MERGERS & ACQUISITIONSTransfer of business as a going concern – tug of war between the courts and tax authorities?
The Estonian tax authorities have lately been aggressively pursuing transfers of business as a going concern. These transfers of assets and rights of businesses from one entity to another involve automatic transfer of liabilities, including tax liabilities. Tax officials have been interested in possible transfers of the business of newly-bankrupt companies. Unfortunately, some over-enthusiasm is evident. For example, in one case the authorities suspected a transfer to have occurred when a company employed a person whose previous employer went bankrupt and the new employee was able to attract customers of the previous employer.
At the other extreme seems to be the Supreme Court judgment of 20 October 2009. That case was about an insolvent company which used to operate a pub. Just before applying for bankruptcy, the company had sold its pots and pans to the landlord for a good price and terminated the lease agreement for the pub. On the next day, the landlord concluded a lease agreement with its sister company, which proceeded to operate the pub. Thus the pub continued to operate with the same name without interruption with nothing to indicate the change of ownership. The court found that despite appearances, this did not constitute a transfer of business and thus the creditors of the previous operator were left without recourse.
The reasoning for the judgment was particularly interesting. Apparently, for the transfer to constitute a transfer of business both things and rights associated with the business must be transferred. In this case, no transfer occurred since the operator did not transfer its cash and receivables along with the pots and pans. The court also gave importance to the fact that an agreement with a beer manufacturer regarding the use of certain equipment and furniture in the pub was not assigned to the new operator, who had simply signed a new agreement with the manufacturer.The Supreme Court decision is at odds with the practice of the tax authorities, but should cause concern for all creditors. The judgment suggests that it may be possible to avoid transfer of liabilities, in what is effectively a transfer of business, merely by excluding rights not essential for the business and by signing new agreements instead of a formal assignment. This perhaps makes it too easy to consider transfer of business as an alternative to restructuring, thus increasing the risks for creditors.
REAL ESTATENeighbours’ pre-emption right of state-owned forest land
According to amendments to the State Assets Act, neighbours or the user of state-owned land enjoy a pre-emptive right to buy the property from the state. Legislation regarding state property purchase changed many times in 2009. The final amendments set out how the right-holder can buy state-owned forest land.
Amendments to the State Assets Act in force as of 9 November 2009 stipulate that a neighbour whose land plot contains forest land and who is considering buying state-owned neighbouring forest land must participate in the auction. This means that an interested neighbour must at least bid the starting price of the land plot during the auction. The pre-emption price will be the highest bid at the auction. If more than one neighbour is interested in buying forest land, then the neighbour who has the longest border with the state-owned forest land has the first option to exercise the pre-emption right.
The legislation also stipulates that a user of arable land has the pre-emption right to buy the land from the state. If the person entitled does not exercise their pre-emption right during the time determined by the state, then the winner of the auction is entitled to buy the land plot from the state.
The Supreme Court of Estonia clarified landlords’ rights in court case No 3-2-1-83-09. In this case the tenant was not willing to deliver possession to the landlord after the lease agreement expired. The landlord changed the locks on the apartment building so that the tenant was unable to use the apartment and tenant’s belongings in the apartment.
The Supreme Court stated that changing the locks is illegal even if the tenant is using the premises after the lease agreement has expired. The Supreme Court clarified that the landlord has no arbitrary right to regain possession from the tenant other than laid down by law. This case decreases the opportunity to enforce the tenant’s surrender of possession obligation in the lease contract without filing an action with the court when the tenant is not willing to deliver the premises.The court also clarified that the landlord is obligated to compensate for damage caused to the tenant’s belongings during illegal (re)possession. The court can reduce damages if the landlord can prove that the circumstances partially arose out of the activity of the tenant. The landlord may set off the amount of rent or a rent which is normal in the same place at the same time against damages. This practice is based on a residential lease agreement and it is not possible to estimate the consequences to the commercial leasing market.
Until recently, the law was unclear as to how much unpaid rent the landlord can claim from the tenant if a lease was cancelled because of the tenant’s breach. The prevailing opinion has been that an unpaid rent claim is limited to 3-6 months.
