Category: Uncategorized

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.

Almost one year since the Slovenian National Assembly gave a “go-ahead” to the sale of state equity investments, the privatization procedure in the country is generating critical reactions from experts. While the majority of European countries are still struggling to recover from the economic crisis, the success of current privatization in Slovenia is being called into question, especially in light of recent affairs connected to the sale processes and political turbulence in the country.   

Uros Cufer, the Minister of Finance, recently stated that the last two of these companies are included in the current plan for the sale of state assets, which has not yet been passed by the National Assembly. According to unofficial information, the government is now preparing to sell state equity investments in 80 different companies.

The largest profit is to be expected from the sale of Telekom Slovenije, the largest provider of communication services in Slovenia. Although the sale of a 75.5% stake of the company will open the Slovenian market to foreign investors, the government’s decision to sell the equity investment in Telekom Slovenije has sparked controversy, as Telekom Slovenije is among the biggest tax payers in Slovenia, with an annual profit of several million EUR even in times of recession, and is also among the least indebted European telecommunications companies. Regardless, the announcement of the privatization of Telekom Slovenije had a major effect on the stock market, as the sale of company’s shares increased significantly. Deutsche Telekom is expected to be the most likely buyer of Telekom Slovenije.

Twenty potential investors showed interest in buying Aerodrom Ljubljana, the company operating the largest airport in Slovenia. Another company to be privatized is Elan, one of the top manufacturers of skis and snowboards in the world. The biggest controversy with respect to Elan is the recent entry of the Finn Jari Robert Koivula into the sales process, interrupting the key stage of sale coordination with the American financial fund WAB Capital. Koivula introduced himself as an interested party and was given permission to conduct due diligence of Elan. Shortly after being given insight into company’s proprietary and confidential documentation, Koivula disappeared without submitting an offer and is supposedly being sought by the police.

Many potential buyers of state-owned companies, from financial investors to strategic buyers, became worried by the recent resignation of the Slovenian Prime Minister, Alenka Bratusek, under whose leadership the privatization process was approved. The Minister of Economic Development and Technology, Metod Dragonja, reacted immediately and assured the investing community that all privatization processes will remain intact and will be carried out as planned, regardless of political perturbations.

Closely monitoring the privatization process are Slovenian workers’ unions, which draw attention to a common pitfall of privatization – layoffs after company acquisition. Such consequences unfortunately are not rare, and are reported to have happened in one of the recent sales, despite the buyer’s promises that layoffs would not happen.

Considering the current high unemployment rate in Slovenia, this concern is certainly not negligible and increases the lack of trust in foreign investments, which at the same time appear to be one of Slovenia’s most convenient emergency exits from the economic crisis and indebtedness.

The European elections of May 25, 2014, will probably be an indication for the national parliamentary elections to be held later on (currently the date is not yet set). The latter will however be decisive and will surely set the pace and direction for future developments in the field of privatization in Slovenia.      

By Mojca Muha, Partner, and Dalia Cerovsek, Attorney Trainee, Miro Senica and Attorneys 

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.

Privatization was a high priority for new-born Ukraine in the early 1990s. The first Ukrainian privatization act was adopted within the first months of independence of our country. The privatization process underwent a great deal of review and scrutiny and faced issuance of “privatization certificates,” a mass sale of state-owned objects, forming of industrial and financial groups, etc.  

The chief governmental authority responsible for the privatization process in Ukraine is the Fund of State Property of Ukraine (the FSPU). The FSPU overviews and participates in privatization processes, manages state property, and protects and represents the interests of Ukraine in  companies with a State share. 

Privatization in Ukraine is conducted in line with the three-year State Privatization Program. Yearly reports on the execution of the program are delivered by the FSPU and approved by parliament. The State Privatization Program defines the goals and expected results of privatization, as well as the methods by which they are to be achieved.    

The Privatization process in Ukraine has been political-driven and reflected changes in the power elites of the country. One of the most illustrative cases is the double privatization of ArcelorMittal Kryvyi Rih (former Kryvorizhstal), in which the new government cancelled the sale of the company to the son-in-law of the former President.

