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Unlike in most European jurisdictions, land plots and buildings aren’t considered uniform real estate objects in Russia, and as a result there are situations where a building and the land plot under it have different owners. In many cases, the State owns the land, while individuals own the buildings or other constructions thereon. As a result, privatization of land plots in Russia remains on the agenda mainly in this context.   

The question of how to determine the price of a privatized land plot has become especially pertinent now because, after July 1, 2012, the ability to apply for preferential price at privatization is only rarely available, though before that date it was a matter of right. 

Current legislation determines that the cadastral value of a land plot can be established either as a result of carrying out the state cadastral appraisal or upon the resolution of a dispute regarding the  determination of cadastral value. Cadastral value is relevant as the basis for calculation of land tax, rent payment rates, land privatization rate, and other payments collected by the State acting as the owner of land.

The basis for carrying out a state cadastral appraisal is a decision made by a relevant regional executive authority of the Russian Federation – or, where so authorized by legislation of the Russian Federation, by local government. The appraisal is carried out en masse, rather than on particular land plots – so particularities of specific plots of land are not taken into account – and the results are approved by the State authority which initiated the appraisal.

Cases often arise in which the re-established cadastral value of the land plot is several times higher than its real market price. Market price is determined by the results of an independent appraisal and – unlike the cadastral appraisal – is established not en masse, but individually for the specific land plot.

The owner applying for privatization of a land plot has the ability to challenge the declared repurchasing price of the land plot when he believes that the basis for establishing  the repurchasing price (100% of cadastral value) was incorrect. To do so he must obtain the market cost of a corresponding site by means of carrying out an independent appraisal, and then he may appeal to the court or to the commission tasked with considering disputes regarding determinations of cadastral value at the territorial administration of the Russian State Register. Within any of these procedures the establishment of cadastral value of a land plot equal to its market cost is imposed.

As establishment of market value of a land plot is almost the only instrument for defining a fair repurchasing price of a land plot now, currently a large number of claims are raised before the court challenging the cadastral value of land plots – and that number continues to increase, as a majority of cases succeed, causing the cadastral value of land plots to decrease. Thus it should be noted that within consideration of similar affairs questions may arise on which there haven’t yet been decisive precedents. For example, whether the tenant planning to redeem the land plot can challenge cadastral value. Generally tenants are refused in their claims, but several recent judgments have sustained the claims of tenants of land plots regarding the determination of cadastral value proceeding from their market costs.

Thus, contestation of the cadastral value of land plots (as bases for calculation of the repurchasing price of a site during privatization) in most cases is quite successful, but the process itself takes a lot of time. Quite often after a successful contestation of the cadastral value a competent authority initiates a new revaluation within an administrative procedure that eventually ends with return to the original cadastral value after all. Modification of the legislation regulating the state cadastral assessment is planned now to limit the use of such revaluations in administrative proceedings, and also to increase the term of contestation of determination results of cadastral value in the commission and to establish obligatory pre-judicial consideration of the corresponding disputes in the commission.      

By Sergey Patrakeev, Partner, and Irina Dyubina, Associate, Lidings

This Article was originally published in Issue 3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

It appears that, after many delays in Parliament and a rejection by the President, Romania should soon have a new PPP law.   

If it is passed in the form of the current draft, the proposed law would replace the existing 2010 PPP Law in its entirety. As such, the proposed law should be a step forward in general, in providing a single coherent (and, hopefully, stable) legal framework for PPP projects, notwithstanding that there is political debate over some points of detail.

It should however be noted that the proposed new law appears to be limited in scope and that it will not regulate all PPP projects. The new law is apparently intended to regulate specifically only those PPP projects in which the revenue of the private partner will primarily depend upon payments from the public partner, such as the provision of prisons, public hospitals, and defense facilities. PPP projects in which the private partner’s revenue will be derived mostly or entirely from payments from users appear to fall outside the scope of the new law and will presumably continue to be covered by the existing legislation on the concession and operation of public assets. Classic models of such projects would be toll roads and bridges. It will be interesting to see whether the Romanian government regards projects which depend partly on shadow tolls and partly on actual tolls as falling within the scope of the existing concession regime or under the proposed new law.

