Czech Republic/Slovakia: Czech points

Sweeping legislative change is providing the bulk of the work for lawyers in the Czech Republic and Slovakia

It has been a quiet year or so in the Czech and Slovak legal markets. Nobody has moved in, nobody has moved out and lateral hires have been few and far between. But that does not mean there is not plenty to keep local lawyers busy.

Although, as in other parts of Europe, M&A is tending towards the slow, legislative changes are looming in both countries and making sure lawyers and clients are on top of these is taking up much of firms’ time.

Czech/Slovakia map

“There’s enough work but not the right kind,” says Katarina Cechova, managing partner of Slovak firm Cechova & Partners. “There aren’t too many M&A transactions, just smaller deals consisting of reorganisations in existing businesses.”

A similar picture is painted by lawyers in Prague.

“It feels like the 1990s,” says PRK Partners partner Martin Kriz. “Those were incredibly busy times – the only challenge was to select the right part of a transaction. In the past six months it’s been incredibly busy, but not in the normal way.”

The small size of most local firms makes it hard to get a good overview of how busy the market really is.

Glatzova & Partners managing partner Vladimira Glatzova comments: “By chance you get three big transactions and then you’re busy.”

Air force

However, there have been some big deals in both markets, with the energy, aviation and real estate sectors all busy.

One of the most significant transactions to have completed recently is Korean Air’s acquisition of a 44 per cent stake in state airline Czech Airlines. Korean Air was reportedly the only bidder for the minority stake, which was a key transaction for the future of the local company. At €2.64m (£2.23m) the size of the deal was small, but it was strategically critical.

A much bigger deal that also had a state connection was the recent sale by GDF Suez and E.on of their combined 49 per cent stake in Slovakia’s dominant gas company, Slovensky Plynarensky Priemysel (SPP), to Czech power company Energeticky a Prumyslovy Holding (EPH). EPH paid €2.5bn for the stake and the deal closed in January. The Slovak government retains a 51 per cent stake in the company.

The largest transaction in the Czech Republic so far this year was also in the energy sector. A Canadian-German consortium plans to spend CZK41.16bn (£1.35bn) buying the entire share capital of Prague-based gas transmission provider Net4Gas from RWE in a leveraged buyout. A number of investors and private equity groups were rumoured to be in the running for the acquisition when it was first announced back in 2011.

“Energy transactions dominated the first half of this year,” notes Havel Holasek & Partners managing partner Jaroslav Havel, his firm having won roles on both the SPP and Net4Gas deals.

Lawyers also point to the media and technology sectors as being particularly active.

The need for an international focus has never been greater, they add.

“Purely domestic M&A is relatively exceptional,” says Kriz. “Whether you like it or not, in most cases we’ve got a foreign shareholder involved.”

Some transactions, such as the EPH-SPP deal, are cross-border in a regional sense, but an increasing number involve investors or other companies from outside Europe looking for cheap opportunities.

But not everyone agrees deals involving foreign companies are on the up.

“From the investment point of view foreigners are still hesitating because even at home they don’t know what will happen,” says Peterka & Partners partner Ondrej Dusek.

Lawyers also say there has been an uptick in work in real estate.

Dagmar Dubecka
Dubecka

“In recent years there has been quite a low demand in real estate transactions, but this is changing,” says Kolcian Solc Balastik managing partner Dagmar Dubecka.

Havel also points to real estate and construction as a growth area.

“There are a lot of interesting deals in the construction sector with a public component,” he notes.

On top of M&A and transactional work, litigation, insolvency and employment work are also buoyant.

“We’ve been heavily involved in dispute resolution,” says Glatzova, describing a recent case that saw the firm fight – ultimately unsuccessfully – the Czech government’s changes to solar power feed-in tariffs.

“We have a big employment law practice and it’s growing,” she adds. “There’s a lot of redundancies and a lot of reduction in staff, which always means quite a lot of advice.”

Dubecka agrees.

“Litigation is a growing area, but that is normal,” she says. “I remember 20 years ago there was no litigation between businessmen or companies because they were founding companies and starting businesses. Now we are seeing problems – and unfortunately people have started to solve their problems through the courts.”

Contentious work is also a hot topic in Slovakia, according to Cechova.

“As an M&A lawyer I’m not happy with what’s going on,” she comments. “There are a lot of reorganisations plus an increase in insolvency and bankruptcy and liquidation cases. I’m also seeing an increase in antitrust advice as well as a rise in regulatory – and, particularly, an increase in labour law advice. On the upside, it’s more work.

Katarina Cechova
Cechova

“I see this as players in the Slovakian market being more cautious in enforcing objectives with their partners, and also trying to sue partners for commercial reasons if something’s gone wrong,” Cechova adds.

Code red

Market maturity is also leading to legislative changes in both the Czech Republic and Slovakia.

In January 2014 one of the most critical pieces of regulatory reform in recent Czech history takes effect as the country implements its new civil code and a new Commercial Corporations Act. The civil code has been many years in the making and replaces laws originally enacted in 1964 when the country was under Communist control.

Glatzova says the civil code is of “major importance”.

“It’s a complete change in the legal system – there’s nothing left from the current code,” she says.

