Category: Uncategorized

In recent years the corporate practice in Bulgaria has revealed many cases of limited liability companies (“Ltds”) going after their managers and claiming compensation for losses caused by the managers’ wrongful actions.

A growing number of shareholders are claiming that the managers have done significant damage to the financial condition of their Ltds. In particular, they claim, the managers have: (i) concluded detrimental deals not at arm’s length; (ii) interposed related companies as intermediaries to the damaged Ltds, paying them high fees for no real benefit; or (iii) used the Ltd’s resources and sales network for the benefit of other companies related to the managers. After ascertaining the real amount of the losses caused by the managers the shareholders are eager to file claims for damages. However, it often turns out that the shareholders themselves have acted in ways in the past that prevent the company from successfully litigating these claims and obtaining awards of the demanded compensation.

To claim liability for damage and losses the claimant (i.e., the Ltd) must prove: (i) damage to the Ltd; (ii) detrimental action by the manager; and (iii) a causal relationship between the two. In addition, the shareholder meeting must adopt a resolution to initiate proceedings against the manager. However, if the shareholder meeting has discharged the manager from liability for the respective financial year, the Ltd cannot seek damages for the manager’s wrongful actions. Often shareholders face situations where they can establish that the managers have continuously damaged the Ltd throughout the past several years, but as they have already discharged these managers from liability for these years, damages can be sought only for the last financial year for which no discharge has been granted. 

Legally, the shareholders are in a position to monitor and to supervise the manager’s actions by, among other things, demanding management reporting and examining the Ltd’s annual financial statements. Based on their scrutiny and conclusions they should make an informed decision whether to discharge the manager from liability or not. Thus, by examining the manager’s work in detail the shareholders can ensure that the discharge from liability is well grounded.

However, in practice the situation looks quite different. Usually, a discharge from liability takes place with the shareholder resolution approving the annual financial statements for the previous financial year. In the majority of cases the agenda of the annual ordinary shareholder meeting consists, among others, of the following items: (i) adoption and approval of the annual financial statements for the previous financial year, (ii) distribution of profits (if generated by the Ltd), and (iii) discharge of the management from liability. In a vast number of cases the discharge from liability is granted without any real monitoring or examination of the manager’s actions based on the annual financial statements. Thus, the manager is exonerated for his negligent actions and the company is deprived of the possibility to seek damages at a later stage when losses due to detrimental actions of the manager are apparent. The so-called “blank” discharge grants a free pass to the managers as they cannot be subjected to future civil liability.

Liability for facts not reflected in the annual financial statements, however, is possible. However, the burden of proof that such facts should have been included in the annual financial statements lies with the Ltd. Yet again, a thorough monitoring and examination of the management reports and the annual financial statements would allow the Ltd and the shareholders to detect such issues and cope with them at an early stage without having to face procedural obstacles and difficulties with providing evidence.

To avoid these unfortunate consequences, shareholders should always pay close attention to the management accounts and demand reporting whenever necessary. They should also get closely acquainted with the annual financial statements when they are made available to them before the ordinary annual shareholders meeting. Such responsible behavior will prevent situations where the Ltd cannot claim compensation from the managers for their wrongful actions. To a large extent it will also ensure quality of management and contribute to the business’s integrity as a whole.

By Georgi Tsonchev, Attorney at Law, Schoenherr

This Article was originally published in Issue 3.1 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 briefly outline some important legal aspects around non-performing loans (NPL) transactions – a Bulgarian market which is rapidly moving forward.

Structuring NPL Transactions

NPL transactions are commonly structured as assignments of receivables. This is the preferred route for sellers as it permits full risk transfer of NPL portfolios to purchasers, as parties are free to contract out of the statutory rule that assignors are liable for the existence of the receivables at the time of the sale.

By way of contrast, structuring an NPL deal as a transfer of business enterprise or demerger is associated with certain mandatory liability regimes that parties may not derogate from.

Data Protection and Banking Secrecy Limitations

Under Bulgarian law assignors are under a statutory obligation to provide assignees with all documents concerning the assigned receivables. Since such documents may contain personal data or facts and circumstances subject to banking secrecy, the interaction between this statutory disclosure requirement on the one hand and data protection and banking secrecy limitations on the other merits particular attention. As far as data protection is concerned, the selling bank’s legitimate interest (e.g., to achieve regulatory capital relief by assigning loan receivables) should prevail over the interests of the debtor, especially with respect to non-performing loan receivables.

However, the Bulgarian Supreme Court of Cassation recently upheld a huge administrative penalty on a bank for transferring personal data to a collection agency (only for dunning purposes), in a scenario where there was no actual assignment of the respective loan receivables. In that case the initial consent of the bank’s customers for transfers of personal data was quite narrowly worded and did not expressly cover transfers to collection agencies for dunning purposes, so it is possible, if the consent had been phrased in a broader manner, that the result would have been different.

In situations involving an actual assignment of receivables, the Bulgarian Personal Data Protection Commission has repeatedly held that mobile operators that had assigned claims for unpaid bills to third parties and in performance of the assignments were permitted to transfer personal data about the respective debtors, on the reasoning that the data transfer forms a part of the “legitimate interests” of the creditors. While this argument has not yet been tested before Bulgarian courts, we believe that the “legitimate interest” exception from personal data protection rules could be applied mutatis mutandis to bank secrecy restrictions where a bank has assigned non-performing loans to a third party. It seems a reasonable solution with respect to non-performing loans from a banking secrecy perspective to uphold the bank’s interest to assign receivables under such loans, thereby enabling it to clean its balance sheet and to generate some liquidity instead of attempting to collect its claims in lengthy and cumbersome enforcement proceedings. Bank secrecy should therefore not be an obstacle to disclosing information about the debtor, but disclosure should be made only on an as-needed basis.

Regulatory Requirements

From a financial services regulatory perspective, the general rule is that the acquisition of receivables arising from credit agreements and other forms of financing (such as factoring and forfeiting) may be performed locally as a “substantial activity” (bringing 30% or more of the net revenues or corresponding to 30% or more of the balance sheet total) only by credit institutions (local or EU/EEA under EU passporting rules) or by financial institutions registered with the Bulgarian National Bank. Such registration does not imply fully fledged supervision compared to a credit institution but involves certain minimum capital requirements as well as information disclosure procedures both initially and on an on-going basis. Careful structuring of the transaction may, in certain cases, allow it to avoid the local regulatory regime. Once regulatory constraints on the purchaser are avoided, the transaction may be implemented in an unregulated environment, since the activities of collection agencies are not subject to licensing/registration requirements in Bulgaria.