The company was privatized for the first time in 2004 when it was purchased by two Ukrainian tycoons (the son-in-law of the President and another oligarch with substantial support in the government). In the result of the purchase agreement more than 93% shares of the company were sold for USD 800 million. Following the Orange Revolution that year the privatization and its results were cancelled by the new government, and the money returned to the unsuccessful purchaser. Return of Kryvorizhstal to State ownership and then re-sale were among the key promises by new President Victor Yushenko and his “comrade-in-arms” Yulia Timoshenko. The new government kept its promise and re-sold Kryvorizhstal at an open auction to Mittal Steel Germany GmbH for USD 8 billion (10 times more than the price paid by the first “investor”).

Unfortunately, in 2010-2013 Ukraine faced another difficult period of business history related to the governance of criminal President Yanukovich and the concentration of key business assets in the hands of the President, his family, and other close associates. 

The privatization processes during this period were mostly unfair, unclear, and heavily corrupted. The most prominent case was the privatization of the Ukrainian telecommunications giant Ukrtelecom. Notably, the process was restricted to those companies in which a state had more than a 25% stake and those companies which already had a substantial share in the Ukrainian telecommunications market. As a result the company was sold to the only participant – the Austrian company EPIC – that then indirectly re-sold Ukrtelecom to the oligarch supporting the former President.

The expected result of privatization for the State is an additional boost to the budget, and the benefits to the privatization object include development and modernization. By signing a privatization sale-purchase contract the purchaser undertakes to preserve the main activity types of the target, to conduct technical modernization, to settle any debts of the company, to ensure social guarantees of the employees, etc. Grounds for the termination of such contracts include non-payment of the purchase price within 60 days following execution of the agreement, non-execution or improper execution of the privatization conditions for the development of the privatization object, and non-fulfillment of contractual obligations due to insolvency of the object or the purchaser. 

Ukraine is now facing difficult economic and financial times due to the plunderous policy of the former President and his cronies, and the annexation of Crimea and unrest in the East of Ukraine fueled by the hostile actions of Russia. According to information from the official web-site of FSPU there are 560 companies in which Ukraine holds stakes of different sizes. Privatization of State-owned objects may serve as a good source of budget revenues. Privatizations of many small and middle-size objects are almost complete, and a number of large strategic state-owned companies are expecting their turn to be sold to potential investors. Among them are the Odessa pre-port plant, a huge machine-building complex in Mariupol (Azovmash), a chemical giant in Sumy (Sumykhimprom), the Kharkiv turbomachinery producer Turboatom, and others. Large-scale privatization (including privatization of coal mines) is among the IMF’s demands to Ukraine in exchange for substantial financial support to our country.

Election of the new President of Ukraine, as well as the shift in foreign policy of Ukraine from Russia to the EU, brings a hope that foreign and national investors will find Ukrainian State-owned objects attractive and will participate in fair and competitive privatization processes in Ukraine for the mutual benefit of all parties.  

By Timur Bondaryev, Partner, Arzinger

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.

1) Are there any special laws regarding privatization in Moldova or are ordinary private M&A laws applicable?

Similar to all post-Soviet countries, Moldova adopted privatization laws to facilitate the transition from a planned to a market economy. The first regulation of the early 1990s allowed for privatizations to be carried out in all economic sectors, including the social sector.    

Today, all privatizations are regulated by the Law on Administration and Divestiture of Public Property of 2007, with the exception of the privatization of public newspapers, which is regulated by a law specific to it. 

2) What are the most important past privatizations of Moldova?

Despite countless efforts at demonopolization, the gas sector is still dominated by a single supplier. In 1995, the major public company Moldova Gaz was converted into a joint-stock company. Later, since gas prices did not reflect the high costs of gas provision, the state offered company shares on the basis of its public debt – a novel privatization approach. As a result, the Moldo-Russian company MoldovaGaz SA emerged in 1998, with 51% of shares owned by the Russian  Gazprom and 35% by the Moldovan state.  

Recently, state minority stakes in Hotel Jolly Alon (34.96%) and the meat manufacturer Carmez SA (0.110%) were sold.  

3) What are the assets that the state is not willing to privatize?