As is the case with many pieces of Romanian legislation, it is expected that the implementation of the proposed new PPP law will depend upon detailed subordinate legislation (norms). At the time of writing no draft of the norms was available and it is understood that they are still being worked on, which may explain the apparent lack of progress of the proposed law itself since March 2014.  The new law envisages that the norms will be approved by a Government decision within 90 days of the new law itself entering into force. As Romania is in competition with other countries for funding for PPP projects, it is to be hoped that the passing of the new law and the issue of the norms will be coordinated, so that potential private PPP partners and investors can consider them as a coherent whole. I would certainly not expect any potential PPP investors to make any decision about investing in Romania until both the new law and the norms are available.  Legislative instability is also the curse of investors and it is to be hoped that the Government will take time to ensure that the new law and the norms do form a single coherent and stable package which will not require changes to be made by Emergency Ordinance, as was the case with the existing 2010 PPP Law.

In conclusion, the new law is unlikely to be successful unless it recognizes that the risk in a PPP project where the revenue flow is derived from the state is primarily borne by the private partners, particularly the finance providers. Many models of PPP projects work in other EU countries in which it has been recognized that in order to be bankable, the project must commit the public partner to pay for the asset or service over an extended period. Private partners and their bankers need to be convinced their revenue stream is assured over the full payback period, regardless of which political parties are in power from time to time over that period.      

By Neil McGregor, Managing Partner, McGregor & Partners

This Article was originally published in Issue 3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Investing in Bosnia and Herzegovina (BH) may be summarized in a simple but contemplative Latin proverb:fortis fortuna adiuvat – i.e. fortune favors the bold. We suppose Cicero did not have BH in mind when leaving this written treasure in the legacy of Humanity. However, given the country’s current investment climate, there is no better way to describe it in fewer words.   

On one side, BH is placed at an ideal geo-strategic position that made it popular among conquerors in past centuries (i.e., the Austro-Hungarian Empire and the Ottoman Empire), with outstanding natural resources (i.e. water, timber, energy), qualified and hard-working human potential, outstanding agriculture, and much more. Its industrial and tourism opportunities are therefore developing fast, with an economy evidently crying out for investments. On the other side, BH still has a number of issues to resolve when it comes to foreign investment. One of the most prominent ones, besides obviously the relatively small nature of the country and market (51,209 square kilometers of territory, 3.8 million inhabitants, and a per capita GDP of approximately EUR 3,500.00), is the complex and heavily-divided administrative and legislative environment. The nation properly consists of two entities: the Federation of BH (“F BH”) and the Republic of Srpska), one district (Brcko District), and ten cantons within the F BH. The total number of legislative authorities, on different issues, eventually amounts to fourteen. There are over 135 ministries, which create an almost-intolerable bureaucracy causing slow movement in obtaining any kind of license, from Corporate, Immigration, to Real Estate, or Environment. The significant political tension is an additional issue, used for masking the corruption and theft of the country’s resources (e.g. the country imports water while at the same time it is one of the main export potentials). 

However, the fact is that the negatives (i.e., the burdensome administration) can be changed, while the positives (i.e. the geo-strategic positioning, the unexploited natural resources, etc.) are quite constant. The best showcase of how prudent investors see BH is the UK energy company EFT Group, which initiated a tremendous investment project of EUR 600 million related to the Thermal Plant Stanari mine and power plant project in the RS (which is financed through the credit line of the China Development Bank). While advising the EFT Group we witnessed the willingness of the government administration to even change the legislative environment so it would fit the needs of the transaction. There are also number of foreign investors (predominantly coming from Austria, Serbia, Croatia, Slovenia, Russia, Germany, Switzerland, the Netherlands, and Turkey, among others) who, following our advice, looked beyond the challenges and proved that the hardships are worth enduring to get to the benefits. 

Ultimately, even though the prolonged process of incorporating a company or the requirement to obtain residence and work permits for key personnel can make one want to leave before even truly entering the market, and through litigation can take several years – and enforcement of judgments over a year or more – can make one tempted to take the first plane out; still, business goes on and a predominant number of investors make a profit. The legislative framework is in fact becoming more harmonized with EU principles and practices, the implementation of it is improving each day, and bold investors are most generously rewarded for their endurance and prudence. 

