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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.

This article will provide a snapshot of the major regulatory reforms in the Republic of Moldova affecting the M&A sector. Having been directly involved in assisting the Moldovan government to cope with the challenges of the reform era, our legal specialists would like to share in this brief overview just some of the actions which have influenced or will influence the M&A sector in Moldova, which is ready to start growing.  

Protection of Competition

In July 2012 the new Competition Law was approved in Moldova. The law provides for specific rules on competition clearance of economic concentrations by the Competition Council, the competent Moldovan competition authority. Thus, prior to putting an economic concentration into operation, parties involved in the transaction should take care to obtain proper competition clearance, otherwise their transaction may lead to negative legal consequences.

The new Competition Law has set out more clearly the thresholds that make competition clearance mandatory. An economic concentration is subject to notification when the combined turnover of all undertakings involved in a deal exceeds MDL 25 million (about EUR 1.6 million) for the year preceding the intended transaction, and at least two of the undertakings concerned had a turnover in Moldova exceeding MDL 100 million (about EUR 633,000) in the year preceding the transaction. The penalty for failure to notify the competent competition authority can be significant, reaching up to 4% of the turnover for the preceding year.

At the moment, only three economic concentrations have been cleared and authorized by the Competition Council. However with the improvement of the economy and an increase in the efficiency of the Competition Council, we expect to see growth in M&A deals next year. 

Simplification of the corporate reorganization procedure

M&A deals as a rule lead to corporate reorganizations which are subject to proper registration by Moldovan competent authorities. The legal formalities related to corporate reorganizations have been rather lengthy and bureaucratic in Moldova, sometimes exceeding six months prior to formal entry of changes in corporate documents. Companies involved in reorganization were required to publish an announcement on their reorganization in two consecutive issues of the Official Gazette of the Republic of Moldova. Upon being informed of reorganization, any creditors could request that the company being reorganized provide additional guarantees for their claims within two months of the announcement’s publication. 

a) The term for creditors to request additional guarantees was reduced from two months to one month from the moment of publication of the announcement in the Official Gazette of the Republic of Moldova or from the date of other notice to the creditor.

b) The number of notifications required to be published was reduced from two announcements to one.

c) The term for submission of reorganization documents for registration was reduced to thirty days after proper notification of creditors, while prior to reform it was three months.

d) Finally, all notifications published in the course of the reorganization process will be also placed free of charge on the official website of the Moldovan registration authority, which will reduce the costs of informing the creditors.

Alternative dispute resolution mechanisms in M&A deals

One of the major challenges to foreign investments in Moldova is the quality of the judicial system and enforcement of judgments. As a prevailing practice foreign investors insist that a foreign law governs M&A deals involving Moldovan entities and that potential disputes be settled in a foreign forum (the usual choices are the arbitration courts of Hague, Stockholm or Paris). Still a number of aspects in an M&A deal are subject to Moldovan legislation, a fact which requires the close attention of Moldovan counsel preparing a legal opinion on any transaction. It should be noted that a choice of Moldovan law and venue in fact may offer decent comfort to foreign investors, at a much lower cost. Of course, there’s little doubt that a better legal framework and more transparent dispute resolution process would significantly improve the current situation and increase the attractiveness of the Moldovan dispute resolution mechanisms which are more affordable to Moldovan companies.

To boost this sector the Government has undertaken to reform both arbitration and mediation legislation to reflect the best and most efficient practices. We await a major shift in ADR which will definitely smoothen some of the issues affecting the M&A sector as well.    

By Cristina Martin and Andrei Caciurenco, Partners, and Carolina Parcalab, Senior Associate, ACI Partners Law Office

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.

Croatia has gained a reputation for being an overly regulated, bureaucratic, and non-investor- friendly market. The steady decline of foreign direct investments is often cited as being the result of this perception. However, with some recently enacted legislative changes, the long process of removing barriers has hopefully started and will reverse this trend.  

