Czech Republic/Slovakia – Nervous centre

As international firms question their future in these small, closely linked markets, local lawyers too are eyeing the business environment with caution

In the past few years foreign direct investment (FDI) into the Czech Republic has been up and down, to say the least. An all-time high of €9.4bn (£7.7bn) – much of it from Germany – in 2005, just after the country joined the EU, has not been matched since. In 2012 there was a net total of €6.2bn flowing into the Czech Republic. Last year that nearly halved, to €3.8bn.

Prague

Along with uncertain dealflows, the lack of international work is starting to drive some global law firms out of Prague. This year both Hogan Lovells and Norton Rose Fulbright closed their Czech operations. Norton Rose Fulbright deputy managing partner for Emea, Tim Marsden, blamed “long-term difficult trading conditions” and aggressive competition from other firms in the region for the decision.

Marsden’s opinion on competition is shared by lawyers in domestic firms.

“The market is competitive and saturated,” says one. “It’s becoming difficult for the international firms because the Czech and Slovak markets – even combined – are small. Too much effort is being expended relative to the size of the market, especially bearing in mind the fee levels in such a competitive market.”

“The future is not particularly bright for English or US firms here,” says PRK Partners’ corporate and finance partner Martin Kriz. “They are leaving because they were surviving purely on the inflow of Western capital. If that capital is gradually leaving, there isn’t that much work remaining for them.”

Kriz says there is an imbalance between the cost of operating in the Czech Republic and Slovakia and the revenue international firms might derive from those operations.

foreign investment

Iron Curtain calls

International firms have been in the Czech Republic, and to a lesser extent Slovakia, since the fall of the Iron Curtain. Allen & Overy (A&O) was one of the first in, launching in 1992, but even after the exit of Hogan Lovells and Norton Rose Fulbright there remain more than 10 Anglo-Saxon firms with Prague offices, including Baker & McKenzie, Dentons, DLA Piper and White & Case. A&O, Dentons, DLA Piper, Squire Sanders, Taylor Wessing and White & Case are all also present in Bratislava.

Kriz says local businesses were initially enticed by the global brands, which offered greater sophistication. That reputation has now vanished.

“There’s been a shift,” says one local partner. “It’s now apparent that the market is saturated, leading to spin-offs from the international law firms. Those spin-offs tend to be just as sophisticated in their legal advice and experience but much more price-competitive. There’s now a group of local firms that can service the complex transactions, but with the flexibility to adjust to lower fee requirements. That isn’t the case for international firms comparing the market with Russia, China or Hong Kong.”

It is a similar story with the Czech offices of Austrian firms, which generally are not seen as direct competition by domestic practices.

One Czech partner suggests that the Austrian firms, including Schoenherr and Wolf Theiss, should have focused on local clients instead of following their Austrian clients.

“The Austrian firms didn’t concentrate on them because they were below their radar, whereas the big Czech firms grew with those clients and that’s why they’re now in such a good position,” he says.

Unified market

Although there are subtle differences in the legal systems of the Czech Republic and Slovakia local lawyers – many of whom are dual-qualified – see the business law market as inextricably linked.

“Slovakia is still connected to Czech,” says Tomáš Otruba, banking and finance head at BBH Law Firm. “There are deep cultural and commercial connections so it makes sense for Czech firms to open in Bratislava.”

Local lawyers describe the Bratislava market as even more competitive and narrow than that of Prague. The Slovak economy is smaller than that of its neighbour, meaning local law firms are tiny, generally being between 10 and 20 lawyers, with practice groups of no more than three lawyers each. In other words, not large enough to service significant transactions, which is why the Czech firms have moved in.

Their approach effectively mirrors that of business more widely, explains Daniel Weinhold, of Weinhold Legal

“Corporates are moving towards a single operation across Czech and Slovakia,” he says, giving the recent example of the merger of the Czech and Slovak operations of UniCredit Bank late last year. 

“That means law firms are following suit – those with operations across both jurisdictions are better placed to get those corporate and banking instructions.”

Kriz maintains that global firms looking to boost flagging Czech revenues will be disappointed if they turn to Bratislava. 

“Some of the globals attempt to serve Slovakia from the Czech Republic, usually by having one or two lawyers in Prague who are Slovak-qualified,” he says. “But for specialised work they will instruct local firms – even if that is not obvious to the client.”

Codeworks

One advance the Czechs are making over their counterparts in Slovakia is the implementation, from the beginning of this year, of an updated civil code. This has been keeping law firms busy for some time.

The redrafting was a massive undertaking, with the new code replacing 200 pieces of legislation and running to some 3,000 sections. It replaces a communist bloc-era code produced in the early 1960s and has forced businesses to take many hours of legal advice on the implications.

“There are many issues around interpretation,” explains Weinhold. He maintains there are some flaws in the new code, along with fiddly changes in terminology, resulting in clients needing to have contracts assessed against it. 

“Even if the substance of contracts doesn’t need that much amendment, they still need to be checked,” he says.

In addition to the civil code relaunch, the Czech government has implemented a corporate law that is broadly welcomed by lawyers as it incorporates modern concepts concerning the statutory responsibilities of directors’ accountability.

“In coming years clients will see the positive effects of these moves,” says Weinhold. “But at the moment they are focused on the increased costs involved in having to take legal advice. One often hears the complaint that this legislation was just concocted by lawyers to create new areas of work. But the reality is that most of the drafting was done by academics.”

Hopeful signs – again

The general economic outlook for the Czech Republic and Slovakia is relatively upbeat. EU forecasts suggest the Czech economy will grow by 2 per cent this year and 2.4 per cent in 2015, while the Slovak economy was already 2.4 per cent up in the first quarter of this year compared with the same period in 2013.

Otruba sees a shift in the local M&A market. 

“Instead of doing a lot of smaller acquisitions – which was the case before the crisis,” he says, “at the moment, we’re seeing more complex transactions.” 

As an example he points to the $3.4bn (£2bn) acquisition of Telefonica Czech from its Iberian parent by Czech financial group PPF.

Weinhold agrees that increased M&A activity is welcome. But he is not jettisoning his natural caution.

“In the past few months we’ve seen some positive signs in the transactional markets of the Czech Republic and Slovakia,” he says. “But this shouldn’t be overestimated. Since the depths of the financial crisis we’ve seen positive signals that have come to nothing. I don’t want to be too optimistic.”

M&A
M&A

Key figures: Czech Republic

GDP: $196bn

Inflation: 0.9%

Population: 10.5m

Life expectancy at birth: 78

Unemployment: 7%

Source: World Bank, Czech Statistical Office

 

Key figures: Slovakia

GDP: $91bn

Inflation: -0.2%

Population: 5.4m

Life expectancy at birth: 76

Unemployment: 14%

Source: World Bank, Statistical Office of the Slovak Republic