By Tsvetan Krumov, Attorney at Law, Schoenherr

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Marcell Clark is a Partner in Dentons’ Bratislava office and is legacy Co-Chairman of the Real Estate Finance team of the firm’s Global Real Estate Group. Clark has over 15 years experience in cross-border transactions and is active on major real estate finance transactions and restructurings throughout CEE. Before joining legacy Salans in 2007, he spent 7 years as Associate General Counsel with TIAA-CREF (one of the largest American pension funds), and spent the last three years of the 20th century with Jones Day.

M.C.: I’m a New York lawyer.  I speak Hungarian and German fluently and French on an intermediate level. After working 10 years in the US, I joined Salans (now Dentons) to help build up their CEE real estate finance practice. I initially worked in Budapest but after 7 years was looking for a change of location. Bratislava was an attractive option because it is close to Vienna and my banking clients there.

M.C.: No, although it was always a possibility for me. In the beginning I wanted to work at a large firm in New York and I was very happy to have that opportunity. I then moved in-house and worked for a large financial institution, which I also enjoyed immensely. It is relatively rare for a business transactional lawyer to be able to work abroad, and when the opportunity came, it seemed like the right choice. Having built up good experience and a strong understanding of my practice area in the US, I had an ambition to give it a try overseas.  I felt confident that it would go well and that my life, and that of my family, would be more interesting as a result.

M.C.: I am first and foremost a real estate lawyer and have deep experience in real estate finance and restructuring in addition to the run-of-the-mill real estate deals. After working as an associate in a large law firm, I worked in-house for a leading global investor in real estate. This experience was phenomenal, because I was able to work with some very smart people and learn the industry inside out.  When I moved to Salans, I believed that my skills as a lawyer and excellent service would bring me a client following.  It does, but this alone is not enough – it is critical to build relationships. I am fortunate to work with wonderful clients on interesting projects.  I gained many of these clients after working for or across from them on transactions. Developing a long-term relationship with a client and helping them achieve their goals is particularly rewarding both on a professional and personal level. 

M.C.: I cannot say too much about Slovaks in particular, as my clients are nearly all international, but I do not think that clients are very different from country to country. Without question, it is easier to communicate with people with whom you share a common language and culture and I always include strong local lawyers from Slovakia and other Dentons offices on my team. However, ultimately you are being engaged to give legal advice, and if you give excellent quality service, then clients will be enthusiastic no matter where you are from.

M.C.: I work on cross-border deals involving several jurisdictions, including Slovakia. My focus is on achieving the right overall outcome for a transaction by implementing exactly the commercial deal that my client has negotiated with his counterpart, and a critical part of this process involves understanding how the local law works. There are large differences between common law and civil law systems and from country to country, but in truth I never focus on the differences or idiosyncrasies as such but on what effect the local law will have on the transactional structure or a particular point of a deal.

M.C.: I work largely outside these legal systems and legal cultures because of the international nature of my work, so this is hard to answer. What I can say though is that in either of the two legal systems, the most valuable lawyers are not those who are only able to recite the law, but those who are able to help advise on possible solutions to legal impediments.

M.C.: I go back to the US to visit my friends at least once a year. I have no plans to return to the US to work or live, but if that opportunity did arise and it felt like the right thing to do, then I would gladly make the move. I think both Europe and the US have plenty to offer and they both have their own drawbacks. We are living in very interesting times, so who knows what the future will bring!

M.C.: A senior expatriate lawyer gives credibility to a firm’s offering. It’s difficult to sell legal services to multinational companies without having lawyers who understand fully their environment and have themselves worked in that environment. They understand the clients’ goals, objectives and way of doing business. From the client’s perspective, they have this international perspective, plus the benefit of having a lawyer who knows the local environment intimately and can give them the same level of service as they are used to obtaining back home. 

M.C.: It would be hard to beat the Czech Republic and Austria in terms of historical sights and beautiful natural landscapes, but each country I have been to has something exceptional. For example, when I was in Moscow last time, I visited the Tretyakov State Gallery and the Russian landscape paintings were very impressive. It is not easy, but if at all possible I try to build in time to take in some of the sights when I am traveling for work.

M.C.: I like winding down at my neighborhood wine bar La Putika 5, which has a very relaxed atmosphere and is a perfect place to kick back at the end of the day.

This Article was originally published in Issue 3.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Deal:

In December 2015, White & Case advised Energeticky a Prumyslovy Holding (EPH) – a leading Central European energy group operating mainly in the Czech Republic, Slovakia, and Germany – on its acquisition of a 66% stake in Slovenske Elektrarne from Enel Produzione S.p.A., a subsidiary of Italy‘s Enel S.p.A. Enel was advised by Allen & Overy on the deal.

The Players

•   Marek Staron, Partner, White & Case: External Counsel for EPH

•   Martin Magal, Partner, Allen & Overy: External Counsel for Enel Produzione

Staron: EPH sought to instruct external counsel with strong cross-border M&A capabilities and significant local energy market knowledge and experience. A factor clearly in our favor was our previous transactional work for EPH, with our London office recently advising on its agreement at the end of 2014 to acquire Eggborough Power Limited, an independent power producer that owns the coal-fired 2 GW Eggborough Power Station in North Yorkshire.

The established position of our Bratislava office in the Slovak legal market was also an important factor. Our Bratislava-based lawyers regularly advise on important transactions in the Slovak energy sector – on several previous occasions with EPH on the other side of the table. 

Magal: We have cooperated with Slovenske elektrarne and ENEL for a long time. Given our thorough knowledge of the target’s most critical legal issues and our top-ranked M&A practice in Slovakia, it was natural for ENEL to choose A&O for this deal.

Staron: We were instructed at the end of 2014 around the time of EPH’s submission of its non-binding offer. Our original mandate included legal due diligence, financing advisory and SPA negotiation. The financing advisory services were eventually not required due to the final transaction structure (only part of the purchase price is payable on the closing of the first phase).

Magal: Right from the start of the process. We conducted a vendor’s due diligence investigation, assisted the client with non-biding and binding bids, considered a change to the deal structure following bids coming in, and then spent a couple of months negotiating the final deal parameters and ancillary matters with EPH and their counsel. Our role when retained was exactly the same as finally performed, only it took approximately 12 months longer to complete.

Staron: I led our team, which included London Partners Ian Bagshaw and John Cunningham with support from Associates Zoran Draskovic (in Bratislava) and Tom Cambidge (in London). London Associate Laura Hoyland advised on the tax aspects. The relationship with EPH that Ian and John had developed while advising on previous transactions was invaluable. I, Zoran, and Tom played key legal roles in the negotiations stage, and the due diligence process was mainly managed by the Bratislava team.

Magal: The core team consisted of me, Senior Associate Vojtech Palinkas, and Associate Tomas Demo. We also received specific competition, employment, and data protection advice from our sector specialists in the Bratislava office.