The most prominent investment opportunity in BH at the moment relates to the incomplete privatization process. Unlike most of the surrounding countries and Europe in general, BH still has a number of state-owned companies to be privatized, as well as other smaller state-owned companies in the energy, postal services, and telecommunication sectors, among others. There are no highways or other significant roads or railway infrastructure; energy potential is mostly unexploited, especially when it comes to renewable energy sources, and well as tourism, agricultural, and timber potential all remain high. BH has also shown significant potential when it comes to semi-finished products and partial industrial production (automotive industry, energy, wood, etc.), however, there are also examples of imports of unfinished goods for production process completion in BH, with final products exported without triggering any tax or customs issues.    

Finally, given that most of the foreign investors are still here and reinvesting, the question that emerges would be: If they are able to generate profit in this unfavorable investment climate, can you imagine the growth of their businesses once the inevitable and ongoing transitioning processes are finally completed, and most of the hardships resolved? 

Therefore, to all bold investors, all we can say is: “Welcome aboard!”      

By Emina Saracevic and Adis Gazibegovic, Managing Partners, SGL Saracevic & Gazibegovic Lawyers

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Investing in Kosovo can certainly be a challenge. Yet, if equipped with advance knowledge of what to expect on the ground and with adequate local technical support, investing in Kosovo can  be lucrative and rewarding.  

Still, Kosovo, like many of the countries in the region, is plagued by some issues that have prevented serious foreign investors from trying it as their next frontier. Political and institutional instability, a weak rule of law, die-hard communist habits of the state bureaucracy, and unresolved political issues with its northern neighbor all can make Kosovo a challenging market for domestic and foreign investors alike.

Polls show that the most discouraging factor for foreign investors in Kosovo is the weak justice system. Unfortunately, while business legislation is comparable to that in developed countries, its implementation leaves much to desire. Moreover, the judicial system remains dysfunctional and inefficient due to its lack of human resources and low professionalism. This has created in most courts a huge backlog of cases which take years to reach a conclusion. And until now, that has been only half the battle, as enforcement of judgments was a true nightmare. And finally – the Balkans’ favorite – organized crime and corruption is more or less rampant in Kosovo, with its greatest presence in public procurement, as despite Kosovo’s numerous attempts, it has been unable to battle it effectively.  Until recently, all these factors made doing business in Kosovo  unfavorable to domestic and foreign investors.  

However, the picture is not completely bleak for Kosovo and Kosovo-bound foreign investors. Some indicators show that Kosovo indeed may be becoming more favorable to FDI, despite its recent business-unfriendly history. The Central Bank of Kosovo reports an increase of foreign direct investment (“FDI”) in Kosovo in 2013, as compared to prior years. In 2013, Kosovo received EUR 260 million in FDI, which is a 13% increase over 2012. The greatest investments came primarily in the real estate, construction and development, and financial sectors, while the lowest FDI was recorded in the energy, production, and trade sectors.  

This increase in FDI may be the initial result of some groundbreaking reforms, primarily by the now-outgoing Minister of Trade and Industry, with regard to improving the overall business environment in Kosovo. Foreign investment legislation has been revamped in an attempt to increase foreign investor confidence. The new Law on Foreign Investments that came into force in January 2014 provides serious assurances for foreign investors, including the prevention of any public or private interference in their business activities, the guarantee of equal treatment for foreign investors, and Kosovo’s pledge to subject itself to international investment dispute settlement mechanisms. The Business Registration Agency has been completely restructured, and in that process has opened up one-stop-shop registration centers in all municipalities in Kosovo. Moreover, with the assistance of the US Government, Kosovo has set up two ADR tribunals, one functioning within the Kosovo Chamber of Commerce and the other within the purview of the American Chamber of Commerce in Kosovo. Furthermore, a newly constructed private enforcement mechanism has just recently come into play in Kosovo ( in June 2014), and has shown some promising preliminary results with regard to enforcement of judgments and other enforceable instruments. A noteworthy 2013 accomplishment, thanks mainly to the assistance of the Swiss Government, has been the installation of a public notary system in Kosovo, which has lightened the load on the court system by transferring some non-judicial functions to public notaries. Finally, the local legal, accounting, business, and financial services providers in Kosovo, although not great in numbers, if carefully selected, can provide services commensurate to those found in the EU or the USA.    

