Category: Uncategorized

1. State-Owned Enterprises in Austria 

In order to renew its largely destroyed industries after World War II, the Republic of Austria has experienced an extended period of strong governmental intervention, in particular due to nationalization measures of important industry sectors including manufacturing and energy.     

2. OIAG

In 1967 Austria established a state-owned holding company to hold and govern a significant part of Austria’s nationalized post-war industry. This holding company underwent several reforms and restructurings, and is now called Oesterreichische Industrieholding AG (“OIAG“). 

The OIAG focuses on two core functions on the basis of a special act – the OIAG-Act.

Pursuant to this act, the OIAG is primarily an investment management body and administers its Austrian shareholdings. The OIAG has to ensure the maintenance of influence over its SOEs by either holding at least 25% plus one share of the voting share capital in each company (giving OIAG certain statutory approval rights) or by exerting influence on the basis of shareholder agreements. 

• Secondly, the Austrian Federal Government can issue a privatization mandate to OIAG authorizing the OIAG to further privatize the companies it owns. 
• Currently the OIAG holds a minority share in the international oil, gas and energy company OMV (31%) and the telecommunications provider Telekom Austria Group (28%). 
• OIAG also owns 53% of the shares of the postal service provider Oesterreichische Post AG. 
• In terms of recent developments, OIAG just concluded a shareholders agreement with America Movil in order to ensure Austrian interests in Telekom Austria Group for the next 10 years.
• OIAG’s total shareholding portfolio is currently valued at around EUR 5.6 billion.  

At present there are political discussions about either transferring other major SOEs to the OIAG or winding down OIAG and selling off its shareholdings. An amendment of the OIAG-Act could also lead to the OIAG taking on new responsibilities such as the promotion of small and medium-sized businesses. This is ongoing and has not been decided yet by the Austrian Government. 

3. Legal Framework of Privatizations 

Pursuant to the Austrian privatization act (Privatisierungsgesetz), all privatizations of SOEs have to be based on a privatization concept and must be authorized by the Austrian Federal Government. For any privatization of companies currently held by OIAG, the OIAG-Act has also to be taken into consideration. 

Although the OIAG is dependent on a privatization mandate of the Austrian Federal Government, it is free to determine the specific structure of an individual privatization, within the scope the OIAG–Act. Additionally, the OIAG has to consider the interests of the respective company and the Republic of Austria in all privatizations it undertakes.

4. Privatization Waves in Austria 

Austria has a long history of transferring governmental responsibilities to publicly-held companies. For example, Austria’s road pricing and road maintenance is handled by a publicly-held company called ASFINAG. Although not privatization per se, the transfer of governmental responsibilities to publicly-held companies is often an important first step for a subsequent privatization. 

In particular due to Austria joining the EU and in order to increase income for the Austrian budget, there have been several waves of privatization in nearly all kinds of state-owned areas, including telecommunication, the cultural sector, public transport, and the research and development sector. During the last 15 years, OIAG alone handled 24 privatizations, including some major SOEs such as the Austria Tabak cigarette manufacturer, the Dorotheum auction house, the Vienna Airport, and the Oesterreichische Postsparkasse postal bank. This provided total placement and privatization gains of around EUR 6.3 billion, mostly via the Vienna Stock Exchange. 

5. Future Perspectives oF Privatization in Austria

The OIAG currently holds no privatization mandate for a specific SOE. From our point of view, there still is a considerable potential for privatization of SOEs in Austria, including both full privatizations as well as the complete sale of partly privatized/partly state-owned companies. Since the OIAG only holds three major participations, there are two possibilities for its development in the immediate future, both mainly dependent on the outcome of political discussions: Either its role as primary state-owned holding for SOEs will be reinforced and other SOEs such as ASFINAG will be transferred to OIAG, or the concept will be abandoned altogether and the remaining participations will be transferred back to the Republic of Austria. Either path will lead to an interesting future for privatizations in Austria.       

By Rainer Wachter, Partner, and Oliver Werner, Attorney-at-Law, CMS Reich-Rohrwig Hainz

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.

The privatization era in Albania began in 1991, following the adoption of the country’s new Constitution and the “On Sanctioning and Protection of Private Property, Free Initiatives, and Privatization” Law.   