The Moldovan Government has established a list of assets excluded from privatization. The list, which is subject to amendments by the Parliament, includes the national Cricova SA wine manufacturer (100% state ownership), the Franzeluta SA bakery (52.51%), the MoldovaGaz SA gas supplier (35.33%), the Moldexpo SA international exhibition center (100%), the Moldova-Film SA film production studio (100%), and the Chisinau heating power stations (100%), among others.  

Notably, in February the Government suspended the privatization of 13 of the largest companies, citing a lack of transparency in the process of privatizing sizable companies. These included the national airline Air Moldova, the Moldtelecom telecom monopoly, the Tutun-CTC tobacco company, the Aroma and Barza Alba spirits companies, and the national circus Circul din Chisinau. 

4) What are the current efforts of the state in Privatization?

Large-scale privatization is over. The state currently focuses on PPPs and on developing a list of goods, services, and works to be supplied through public-private partnerships. Such projects are already underway in the healthcare sector (equipping the radiology, hemodialysis, and rehabilitation sections of medical institutions with modern technology), sports (building a multi-functional national stadium with a capacity of about 30,000 seats), new technologies (creating a technological park with at least three local companies by the end of 2014, which is to become a “smart city”) and public transportation (modernizing the bus station services offered by the public enterprise “Garile si Statiile Auto”).  

5) How can an investor keep track of privatization opportunities in Moldova?

Privatization opportunities are announced by the Agency of Public Property (“APP”) on its website: www.app.gov.md  

6) How can an investor engage in a privatization?

Foreign investors may participate in local privatizations as long as they fulfill customary legal criteria and provide the requisite information. An investor would first submit a request for participation alongside a registration certificate and the incorporation documents and financial statements for the previous year, the offered price and commitments to be undertaken, as well as a detailed investment program. In addition, the bidder must provide a bank guarantee of at least 50% of the initial price, which, for investment tenders, must cover at least 25% of the total investment value. There is also a participation fee of MDL 200,000 (about EUR 10,600) for each property/asset bid for.

The investor is entitled to carry out full financial, legal, and technical due diligence of the target. The investor also has the right to receive access to privatization documentation, visit the company, and request that management discloses all material information.  

As of 2008, a sale and purchase agreement cannot be negotiated directly. The sale of public assets, irrespective of the method of privatization, is subject to competitive bargaining that takes place in the presence of all participating investors. Nonetheless, the APP may end the process at any stage without selecting a winner if the offered price is unsatisfying. The sale and purchase agreement shall be signed within 30 days after a winner is designated.      

By Octavian Cazac, Partner, and Diana Ichim, Junior Associate, Turcan Cazac Law Firm

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 energy sector in Macedonia has been one of the areas where privatization has progressed with the most difficulty. Up to 2004, the vertically-integrated and state-owned JSC Macedonian Electricity Company (MEC) exclusively provided the generation, transmission, distribution, and supply of electricity, as well as imports, transits, and maintenance of the integrity of the electricity system. In 2004, MEC was split into two independent new joint-stock companies. Its legal successor MEPSO assumed the transmission function, while ESM assumed the electricity generation, distribution, and supply functions. In 2005, ESM was further unbundled into two independent joint-stock companies:  Macedonian Power Plants (MPP), which assumed the electricity generation part of the company, and ESM, which retained the electricity distribution and supply parts. In 2006, ESM was privatized by Austria’s EVN AG and was rebranded into the EVN joint-stock company. As a result of the restructuring and privatization process, therefore, the key players in the electricity market currently are three separate and regulated monopolies: (i) generation – the state-owned MPP; (ii) transmission – the state-owned MEPSO; and (iii) distribution and supply – the privately owned EVN.  

Privatization of MPP

Recently, the Government has announced its intention to privatize the 100% state-owned MPP by increasing its share capital and offering private investors the opportunity to purchase up to 49% of newly issued shares. The process for hiring a privatization consultant is underway, and it is therefore likely that the international public call for the privatization will be published in 2015.

Why is the privatization of MPP important?