With regard to its global or regional positioning as an attractive FDI environment, Kosovo is certainly not where it should be. But it is in a much better place than it was only a few years ago, and fortunately it is showing a positive trend.  Kosovo remains an attractive place to a certain type of foreign investor, who does not mind a good fight in order to get the top prize and the benefit of the first entrant advantage in many of Kosovo’s unexplored sectors, such as telecommunications, energy, agriculture, tourism, and so on.      

By Korab R. Sejdiu, Founder and Managing Director, Sejdiu & Qerkin

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Experience has proven that in the majority of cases foreign investors who are planning to do M&A deals in Belarus do not pay serious attention to the procedural aspects of the process and potential legal problems that may arise. Thus, we have tried to create a summary of the 4 most common challenges faced by foreign companies when acquiring assets in Belarus, and to recommend ways to avoid or overcome them.  

#1 Lack of Assets Purchase Agreement as a full “live” agreement applicable in practice.

To sell a business in Belarus, in 99% of cases you need to sell the company (i.e., its shares, with all history, assets and obligations). Theoretically, the Belarusian Civil Code contemplates  an “enterprise as asset’s complex” that may be a separate object of the deal, but in practice in order just to obtain the proper legal status sellers need first to estimate this complex by professional auditors, then to register it. Only then can they dispose of it. And they cannot include in this complex such assets as contractual relations (only existing debts and receivables), goodwill, permits and licenses, and staff. Finally, deals of purchase and sale of such complexes are subject to 20% VAT. 

To avoid this process and to conclude separate deals for transferring contracts and staff in addition to the primary sale, the best solution is to use a share purchase agreement (SPA). The main disadvantage of this procedure is that the business is acquired along with the history of the company (which always involves risks). In addition, this solution may not be good if the company conducts different types of business (for example contraction and rent) and the buyer wants to obtain only a part. Our advice here is to organize the sale as a spin-off, with a new company spinning-off from the main old one (with its history), and only those assets which the parties want to sell are transferred (or, alternatively, the reverse: transfer everything except for the object of the deal). Such action will not be subject to VAT, and at the same time due diligence will be reduced to a check of the correctness of the reorganization and transferred assets. Moreover, a sale of shares does not require the obligatory estimate of the contract’s subject, so the price may be defined by the agreement of the parties.  

#2 Lack of shareholders agreement and option agreements.

Belarusian law has not yet adapted to complicated and flexible partnership agreements, which may be regulated only in the company’s charter, and not by agreement between parties. Also there is no provision for classical option agreements in local corporate law. So if the company is sold partially and a period of joint ownership is planned, relations for the future may only be regulated by very sophisticated charter plus different conditional SPA’s and “surrogate” agreements (different artificial loans, assignment of rights, etc.). The second option is to transfer all agreements to a non-resident form – when a Belarusian company is sold to a foreign holding in a different jurisdiction – and then all shareholder relations are structured in the corporate documents of that non-resident company.

#3 Habitat antitrust regulation in the sphere of concentration control.

On July 1, 2014, a new antitrust law entered into force in Belarus, but unfortunately it did not improve some controversial aspects regarding control over M&A deals. The requirement to apply for consent of the antitrust department remains for all acquisitions of more than 25% of shares in companies that have: (1) value of assets more than BYR 15 billion; or (2) amount of gross revenue calculated for the previous year of more than BYR 30 billion. Thus, application for consent is necessary regardless of the real influence of the company’s activity on the market, as this is not evaluated. And even if the share of the market is negligible but the company has valuable real estate as an asset, the parties must comply with the formal and somewhat onerous antitrust procedures. A better alternative here may be to structure the deal sharing the acquisition between separate buyers obtaining not more than 25% each, or at least to be prepared in advance with the necessary documentation for the application.

#4 No guarantees to change CEO as a result of full purchase of the company.