Law no. 7501, “On Land”, dated July 19, 1991, and law no. 8053, “On Transfer Without Compensation of Agricultural Land Ownership”, dated December 21, 1995, stipulated that agricultural fields, which had been previously controlled by collective and state farms, were to be divided into plots and distributed to the collective members and farm employees in a system of family ownership.

Law no. 7652, “On State Housing Privatization”, dated December 23, 1992, required residential properties, including apartments and houses with small land plots, to be transferred into the ownership of their occupants.

Law no. 7698, “On Restitution and Compensation of Properties to Former Owners”, dated April 15, 1993 (which was revised by law no. 9235, “On Restitution and Compensation of Property”, as amended, dated July 29, 1994), enabled families that had owned land and property prior to 1945 to claim restitution of their non-agricultural properties, or alternatively to receive other property or financial compensation.

The following five years saw successive governments engage in a program of accelerated privatization; the process was carried out under the guidance of the World Bank and the International Monetary Fund. During this period, the majority of small-and-medium-sized enterprises in the country were sold, leased, or liquidated. By 1996, much of Albania’s economy had shifted into private hands.

A mass privatization program, enabling citizens to buy equity in public enterprises, also began in 1995. However, this process proved difficult to implement, and it was halted in 1997.

The process suffered from lack of strategy and organization in the liberalization of the market. The lack of capital available, due to an underperforming financial and banking system, also impaired the process.

In April 1998, the government approved the Strategic Sectors Privatization Strategy and began  privatization of strategic sectors, including large, state-owned industries. Law no. 8306, dated  March 14, 1998, provided a privatization strategy for sectors considered to hold significant importance for the country’s economy.

Examples include: telecommunications; posts; mining; oil and gas; forests and waters; airport; insurance companies; and state-owned second tier banks. State enterprises and companies with state-owned capital operating in strategic sectors were, as a result of the law, also open to privatization. In order for a state-owned enterprise to be privatized, a specific law had to be approved by the Albanian parliament. This practice remains in force today.

In the years following law no. 8306, numerous companies operating in strategic sectors were entirely or partially privatized.

The privatization of the energy sector was a special focus in the last decade, and it remains so today. Between 2005 and 2010, the Albanian government unbundled the industry’s transmission and distribution systems, introduced a new power market model, and granted concessions for the development of new hydropower plants to private investors.

The privatization of the Transmission Operator System was followed by the privatization in 2013 of four existing medium-sized hydropower plants on the Mat and Bistrica rivers, which have a combined capacity of 76.7 megawatts. The four plants were privatized through competitive international tenders.

However, the wave of privatization seen in previous years has declined recently as Albania, like many countries, was hit by the global economic crisis. The failed sale of the shares held by the Albanian state in INSIG SHA, the only state-owned insurance company, is a particular example of the effects of the financial crisis. The Albanian parliament authorized sale of the state’s shares in 2006; there were also attempts to offer the shares to strategic investors in the international markets – and later in the domestic market, too. The offering did not attract investors, however, and the company, which has subsidiaries in the Republic of Kosovo and FYROM, continues to be owned entirely by the Albanian state.      

By Genc Boga, Senior Partner, and Sabina Lalaj, Senior Associate, Boga & Associates

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.

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.

The privatization of majority state-owned companies continues to be the primary source of M&A activity in Slovenia in 2014. However, several recent sales processes in Slovenia – most notably the Mercator sale process – have also included non-state related sellers participating in a sale consortium for the sole purpose of selling their shareholdings. Such sellers typically do not hold joint control over the target and, as far as the consortium is concerned, its members have never obtained merger clearance for acquisition of joint control over the target or published a mandatory takeover for the shares in the target. In such circumstances, any potential purchaser as well as the selling consortium are faced with several dilemmas.   

Second, because the sellers have only teamed up for the purpose of the sale, they usually do not have a good insight into the workings of the target company and are therefore not prepared to give the buyer any business-type representations and warranties (relating to either the period between the last published annual accounts and signing or the period between signing and completion). 

One of the solutions to the above issues, introduced by our law firm probably for the first time in Slovenia in the Mercator/Agrokor deal, was for the buyer and the target to enter into a pre-completion business combination agreement. In such an agreement, the buyer typically gives  the target company several undertakings (in connection to future business conduct of the combined groups, increase of capital, pay-downs to lenders of the target group in case of change of control triggers and similar) in exchange for deeper due diligence and assurances by the company about its past and future business behavior. Although such assurances are given by someone who will be acquired, the fact that management of the target (which may also be requested to give them personally) stands behind the assurances provides at least some level of comfort to the buyer. Management representations and warranties are not common in Slovenia (also because the management usually does not have a substantial capital interest in the target) but have in the past been often requested. Business combination agreements may also regulate assistance with respect to merger clearance proceedings and various information undertakings. It is not unusual for definite share purchase documentation to be conditional on the entry into a business combination agreement with the target. 

