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Although there has been a healthy number of mergers and acquisitions over the years in Estonia, the transactions are fairly under-regulated in the country, and there is no comprehensive court practice on the subject.  

If the shares of a private limited company have not been registered in the Estonian Central Register of Securities (Estonian CRS), which is not mandatory for private limited companies, then the share transfer deed must be notarised. In addition the application made to the commercial register after registration in the Estonian CRS would also have to be notarised. The requirements for notarial attestation are accompanied by notary fees, which depend on the value of the transaction, and are thus usually relatively high.

It is important to point out that in Estonia documents issued by a foreign state usually have to be legalised or authenticated by a certificate replacing legalisation (apostille). This can cause difficulties because in some countries – such as the United Kingdom – obtaining an apostille is complicated, in which case intra-firm transformations (i.e. changes in the composition of the management board or an increase of share capital) can take a long time due to the need to wait for an apostille. This problem in turn can inhibit the interest of foreign investors to do business in Estonia. In addition it seems overly encumbering that there is also an obligation to translate notarial certificates into Estonian.

Of course, certain notarisation requirements are necessary for security reasons such as ensuring a trustworthy business environment and even preventing crime, but it is also important to keep in mind that over-regulation can result in the deterioration of interest of foreign investors, and it can be argued that the current notarisation and certification requirements especially in connection to M&A transactions are no longer necessary to achieve the security-related goals. Most importantly, the reduction of notarisation requirements would make entrepreneurs’ lives much easier and would have a positive effect on the flexibility of the business environment.

Regarding public limited companies the registration of shares in the Estonian CRS is mandatory, and although registration is voluntary for private limited companies, it would be advisable to register the shares regardless, because due to current requirements registration results in lower notary fees. It should be mentioned that the registration of shares isn’t a very straight-forward process either, however, and in order to acquire shares one has to have a securities account, which can only be opened in a bank that is a member of the Estonian Central Securities Depository that maintains the Estonian CRS. A bank account has to be opened in the same bank, which in turn is a pre-requirement for opening a securities account.

It has to be stressed that banks have higher compliance requirements for rendering financial services to individuals who are located outside the European Union (EU). These requirements originate from the Money Laundering and Terrorist Financing Prevention Act, corresponding regulations of the Minister of Finance, the instructions of the Financial Supervision Authority, and directives of the EU. As a result the opening of an account is only simple for residents of the EU.     

By Merlin Salvik, Partner, and Deivid Uibo, Lawyer, Hedman Partners 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 financial services sector in Hungary has been fairly active in recent years. The entire Hungarian banking sector seems to be in a state of flux, mostly due to the various steps taken by the Hungarian government in an attempt to counter the effects of the global financial crisis and to the Hungarian-specific problem of widespread foreign currency-based lending arrangements. Although approximately 70% of the Hungarian banking market is foreign-owned, the government has clearly stated its intention to decrease this proportion to 50%.  

As a result, the M&A market has followed three principal trends: (1) share deals made mostly for strategic reasons, as some players leave the market and others enter it; (2) portfolio deals between existing players as some downsize and others make strategic acquisitions; and (3) the emergence of new investment from new entrants in new market segments such as payment services. 

These trends may be further strengthened by the asset quality reviews currently ongoing at Hungarian banks. The expectation is that, just like in the rest of Europe, the AQR will expedite decision-making on portfolio transfers and strategic departures from markets.

One obstacle to leaving the Hungarian market is that many major international players have converted their local subsidiaries into branches in order to benefit from home-country supervision and to free up regulatory capital. Although successful in achieving these objectives, the change creates a potential problem on exit, as the local branch of a foreign parent company may not be disposed of by share sale (although asset deals may be considered). 

The problem with asset deals, however, is that if a complex foreign exchange denominated loan portfolio is to be transferred by way of an asset deal, any litigation affecting the portfolio must remain with the transferor. Under Hungarian law, the claimant’s consent is required before a claim can be transferred to a new defendant. This creates a significant problem for foreign exchange (FX) portfolios, which are affected by significant litigation, as potential transferors will only be interested in selling their loan portfolios if they can also get rid of any litigation connected to them.

The second phase of legislation, due in September/October 2014, is expected to provide clarification for the banking sector as the new law renders certain FX claims invalid but does not fully explain how customers will be compensated once invalidity is established. Until the second phase legislation is in place, uncertainty will reign in the market. 

Another rumor sweeping the market is that the Government plans to introduce further radical changes affecting FX loan customers, perhaps even compelling the conversion of certain foreign currency denominated loans to be converted into HUF loans. At the moment, it is unclear when and how this measure would be taken and how much the financial impact of it would be absorbed by financial institutions and how much by the Government.

