Small is beautiful
19 April 2010
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13 December 2013
With most UK law firms having deserted Slovakia during the recession, Tom Phillips looks at why they may be beginning to regret it
After years of growth and stability, how well has forward-thinking Slovakia come out of Europe’s economic slump?
The UK contingent has all but departed Bratislava, leaving behind just Allen & Overy (A&O) with an office on the ground. But with an educated workforce, low labour and employment costs, a stable political system and a pro-business tax rate that is the envy of its neighbours, there are many law firms that not only remain but are optimistic about this small and economically established country.
Competition for legal work can be seen as threefold. First there are strong local firms such as Ružicka Csekes, Cernejová & Hrbek, Dedák & Partners and B&S Legal.
Finally there are the international players that include A&O, White & Case, Squire Sanders, Kinstellar, Hillbridges, DLA Piper Weiss-Tessbach and CMS Cameron McKenna, which works in conjuction with CMS Reich-Rohrwig Hainz in Austria and has a close relationship with Ružicka Csekes.
Linklaters exited in 2008 leaving behind Kinstellar, while Freshfields Bruckhaus Deringer shut its Bratislava operation towards the end of 2009 and now operates out of Vienna. Clifford Chance has never had an office in the country.
Schoenherr opened in Slovakia in May last year with two partners. It then took on Freshfields senior lawyer Stanislav Kovár as a partner when the magic circle firm pulled out of the country. Schoenherr now has seven lawyers in its Bratislava office.
“It’s a sophisticated market for its size,” says Gudrun Stangl, partner and head of Schoenherr’s Bratislava office. “[Slovakia] became a niche market and niche markets aren’t very interesting for Anglo Saxon law firms. It’s difficult because the country is small and dominated by established corporations and companies. What the international law firms could do they’ve done already.”
A unique role
One such international firm with an apparently thriving office in Slovakia is A&O. The magic circle firm has chosen to ignore the departure of Freshfields and Linklaters and concentrate on its own plan in Central and Eastern Europe (CEE). The firm now has 17 fee-earners, including two partners working out of Bratislava. But why keep your office when all around you are losing theirs?
“While at first I was nervous, the withdrawal of Linklaters, Freshfields and Clifford Chance from this region has given us more opportunities,” says A&O Slovakia managing partner Hugh Owen. “Linklaters pulled out because it refocused its business geographically and towards core clients. I feel very strongly that our CEE network is here to stay. Our presence is consistent with our global strategy.”
Owen says the decision of A&O’s magic circle rivals to close many of their CEE operations has strengthened the firm’s resolve to remain. And that includes in Slovakia, a country where, more than a year on from the departure of Linklaters, A&O is “very pleased” with its position in the market, according to Owen.
“The only other firm with the same footprint is White & Case,” he adds. “There’s still a unique role for us here.”
Owen says the kinds of big-ticket mandates that are the food and drink for firms such as A&O have changed. The work has moved from corporate, M&A and real estate to project finance, restructuring and, in particular, regulatory, often involving litigation.
“The difference this year is the [Slovakian] election, which means we’ll see fewer projects,” he notes.
According to Stangl, Freshfields leaving the market has had “no effect” on Schoenherr. While A&O focuses on regulatory, competition and cartel litigation work, Schoenherr is focusing on renewable energy, PPP and public procurement, pointing to the sectors that the pan-European firms believe will be the ones to watch in the coming year.
“The global firms concentrate on other markets,” confirms Erik Steger, managing partner of Wolf Theiss in Slovakia. “What strategic aims would they have to open an office in this country?”
He says his firm sees a lot of cross-border, multinational M&A work, especially with companies that have branches across the CEE countries.
“There are mandates that firms such as Freshfields aren’t even looking for,” adds Steger. “Slovakia is neither legally or business-wise a saturated market. Local firms have closed the gap significantly but they are still a little behind the magic circle.”
Firms from the neighbouring Czech Republic also have an interest in Slovakia. Many followed their clients who, like those from Vienna, have been keen to invest out of Prague and take advantage of Slovakia’s favourable tax rate (see below).
One such firm is Balcar Polanský Eversheds, which has offices in both Prague and Bratislava. The firm’s Slovakian operation opened in 2004 and now has eight lawyers, including one partner.
”Our ideal clients are those with operations in Czech Republic and Slovakia,” says managing partner Jaroslav Polansky. “We wanted to build a bigger office [in Slovakia] but unfortunately the market didn’t support it. I don’t think there’s any room for more international players.”