While obviously all business combination agreements must take full account of applicable competition laws and takeovers rules in order not to trigger any premature merger clearance or mandatory takeover bid requirement, such agreements seem to be slowly becoming a “market standard” in deals involving a consortium of independent sellers.      

By Bojan Sporar, Partner, Rojs, Peljhan, Prelesnik & Partners

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.

In the past, foreign investment in Russia has been characterized by the use of offshore structures. Typically, foreign investment would be via a joint venture arrangement, whereby the parties establish an offshore holding company and regulate cooperation through a JVA. However, recent developments in Russia may impact the use of offshore structures going forward and force a reevaluation of existing structures.  

Broadly, the Bill introduces three key measures. 

First, controlled foreign companies (“CFC”) rules, whereby Russian tax residents are required to pay Russian corporate tax (20%) or personal income tax (13%) on attributed, undistributed CFC profits in excess of RUB 3 million, in respect of CFCs they “control” (i.e. exert or may exert a determining influence over decisions concerning CFC profit distribution), or CFCs in which their interest exceeds 10%. “CFC” is broadly defined. It can be a “foreign entity” that is not Russian tax resident and whose securities are not listed on a Russian Central Bank-approved stock exchange. It can also be a “foreign structure” (e.g. a fund, trust or other form of collective investment). However, a foreign entity will be exempt in certain circumstances; in particular, where its permanent residence is in a jurisdiction included in the list of states that exchange tax information with Russia (the “white list”), provided it also meets an effective tax rate test (15%). So far, there has been no indication of the jurisdictions to be included on the “white list”. However, as the effective tax rate test applies to gross income, the effective tax rate will most likely be lower than 15% for foreign entities receiving primarily tax exempt passive income. Consequently, a significant number of existing offshore structures may be caught by the CFC rules. 

Second, reporting obligations for Russian tax residents in respect of their participation in all foreign entities in which their participation is 1% or more or where they are a controlling person. There are also similar reporting obligations proposed in respect of foreign structures.

Third, a “management and control” test for assessing the Russian tax residence of foreign entities, whereby a foreign entity whose effective management and control is found to take place in Russia will be subject to Russian taxation, regardless of its jurisdiction of incorporation.

Significant fines are proposed for non-compliance.

In addition to increased tax exposure, the Bill may result in extensive compliance related costs and increased complexity and costs in maintaining existing offshore structures. 

Consequently, Russian business is currently lobbying the Russian Government to revise certain aspects of the Bill (e.g. reduce tax rates applicable to CFCs; increase default “control” threshold from 10% to 50% (plus one vote); increase reporting threshold from 1% to 25%; removal of “management and control test”; phased introduction of deoffshorization measures; moratorium on enforcement of penalties until 2017). Although the Russian Government has been receptive to some changes, discussions are still ongoing and it remains to be seen what form any concessions ultimately take.  

Nevertheless, participants should review existing structures and consider potential restructuring opportunities, to mitigate the effect of the contemplated measures.

If passed, the Bill may render offshore structures less attractive to Russian counterparties, making it difficult for foreign investors to insist on their future use. Tax considerations aside, foreign investor preference for offshore structures has predominantly been driven by the greater legal certainty, flexibility and protection such structures afford. However, recent amendments to the Civil Code, in force from September 2014, encourage the use of onshore structures by addressing perceived shortcomings under Russian law. In particular, the amendments clarify rules governing Russian-law governed JVAs and introduce additional flexibility with regard to the classification of Russian legal entities and corporate governance. 

In conjunction with proposed deoffshorization measures, the Civil Code amendments may result in a greater insistence on the use of onshore structures by Russian counterparties. However, until foreign investors can be confident that they are able to implement all their desired commercial arrangements comprehensibly and reliably under Russian law and enforce their rights thereunder, resistance to the use of onshore structures will remain; notwithstanding the form that any deoffshorization measures take.      

By Sebastian Lawson, Partner, and Sean Huber, Senior Associate, Freshfields

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.