The net result is likely to be large losses for banks that, in recent years, have imposed on their customers forced currency conversion or unilateral margin increases (often creating unfair and invalid repayment obligations). Following such losses, a certain degree of consolidation of the Hungarian banking system is likely. 

New legislation on resolution and recovery procedures will add another layer of color to the banking sector by giving the local regulator new powers to exercise effective control over banks in financial difficulties.      

By Erika Papp and Ivan Sefer, Partners, CMS Budapest

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.

After long-term unfavorable results and inefficiency in tax collection – in particular value added tax (VAT) – the Slovak government has commenced a fight against tax evasion. As a result of this initiative, the Ministry of Finance of the Slovak Republic has taken a number of measures to increase the effectiveness of tax collection and to move towards at least the average of other European Union member states.  

Prior to the amendment, the transfer of a shareholding interest in a limited company was effective between the parties at the moment of contract (unless agreed otherwise between the parties). The actual registration of a change of shareholder in the Commercial Register had only declaratory effect. These rules corresponded with  common business practice, which provided for the immediate transfer of a shareholding interest between the transferor and the transferee. Also for this reason, a limited company was the most popular legal form when starting a business in Slovakia or in any project transactions preferring a quick and informal transfer of assets in the form of a share deal. The relative informality and flexibility in the transfer of a shareholding interest in a limited company predestined it for wide use in business in Slovakia as well as abroad. However, since the amendment has come into effect, transfers of majority shareholding interests in limited companies become effective only when they are entered into the Commercial Register. 

The most important issue seems to be that without the consent of the Tax Authority or without the written declaration of the foreign entity in those transactions not involving Slovak taxpayers, the Commercial Register will not register the transfer of a majority of a shareholding interest, and thus the effects of the transfer will not occur. This needs to be borne in mind with all M&A transactions involving the transfer of a majority shareholding interest in a limited company, and, accordingly, this risk should be acknowledged in the Share Purchase Agreement and Escrow Agreement, if it is part of the deal. 

As per the amendment, the actual effect of such transactions is extended by approximately two weeks, which constitutes the time for obtaining the approval of the Tax Authority (five business days) and the term in which the Commercial Register registers the change (which is two business days from the submission of the application). However, in practice, due to the high work load of clerk it often occurs that the Commercial Register does not keep to the prescribed period, which can lead to additional delays in M&A transactions. 

Currently, the Slovak government is considering another change in legislation related to limited liability companies as part of a package of tax reforms related to the limited companies. Preliminary information suggests that in addition to changes related to the amount of share capital, the payment of profit and other capital funds to individual shareholders will be tightly regulated considering the regulated amount of equity to liabilities of a limited company.      

By Jana Togelova, Junior Partner and Michal Hulena, Senior Associate, Ruzicka Csekes in association with members of CMS

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 it comes to distressed M&A transactions, the Austrian market – like many other markets in the region – has increased in recent years, both in terms of volume and the number of deals being done. Not surprisingly, time is key, and transaction documents are usually prepared, negotiated, and signed within a very short period of time. Due diligence (of the legal kind) is limited to what is feasible given the tight deadline.

The liability regime in Austria is perhaps particularly complex, and investors should be aware of the various options and challenges to ensure that the transaction will be carried out successfully.  

Asset deals vs Share deals 

Any purchaser of assets in a distressed M&A deal will be keenly interested in not assuming any liabilities associated with the company it is purchasing – obviously one of the main advantages over a share deal. 

Austria is fairly unique in the region in that it has wide-reaching provisions which impose successor liability on purchasers in asset deals for pre-existing liabilities of the sold business. Hence, it is not always so easy to achieve this result through an asset deal in Austria.

Besides successor liability provisions in tax and social security law, both the Austrian Civil Code (ABGB) and the Company Act (UGB) contain provisions on purchaser liability for M&A deals which apply cumulatively. It is thus key for purchasers to be aware of the implications and interplay between these two liability successor regimes. 

Section 1409 of the Austrian Civil Code 

Under Section 1409 of the Civil Code (ABGB), a purchaser in an asset deal – generally speaking – is jointly and severally liable with the seller vis-à-vis the seller’s creditors for any pre-existing liabilities of the acquired business. The purchaser’s liability, however, is limited in amount to the value of the assets actually acquired. 

To trigger successor liability, the assets sold must represent either substantially all of the assets of the seller or at least be a separable business unit. Otherwise creditors would be better off by enforcing claims against a seller where the seller has not yet turned the assets into cash.