The Belarus Labor code does not provide special legal grounds to terminate a labor contract with the director (or any other employee) when changing full control over a company, although obviously new owners may be very interested in placing their own management teams in operational control. Accordingly, it may be important for a Buyer to state as a condition of the sale that the Seller provide the possibility to change the director at the sole discretion of the highest competent corporate body that may be provided by special clauses in the labor contract stating the amount of compensation. Since this is not legally connected with the fact of a change in ownership, the conditions for the dismissal of a director should be created separately, and may be included in the terms of M&A deal only as an additional warranty. 

There are, of course, other issues investors should be aware of as well. 

Despite everything mentioned above, it should be noted that M&As in Belarus are not particularly complicated and rigid. Still, potential solutions and costs should be evaluated in advance and carefully taken into account at the earliest M&A stage.  

By Dmitry Arkhipenko, Managing Partner, and Helen Mourashko, Senior Associate & Head of Corporate Practice, Revera Consulting Group

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The awarding of procurements in Bulgaria continues to be an extraordinary challenge, for both the bidders in different types of procedures and contracting authorities alike.  

The latest development

One of the most recent amendments to the PPA, a provision set to come into force on October 1, 2014, is an especially fresh example of a completely inadequate legislative decision that has caused turmoil among the majority of authorities. This provision, under the pretext of aspiring to achieve maximum transparency in all procurement actions and limiting corruption, introduces rules that will presumably transform the authorities into database-crunching website gurus on a local level.

On its official webpage, each contracting authority will soon be obligated to publish the following for each announced tender: the preliminary notices; the decisions to initiate the procedures; the tender notices; all tender documents; any changes to such documents; additional explanations; invitations; all minutes and reports issued by the designated committee; the participation guarantees; the procurement contracts; the framework agreements; the date, grounds and amount for each payment due; contract completion or termination, and so on. 

Bor?d already? We are not even halfway through the list of documents that must be published (we will spare you from listing the rest).

The legislator finishes the enumeration with the prescription “and any other useful information,” thus leaving even the most diligent of contracting authorities on tenterhooks lest a document has been omitted and left unpublished, putting them in violation of the law and making them a target for possible sanctions.

The consequences

This is the point where any humor that may have existed will start to run somewhat dry. Serious questions, however, persist. What is to arise from this amendment to the PPA and how will this “innocent” overzealousness on the part the legislator reflect on proper public spending?

Here comes an example: An average-sized contracting authority carries out between 200 and 400 tenders each year. For each such tender, some 40 documents must be uploaded and kept on the authority’s server for a minimum of one year following the completion of the procedure or the performance of all obligations. A portion of these documents must, as per law, be stored for an unlimited period and cannot be removed. There is no need to employ high-level arithmetic skills. It should be obvious that we are talking of thousands upon thousands of documents and millions of scanned pages for each authority.

All of these steps must be taken simultaneously with the implementation of the obligations set out by the Directives – the procurement information to be promulgated in the EU Official Journal, the national Public Procurement Register, the mass media …

Thus, while aiming to ensure maximum transparency in the award process, the provision will in fact create incredible hassles for what is already an extremely complicated administrative apparatus and add further financial burdens to the authorities. The latter will need to maintain state-of-the-art official websites and ensure that procurement data is constantly updated and uploaded – which will lead to the need to hire and train personnel for those purposes. In other words: a huge waste of time, means, and human resources, concentrated in an activity with a very ambiguous objective and a yet more ambiguous outcome.

The final picture

There is no question about it: the process of awarding procurements in Bulgaria must become more transparent than a pane of glass. However, we feel confident in predicting that corruption will remain entirely unaffected by this latest measure. Why? Because while the general public is busy perusing each and every duly scanned and uploaded document, the seat designated for expedient control over actual procurement performance will remain unoccupied. Secret arrangements and agreements following the conclusion of contracts will continue, discriminatory criteria, utterly confusing for anyone outside the business, will abound (even after the implementation of the 2014 Directives), and the favoring of candidates and handing out of procurements by each new government will continue to happen again and again.

So, instead of wasting money on improving websites and turning procurement for white hospital coats into an undertaking worthy of a dissertation, would not it be much more rewarding to instead finally introduce e-procurement in Bulgaria and strengthen ex ante control?

Other EU member states managed to figure this out a long time ago. Why can’t Bulgaria do likewise?      