Dubecka agrees that the code is a crucial change for the jurisdiction, describing it as the most important legislative amendment since the 1980s. She points out that the old code was hard to amend to make sure it reflected the present economic and political situation in the country, whereas the new one is more flexible.

“It’s going to be a massive change for lawyers in private practice,” says Kriz. “The approach will change very much next year, which I think is good news for anyone drafting contracts or negotiations.”

The changes will spark disputes, predicts Dusek.

“There’ll be a lot of litigation, not imminently, but after one or two years,” he says, adding that the cause will likely be a breakdown in relationships between parties to contracts signed under the new legislation.

Dusek explains that good faith is a principle in the revised legislation – a significant change.

Change with the times

Lawyers have been advising clients on the expected changes for a while already. Kolcian Solc Balastik has set up an ‘institute’ designed to be a platform for education about the changes, while Havel Holasek has been sending out news alerts branded as ‘recodification news’ for some time.

“It started three months ago and the peak will be in the autumn,” says Dusek, regarding queries from clients.

Meanwhile, CMS Cameron McKenna carried out a survey of clients earlier this year asking about the impact they are expecting from the legislation. Just under half the

respondents said they were aware of the impact of the changes, and around the same number had taken steps to prepare their business for those changes.

Financial services and energy companies were best-prepared, with more than two-thirds of respondents in both sectors having already taken measures to prepare for implementation, including instructing an external law firm.

Law firm seminars are proving a popular way of educating clients, both in-house lawyers and lay clients, and around half the companies surveyed said they were relying on their in-housers to update them on developments.

Changes in the way commercial agreements are negotiated are expected to have the greatest impact on business.

Half the respondents were concerned about the cost of making changes, with 63 per cent saying time and resources were their greatest concern.

Vladimira Glatzova
Glatzova

While most lawyers welcome the changes Glatzova says she is concerned about the sheer scale and scope of the reform.

“I don’t think this will encourage investment in the Czech Republic,” she says. “There’ll be a few years of legal mess where you just don’t know how to interpret the law. Until we know how the law will be interpreted it’s difficult to advise our clients. I remember the days in the early ’90s where we always had to say to our clients, ‘we don’t have a clear answer on that’. Clients hate this and it’ll be the case again.”

Dubecka concedes that the change is substantial.

“The new civil code could be a bit confusing but on the other hand it will be helpful,” she argues.

The main impact, says Dusek, is that other laws also need to be amended due to civil code changes.

“Thousands of other laws will need to be changed and nobody knows how,” he explains.

Updates in Slovakia

In Slovakia, legislative changes on the table are less sweeping. Cechova explains there are a number of amendments being made to the country’s labour code, although the government is stopping short of a total revamp.

“I wouldn’t say there was a complete change in the legislation – it’s just updating and amending the existing legislation,” she says.

The Slovak Republic is also implementing new public procurement rules, which, lawyers predict, could cut public spending.

“If these rules work as intended they’ll reduce the amount of money the state spends on services and products,” explains Kriz.

Relationships between firms in the two republics remains good. A number of Czech-headquartered firms have offices in the Slovak Republic, although the amount of work done by these firms in Bratislava varies.

“We don’t have that many clients acquired locally, it’s rather that the clients who use us in the Czech Republic are also clients in Slovakia,” explains Glatzova.

“A lot of transactions are run from the Czech Republic – it’s a small market and a limited number of transactions are purely Slovakian,” agrees Havel, predicting more growth in the Czech Republic than in its neighbour.

Despite this, Havel Holasek is one of those investing in its Slovak operations. The firm is planning an imminent launch in Kosice, the country’s second-largest city, and has recently hired White & Casecorporate and real estate associate Martin Jurecko as a partner in Bratislava.

Cechova says the international firms that have remained committed to the country – led by the likes of Allen & Overy and White & Case – are likely to stay put and, from her perspective at a local firm, have successfully converted their practices from a heavy banking and corporate focus to a more diversified model including practice areas such as litigation.

Those Czech firms not in Slovakia, such as Kolcian Solc Balastik, have no intention of moving in. Dubecka says her firm has a longstanding relationship with Cechova & Partners, and both sides are happy that being referral partners enables them to get the best out of each other’s jurisdictions.

Guarded optimism

Although firms such as PRK Partners and Havel Holasek report record years for 2012 – Havel says turnover was up by 20 per cent last year – both republics are suffering from the same issues as other parts of Europe. Slovakia, a member of the eurozone, is perhaps slightly more affected by the crisis, but both countries are experiencing the same fee pressures and changing work profile as their colleagues across Europe.

As ever, the firms that successfully diversify and make the most of opportunities such as the revisions to legislation will be those that thrive. The future in the Czech and Slovak markets is brighter than in some countries, but it continues to hold its challenges.

Key figures: Czech Republic

GDP (2011): $217bn

Inflation (Apr 2013): 2.7%

Population (2012): 10.5m

Life expectancy at birth: 78

Unemployment (Apr 2013): 7.7%

Source: World Bank, Czech Statistical Office

Key figures: Slovak Republic

GDP (2011): $96bn

Inflation (Mar 2013): 1.9%

Population (2011}: 5.4m

Life expectancy at birth: 76

Unemployment (Mar 2013): 14.7%

Source: World Bank, Statistical Office of the Slovak Republic