1. The tenant attempts to terminate the lease.
In this situation the landlord should be careful in claiming damages because the court may consider this as terminating the lease, thus ending the tenant’s obligation to pay rent and triggering the compensation regime. In this case, landlord’s savings due to the tenant’s absence from the premises, for example, reduction of utilities costs, should be deducted from the amount claimed.
2. The landlord terminates the lease.
SECURITIES & CAPITAL MARKETSNew guidelines adopted by Financial Supervision Authority
In August 2009, the Financial Supervision Authority (the FSA) adopted two guidelines which clarify requirements for risk management and disclosure obligations for investment funds.
The guidelines entitled “Disclosure of Risks in an Investment Fund Prospectus” entered into force on 15 November 2009 and govern the information requirements for prospectuses regarding risk levels of funds. The guidelines clarify, for example, requirements for describing in the prospectus typical investors to whom the offer of units is directed and risks specific to the fund. Under the guidelines, clear reference to risks should be made when describing potential gains from investments.
The guidelines entitled “Requirements for the Management of Risks Related to Investment of Fund Assets” clarify requirements for internal risk assessment procedures, for identifying and measuring risks, and for a risk management unit. The guidelines also direct the board of the management company to approve a risk profile, establish a risk limit system, and apply an appropriate liquidity management procedure for each fund that it administers. Upon entry into force of these guidelines on 15 February 2010, management companies are required immediately to file with the FSA their internal procedures related to implementation of these guidelines.Currently, the FSA is drafting guidelines which focus on providing guidance in arranging securities issues and the role of the security agent. SORAINEN Estonia on the basis of a request from the FSA has provided comments and amendment proposals on the draft FSA guidelines. SORAINEN intends to be actively involved in the ongoing drafting of these guidelines.
COMPANY LAWElectronic voting at general meeting now possible
Amendments to the Commercial Code, in force as of 15 November 2009, allow the possibility to attend and vote at the shareholders’ meeting of a private limited company or general meeting of a public limited company in absentia, that is by electronic means or by post. The changes derive from implementation of the Shareholders’ Rights Directive (Directive 2007/36/EC). The new law will make it simpler and more advantageous for shareholders to vote at the general meeting without physically attending and thus enables more active participation in the management of the company.
For example, the general meeting can be held via Skype. However, it is relevant to note that a shareholder is considered to be participating at the meeting if he or she has voted electronically or by post before the meeting or has done so during the meeting. Merely viewing the meeting online is not considered as participation.
In order to vote electronically, the shareholder must vote in such a way that the will of the shareholder is digitally signed. For example, the vote may be sent by e-mail with a digitally signed document attachment stating the position of the shareholder, or a digital signature can be given in the respective online system. Unfortunately, this type of electronic voting may be used only by people with an Estonian ID card because currently no public software is available for recognition of digital signatures of other EU countries. However, it is estimated that within a year public software will be developed which will also recognise digital signatures of most EU countries. Until then, foreign shareholders may send their votes by post before the general meeting.In order to use the benefits of the new law, the company must amend its articles of association and regulate the exact procedure for holding general meetings online, for electronic voting, and for voting by post.
Use of a public document executed abroad requires internationally recognised proof of the document’s authenticity. These documents need to be legalised or apostillised, unless otherwise arranged by international agreement.
The list of Contracting States to the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (replacing the formalities of full legalisation by issue of an apostille) is available on the website of The Hague Conference on private international law (to see, please click here).
As of 1 January 2010, notaries apostillise public documents issued in Estonia. Notaries may issue apostilles regardless of their territorial jurisdiction. However, a notary may not apostillise documents which they have notarised or certified. The notarial fee for issuing an apostille is approx EUR 23.Apostillisation is not required where a public document is intended to be produced in a state with which Estonia has executed a mutual legal assistance agreement (for example, Lithuania, Latvia, Poland, Ukraine, and Russia). However, Lithuania unilaterally interprets the agreement restrictively and requires apostillisation in certain cases.
EMPLOYMENT LAWInternal work organisation rules have not lost importance
The new Employment Contracts Act has been in force in Estonia for half a year. The main purpose of the new act is to allow more flexibility in employment relationships. For example, increased flexibility is characteristic of the employer’s internal work organisation rules.