A particularly good example of this is the struggle of a reputable US-based fund to proceed with a residential development in Dubrovnik, just below the old Napoleon fortress and next to the proposed Dubrovnik golf course (which has been facing similar obstacles). Unfortunately, the development became entangled in the very protective (and political) local zoning regime, as the County (the second level of regional government in Croatia) denied its consent to the detailed urban plan proposed by the City of Dubrovnik. Despite the fact that a number of mandatory public debates had taken place during the process of the urban plan adoption, in which architects’ associations, citizens’ groups, local land-owners, and other interested parties voiced their opinions and finally supported the plan, County officials persistently blocked adoption. The County did this by doing such things as requesting documents not required by the applicable regulations and requesting additional studies.They even went as far as refusing to accept express clarifications of the relevant legislative act from the Ministry of Construction and Physical Planning confirming that the City’s (and investor’s) proposal was in accordance with all applicable regulations.

The Wolf Theiss team, led by Zagreb-based Partner Luka Tadic-Colic, assisted by Senior Associate Silvije Cvjetko and Split-based Counsel Dora Gazi Kovacevic, has been assisting the investor since 2010 in removing a number of hurdles that the project has faced over the course of its development (such as land registration issues and obtaining approvals and consents required in the zoning process), and has supported it in numerous discussions with the relevant authorities, including the Minister of Construction himself. As a measure of last resort, we are now developing a strategy for the final legal battle, including filing damages claims before Croatian courts, claims before European courts, investment arbitration tribunals, and even bringing criminal charges against the relevant officials.

In the meantime, Croatia has undertaken certain steps in the right direction to assure a more favorable climate for foreign investors. For example, recent changes in zoning legislation have removed the need to obtain certain consents at the regional government level, which would help in resolving situations such as the one described in Dubrovnik. Another important milestone is the recent adoption of the Strategic Investment Act, aimed at expediting the realization of strategic national investments and projects. Unfortunately, many private projects will not meet the relatively strict criteria to qualify under the Act in terms of: (i) the value of investment (generally, projects must exceed 20 million Euros), and (ii) a focus on specific sectors or activities. Also, qualifying for the status of a strategic project does not automatically occur when the conditions are met, as a discretionary decision of the Government is also required. This may not provide foreign investors with a sufficient level of security in planning their investments. However, for projects that eventually succeed in qualifying as strategic investments, the relevant construction permits will be decided upon at the central government level and cannot be torpedoed at the local level.

Finally, the Croatian prosecutor’s office has recently emphasized its commitment to combat the arbitrariness of local “sheriffs” and corruption on the local level in general. We strongly believe these are steps in the right direction and that, once undertaken, they will result in a better investment climate in general.  

By Luka Tadic-Colic, Partner, Dora Gazi Kovacevic and Silvije Cvjetko, Attorneys, Wolf Theiss

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.

Attracting foreign investment and improving the investment environment in Latvia are among the key objectives in policy documents and strategic development plans as well as government declarations in Latvia.  

In the area of investment protection, Latvia ranks 68th, and it has been involved in about ten investment disputes. This may not seem like much, but three of these disputes are still in process and three of them Latvia has already lost. 

Latvia has signed investment protection agreements with 59 countries. Russia, with its investors ranking 6th on the volume of investments, is however not among them. 

Different investors emphasize different issues related to the investment environment in Latvia. Eastern European and Russian investors are primarily unhappy with the low profitability of their investments, while Scandinavian investors are not entirely satisfied with the local legislation processes. This issue has also been raised in the annual reports of the Foreign Investors’ Council in Latvia.

When making decisions about where to place their money, investors look at a wide range of different factors, including economic indicators, labor supply, and tax rates. Recently, investment protection has become one of the key factors for potential investors, who look for their property not to be expropriated, for the ability to recover their investments, and for their transactions not to be reversible by any sudden changes in local regulations.

Changes in the laws and regulations of Latvia are rapid at times, and a considered transition to a new regulatory framework is not always observed. The Constitutional Court of Latvia has provided for such transition period to be observed by setting reasonable timeframes or compensation measures. 

A key to a successful trade and investment environment lies also in the ability of the parties to rely upon the knowledge that their transactions will correspond to the regulations in effect when they were executed, and that they will not be retroactively  voided due to subsequent legislative amendments.