Further, the law assumes that the purchaser must have known or should have known of the pre-existing liabilities at the time of the purchase. In order to minimise the purchaser’s exposure, it is therefore highly recommended to perform detailed due diligence instead of relying only upon the seller’s reps and warranties. 

However, if the purchaser has agreed with the seller that the purchase price funds are to be used to pay off the seller’s debt, liability is reduced on a euro-for-euro basis. 

Importantly, successor liability may also apply to a share deal (!) if the shares sold represent substantially all the assets of the seller. Section 1409 ABGB will however not apply if a company or assets are acquired by way of a mandatory reorganisation or insolvency proceedings, or if the debtor is being supervised by a trustee of the creditors. 

This is justified by pointing out that in contrast to the acquisition of assets in non-distressed scenarios, company reorganisations in insolvency obviously only work if the purchaser is not liable for past liabilities. Further, the claims of unsecured creditors are limited to what is referred to as the insolvency quota in insolvency proceedings.

Section 38 of the Company Act (UGB)

In contrast to Section 1409 ABGB, Section 38 of the UGB provides for liability that is not limited to the value of the assets acquired by the purchaser. Moreover, the purchaser’s liability may not be reduced by an agreement between the purchaser and the seller that the purchase price funds will be used to pay off the debt of the business sold.

In practice, however, the purchaser and the seller may entirely exclude the purchaser’s liability vis-à-vis third party creditors if: (i) the agreement is entered into the commercial register at the time of the asset transfer; (ii) a public announcement is made that is customary in the market; or (iii) third party creditors are individually notified. 

Contractual relationships relating to the sold business are transferred by operation of law to the purchaser unless a third party objects within three months of receiving notice of the transfer. Since a third party need not justify its objection, the latter is at times used by creditors to exercise pressure, primarily in distressed deals.

Just as with Section 1409 ABGB, Section 38 UGB – including its successor liability provisions – does not apply in mandatory reorganisations  or insolvency proceedings, or the supervision of the debtor by a trustee of the creditors.

All reasons enough to start looking for a good attorney in Austria.      

By Thomas Trettnak, Partner, CHSH Cerha Hempel Spiegelfeld Hlawati

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.

Despite the country’s deep political crisis, particularly in the Crimea and the eastern regions of the country, Ukraine still offers tremendous investment potential. Recently Ukraine has signed the Deep and Comprehensive Free Trade Agreement, as well as the broader EU Association Agreement with the European Union. Both agreements could move Ukraine towards a more open and transparent trade regime and improve the country’s investment climate. Currently the global investment community is closely scrutinising the steps that the new Ukrainian President and Government are taking, evaluating the risks perceived by industry leaders, bankers and investors.  

As a result, for a number of reasons, compliance issues are currently high on the list of priorities for all multinational companies doing business in Ukraine. First, there is the perception that the problem of corruption in Ukraine is significant, underpinned by the 2013 Transparency International Corruption Perceptions Index, which ranks Ukraine 144th (out of 177 countries). Second, new anti-corruption legislation was introduced in Ukraine in July 2011 (the “Anti-Corruption Law”), making it necessary for multinational companies to take another look at their compliance policies and procedures. Finally, these developments have been occurring against the backdrop of the introduction of the United Kingdom’s Bribery Act, the enhanced enforcement in the U.S. of the Foreign Corrupt Practices Act, and the increasing level of cooperation between enforcement authorities across the U.S. and Western Europe in terms of the oversight and regulation of the business conduct of their companies overseas, particularly in high-risk emerging markets.

The Anti-Corruption Law sets forth the main principles for combating corruption. In addition, four laws were adopted between April and May of 2013 in order to enhance the government’s ability to combat corruption and address Ukraine’s commitments to the European Union and the Group of States Against Corruption. The new legislation includes, among other provisions, corporate criminal liability for certain corruption offences, asset forfeiture as a penalty for certain corruption offences, and whistleblower protection laws. 

The Anti-Corruption Law defines corruption misconduct as an intentional act that has the features of corruption, and is performed by a covered person (as defined below) who is subject to criminal, administrative, civil and/or disciplinary liability. The following persons, among others, are now subject to liability for corruption: (i) Ukrainian civil servants; (ii) foreign civil servants; (iii) officers of international organisations; (iv) officers of legal entities; and (iv) “public service providers,” i.e., persons who provide public service even though they are not civil servants, such as auditors, notaries, experts, evaluators and arbitrators. The law introducing criminal corporate liability for certain corruption offences will take effect in September 2014.