By Alexandra Doytchinova, Managing Partner, and Irena Georgieva, Attorney-at-Law, Schoenherr

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Poland continues to be on top of the list of the most attractive locations for foreign investors. In Bloomberg’s “Best Countries for Business 2013” ranking, Poland scored  highest among all Central and Eastern Europe countries and ranked 20th worldwide, among 161 nations analyzed in the ranking. Poland’s economy is one of the largest in the EU – and is the largest of the former communist countries of Eastern Europe. Economic forecasts for Poland are also optimistic. Real GDP growth is projected to speed up, driven by expanding exports and a gradual strengthening in domestic demand.  

Cutting red tape

So, is there a downside? As in every other country, investors entering the Polish market need to overcome certain hurdles. Bureaucracy is often indicated on top of the list. Excessive formalism and state control established by communism and communist-era attitudes in public administration are important factors discouraging foreign investors. And businesses have often complained about the complexity of legal regulations (particularly taxes, including ambiguous and unclear tax interpretations).

As a result, the governing party in Poland has promised to cut red tape, and introduced several reforms aimed at lowering business barriers. More changes are upcoming, in particular a complex reform of the Polish construction law that, according to the government, should simplify and speed up building permit procedures. The long-awaited reform will unify construction regulations into one legal act, making proceedings easier and more efficient.

Payment gridlock

Another significant hurdle for businesses operating in Poland is payment gridlock. Poland still lags behind other European countries in terms of timely payments. In 2013, 69.5% of invoices were paid late. Higher rates were reported only in Great Britain and Portugal. In addition, 10.8% invoices were overdue more than 90 days. Most entrepreneurs indicate defaults of their own debtors as the main reason for not regulating their debts, creating a vicious circle. Gridlock may considerably impair companies’ financial standing or even lead to bankruptcy. 

This difficult market situation has been addressed by lawmakers as well. Several law changes introduced in 2013 were aimed at increasing payment discipline. New regulations were introduced applying to, among other things, VAT (simplifying “bad debt relief”), income tax (introducing tax consequences for overdue payments for debtors and creditors), and maximum payment terms (that should, as a general rule, not exceed 60 days). These new laws, combined with the Polish economy picking up speed, have had a noticeable effect. Companies’ invoice-payment discipline is improving. The Companies’ Liabilities Index, which shows how payment gridlock impedes the functioning of business (i.e., the easier it is for companies to collect debts, the higher the index is), has reached its highest value in the last five years. And average payment delay and debts collection costs are lowering. Overall signs indicate that payment trends in the country are improving. 

Positive business outlook

Ultimately, and despite some challenges and hurdles, investor confidence in Poland remains strong. And, indeed, these difficulties are characteristic of the entire CEE region (many post-communist countries face extensive bureaucracy) or Europe (the number of unpaid invoices has increased significantly during the crisis in many countries). Meanwhile, economic perspectives for Poland look promising. The economy is gaining momentum, and many of the challenges that remain may be overcome with the assistance of tax and legal advisors who know their local and regional markets and can help businesses find a smooth way through them. We have seen the legal and economic backgrounds change in Poland during recent years. Now, as we see business activity reviving again in CEE, we look with optimism to the future.      

By Siegfried Seewald, Partner, Wolf Theiss Poland

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Foreign investors considering purchasing or divesting themselves of stakes in Lithuanian companies that own agricultural land are facing a potentially unpleasant surprise.   

The transitional period ended on May 1, however, the market should be free, and Lithuania should no longer be able to prohibit non-nationals from acquiring agricultural land. However, this is not reflected in the actual law, as restrictions enacted to be effective the same day the transition period ended cannot be seen as allowing free movements — in particular when foreign investors are concerned. 

The legal environment before May 1, 2014, did not regulate the transactions of acquisitions and alienation of shares in legal entities owning agricultural land. Now, however, these transactions fall within the scope of the Amending Law. In particular, if the object of the transaction involves a stake of more than 25% of a company owning more than 10 hectares of agricultural land, the vendor or purchaser has to carefully assess and structure the transaction to satisfy the requirements of the Amending Law, which sets special criteria that the potential purchaser has to meet, and limits the purchaser to a maximum of 500 hectares of agricultural land.