Staron: The final structure … involves a transfer of Enel Produzione’s entire stake in SE to a newly established company (HoldCo), and the eventual sale to EP Slovakia of 100% of the share capital of the HoldCo. This sale of HoldCo to EP Slovakia is due to be implemented in two phases.

In the first phase, Enel Produzione will sell 50% of the HoldCo’s share capital to EP Slovakia for EUR 375 million, of which EUR 150 million will be paid upon the closing of the first phase, and EUR 225 million will be paid upon the closing of the second phase. The consideration could vary subject to the application of the adjustment mechanism, as described below. Following the completion of the first phase of the transaction, SE will be deconsolidated from the accounts of the Enel Group.

In the second phase, a put or a call option can be exercised respectively by Enel Produzione or by EP Slovakia, exercisable 12 months after receiving the Trial Operation Permit of units 3 and 4 of the Mochovce nuclear power plant, which are currently under construction. On the basis of the current work plan, these options are expected to become exercisable within the first half of 2019. Upon exercise of either option, Enel Produzione would transfer the remaining 50% of the HoldCo’s share capital to EP Slovakia for EUR 375 million. Payment will be due at the time of the closing of the sale and the consideration is subject to the application of the adjustment mechanism described below. The closing of the second phase is subject to obtaining the Final Operation Permit for Mochovce’s units 3 and 4.

The total consideration payable over the two phases, equal to EUR 750 million, is subject to an adjustment mechanism. Any adjustment will be calculated by independent experts and applied upon completion of the second phase on the basis of a set of parameters, including the evolution of the net financial position of SE, developments in energy prices in the Slovak market, operating efficiency levels at SE as measured against benchmarks specified in the agreement, and the enterprise value of units 3 and 4 of Mochovce.

The agreement also provides that, should the options not become exercisable within the aforementioned terms, these options could be in any case exercisable starting from June 30, 2022 (or “long stop date”). In that case, the adjustment of the consideration will also take into account the effective enterprise value of the abovementioned units.

While the basic deal structure was the result of commercial negotiations, its implementation in the transactional documents required a number of negotiation rounds spread over three months, with intense involvement of lawyers workin side-by-side with financial and technical advisors. At this stage, three members of our team (I, Zoran Draskovic, and Tom Cambidge) provided constant support to the client on the gradual process of delineating the common ground for reaching the detailed agreement with ENEL.

Magal: Here I can only refer you to our client’s press release which is on their website. It’s fair to say that although the commercial structure was agreed by the clients, we had to design a workable legal structure around it, especially concerning interim JV corporate governance, the interplay with the existing Shareholder’s agreement between ENEL and the Slovak government, and, in particular, a very detailed and complex price determination and adjustment mechanism. A number of bespoke warranties also had to be negotiated.

Staron: The deal involved the sale of not only highly regulated nuclear and other electricity generating assets, but also of uncompleted units 3 and 4 of the Mochovce nuclear power plant, in a situation where ENEL was seeking to achieve the objectives of its divestment program in a timely fashion, including the reduction of ENEL group’s net debt.

The complex transaction structure was thus intended to achieve two primary goals – the timely deconsolidation of SE from ENEL’s perspective and the proper allocation of risks relating to the completion of units 3 and 4 of the Mochovce nuclear power plant from EPH’s perspective. These considerations led to the splitting of the sale into two phases, allowing ENEL to deconsolidate SE on the closing of the first phase but at the same time keeping ENEL’s skin in the game in relation to completion of units 3 and 4 of the Mochovce nuclear power plant. The resulting shift of valuation of the nuclear units under construction into the future required setting up a very robust expert determination-based framework for such valuation. Similarly complex arrangements (many of them very technical and requiring an in-depth understanding of construction, commissioning, licensing, and operational aspects of a nuclear power plant project) had to be devised in respect of corporate governance issues, in order to reflect the need to adequately regulate the relationship between EPH and ENEL as joint venture partners in the interim period.

Additional complexity related to various roles of the Slovak government relevant to the deal. The Slovak government, as owner of a 34% stake in SE, had entered into shareholders’ arrangements with ENEL in respect of SE’s corporate governance – the related limitations had to be taken into account in structuring the joint venture stage of the transaction. Moreover, a memorandum of understanding was negotiated in connection with the transaction with the Slovak government, and the outcomes of such negotiations had to be reflected in the negotiations between ENEL and EPH. Last but not least, several high impact (both passive and active) disputes between SE and the state warranted a specific treatment within the transaction.

Staron: The most challenging part of the process related to negotiations on the adjustment mechanism applicable to the payment of consideration. The adjustments will be calculated by independent experts upon completion of the second phase of the transaction, based on specific guidelines which were agreed between EPH and ENEL in respect of several elements, including the evolution of the net financial position of SE, developments in energy prices in the Slovak market, operating efficiency levels at SE as measured against benchmarks specified in the agreement, and the enterprise value of units 3 and 4 of Mochovce.

Magal: The innovative and unusual structure of a two-phased project where, in the first phase, an interim JV vehicle was created to exercise management control over the target and be a counterpart to the Slovak government as the minority shareholder. This in essence meant a tri-lateral relationship which had to be documented as a hierarchy of bi-lateral relationships (the first level between ENEL and EPH for the Interim Holdco, the second level between Holdco and the Slovak government for SE). This required careful and detailed allocation between EPH and ENEL of the various management responsibilities and competencies at the SE level, although neither party would have a direct shareholding in SE following the Tranche 1 completion.

Staron: Given that only a minor part of the purchase price will be payable on the closing of the first phase, the financing advisory services turned out not to be required. What has changed considerably, compared to our initial mandate, was the scope of work required in the SPA negotiations stage. From what our initial mandate originally assumed to be a rather straightforward process based on a standard transaction structure, the final deal evolved into a ‘once in a lifetime’ complexity, requiring on both sides of the table both considerable stamina and a great deal of creativity during protracted negotiations, in order to find a way through to a mutually acceptable agreement. 

Magal: Except for the time it took to sign the deal, our mandate remained the same throughout the process.

Staron: Generally speaking, the working relationship with EPH was very efficient. As the process involved intense bouts of negotiation, we had very close interaction with EPH, particularly during numerous negotiation sessions held in Rome and London. The legal background of senior members of EPH’s negotiation team certainly contributed to the ease of mutual communication. 

Magal: Intense, collegiate, and challenging are the words that come to mind. After all, between September and December our team probably spent more time with the ENEL team than with our families. We would commute to Rome for meetings on an almost weekly basis.

Staron: The working relationship with Allen & Overy was constructive, which was aided by the experience of Slovak lawyers on both sides working as counterparts in a number of past transactions.

Magal: As usual, very professional and collegiate. We know each other quite well given that both our firms tend to be involved in the major Slovak M&A deals in one role or another. I believe both clients appreciated that we were able to concentrate on the common goals and not waste time on meaningless bickering and one-upmanship. Of course, there were heated discussions and tense moments, as there are bound to be on a deal of this importance, but overall the experience with the people at W&C was very good.