MPP generates more than 90% of the nation’s electricity. It owns and operates the main national generation facilities: (i) the thermal power plants in Bitola and Oslomej, with a total installed capacity of 800 MW; and (ii) seven large hydropower plants, with a total installed capacity of over 500 MW. It also acts as the wholesale electricity supplier for the retail supplier EVN. The estimated value of 49% of MPP’s shares is approximately EUR 750 million. Therefore, this will be the largest privatization in Macedonian history (the largest Macedonian privatization to date was the EUR 388 million sale of Makedonski Telekom to Hungarian Matav in 2001). For now, the largest privatization in the energy sector remains the sale of EVN’s shares in a transaction of EUR 225 million and an investment obligation amounting to EUR 96 million in the three-year period following the sale.

How will the privatization be organized?

The key legislation that governs the privatization process in Macedonia is the Law on Transformation of Enterprises with Social Capital (OJ 38/93) and the Law on Privatization of State-owned Capital (OJ 37/96). Both laws provide foreign investors with equal rights to domestic investors in the tendering and privatization process for sale of Government’s shares in state-owned enterprises. It is very likely that the privatization will be organized similarly to the sale of EVN, which  was organized through an international public call for a trade sale in a one-round bidding process. The ranking criteria for the received bids were the purchase price and a three-year investment commitment. In the case of MPP, it is reasonable to expect that the Government will also apply an investment commitment criterion, as it has announced that it expects the successful bidder to make additional investments in the development of electricity generation facilities.

What will be the main legal concerns?

Any attempts by the Government to “clean” or restructure MPP prior to its sale (e.g. write-off state debt, debt-to-equity conversion, and capital increases before privatization) will in many instances constitute state aid if they are not compliant with the “market economy investor principle” (i.e. if a public authority invests in the enterprise on terms and in conditions that would be acceptable to a private investor operating under normal market economy conditions, the investment is not considered as state aid). The Government’s enthusiastic efforts to attract foreign investment by providing various incentives to international corporations are well known. Therefore, it is of critical importance for the Government to organize the privatization through a well-publicized, transparent, unconditional, and competitive tendering process, to provide prospective bidders with access to all relevant information for valuation of the share package and to ensure that there is no discrimination based on the nationality of the prospective bidders.

The Government will remain the majority shareholders in MPP (51%) and will therefore retain control of management. The successful bidder will want to ensure that it has a voice in MPP’s management and that there is an effective dispute resolution mechanism in place. The memory of the dispute between the Government and EVN AG in connection with EVN’s sale is still fresh. In 2009, EVN was ordered by the Macedonian courts to pay EUR 200 million to MPP on the basis of a debt deriving from unpaid electricity bills from consumers, before the privatization. Not long after EVN AG filed a claim for arbitration against the Government alleging a breach of the Bilateral Investment Treaty between Macedonia and Austria, the parties settled.      

By Gjorgji Georgievski, Partner, ODI Law Firm

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

It has been almost 25 since the privatization program in Poland was launched. However, despite of the length of the period the process is still ongoing. And it also looks like we will be involved in privatization and post-privatization transactions for many years to come.   

But the number of entities to be privatized is not the only reason why the legal and non-legal aspects of privatization are and will remain so crucial to transactional attorneys. Instead, the many elements of the Polish privatization and post-privatization process are so diverse and challenging that in Poland some say that you have not lived as an M&A lawyer if you have never done a privatization or post-privatization transaction.

There are several reasons for this, most of which relate especially to post-privatization transactions. Whatever the reason, being a true transactional lawyer requires some experience with  privatization processes.

One reason which deserves special attention is the participation of employees in the privatization process (a right ensured by Polish law). This also applies to farmers and fishermen as suppliers in cases of agricultural product processing or seafood processing enterprises.

Employees’ participation includes three substantial rights: (a) the right to acquire up to 15% of shares in the share capital of the company set up as a result of the commercialization of a State-owned enterprise (i.e., a stock option); (b) the right to appoint some of the members of the supervisory board; and (c) the right to appoint a member of the management board.

The first of these rights may be the most crucial in the subsequent transformation and M&A processes. Someone who has never gone through the management and acquisition process of former State-owner enterprises transformed into State-owned companies may not imagine challenges it brings.