The Anti-Corruption Law prohibits a covered person from receiving any gifts other than in accordance with the generally recognised acceptance of hospitalities and within the expressly allowed limits. At any one time, the value of a gift may not exceed half of the statutory minimum monthly salary (approximately USD 60). Within a calendar year, a covered person is not allowed to receive gifts from one source with a value of more than one statutory minimum monthly salary established as of the first of January of the current year. In 2014 the total value of gifts received from one source may not exceed approximately USD 120. 

The Anti-Corruption Law expressly requires that a state official take active measures to prevent any conflict of interests. In addition, information about a state official’s property, income, expenses, and financial obligations must be declared and is subject to public disclosure. State officials are not allowed to have any income in addition to their salaries, apart from income received from medical or sports judging practice or artistic or scientific activity. Also, for one year after the resignation, former state officials are prohibited from occupying certain positions and roles within the companies that they have monitored prior to their resignations.

Any losses and/or damages caused by corruption misconduct must be duly compensated to the state and/or to the other injured party. Moreover, decisions of a state body related to alleged corruption offences may be challenged in court. The Anti-Corruption Law does not indicate any mandatory or recommended actions that could reduce the risk of violations or would mitigate sanctions or other negative consequences. However, the precautions that would protect a company from being penalized under US or European anti-corruption legislation (e.g., adoption of policies, monitoring, and investigation) can also be implemented in Ukraine. 

Conducting an “anti-corruption due diligence investigation” of potential business partners and intermediaries before engaging in business activity with them is certainly recommended. Despite the difficult operating environment, some investors are finding opportunities in Ukraine. For their part, officials at regional and local levels are increasingly looking to attract investment and create jobs in their regions who become willing partners for investors in need of land or permits, which frequently are controlled below the national levels.      

By Serhiy Piontkovsky, Partner, Baker & McKenzie

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.

Throughout the last couple of years, the Romanian government has initiated various tax measures meant to attract foreign investors and encourage their long term operations in Romania. Although this has always been the ultimate goal, none of the recent Romanian governments have had a coherent strategy to insure conditions for economic development while achieving budgetary balance at the same time. Moreover, a large majority of the tax measures initiated during this period have led to an increase of the tax and bureaucratic burden on all Romanian taxpayers.  

Among these, perhaps the biggest challenges which foreign investors face in Romania is the overall instability and unpredictability of Romanian tax legislation. In fact, recent analysis I conducted revealed that in the past 10 years alone the Romanian Tax Code and Tax Procedure Code have been modified in more than 220 significant ways, while budgetary revenues remained at approximately 28 – 29% GDP. Therefore, we can say that with an average of over 20 changes per year to its two most important pieces of tax legislation, Romania cannot secure the legislative stability and predictability which any investor would seek. This is one of the main aspects which the Romanian government needs to improve in the future.

Another important aspect which needs improvement pertains to the regulation of the tax consolidation in the Tax Code, which has not yet been drafted, despite all the requests pouring in from the Romanian business environment. Essentially, a mother company cannot act in a unitary manner from a taxation point of view at the level of the entire holding, so that it can use the profits obtained by some of the companies within the group to offset them against tax losses obtained by other companies within the group.

Yet another significant issue affecting taxation in Romania regards the poor efficiency of its tax administration system. The best indicator is the huge delay in receiving advance tax rulings or advance pricing agreements taxpayers request from the Romanian Tax Authorities.    

In addition to the overall lack of stability and predictability of Romania’s tax legislation, it is quite often inconsistent with Romania’s macroeconomic objectives. In this regard, it is worth mentioning two  substantial inconsistent legislative changes: 

First, the VAT rate increased from 19% to 24%, starting July 1, 2010, which deepened the economic crisis, and led both to a decrease in consumption (Romania being the only EU Member State where consumption has decreased within the past 6 years) and to an increase in tax evasion.

Second, the tax on constructions, introduced on January 1, 2014, quantified as 1.5% from the net book value of the constructions for which no building tax is due. Its strongest impact will be in agriculture, telecom, and energy, domains where the infrastructure used in operational activity has the largest costs incurred and registered. Overall, the impact of this measure on the macro-economy will be the decrease of investments. This measure was intended to be later balanced by a new profit tax exemption for the profit reinvested for the acquisition or production of new equipment. 

On the other hand, recent amendments regarding the taxation of dividends and capital gains have put Romania on the map of the European countries with the most favorable holding legislation, along with the Netherlands, Cyprus, and Luxembourg.

These positive changes are also backed up by the 16% corporate income tax rate, one the most competitive in EU, and by the very large number of DTTs concluded with countries throughout the globe. It is also worth mentioning that at this moment there are also intense discussions regarding a potential decrease of the social security contribution by 5%.