Staron: This deal confirms the position of EPH as a rapidly growing European energy market actor, not shying away from structurally complex deals. From the perspective of the Slovak market, it marks another stage in the shift from a market structure created by privatizations of state energy companies in the early noughts and dominated by large Western European incumbents to a more layered one where the central stage is increasingly occupied by CEE players.

Magal: Including the size of SE’s debt, the deal value is around EUR 4.5 billion, so easily the largest M&A deal Slovakia has seen in the last decade. Given EPH’s already significant presence in the Slovak energy sector (their ownership of controlling stakes in SPP and SSE), it will very likely be closely scrutinized by local and European regulators and market participants. Overall, it seems like the right type of deal for all important stakeholders – ENEL, EPH and the Slovak government.

This Article was originally published in Issue 3.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Slovakia, it appears, is an unusually competitive CEE market for law firms – but one in which clients appear to be particularly satisfied with the quality of service they receive.

Keeping Work In-House

It appears that more work than ever is being kept in-house in Slovakia. 

The 2015 CEE Corporate Counsel Handbook shows that while General Counsel and Heads of Legal (collectively Chief Legal Officers, or CLOs) across the region reported an increase in the amount of work they kept in-house, Slovakian CLOs reported the highest increase, with 71 percent of Slovakian survey participants reporting an increase from the previous year. Unsurprisingly, then, Slovakian CLOs reported spending an average of only seven percent of their time supervising the work of external counsel – almost half the regional average of 12 percent. 

CEE Legal Matters reached out to several Slovak CLOs to reach behind the numbers. Stefan Orosi, Head of Legal and Compliance at Prima Banka Slovensko, reported a representative strategy, saying that “most of the legal work is done internally,” and adding, “we outsource preparation of transaction documentation in high volume loans and litigation in delicate legal cases.” Indeed, litigation is the most common work outsourced by CLOs. Marek Simoncic, General Counsel at Atos Slovakia, explained that Atos outsources, “in general, complicated bigger cases (where the damage exposure exceeds EUR 100,000) and labor law disputes.” Lucia Tandlich, Head of Legal at Markiza, also said: “we usually outsource litigation matters and occasionally issues which require specific knowledge of the subject matter and which are time-consuming, or more complex projects.”

In terms of corporate/transactional work, the annual summary of deals reported by CEE law firms contained in the CEE Legal Matters Special Year-End Issue showed that Corporate/Commercial/M&A work represented 32.6 percent of the client matters firms reported – and Slovakia was right on par, with 31.4 percent of the work reported in the country being Corporate/M&A related. 

The Importance of Relationships in a Saturated Legal Market

Competition among firms in the country is fierce. Slovakia, with a population only one-seventh that of next-door Poland, has a comparable number of ranked firms in the major listings: 24 in Corporate/M&A in Chambers & Partners compared to Poland’s 31, and 34 in Legal 500 against 37 (or 48 if “other recommended firms” are included) for Poland.

And the General Counsel we spoke with seem to feel the market is, indeed, full. Simoncic said: “In my opinion the Slovak market is more or less saturated,” and Orosi said, “in my personal opinion, the Slovak market in legal services is very saturated. I do not see any room for new competitors.” Although Tandlich agreed with this suggestion and said that she understands that “the fight for a client becomes even harder [in] these times,” she also added that, “on the other hand, there is always place for new players, local or international; its just [a] question whether they are able to convince potential clients about quality of their services and submit a reasonable offer.”

But the difficulty in securing new work may relate to more than an over-crowded market. Perhaps as the result of a considerably smaller marketplace to begin with, GCs in Slovakia seem to focus more on previous exposure with their external counsel than counterparts across the region. The 2014 CEE Corporate Counsel Handbook showed that “Trust/Track record of working with an individual lawyer” was ranked higher in Slovakia than in most CEE countries as an important criterion in picking external counsel. While the average across CEE was 2.47 (respondents were asked to rank several criteria from 1 to 5 with 1 being the most important to them), the Slovakian average for it 1.9. 

This unusual focus on the value of an existing relationship was stressed, in one form or another, by all three of the General Counsel we spoke with. When asked the main source of information he uses in selecting law firms, Simoncic – who was in private practice himself before joining Atos – referred to his “personal contacts and experience from the past.” Tandlich mentioned the same criteria first in her answer: “Previous experience, if available (quality and [effectiveness] of provided service); reputation in the market; price and references in specific area that is subject to outsourcing.” 

Evidence that Slovakian law firms depend on previous experience as a source of business even more than those in other markets is found in another set of data from the 2014 Handbook as well. Specifically, when asked about the “primary sources of information as to the quality of external counsel you have not yet worked with,” GCs in Slovakia, on average, ranked referrals and recommendations from their network at 1.49 – higher in importance than the CEE average ranking of 1.81, and the highest ranking in the region. 

A final set of data may provide Slovak law firms a metaphorical pat on the back. Happily, the 2014 Handbook reported that CLOs in Slovakia are more satisfied by the quality of service they receive from external counsel than the CEE average.

The 2014 CEE Corporate Counsel Handbook, supported by Edwards Wildman, CMS, Freshfields, Tuca Zbarcea & Asociatii, and Stratula Mocanu & Asociatii, included the responses of 69 CLOs responsible for Slovakia.

The 2015 CEE Corporate Counsel Handbook, supported by DLA Piper, Gide Loyrette Nouel, and Wolf Theiss, included the responses of 72 CLOs responsible for Slovakia.

This Article was originally published in Issue 3.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Vladislav Nikolov is the General Counsel of Overgas, Bulgaria’s largest private natural gas company. He’s worked at Overgas since 2006.

Before that he spent more than a year with the Bulgarian Commission on Protection of Competition, in the Antitrust sector.

V.N.: The work at the Commission on Protection of Competition (CPC) is very specific and very attractive at the same time. Due to the intenseness of the working process and the short period of time available CPC experts are required to dip into different business areas, which allows them to acquire skills and accumulate knowledge which elsewhere would require much more time. Still, I eventually decided that a role as state expert was not my preferred route for professional development. 

The offer by Overgas some ten years ago came in parallel to an invitation to join the legal team of one of the Big Four. My strong interest in the areas of Energy and Competition law influenced my decision to choose Overgas.

On the other hand, the legal work of an in-house lawyer is not so different from that of my external colleagues. The differences are only in the perspective and the way you approach the client/employer.

V.N.: Actually, litigation formed an essential part of my work at the CPC. The law is so broad and diverse, and lawyers are lucky to have many choices when looking for their area of professional dedication. I started at Overgas as Senior Counsel and initially I was involved in literally every kind of legal issue. During the first couple of years there happened to be a number of legal proceedings, mainly in the field of administrative law, and I got the chance to gain substantial experience in litigation. Subsequently the management established a separate department responsible for litigation and arbitration, and I was delighted to head it.

