by some 15% compared to the first half of 2019.

Looking Ahead: Enhanced FDI Screening and Adapting to the New Reality

In the short- to mid-term, M&A activity in Slovenia will be driven primarily by legislative developments as well as by specific trends in the economy – particularly, consolidation.

On the legislative side, the hot topic in M&A circles is the newly introduced FDI screening regime. Although modelled on the EU’s FDI Screening Regulation (2019/452), the Slovenian FDI rules have drawn early criticism from investors and practitioners for reasons of substance and process. In terms of substance, Slovenia’s FDI rules – compared with those set out in the EU FDI Screening Regulation – expand both the scope of businesses/assets which trigger FDI scrutiny (notably including real estate assets located “near” critical infrastructure) and the range of acquirers subject to the obligation to notify the transaction (notably including EU-based entities). Perhaps more importantly, in terms of process, because the Slovenian FDI rules do not envisage an obligatory issuance of a clearance decision, unless the competent authority – the Ministry for Economic Affairs – based on a prima facie assessment, initiates a review proceeding in relation to a notified acquisition (which then results either in a clearance or prohibition), parties to a transaction can find themselves faced with the potential risk of having their transaction reviewed and prohibited retroactively (within five years from closing).

While it is too soon to speak of a common response of the M&A market, it seems logical that, in terms of deal documentation, this risk will increasingly be allocated to the buyer (similarly to merger control), as this is in many respects a buyer-idiosyncratic risk.

The general drivers behind M&A activity in the mid-term will be, in particular: (i) the secondary effects of COVID-19, which will presumably bring about an increased number of distressed transactions (ranging from distressed disposals of non-core businesses by large corporations and secondary debt (loan-to-own) driven acquisitions), (ii) growth-driven acquisitions, especially in the technology sector, and (iii) the continuing trend of consolidation in the financial industry.

By Vid Kobe, Partner, Schoenherr Slovenia

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.

On 23 September 2020, the Slovenian government decided that price control measures in the field of fuel products are no longer necessary, meaning that the retail fuel market will be fully liberalised from October 2020.

Slovenia was the last EU Member State in which the government administered retail fuel prices. The first steps towards full liberalisation were taken back in 2016, when the government liberalised the prices of premium petroleum and heating oil, while regular petrol and diesel remained subject to administered prices.

Expected market developments

The Ministry of Economy is convinced that now is the best time for such a measure, since global oil prices are low and raising trading margins will have a minimal effect on raising retail prices.

Expected developments:

• the entry of new discount fuel suppliers, especially in the parking areas of shopping centres;

• the entry of new fuel suppliers on the market within 10 years;

• fuel companies will now be able to adapt to market conditions and respond to prices in neighbouring countries;

• no (significant) increase in margins and consequent increase in fuel prices due to the entry of new bidders;

• margins are expected to reach a level comparable to other EU Member States within five years following the liberalisation;

• after full deregulation, it is expected that fuel prices on motorways will continue to be higher, while competition prices in other areas will remain lower.

Competition law considerations

Following deregulation, fair competition in the fuel market shall be ensured through the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”) and its Slovenian equivalents, Articles 6 and 9 of the Slovenian Prevention of Restriction of Competition Act (“ZPOmK-1”), which prohibit anti-competitive practices and abuse of dominance in the market.

Generally, any agreements or concerted practices aimed at or having the effect of preventing, restricting or distorting competition in the Republic of Slovenia, are prohibited.

Concrete examples of anti-competitive behaviour include:

• fixing of prices or other business conditions related to the purchase or sale of motor fuels;

• geographical partitioning of the market between market participants;

• abuse of a dominant position by setting unjustifiably high road fuel prices.

In the road fuel sector, parallel pricing, price cycling patterns and “rockets and feathers” pricing (asymmetrical adjustment of retail prices to changes in commodity prices) all raise suspicions and may prompt action by the Slovenian Competition Protection Agency (the “Agency”).

The Agency is following the fuel market closely, having carried out a sector inquiry into the market already back in 2017, when there were indications that it was not functioning as well as it should and that competition breaches may have been a contributing factor.

Government’s safety mechanism

The government instructed the Ministry of Economy to monitor and analyse the formation of fuel prices based on oil prices on the global market and report the data to the Ministry of Finance for 14-day periods.

In justified cases, the government reserves the right to (re)apply the price control measures, as provided by the Price Control Act (Zakon o kontroli cen, Ur. l. RS, št. 51/06). Such a price control measure is extraordinary in nature and can last for at most one year.

By Eva Skufca, Local Partner in cooperation with Schoenherr, Lea Avsenik, Associate, and Maks David Osojnik, Associate, Schoenherr

On July 9, 2020, CEE Legal Matters reported that ODI Law had advised Hranilnica Lon on a new issuance of shares. CEEIHM spoke with Imre Balogh, President of the Management Board at Hranilnica Lon, to learn more.

CEEIHM: To start, please tell our readers a few words about Hranilnica Lon. 

Imre: It is a specialized financial institution in Slovenia – its status is that of a savings bank. It is a small traditional institution, mainly servicing private clients and micro-enterprises. Our total assets amount to approximately EUR 300 million and the total capital amounts to roughly EUR 20 million.

CEEIHM: As reported already, “the share issuance is one of the first transactions in Slovenia based on a newly adopted exemption under the Prospectus Regulation and Slovenian Market in Financial Instruments Act.” Can you tell us a bit about the exception and how it impacted this issuance specifically?

