Toeing the line
28 November 2010 | Updated: 29 November 2010 11:23 am
Blighted Bulgaria is freeing up its bar rules for international firms, while the government has promised to clamp down on corruption. James Swift looks at whether things really are looking up
International firms have come not to expect a warm welcome when they open offices in Central and Eastern Europe. Local bar associations in the region are often accused of stifling global players with protectionist rules.
For example, as reported by The Lawyer in (21 June), Serbia offers international lawyers no professional legal status and will not admit foreign firms to the bar unless there are reciprocal arrangements in place for Serbian lawyers.
Despite the region’s record, Bulgaria still managed to shock and incense international lawyers when, in July 2008, its Supreme Administrative Court - following complaints by some of the country’s largest local firms - slapped four international firms with fines ranging from BGN30,000 (£13,120) to BGN50,000 for unfair competition practices.
“It was a case of merge and squeeze,” says one partner at an international law firm. “When we came into the market there was no question of us poaching lawyers, but CVs landed on our desks and our presence did, naturally, drive up market rates.
“And with revenues going down and costs going up, that’s when the problems [with local firms] started. The whole thing was a smokescreen.”
But things appear to have turned a corner in Bulgaria in 2010. Although this was the year that the country - Europe’s poorest - felt the full force of the economic downturn, the new government has amended the country’s bar rules (under pain of sanctions from the EU) and begun to tackle the corruption that lawyers say has made international investors wary of the country. This could be the year Bulgaria starts to realise its potential.
The problems between international and domestic law firms, at least legally, stemmed from the Bulgarian Bar Act. The law was adopted in 2006, shortly before the country joined the EU in 2007. It stated that a law firm must register explicitly as such, meaning that commercial enterprises could not practise law, and prevented international firms from establishing branch offices in Bulgaria under their brand names.
The act also prevented non-citizens from qualifying as Bulgarian lawyers.
The restrictions were a big disadvantage to firms that invest so much into their brands across the globe. The restrictions also created tax and administrative issues, forcing international firms to repatriate revenues to their head offices.
In 2008 a group of 11 Bulgarian firms complained to the country’s Commission for the Protection of Competition, saying the international firms had breached competition rules. The Bulgarian firms claimed the international firms were trying to get round the bar rules and practise law while operating as registered commercial enterprises.
As a result, four firms - CMS Cameron McKenna, CMS Reich-Rohrwig Hainz, Cerha Hempel Spiegelfeld Hlawati (CHSH) and DLA Piper Weiss-Tessbach - were fined. Local lawyers insisted they were merely ensuring the enforcement of local bar rules. International lawyers said the complaint was a smokescreen and that the bar rules contravened EU Directive 98/5/EC, concerning the freedom of establishment for lawyers in the EU.
“The main problem was that international firms came to the market and started competing,” says the partner. “When they came in they started getting CVs sent to them from lawyers at local firms and the international firms took on some people. They didn’t take a lot of big teams, but it was still uncomfortable for local firms, and a lot of clients moved too.
According to international lawyers, this created a difficult situation: the local players wanted to put pressure on them because they thought they could push international firms out of the market. “But when your clients are happy, who cares what cases they’re bringing?” says one lawyer.
Back to business
The way the case was handled left a bad taste in the mouths of the international firms. Now, however, most seem keen to forget about the debacle and move on, while local lawyers insist that the whole issue was blown out of all proportion to begin with.
“I believe emotions have cooled now; it’s been almost three years since the proceedings were initiated,” says Alexandra Doytchinova, managing partner of Schoenherr’s Sofia office. “Local firms have recognised that soup when eaten is not as hot as when it’s served. The biggest national law firms are still ranked as the market leaders here.
“Certainly there are now more players in the market and a few of the international firms are following closely, but healthy competition has always proven to be a good thing.”
At any rate, the international lawyers were vindicated in June 2010 when the new government changed the bar rules to conform with EU law following a letter of formal notice from the European Commission.