The major factor that ensured international firms fell in love with Slovakia happened six years ago. If there is one thing most economic observers know about the country, it is its generous tax rate for businesses. In 2004 Slovakia surprised everyone by incorporating a 19 per cent rate on personal income, corporate income and value added tax.
It is a political hot potato and the Slovakian prime minister Robert Fico knows this all too well. Fico, who heads the left-wing SMER (Sociálna Demokracia) party, is expected to win the country’s parliamentary elections in June. He was given a boost by the decision of the main opposition leader Mikulas Dzurinda not to stand. Dzurinda previously served as prime minister and it was under his centre-right SDKU party that Slovakia brought in the flat tax rate system.
“This is what the business community remembers about Slovakia,” says Stangl. “The system is working very well, the tax office operates very quickly and is
pro-business. This makes the market very attractive.”
Fico has hinted at changing the tax system to net more from higher earners and revising the costly social and health contribution system, which is currently between 20 and 30 per cent of gross salary. Slovakia needs the revenues for its coffers but any mention of the highly successful flat tax rate causes concern among voters.
Even if there are changes to social and health contributions, Slovakia remains a business-friendly country.
“It’s still very attractive compared with old Western Europe,” confirms Steger.
Some 30 per cent of the country’s inward-bound investment is from the German-speaking countries: Austria, Switzerland and Germany itself. The influence of this investment can be seen on the ground in the form of companies such as RWE, E.ON, OMV and Siemens, all of which have significant interests in the country.
Overall investment may have waned in line with European trends over the past 18 months but Slovakia still represents an opportunity for commerce and industry emanating from the country’s Western neighbours.
“The dominant market positions are held by German companies,” says Stangl. “There’s less money in the market now than there was but there’s huge interest from German and Austrian investors to create large renewable energy plants.”
Despite Slovakia’s historical economic ties remaining with the German-speaking countries, there has been growing interest from some of the world’s most active emerging economies, such as Russia and China.
The 30 per cent figure, while important, could hide the input these new superpowers are having on the major building projects that often have involvement from various consortia, argues Steger.
“It would be more interesting to look at how many transactions come from each country,” he says, “to see whether there’s a shift from old established markets to elsewhere. I think you’d see such a shift.”
Creditor crunch: slovakia’s insolvency crisis
Slovakia is being gripped by an insolvency crisis. Lawyers in Bratislava say the problem stems from debtors not being pushed hard enough by the authorities to file early for bankruptcy.
“The problems have already deformed the market and the worst damage is already done,” protests Radovan Sala, a partner at ENWC. “There’s formal legislation but we’ve never seen a consistent enforcement of directors’ liability to make [debtors] file for insolvency when there is no viable plan for rescuing the business.
“The creditors have only a theoretical possibility of filing for the bankruptcy of their debtors because a creditor can only file when there are two creditors with execution titles. But obviously, once you have an execution title then you just go for individual satisfaction, so in reality these orders are virtually nonexistent.”
This has led to some of the larger companies, in the construction industry for instance, not paying their subcontractors, even though they were already overindebted. However, because they did not file for bankruptcy, the subcontractors were unaware that the situation was so bad. Because of this, smaller companies are becoming the first to go bankrupt while the bigger companies try to save themselves.
A proposal to make creditors’ insolvency easier was due to come into force last September, but it was vetoed. Lawyers think the passing of the insolvency amendment
will be held up by the parliamentary elections in June and is more likely to be passed in the autumn.
“The worst thing was that the amendments were prepared two years ago,” adds Sala. “At that time, the government had just adopted a new criminal procedure that imposed stricter rules against business. There was some criticism and the government didn’t want to make things worse by adopting another piece of legislation penalising businesses. They didn’t have the guts to pass it.”
There may be some hope in the recent winding-up of Bratislava-headquartered SkyEurope, an airline that went bankrupt in 2009 but was resolved quickly early this year after the government stepped in to protect it from creditors.
“It’s a sign that the situation is improving,” says Erik Steger, managing partner of the Slovakia office of Wolf Theiss. “On the other hand, new bankruptcy rules will make things more difficult. New, complicated rules always have flaws. There are the small cases like the shop in the street, then the big cases that involve deals done five years ago and lots of [questionable] behaviour. The state is trying to improve the situation but it remains to be seen whether it will help.”