V.N.: In fact, the targets set in the company’s global mission statement are not unachievable or unusual. Unfortunately, however, their implementation in practice still faces lots of barriers in Bulgaria. In particular, the attempts to introduce measures for building a positive business environment often encounter serious resistance and remain primarily as hopes. Overgas’s commitment to create a better climate for business has led to many administrative and court cases in which the legal team of course plays a direct and leading role. Legal proceedings before the Energy Regulator, Courts of Law, and the European Commission are essential to achieving application in practice of the European rules in the Energy sector.

V.N.: The size of our in-house legal team has varied over the years. Since I joined, some of the colleagues have changed their employers and areas of legal practice. However, Overgas is a school! And this is best confirmed by the fact that all of my former colleagues who have left the company are very successful in what they are doing now.

At present the team consists of six lawyers, but we plan to increase a bit in number. Our goal is to achieve better internal specialization in areas like Energy, Contract, Construction, Corporate, Competition, and Public Law. Generally, in my understanding, an internal legal team should be organized and function as a small law firm.

V.N.: The day begins with a short update on the development of key legal issues within the Overgas group. I try to prioritize the tasks and make a timeline for their execution. However, lately the days have been so intensively rich that often the initially set plans and schedules need to be adjusted to cover a number of unexpected meetings or appointments. Still, this is more an exception than the norm.

V.N.: The biggest challenge is always success – in any of its shapes. The most regular source of frustration may be the illogical or sometimes predetermined actions or decisions of the state bodies. I guess this is the typical disincentive for anyone who wants to live in a world of things that happen.

V.N.: Overgas has been a leader in its area of business over the last 25 years. That means surviving different legislation and legislative regimes. Since Bulgaria gained EU membership in 2007, the most significant obstacle before the company has been the state’s continuous attempts to keep the monopoly position of the existing energy operators stable and unchanged. Liberalization remains distant and practically impossible – even though it is provided for in the national legislation.

This Article was originally published in Issue 3.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Deal:

On July 31, 2015, the CEE Legal Matters website reported that Schoenherr’s Sofia office had advised the EQT V private equity fund on its July 29, 2015 sale of Bulgaria’s Blizoo cable operator to Telekom Austria Group – which was advised by CMS in Bulgaria and Austria. 

The Players

• Ilko Stoyanov, Partner, Schoenherr: External Counsel for EQT 
• Gentscho Pavlov, Partner, CMS Reich-Rohrwig Hainz: External Counsel for Telekom Austria

Stoyanov: Schoenherr was contacted by EQT with a request to make a proposal. We were selected following a competitive process involving other law firms.

Pavlov: We have a long-lasting relationship with Telekom Austria. In 2003/4, we acted for the company when it acquired Mobiltel – one of the three largest providers of telecommunication services in Bulgaria. Also, we supported Telekom Austria three years ago when blizoo was first put up for sale (alongside its Macedonian subsidiary), but a deal was not reached.

Stoyanov: At a very early, planning stage. First, we were asked to review Blizoo Macedonia and Blizoo Bulgaria for any legal issues that could be solved prior to starting the sale process. Then, we prepared vendor due diligence reports and set up data rooms. We were also involved in the negotiations with the bidders and EQT’s financing banks with regard to the Macedonian and Bulgarian legal matters (Hogan Lovells advised EQT on English law aspects of the equity side of the transaction; Clifford Chance advised EQT on English law aspects of the financial side of the transaction). The scope of our mandate did not significantly change – we were retained to advise EQT on all Macedonian and Bulgarian legal aspects from the start until the end of the sales of Blizoo Macedonia (closed in 2014) and Blizoo Bulgaria (closed in 2015). 

Pavlov: Together with CMS Vienna, our mandate was a broad one, covering all aspects of a typical M&A transaction. In particular, we were mandated with the due diligence of the target (an update of the report we prepared in 2013), transactional and structuring support, SPA negotiations, signing, merger control clearance, and closing. 

Stoyanov: At the start, Christian Herbst, Partner Vienna, was responsible for the overall coordination of the Bulgarian and Macedonian teams of Schoenherr and, in respect of Macedonia, [a team from the] Polenak Law Firm. As work progressed, I took responsibility for overall coordination and was EQT’s principal point of contact from late 2014 on. I was supported by Katerina Kaloyanova, attorney in our Sofia M&A practice, and a team of specialized attorneys to assist in the vendor due diligence and a vast array of specialized legal issues. 

Pavlov: I had overall responsibility for the transaction on the Bulgarian side. Our Senior Associates Valentin Savov and Dimitar Zwiatkow, and our Associates Ivan Gergov, Marin Drinov, and others, carried out due diligence of the target, provided structuring and SPA support, and assisted on closing. Associate Gabriela Edreva advised on merger control clearance. Partner Guenther Hanslik and Senior Associate Andreas Goeller, at CMS Austria, led the SPA negotiations and signing.

Stoyanov: The deal structure generally followed EQT’s original design except that instead of a single sale of two companies in 2014, two separate sales took place – Blizoo Macedonia was sold in 2014 and Blizoo Bulgaria was sold in 2015.

Pavlov: We became involved in the sale process of the target relatively late, compared to other interested parties, which meant that we worked under great time pressure. Quite challenging was the due diligence of the target, which we had to finish in less than a week. Consequently, we supported Guenther and Andreas on the negotiation of the SPA with Hogan Lovells and on matters related to the structuring of the deal. Once the deal was signed (approximately one month from kick-off), we focused our efforts on acquiring merger control clearance. There were several interested parties that objected to the transaction, but in the end we were successful in getting approval from the competition authority. The closing was relatively smooth.

The transaction lasted less than three months.

Stoyanov: In the 2014 deal, [that would be] the coordination between the Macedonian legal team, which was aware of and handled the local specifics of the transfer of Blizoo Macedonia, and the English legal team, which handled the transactional aspects of the sale. The most challenging part of the 2015 deal was our involvement as a sell side advisor in several simultaneously conducted due diligences by many interested buyers who asked a lot of questions. Over several weeks we had non-stop back-to-back meetings with all buyers.  

Pavlov: The most challenging part of the process was the preparation of the due diligence report. We had only limited time to get it done. Although we performed a due diligence on blizoo three years ago, we were not able to use much of it at all. At the end, we successfully drafted our report in less than a week.

Stoyanov: The scope of our mandate did not significantly change – we were retained to advise EQT on all Macedonian and Bulgarian legal aspects from the start until closing of both deals, including all legal and commercial issues that would come up between the signing of the sale agreements and completion of the transactions.

Pavlov: Our mandate was an all-encompassing one for an M&A transaction where the successful completion of the deal is envisaged from the start. 

