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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.

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.

Turkey started its privatization adventure in 1984, with the transfer of incomplete facilities to the private sector for completion or establishment of new facilities in their place. Since 1985, Turkey’s privatization portfolio has included shares in 270 companies, 22 incomplete facilities, 1439 real property assets, eight highways, two bridges (i.e., the Bosphorus and Fatih Sultan Mehmet Bridges), 120 operation facilities, six ports, and the licenses for the national lottery and vehicle inspection stations. In addition, certain companies and real property assets in the portfolio were removed from the process for various reasons. In the past 29 years, more than half of the companies in the privatization portfolio have been privatized. Today, 23 companies, 565 real property assets, 37 operation facilities, two ports, eight highways, two bridges, and the licenses for the national lottery remain in the privatization portfolio.   

Overview of Legal and Regulatory Framework

Turkey’s first piece of legislation related to privatization was enacted in 1984. When the need for comprehensive and fundamental legislation became obvious, the Privatization Law was enacted. Under the Privatization Law, the Privatization High Council (the “PHC”) and the Privatization Administration (the “PA”) were established to carry out privatization procedures. While the PHC is the ultimate decision-making body, the PA acts as the executive body for the privatization process.

Major Privatizations of 2013

Although numerous real property assets were privatized (often in return for small amounts of money) in 2013, 2013 was primarily a year of energy privatizations. With the privatization of the last eight distribution companies, the privatization of all state-owned electricity distribution companies was completed and USD 7.3 billion was generated for the State. Additionally, several electricity generation assets and a significant natural gas distribution company (i.e. Baskent Dogalgaz Dagitim) were privatized in 2013. Below is a summary of major privatizations completed in 2013.

Surprisingly, none of the above privatizations represented the most important privatization news in 2013. The cancellation of a tender made more impact. The PA cancelled the tender for the privatization of eight highways and two bridges which had been held in December 2012. The highest bid was USD 5.72 billion for the operating rights for 25 years. 

Major Privatizations of 2014

As of May 2014, the total value of privatizations completed in 2014 is USD 725 million. So far, the most significant privatization of 2014 has been the privatization of Salipazari Port (Galataport), with an approximate bid value of USD 702 million. The winning bidder now has the operating rights for Istanbul’s only cruise port for 30 years. The initial tender in 2005 resulted in an offer of EUR 3.5 billion that was eventually cancelled the following year.  

Additionally, the privatizations of (i) Kemerkoy TPP, Yenikoy TPP and Kemerkoy Port Area for USD 2.671 billion; (ii) Catalagz? TPP for USD 351 million; and (iii) Fenerbahce-Kalam?s Marina for USD 664 million, are all still in the approval phase. In the past few weeks, the final bids for many privatizations were submitted to the PHC. Among these are the following:

The PHC has announced the closing dates for submission of final bids for the following privatizations:

Transfer of operating rights

According to the Turkish Statistical Institute, over the past decade, Turkey has experienced stable economic growth with an average annual real GDP growth rate of 5%. One of the main drivers behind this economic success is privatization. Considering that there are still many significant items in its portfolio (especially the package of eight highways and two bridges), and that this portfolio is expanding each year, it seems that Turkey’s privatization agenda may continue to be active in the upcoming years..      

By Okan Demirkan, Partner and Burak Eryigit, Associate, Kolcuoglu Demirkan Kocakli 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.

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.