Many of the commercialized state-owned enterprises (commercialization constitutes the first step of so-called “indirect privatizations” (involving a share deal), as opposed to direct privatizations (which are usually asset deals)) first undergo a restructuring. Once this process has been completed companies are offered for sale to private investors. The potential investors then have two challenges: (a) limitations on acquisition of 15% of the shares in the company; and (b) subsequent management of the process of acquiring shares from dozens or in some cases hundreds of shareholders. 

The first challenge – the legal limit on acquisition of shares – prohibits employees (including farmers and fisherman) from disposing of their shares for 2 years after the State Treasury disposes of the first portion of its shares in the company. This is a sort of non-competition clause imposed in favor of the State Treasury. This obstacle is manageable, as there are several legal instruments which may be used (individually or in aggregate) to secure the position of the investor until the right time comes to definitely purchase the shares from the employees.

Manage the second challenge – the necessity of acquiring shares from a great number of shareholders – requires both legal expertise/experience and psychological and sociological skills. The minority and at the same time numerous shareholders do not usually constitute one solid conglomerate. Various competing interests come to light in the process of acquiring shares from those shareholders. Transactional lawyers dealing with this issue often need not only basic transactional skills, but also some familiarity with inheritance regulations and family law. 

It can be difficult – but at the same time it can also be also very exciting and challenging. Either way: it is doable. 

Thus, privatization involves many aspects beyond the strictly legal. As such it also brings M&A transactions much closer to society and to everyday life. And this is the real challenge lawyers should be prepared to face.      

By Marcin Jakubaszek, Partner, Miller, Canfield, Paddock and Stone 

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 beginning of the PPP story in Latvia can be dated to February 16, 2000, when the first Concessions law entered into force. Partnership in 70 concession projects were launched on the basis of that law until October 1, 2009, when the Law on Public-Private Partnership broadened PPP options as well as confirming decision-makers’ interest in developing that style of partnership. However, the 2009 PPP reform coincided with the start of the global economic crisis, which hit Latvia even more than other CEE countries. The subsequent international loan program for Latvia contained a prohibition on state and municipalities entering into any long term PPP relationship. In fact, all decisions on further PPP projects were frozen for three years and were allowed again only recently after closure of the international loan program in 2013. Thus a new start is awaited for PPP projects.   

During the PPP moratorium period, voluminous research was carried out in cooperation between the Latvian Investment and Development Agency and the Norwegian Financial Mechanism regarding the promotion and development of PPP in Latvia and the impact of PPP on the quality and accessibility of public services. This research project lasted from 2008 until 2011, and included within its framework several different feasibility studies, including the development of procurement documentation for a PPP project on the construction and maintenance of Olaine prison, a study for a project on constructing and maintaining custody spaces in Skirotava and Kurzeme, and a study for the project to develop infrastructure and maintenance for the main state universities: the Technical University, the University of Latvia, and Riga Stradins University.

Investment in those studies was particularly significant regarding the construction of Olaine prison, where procurement documentation was already drafted. However, a last minute decision stopped further PPP progress. The principal argument for this turn was that direct and exclusive allocation of finances from the state budget would allow more transparent supervision of expenditure as well as a more predictable realization of the project than entering into a public-private partnership to implement it. In addition, that decision coincided with the unsuccessful purchase of vehicle speed traps for the state police, which was often publicly (and incorrectly) referred to as a PPP project. The conclusion has to be that a clear need exists for a win-win test case to prove not only to the public but also to decision-makers themselves that PPP is an effective tool for involving additional investment.

Currently, effort in the PPP field is being concentrated on its traditional track, in particular on infrastructure development. For example, two larger projects are in the spotlight, in particular the Kekava by-pass road project and the Riga by-pass road. Preliminary investment in these projects could start in 2017-2019. However, decisions to process them through PPP procedures have still not been made.

As mentioned above the core reason for slow progress in decision-making is very likely uncertainty and unpredictability of a project’s course. One way of simplifying the legal element of cooperation is making standard legal documentation more available, both for procurement and for entering into an agreement. Nevertheless, the rest depends on the ability of the state or municipality to follow project development through all its stages.      

By Theis Klauberg, Partner, and Esmeralda Balode-Buraka, Senior Associate, bnt Attorneys-at-Law

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.