Stoyanov: We would describe our working relationship with EQT as smooth and efficient, at times rather intense due to pressing short deadlines (especially around signing and closing), and the communication was quite straightforward – mainly by e-mail, sometimes on the phone, and at meetings in London and Sofia.  

Pavlov: Although Telekom Austria should also weigh in on this, on our side we have a great relationship with them. As already discussed above, this is the third time we have worked together on an M&A deal in Bulgaria. Our colleagues in Vienna advise Telekom Austria Group on a regular basis. 

Stoyanov: The CMS team were very responsive and it was overall easy and pleasant working with them.

Pavlov: We sincerely have a great working relationship with our colleagues at Schoenherr. I have personally known Ilko Stoyanov for more than six years and we have always worked great together. Moreover, we are currently involved on another ongoing project with Schoenherr.

Stoyanov: The sale of Blizoo Bulgaria was, although not highest in value, the most prominent deal on the Bulgarian M&A market for 2015 – due to the well-recognized Blizoo brand. After the sale of the third and the second largest telecoms in Bulgaria – Vivacom in 2012 and Globul in 2013 (Schoenherr advised on the buy side in both transactions) – Blizoo was another sign of the continuously reshaping TMT market in Bulgaria. This trend is, however, now gradually coming to a halt with fewer players keeping a stake on the TMT market. 

Pavlov: In terms of volume, the deal was probably the second largest for 2015 in Bulgaria. As to its impact on the TMT sector, it is also of great significance. The deal shows that there is an increasing tendency for telecommunication companies to offer full range of services to their clients (one-stop-shop).

This Article was originally published in Issue 3.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

A Famously Unreliable Judicial System

 “[T]here is not enough rule of law in Bulgaria. It is our opinion that the accumulated and unresolved problems in the judiciary are systemic and require a comprehensive approach in order to be eliminated, an approach which ought to be based on the principles of justice, the rule of law, and the reform strategy approved by the National Assembly.” So began a January 25, 2016, open letter signed by representatives of multiple chambers of commerce in Bulgaria and addressed to Bulgarian Prime Minister Boyko Borissov, President Rosen Plevneliev, and others.

The letter continued: “The resulting feeling that reform is not happening leads to uncertainty among investors and the economic entities operating in the country. There is a decline in the willingness to invest in Bulgaria, to the benefit of other countries,” leading to an economic scenario in which “one cannot expect a positive and sustainable development of the country. This is a price the entire society pays and will continue to pay. Ultimately, one of its most valuable resources is being depleted – trust.” The letter concluded with a call for reform of the justice system, “not just in law making but also in implementation and enforcement of legal norms – [which] will increase Bulgarian society’s and business’s confidence in the judicial system.”

The letter was sent shortly after the December 9, 2015 resignation of Bulgarian Justice Minister Hristo Ivanov, who stepped down from his role after the Bulgarian parliament watered down proposed changes to the country’s constitution – an action which, he claimed, prevented genuine reform of the country’s judiciary. All this happened after Bulgarian lawmakers voted in September 2015 against setting up a special agency to investigate high-level corruption, arguing that it would lead to a witch-hunt by prosecutors. 

Taking Matters Into Their Own Hands

One of the chambers of commerce speaking in the January 25 letter was Confindustria Bulgaria, created in 2000 out of the Comitato Consultivo dell’Imprenditoria Italiana in Bulgaria (the Advisory Committee of Italian Entrepreneurship in Bulgaria). With more than 320 member companies, Confindustria Bulgaria is among the largest entrepreneurial associations in Bulgaria. It represents the Bulgarian branch of Confindustria, the main Italian association of manufacturing and service companies, which counts more than 150,000 companies employing more than five million people among its members.

Acting against the backdrop of an unreliable judicial system in Bulgaria, Confindustria has decided to set up its own Arbitration Court, with Wolf Theiss Partner Frank Diemer as its President. Diemer – who moved to Sofia in Spring 2015 to, in the words of Wolf Theiss Partner Christian Hoenig, help the firm “focus on helping Italian investors and their advisors with CEE/SEE opportunities” – believes a specialized Arbitration Court within Confindustria is necessary to “try to overcome at least partially the shortcomings of the Bulgarian judicial system, very well known to Italian entrepreneurs who face similar problems at home (high costs, inefficient process, duration of the process, problems with executions, etc.), and not to wait for the always-promised but never really carried-out reform of the Bulgarian court system. Arbitration and the possible execution of awards under the New York Convention seemed to be a proper means to be of help in this case.”

According to Diemer, the need for an alternative to the Bulgarian judicial system is clear. He notes that a “stable, independent, transparent, and predictable legal system where the rule of law is not only written in the textbooks and in legislative acts but can and will effectively be enforced by the judicial system,” is of the utmost importance for foreign investors, especially given the Bulgarian economy’s heavy dependence on foreign trade and investment. 

“If you cannot be sure that your commercial credits will be paid and can be enforced, if you have to struggle with your joint venture partner in front of inefficient national courts in order to have your agreements respected, if the inefficiency of the judicial system in general can be used by one of the parties to put pressure upon the other side in order to obtain certain results not contractually foreseen or not even contemplated by law, etc. – all these and other issues can to a certain extent be resolved by arbitration and alternative means of dispute resolution in general.“ 

Thus, the Confindustria Arbitration Court is being established to ensure “trust in the fact that what has been established by law or by agreement between the parties will be respected, and if not, can be quickly enforced. In general, the timely and cost-effective enforcement of contractual agreements appears to be even more important than the underlying (residual) legal framework.”

And Diemer believes the existing Arbitration Court at the Bulgarian Chamber of Commerce and Industry is not enough. The idea behind the Confindustria Arbitration Court is “to create a Court of Arbitration which would be more appropriate for Italian investors or trade partners than the already existing Bulgarian Arbitration Court run by the Bulgarian Chamber of Commerce or equivalent institutions established by other chambers of commerce. Language issues, the knowledge of the Bulgarian and the Italian legal environment, of Italian habits and commercial practices which might differ quite substantially from those of other countries, appeared to be enough reason to establish a specialized arbitration court.” 

What The New Arbitration Court Will Look Like – and When

While the initial plan is to focus on Bulgarian-Italian relationships, Diemer emphasizes that the Court will be open to other countries as well and “will try to offer certain innovative concepts which … [by] combining some of the best practices of other well established international arbitration centers, will be attractive and helpful for the international business community in CEE/SEE.”