For instance, one of the latest amendments to the Law on Coming into Effect and Application of the Law on Obligations Part of the Restored Civil Code 1937 of Latvia provides that amendments to the Civil Code limiting the amount of contractual penalties as of January 1, 2015, will apply retrospectively to all previously signed contracts valid on January 1, 2014.

Significant legislative amendments and short transition periods indicate a negative trend regarding the predictability of the regulatory framework, which may be particularly frustrating to foreign businesses that carry out or are planning investments in Latvia and are carefully evaluating the potential investment environment. 

Another notable aspect is the use of electronic signatures. The December 13, 1999 European Parliament and Council Directive 1999/93/EC on a Community Framework for Electronic Signatures establishes and defines electronic signature certification services in the legal framework. This directive provides that EU member states may not restrict each other in certification services and the use of electronic signatures if the conditions laid down in the Directive are satisfied. However, in practice there are often problems with cross-border deal closures between companies wishing to use electronic signatures.

The government of Latvia is working on solutions to make it possible to co-sign documents across borders using secure electronic signatures issued in each member state. This year electronic identity cards were introduced in Latvia, which include individual digital signatures. This means that a contract can be signed simultaneously in Estonia and Latvia using a digital signature. This system is likely to promote and encourage cross-border cooperation. 

At the same time there is still no comprehensive regulatory framework for secure and reliable cross-border electronic agreements, which would include electronic identification and authentication. For its electronic identification to be supported in other EU member states, Latvia has yet to engage in the e-SENS project, which was launched in 2013 and for which significant expansion is in the pipeline.      

By Maris Vainovskis, Senior Partner, and Elina Vilde, Lawyer, Eversheds Bitans Law Office

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 Albania commercial companies are most commonly incorporated under the form of limited liability companies or joint stock companies, and supervised companies such as banks, non-banking financial institutions, and insurance and reinsurance companies must be incorporated as joint stock companies. In practice a large number of significant companies — in terms of turnover, number of employed employees, carried-out projects, etc. — are established as joint stock companies as well, including a significant number of companies controlled by foreign investors.  

Due also to the lack of a properly organized stock market in Albania, to date only one company has been licensed as registrar of shares by the Albanian Supervisory Authority. This company is the Share Registration Centre Sh.a. (“SRC”). The SRC is controlled by the Albanian Ministry of Economic Development, Trade, and Entrepreneurship, which owns more than 80% of the shares of the SRC.

In June 2014, the Albanian Minister of Economic Development, Trade, and Entrepreneurship approved an Instruction requiring all joint stock companies registered in Albania (including those with private offer) to register amendments relating to share transfers, registered capital, number and/or nominal value of shares, etc. with the SRC before registering such amendments with the NRC. It is worth mentioning here that the NRC is a central public institution under the direct control of the Albanian Ministry of Economic Development, Trade, and Entrepreneurship, and therefore disposed to implement any orders issued from its direct superior.

Surprisingly, while relevant normative acts regulating the registration of shares of joint stock companies have not been amended, the Minister of Economic Development, Trade, and Entrepreneurship reiterated the same illegal and extra-statutory instruction by irrationally imposing additional procedures and costs on private offer joint stock companies.

In addition, the SRC procedures, costs, required documents, procedural terms, etc., are not published. Filing expenses applied by the SRC are excessively high and out of any logic compared to those by the NRC, which applies a fix flat fee of less than USD 1 for any rendered service. In practice, registration delays with the SRC are excessively long due also to the very limited number of employees at the company and their general lack of professionalism and experience. Finally, the SRC has only one central office, in Tirana, which means that joint stock companies operating in other cities are obliged to go to Tirana in order to perform filings with the SRC (for comparison, the NRC has more than 30 offices located in all the important cities of Albania).

The discussed instruction has been officially objected to by Albania’s leading law firms through a letter sent to the Minister of Economic Development, Trade, and Entrepreneurship requesting that it revoke the issued instruction. It has also, once again, been publicly contested by the Albanian business community. Nevertheless, to date this illegal, irrational, and abusive instruction remains in force, demonstrating thus that in Albania, political will may still overcome laws, and independence of administrative power from the executive is far from being ensured.      

By Andi Memi, Partner, and Selena Ymeri, Associate, Hoxha, Memi & Hoxha

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.

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.