Imre: I think I should give you a bit of background information before addressing this. A while ago, the shareholders decided that we would increase our capital with 100,000 shares. At the time of the decision, the company had 115,000 shares, so that decision basically represented a doubling of that number. Having looked at the various options at our disposal, it was decided that the first round of the increase would happen under this newly available method. What is this method? Well, in a nutshell, the exception means that, up to EUR 3 million in terms of a total subscription, a company can benefit from a simplified procedure – i.e., there is no need to issue a prospectus and you do not need a special permit from the regulator. As a result, the procedure is much shorter – one can save anywhere between 30 to 60 days by applying this. The transaction took place towards the end of the lockdown and it was important for us to have it closed before mid-year, which is what ultimately had us push the button on taking this route. 

CEEIHM: ODI Law also announced that “after a change of the management board last year the bank is currently in the process of reorganizing its business.” Is this reorganization related to the new issuance in any way? If so, how?

Imre: This change happened at the end of last year in December. That is when I (as the new President) and my colleagues took over at the helm. Our mandate then was to implement a full reshuffle of the operations of the bank. As a part of this, the reorganization was simultaneously done with the capital increase on June 1, 2020, and it was one crucial pillar in the total renewal of the business and operations of the organization. It is now a much leaner organization, with only one management level below the board, which also reflects the major driver to simplify the business. Now we have in place the classic organizational structure you would expect from a bank, with a clear separation of the different functions as required by the banking rules, and with the necessary control points of the organization built in. 

CEEIHM: What would you say was the most complex aspect of the issuance?

Imre: The issuance was combined with the pre-emptive right of the existing shareholders in the first round, with external investors having the opportunity to subscribe in the second round. Running the process partially parallel meant we needed to develop a methodology for the pricing of the second round based on the success of the first round. Those involved in the legal framework had to deal with the dual-level of the procedure, meaning they had to be very precise to treat all investors fairly and equally while achieving a pricing that reflects market conditions, in a market that was already very difficult (not post-COVID-19, but during COVID-19). I’m happy to report it went through smoothly, overall, and the bank could now capitalize and be prepared in the future and participate in the economic recovery of the market. 

CEEIHM: What was ODI Law’s mandate precisely – what did the firm advise on? And why did you choose ODI Law as your advisor on this matter?

Imre: ODI is one of the best known transactional advisors in the legal field in Slovenia and they had great references. I also had a personal excellent experience with them in the past. And they simply had a solid proposal. 

Originally reported by CEE In-House Matters.

According to Andrej Kirm, the Managing Partner of Ljubljana’s Kirm Perpar law firm, things are going pretty well in Slovenia. “It’s pretty much business as usual, apart from the Covid-19 crisis,” he says. Indeed, he says, while most larger transactions were put on hold from March to June, “now a lot of things are progressing, and we hope this will continue through the end of the year.” According to him, “we are quite optimistic, and business is surviving better than we expected back in March.

As a result, the legal market is staying busy as well, he says, describing the last few months as “an atypically good summer.” So good, he says, that “there was less vacation than usual.” The market has stayed busy into the fall as well, he says, “so it’s looking quite good.” Still, he warns that this could change if more stringent measures are necessary to tackle the epidemic.

Slovenian courts are operating more or less as normal, Kirm reports, though he expresses some mild confusion at that very normality. “The courts are not using video-hearings as much as they could,” he says, “and we’re not sure why.” Kirm notes that the technology and enabling legislation has existed to conduct hearings by video for many years now, and some matters with foreign clients were conducted remotely over a decade ago — so it’s not clear why courts remain, generally, reluctant to employ those tools now, during a crisis. Instead, the courts have preferred to adapt to the demands of the pandemic primarily by limiting the number of people actively present at hearings as much as possible, and scheduling the hearings in the largest courtrooms available, “so there is as much distance between people as possible.” Still, he says, “with the situation now — with Covid-19 cases increasing throughout Europe — I think the courts should accept videoconferencing as standard practice, as they have in Austria and several other EU countries. The Slovenian Bar Association is also supportive of this approach.”

In the meantime, Slovenia’s Parliament is staying busy, “and there are a lot of legislative changes being prepared,” Kirm says, “particularly involving the epidemic.” He draws special attention to the  anticipated 5th Legislative Package of measures designed to address the fallout of the pandemic, and “especially those elements related to waiting for work — special measures for those employers who cannot provide work to employees (such as those in the hotels and tourism industry, passenger transport, restaurants, etc.), and guaranteeing monthly basic income for entrepreneurs and micro businesses who have suffered most due to the implemented measures.” According to Kirm, previous measures “saved the year for these businesses” and he reports that the government “is planning on extending those measures, and possibly creating new ones.” The 5th Legislative Package is expected to be available soon, he says.

In general, he commends the government’s response to the pandemic, noting that “previous measures have been successful in keeping unemployment rates at quite a low rate.” According to him, “we fully approve of this, and the government measures are going in the right direction.”

In addition, Kirm points to eagerly awaited Corporate Law amendments (which he says should appear by the end of the year) designed to allow virtual shareholder meetings to take place when insufficient shareholders are able to appear in person. Kirm describes this as a necessary improvement, which will “keep some projects happening” that otherwise would fall through the cracks as a result of difficulties in gathering sufficient shareholders together to approve them. 

Overall, he says, the political situation is stable, with the next elections not scheduled for another year and a half, and there are “no signs that the government will change before then,” as the business community is quite strong in supporting the economic measures it has taken so far.