The requirements for a purchaser of shares in a company which owns agricultural land are the same as they are for those who purchase agricultural land directly: that is, the purchaser has to have engaged in agricultural activity for at least 3 of the 10 years preceding acquisition, it has to declare land and crops, its income from agricultural activity has to exceed 50 per cent of all income, and its economic viability has to be proved by a mandatory procedure. These requirements can be met by almost no foreign investors. Thus, practically speaking, the requirements eliminate the possibility of entering into share deals with foreign investors seeking to get a foot into agricultural businesses in Lithuania. The Amending Law actually froze ongoing deals with new foreign investors. And the Amending Law also restricts the ability of current foreign investors to divest themselves of stakes in local companies and retreat from the market. 

Further, the 500-hectare threshold of agricultural land an investor is allowed to own cannot be triggered by a share deal either. For the purposes of calculation of the threshold the agricultural land held by all related parties is considered. The criterion for determining related parties is a direct or indirect stake granting 25 per cent of votes. 

The expansion of the scope of the Amending Law so as to include share deals together with introduction by the same law of other new restrictions caused a wave of discontent among foreign investors, which immediately raised an issue of legitimate expectations. However, the law is in effect and foreign investors have to be armed with patience, as at the moment the possibility to amend it to loosen the legal requirements are only being discussed.      

By Giedre Dailidenaite, Partner, and Odeta Maksvytyte, Senior Associate, Varul

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

When a foreign company acquires a Serbian target, there are several issues which have to be considered when structuring the acquisition financing.   

The prohibition of upstream security and financial assistance is often dealt with by setting up a Serbian acquisition vehicle, pushing down the acquisition debt to such SPV, which initially grants only its share in the operating target as collateral, and merging the SPV and the operating target after the closing, whereupon the operating target provides security on its assets for what has become its own debt as a result of the merger. However, this is not of itself a bullet-proof solution. One would have to have a valid business reason for the post-closing merger to fight a potential argument that the merger was designed to circumvent the financial assistance prohibition.

Other considerations to be taken into account when structuring financings involving Serbian assets as security stem from the features of Serbian pledge laws. 

Whereas Serbian law regulating pledge on movables, IP, and receivables recognizes the concept of security agent as a third party that may take and enforce security on behalf of the creditor, no such concept exists with respect to pledge on immovable. Accordingly, multiple lenders must either each take security for their own portion of the loan or create a joint and several creditor-ship structure whereby each creditor may clam and enforce the entire debt, including by enforcing security. A third option would be to create a parallel debt structure, whereby an artificial debt in an amount equal to the amount owed at any relevant time by the borrower to all lenders under the loan agreement(s) is created in favor of a third party-security agent. This enables the security agent to become a creditor of its own right and enforce security in this capacity. The parallel debt language also provides that the discharge of any portion of the debt owed by the borrower to the lenders under the loan agreement operates as a discharge of an equal amount owed by the borrower to the security agent and vice versa. The problem with the application of this structure in Serbia is that it has not yet been tested by courts and the lenders are generally not willing to accept the risk that the structure may be challenged as a bogus or simulated contract.

With respect to eligible collaterals, it should be noted that the Serbian Pledge Register stands on a controversial position that no pledge over a bank account may be established except on the specific balance in the bank account existing at the time of pledge registration. Such pledge does not extend to funds which may subsequently flow into the pledged bank account. Therefore, in order for the pledge to capture any funds that may come into the bank account over time, the pledgee and the pledgor would have to annex the pledge agreement and update the pledge in the registry each time the balance on the bank account changes, which is entirely impracticable. 

If an acquirer is interested in physical cash pooling which would include the Serbian target, it should know that this type of cash management is not regulated by Serbian law and would not be possible due to restrictions imposed by the Serbian Foreign Exchange Act. Firstly, this piece of legislation contains an exhaustive list of grounds for making cross-border payments, none of which includes transactions underlying cash pooling. Cash pooling could not be justified as a loan to a foreign related company holding a master account, because Serbian companies may not grant loans to non-residents other than to their own subsidiaries. Secondly, Serbian companies may hold bank accounts abroad only in specific enumerated circumstances, none of which includes holding a bank account for the purpose of cash pooling.      

By Mirjana Mladenovic, Partner, BDK Attorneys at Law

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.