Diemer believes that the Confindustria Arbitration Center will “offer a compromise between sometimes conflicting necessities, like speed, cost effectiveness, well-motivated decisions at law in more complex and important matters, and maybe decisions ‘ex equo et bono’ in simple collection matters. In any case, the result will be a matrix of various proceedings which the parties will be able to choose from, according to their needs.” For instance, the court will offer one type of proceeding in which mediation is included within the arbitration procedure. “And in case the parties are unable to settle their dispute through the incorporated mediation, they may continue with the arbitration proceedings,” he adds. “As opposed to other regulations, we try to carry out the mediation not in an external mediation center, but to keep it, for speed and cost reasons, within the same arbitration procedure. which should not suffer any delay.”

A so-called “emergency arbitrator” is another proposed feature. This emergency arbitrator, who “should be a member of the court itself designated by the President in order to avoid the sometimes time-consuming nomination procedure,” would be tasked with reaching a conclusion in a very short time frame – from a few days to several weeks – and based only on the preliminary documentary evidence and one summary hearing. “Such emergency procedure will then normally be followed by a full arbitration where the emergency arbitrator will obviously not be involved, not even on the institutional side,” Diemer explains.

Diemer says that, after an initial trial phase, the court is expected to be fully up and running by September or October, 2016. The plan is to start “with a reduced number of arbitrators, which might be from six to eight, in an administrated proceeding, and then extend the number of institutional arbitrators according to the needs and the acceptance of the Court and its procedures by the economic operators.” 

First Sofia, Then the World

Of course, Bulgaria’s not the only jurisdiction dealing with a problematic and opaque judicial system, and Diemer sees no reason why this model can’t be expanded beyond Bulgarian borders. The failure of judicial reform in that Balkan country “has drawn the attention also to shortcomings in other jurisdictions where Confindustria is or will be present in CEE/SEE and where change might not happen fast enough.”

This article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On Wednesday, January 27, five senior Bulgarian lawyers gathered at the elegant modern offices of the Penev Law Firm in Sofia for a Round Table conversation on the current challenges facing law firms, lawyers, and the legal industry in Bulgaria.

The Bulgarian Economy

The discussion began with a consideration of the general state of the Bulgarian economy, and there was general agreement that, while the outlook was perhaps “just a little bit” better than the year before (in the words of both Penev Partner Christopher Christov and Schoenherr Managing Partner Alexandra Doytchinova) absolute confidence was premature. Christov suggested that “it’s a joyride, it’s up and down, up and down. Being in the Balkans and having the political situation changing – not dramatically, but significantly from time to time, affects the market and affect the economy, and the legal market is no different. Sometimes we are full with projects. Lately they are not that much.”

Reneta Petkova, Managing Partner at Deloitte Legal in Sofia, was slightly more optimistic: “I would say that definitely 2015 was better than 2014, because in 2014 we saw a lot of exits – only exits – of foreign investors from Bulgaria. In 2015, mainly because of huge absorption of EU funds and a little bit of development of export-oriented businesses, I think there was development in the economy. And we also saw the return of some of the foreign investors.”

Schoenherr’s Doytchinova noted that the global crisis didn’t really hit home in Bulgaria until about 2012, but that the years since have been hard. Like Petkova, Doytchinova reported seeing a trickle of foreign investors coming into the country in the second half of last year. “Unfortunately,” she said, “it’s too early to tell if this will stay, or if it’s a wave, or if it’s a general development. Let’s talk in six months’ time or nine months’ time, and then we can see.” Ultimately, she said, “Bulgaria will need some time to regain trust from foreign investors. Our politicians have managed to mess a lot up over the past years. A lot.”

Vladislav Nikolov, the General Counsel of Overgas, referred to the lingering affects of the global crisis. “After 2012 the environment – in particular in the energy sector – has gotten worse. We’ve seen bankruptcies among the biggest consumers, and some big investors have left the country. Many went to Romania, which is strange at first glance, because our tax legislation here is twice as good as theirs. However, to many, Romania is the better place for business – and in the field of energy, this is definitely the case.” He concluded, smiling, “still, I tend to be optimistic.”

The host of the event, Penev’s Christopher Christov, pointed out that not all was bleak. “We have the IT industry here because we have the fifth fastest internet in the EU and the tenth fastest world-wide. Plus, the cost of electricity, this makes Bulgaria good for the IT sector. So this is a positive sign and a good example.”

A Stable and Diverse Bulgarian Legal Market

The participants at the Round Table spoke as one in describing the current legal market as fairly stable, with few significant split-offs (beyond Kinstellar, which took a team from Wolf Theiss to open its Sofia office in the fall of 2014), consolidations, or departures (since the departure of DLA Piper at the end of 2010). 

Unlike in neighboring Romania, where the market is dominated primarily by domestic firms, in Bulgaria it appears that neither the internationals nor the domestics have the upper hand. Schoenherr’s Doytchinova said, “I think it’s a mix. We have very strong local law firms. I wouldn’t necessarily separate, because the domestic firms have the advantage of longer time on the market, while we [the international firms] have the advantage of the network. Everyone has a separate advantage. But I believe it is very much mixed on our market.”

Deloitte Legal’s Petkova agreed, but reported that she’s seeing fresh law school graduates starting to lean towards the internationals: “I have interviewed a number of young people, and they have shared their experience, and they do prefer international firms. Mainly because they believe in international firms they will get more training.”

Doytchinova wasn’t convinced. “On the other hand, I’ve heard that senior associates at the domestic law firms have better prospects of equity partnership.” (Christov, who in January of 2015 was promoted to Partner at Bulgaria’s Penev firm, laughed. “Look at me as an example!”).

Stable it is … but vibrant it is not. Due presumably to the dullness of the Bulgarian economy in recent years, few firms are growing. Doytchinova reported that, at Schoenherr, “we are quite stable in size for the past two years. We have been rather replacing, but not necessarily growing much.” And Ivan Markov, Senior Partner at Penkov-Markov, said his firm is in a similar situation: “No one has left, and no one has come.”

The only exception was Petkova, who joined Deloitte as part of its reinvigoration of its legal practice across CEE. “We are definitely growing,” she said, “but we are a different case. I joined Deloitte Legal a year ago, and the size of our team has almost doubled since I arrived.”

The Rise of “Funeral Work”

Needless to say, the financial crisis has changed the kind of work available to lawyers in Bulgaria. Ivan Markov explained: “We are fully dependent on the development of the economy in the market. There is a proverb that lawyers will always survive irrespective of the crisis and the scope of work, and this is true … but the type and scope of the work have changed. In the past, when the economy was growing, the work was creative, productive, and a lot of mergers and acquisitions have been assisted by us – and this is something that we are all proud of. Then, along with the crisis, especially our law firm, we are experiencing a new type of work, which we call ‘Funeral Work.’ Insolvencies, bankruptcies, liquidation proceedings. These are things that, believe me, we are uncomfortable with, but we do.”

The subject turned to specific practices. Markov explained that he does not believe that Real Estate, for instance, will ever really return to what it was before the crisis, and he reported that, at the moment, it is only “slightly” active. 