To conclude, even if the latest changes to the holding tax legislation do not entirely compensate for the  shortcomings of the Romanian tax regime, investors may want to keep their eyes on Romania. The country shows high potential to become an important regional hub for foreign investments, considering latest amendments, its importance within Eastern Europe, and expected future legislative changes which will propel Romania towards full compliance with reasonable investor expectations for a European Union member.      

By Gabriel Biris, Partner, and Ioana Cartite, Senior Tax Consultant, Biris Goran

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.

There can be no doubt that the economic crisis in Europe has been felt especially acutely in Greece. With estimates of EUR 100 billion having been erased from its economy, record youth unemployment and a relentless roll-out of austerity policies, the country has had a particularly rough ride in recent years. Unsurprisingly, foreign direct investment (“FDI”) has suffered badly, with total FDI falling from approximately EUR 3 billion in 2008 to approximately EUR 250 million in 2010. And the country’s economy continued to contract in the first quarter of 2014. Nevertheless, after six continuous years of painful recession, there may be signs that Greece is on its way to a (slow) recovery – export performance is rising, Greece is back in the debt markets, and foreign investors are starting to reconsider FDI in Greece.  

Traditionally, investors in Greece have been keen to take advantage of the opportunities afforded by turquoise seas and sunny skies, and while investor confidence has no doubt been battered by the financial crunch, tourists have been amongst the quickest to return, with revenues from the tourist industry expected to rise by 13% (to a record EUR 13 billion) in 2014. European investors are still treading with caution, while others have been quick to seize the new opportunities that have presented themselves on the back of the downturn. A recent example from October 2013 is the acquisition of the Astir Hotel complex in Southern Athens which commanded a price in excess of EUR 440 million from backers of Jermyn Real Estate originating in Abu Dhabi, Kuwait and Turkey.

Potential for FDI has also been noticed by investors further afield with The Fosun Group of China reportedly investing alongside Lamda Development of Greece and Al Maabar Real Estate Group of Abu Dhabi for the EUR 915 million acquisition of the Hellinikon area in Southern Athens. The project, which is set to turn the former Athens airport into a thriving tourist complex, is predicted to contribute 1.2% of the Greek GDP in years to come. However, aside from the return of FDI to tourism and real estate markets, new roles for foreign investors in Greece are also envisaged in the energy sector. The EU has arguably set its sights on Athens to relieve dependence on Russian gas (which is currently transported through the Ukraine and amounts to roughly 15% of total EU demand). The Trans Adriatic Pipeline, expected to be functional in 2019, is intended to transport natural gas from the Caspian Sea to the Greek border, through Albania and the Adriatic Sea to Italy and further into Western Europe, is one of a number of initiatives stirring the industry. New legal frameworks relating to the exploitation of hydrocarbons have also been put in place, demonstrating the Greek government’s commitment to developing the sector and further increasing investor confidence. 

The push in the energy sector has further been backed by recent interest in the Greek shipping market and, while merchant shipping has always been a major part of the Greek economy, levels of foreign interest have soared in recent months. In May, the shipping world welcomed the “Athens Declaration”, under which marine policy for the EU was outlined for the coming years. The Declaration, conducted under Greek chairmanship, was also applauded by representatives of the European Community Shipowners’ Association. In addition, recent Greek legal developments have expedited the port and terminal development in Piraeus. Relations with China have proven to be of paramount importance to the Greek State’s privatization program, and COSCO, already possessing a 35-year concession to run Piraeus’ container piers II and III, is beginning to transform the capital’s port into a distribution centre for Chinese goods into Europe. Plans have also been mooted for a further twelve ports around the country.

During the Chinese Premier’s visit to Athens in June, financing deals reportedly worth EUR 6.5 billion were concluded and a funding arrangement between the China Development Bank and Greek container shipping company Costamare (reportedly worth USD 1.5 billion) took center stage. 

Cooperation between China and Greece is expected to strengthen over the coming years with further Chinese plans for investment revealed in relation to the Greek rail network with linkage between Thessaloniki’s port (the second largest in Greece) and the national network expected to be functional in 2015. Through the eyes of post-recession optimism, the opportunities seem rife with a planned integrated distribution hub, comprising of cargo handling facilities and inter-rail networks, having the possibility to shorten Chinese export time to Europe by up to eleven days.

What remains to be seen is whether further foreign investors will be buoyed by Chinese confidence to stray outside the traditional tourism opportunities in a country only just emerging from crisis. While the road to recovery will be long, there certainly seems to be cause for optimism, and Greece may have finally turned a corner.      

By Jasel Chauhan, Partner, Holman Fenwick Willan

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 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.