Under the new rules, one or more foreign lawyers (registered as such in Bulgaria) can establish a branch office of their international firm in Bulgaria. The branch may include the international firm’s brand name, although it must still include the name of a lawyer registered in Bulgaria.
“For example, we may not establish a ’Schoenherr Rechtsanwälte GmbH - branch Sofia’,” says Doytchinova. “The name would have to be ’Schoenherr Rechtsanwälte GmbH, Doytchinova & Partners - branch Sofia’, which again does not fit entirely into the concept of global law firms and their corporate identities and policies. But this limitation is in line with EU law.”
Foreign lawyers may also now establish an entirely new firm in Bulgaria, which is then treated as a local entity, without the participation of Bulgarian citizens. Again, the name must include at least one of the practising lawyers. This rule was only incorporated into the Bar Act in summer 2010, but the Sofia bar had been permitting it for some time. In May 2009 Peterka & Partners became the first Bulgarian firm to be established by foreign lawyers in the shape of Czech partners Ondrej Peterka and Hynek Peroutka.
Having to include a practising partner in the firm’s name is still a niggle for international firms, but Doytchinova is realistic. “[The new rules] aren’t the most sophisticated changes,” he says, “but they’re some kind of solution, and one shouldn’t expect too much considering we were being sued three years ago.”
Indeed, the spat with local firms was never much more than a nuisance for international firms. Far more pressing concerns were the economic downturn and the endemic corruption that scared off investors, and which the centre-right, pro-business government elected in July 2009 promised to tackle.
“It affects the perception of the country as a place to do business,” says CHSH managing partner Peter Hoffmann about the impression of Bulgaria as inherently corrupt. “People have options: if a client feels Serbia or Croatia is better regulated and a safer jurisdiction to do business, they can just go there. People have a negative view of the country as a place to do business and that’s unhelpful.”
A number of lawyers agree that the government has made inroads into the problem of corruption. Alexander Katzarsky, partner at Georgiev Todorov & Co, says it is “obvious that the government is sincere in its efforts” and that “judges and prosecutors don’t feel as unaccountable as they used to”.
There is even some concern that the government might have gone too far in its efforts.
“The situation’s changed for good in most aspects,” says one partner at an international law firm. “But in other aspects the government’s gone too far sometimes in their focus against organised crime and corruption, and infringed on personal freedoms.”
He gives examples of activities such as phone-tapping, saying this could be used to blackmail people with no connection to corruption.
New legislation is also showing the government to be sincere in its efforts to become more investor-friendly. In particular the renewable energy law, which should come into force by the end of 2010, is expected to provide predictability in the financing of advanced renewable energy projects.
Opinions are divided over dealflow. Apart from a small number of headline deals, such as Camerons’ role in advising Melrose Resources, the largest UK investor in Bulgaria, on its signing of two concession agreements for offshore gas deposits in Bulgaria, estimated to be worth between £250m and £312m, the market in Bulgaria has been largely depressed this year, with only a small uptick in M&A.
But international lawyers are still finding reasons to be positive.
“There’s still a lot of optimism and the government’s talking the right talk and, to some extent, walking the right walk,” says David Butts, managing partner of Camerons’ Sofia office. “There’s not been a euphoric rush to new deals, but things are coming out of the doldrums. The deals are there, particularly restructuring and refinancing, and there are some commercial deals involving consumer products and life sciences.
“We’re seeing more regional transactions too. This kind of work used to go to local firms, but as the market matures we as a firm become more rounded. The volume of deals has gone down, but the percentage of deals that we’re on has gone up.”
For some, however, the spectre of corruption still mars the country’s progress. Indeed, Transparency International moved Bulgaria down in its annual Corruption Perceptions Index, making it Europe’s second most corrupt country after Greece.
“The rule of law doesn’t seem to be improving,” says Hoffmann. “It was one thing to say that in the early 1990s after the [Berlin] Wall came down, but it’s 2010 now. It’s disappointing that the jurisdiction hasn’t improved its standards to a level you’d expect from an EU country.”