Petkova was a little – but only a little – more hopeful. “There are projects that have to be developed somehow. They were frozen before, and now either the financing banks or the owners want to do something with them. So I would say in residential, but also in the office space, there is slight development, but it is slow in all sectors.”

Christov, who started his career as a real estate lawyer, said that “now we have very speculative transactions, venture capitalists, and now the current state of the real estate market is like the opposite side of the restructuring. We had M&As – and now we have restructurings. In real estate we had large investments, and now we have ‘OK, we have to figure that out and just not foreclose it.’ So it’s this kind of work.”

When asked about the amount of Energy work available to law firms in the market, there was a pause. Christov said, “we are away from the honeymoon period. Now there is a lot of work – not immense – but the money is there.” He then said, “Well, it is a strong practice, but it’s a controversial practice. There are retroactive changes within the laws for accessing the grid and feed-in-tariffs, and this changes the business model of the investors in energy, so this changes the legal work. Instead of doing corporate stuff, and expansion, they try to squeeze and seek even – if not negative events – exit.”

Vladislav Nikolov described his frustration at what he feels is the Bulgarian government’s improper support for state-run entities: “I think the explanation is in the lack of political will for liberalizing the energy market. The governments are fighting to keep the status quo, i.e., to secure the status of state-owned companies as the key players on the energy market. Private investors entering the market need to compete with Bulgargaz and NEK, for example. And it turns out to be impossible.”

Ivan Markov explained that his firm sees a lot of disputes against the regulatory authorities in the energy sphere. “we do pursue administrative cases against the regulator in this respect. Because a lot of investors were attracted initially into the very promising incentives that the government initially launched. Then step by step they start to cut, to cut.”

For that reason, among others, dispute practices are constituting an increasingly valuable source of revenue at major Bulgarian firms. Markov said that, at his firm, “this is the biggest group. We started fifteen years ago with less than 3%. Now we are almost 20%.”

Christov said, “We are more on the corporate side, like Schoenherr, but still we have the litigation team, and we try to settle more and more out of court just to have some results, otherwise it just drags on and on for ages.”

Markov wished him luck, saying that while “it was possible years ago … now it’s by far less possible. Somehow the disputing participants have also changed their approach. Sometimes they like to go into court just to create damage. Just to make noise.”

Petkova nodded her head. “Yes, I have to agree with this. I registered as a mediator several years ago, and I have not practiced true mediation once, yet. Of course I use my knowledge and mediation skills, but otherwise, I do agree that, absolutely. It was in the past as well, the businessmen like from time to time to fight, they don’t realize it’s against their interest.”

Fees and Fee Caps

The subject of fees brought frowns and sighs, as Christopher Christov said there was “definitely” a trend downwards on fees. Doytchinova nodded. “I fully agree that fees are going down over time. I wouldn’t say that they have changed for the past one, one and a half years, but compared to 2010 there is certainly a change, and not an insignificant one.”

The participants at the Round Table shared outrage at the increasing – and, they agreed, unreasonable and uninformed – demand for fee caps. According to Ivan Markov: “The approach has changed. Have you received a request to send an offer to assess three or four hospitals, and maybe some other buildings, and you have to deliver it for an acquisition, and the fee has to be fixed. What is this!? This is something I can not understand, and this is only for the legal profession. We are offering a fee for a due diligence report, without knowing one line of what’s involved. Completely blindly. Of course we are pressed by the expectations of the client, and the competition. We are trying to be cost efficient as much as possible, but it sometimes goes against us.”

Doytchinova nodded emphatically. “The problem is really in the behavior. Lower hourly rates are not the problem. The problem is these requirements for caps that are fully unreasonable. So you have a client who only insists on a cap without being able to explain what you have to deliver for that cap. We have seen horrible examples where someone is looking – a big international company with a Bulgarian team – and they are looking for monthly advice and they want a fee cap. But they are not able to explain what the matter involves. Is it litigation, is it employment? How many hours have you worked until now? It makes a difference if it’s 20 a month or 200! And they say, ‘No no! We want a cap!’ That’s unfortunately a rather bad discipline and a lack of understanding.”

Markov shook his head. “It’s awful. It’s awful.”

Reneta Petkova added her perspective as well. “There are limits, you know? Definitely we all here keep our reputations. We cannot deliver the work for peanuts. We cannot manage the quality under those conditions. I fully agree this is not, any more, an hourly-rate market. Absolutely no such quotes for hourly rates. Only capped or fixed fees. And without a strictly defined scope. So you have to be a magician to put assumptions in order just to make sure you won’t have to write off 100% of your time. And to provide regular fee updates and assure predictability for the clients, at the same time.”

Doytchinova explained another aspect of the problem. “And because of the loyal clients you can’t go endlessly down. You can’t offer something new to someone new on the market and disadvantage your long-term clients.”

Markov agreed. “Yes. The ‘old loyal’ clients suffer the most from this. Because they’re placed in the most inadequate position compared to the new clients. So we have old clients, 25 years already with us, at a level that is 50% higher – more beneficial to us – than the newer clients. What is that?!”

And the perhaps-inevitable result is that some firms may be choosing to focus more, or first, on those clients who pay more. Doytchinova claimed, “You know, I have heard rumors – of course I have no idea if they’re true – that some firms in the market are prioritizing work by looking at the fees. So as a client, you pay less, you don’t have priority. Which, if this is true, is unacceptable.”

Petkova said she has heard similar rumors: “Or they push the work down, to juniors, who can not deliver good quality service. But the clients don’t understand this.”

Doytchinova concluded with a sigh. “They don’t see the difference. Until they see.”

Biggest Challenges Going Forward

Finally, the conversation turned to what was agreed to be among largest challenges facing the legal industry and the market in general: the lack of predictability in the Bulgarian courts. 

Ivan Markov clarified: “This is not a challenge. This is a pain.”

When asked whether the lack of predictability is a function primarily of incompetence or Bulgaria’s ongoing struggles with corruption, Doytchinova said, “I think it’s a mixture of both, because we see incredibly incompetent decisions. We don’t know if they have been influenced, or what.”

Vladislav Nikolov, of Overgas, echoed the others at the table. “I agree with my colleagues. Business needs stability and predictability. Effective judicial reform will be a big step forward in removing the uncertainty which business is facing now.”

Reneta Petkova cited the same three obstacles. “For me as well, predictability, corruption, and judicial reform, and I would add two more things. We mentioned already the fee pressure, and … the technology that will change our profession. And both of them can change our profession in ways we don’t want, making it more commoditized. I do feel that our profession is a creative profession and we shouldn’t have our services as a commodity.”

With that the Round Table came to a close. We’d like to thank the Penev Law Firm for hosting the event.

*Photo of Reneta Petkova by Yulian Donov, Manager Magazine

This article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.