Under the previous act, employers could not choose whether to establish internal work organisation rules. If an employer had at least five employees, internal rules were a must. The act set out specific requirements which the internal rules had to comply with. Any deviation from or broader interpretation of what was set out in the act could end in refusal by the labour inspector to approve the rules.
The new act no longer requires establishment of internal rules. This has resulted in a situation where many employers have ceased bringing their internal rules into compliance with the new act and have chosen to do without any internal rules. However, this approach may yield negative results later.
Internal rules may involve anything the employer considers important in organizing work, starting from how to communicate with clients or what the employer’s document management procedure is like to describing the procedure for terminating employment contracts. The employer may establish work organisation rules unilaterally. It is important to consider two things: the rules may not contradict laws and if they contradict what is stated in an employment contract, the employment contract prevails. Internal rules can regulate issues that are not specified in the employment contract.
Internal rules may be used if a dispute arises between the employer and an employee. In that case the employer can rely on the rules as evidence that a certain kind of behaviour was expected from the employee. However, an employer with no internal rules in place can only hope that other evidence suffices to prove that the employee failed to behave as expected.No specific regulation is in place to lay down how internal work organisation rules must be established or amended. Employers have a free hand in deciding how to establish internal rules and change them, if need be. This provides employers with the opportunity to establish the kind of rules that best fit the employer's purpose in the context of constantly changing employment relationships. Any new rules must be introduced to employees. In practice, internal rules are often available on the employer’s intranet and amendments are communicated to employees by email.
TAXCourt rulings on transfer of Hansapank shares
On 4 November 2009, the Supreme Court published judgments in administrative matters No 3-3-1-52-09 and 3-3-1-59-09. The disputes concerned application of paragraph 84 of the Taxation Act to transactions where a natural person transfers securities to a company connected with him/her before selling them onwards to a third person without earning any income from the transaction; instead, the company selling the securities later receives income.
The tax authorities have re-qualified such transactions as if the natural person had directly sold the shares to a third person and have obliged the natural person to pay tax on income which arose in the company. The specific disputes related to sale of shares in Hansapank. A similar earlier court dispute related to ex-shareholders in Sylvester.
The Supreme Court explained that under paragraph 15-4-10 of the Income Tax Act, income tax is not charged on income from the increase or acquisition of a holding (shares, contributions) in a company by way of a non-monetary contribution and that this exemption derives from the principle that only realised income can be taxed.
The Supreme Court held that in both cases making non-monetary contributions had economic substance and that, in contrast to sale of shares, in the case of making non-monetary contributions, considering the exemption set out in paragraph 15-4-10 of the Income Tax Act, it makes no difference whether or not it was clear at the time of making the contribution that the shares would soon be sold to a third person, or whether the person had agreed to transfer the shares to a company not under its control.
The Supreme Court further explained that a distinction needed to be made between avoiding creation of an object of taxation, which is legally permitted, and evading taxes (that is, abuse), in which case paragraph 84 of the Taxation Act applies.
On 14 July 2009, the tax authority prepared draft guidelines for differentiating between dividends and remuneration for work. SORAINEN tax lawyer Priit Raudsepp participated in the work of the IFA-Estonia work-group drafting and submitting an opinion on the draft guidelines to the tax authority and the Ministry of Finance.
The opinion of the work-group raises a question of principle concerning the tax authority’s right to intervene with a taxpayer’s (legal) freedom of decision regarding the type of specific payment (that is, whether it is made in the form of dividend or remuneration for work) as well as the scope and basis of the tax authority’s right.The opinion highlights several shortcomings of the guidelines, such as their over-general nature and ambiguity in terms of how to differentiate between active and passive income. It is still unclear whether and how the tax authority will try to enforce the guidelines.
REAL ESTATENew Law on Management of Residential Housing
On 1 January 2010, the Law on Management of Residential Housing came into force. The law provides minimum requirements for management of residential buildings as well as laying down relations among persons involved in management of residential buildings, such as managers, owners of residential buildings, and others.
According to the law, a house file has to be created for every residential building no later than 30 June 2011. The file should include documents regarding the residential building, owners of the residential building, technical documentation and documents related to building management. Furthermore, previously concluded contracts on management of residential buildings should be amended no later than 31 December 2011 to comply with the law.
The law also sets minimum requirements for managers of residential buildings. As of 1 January 2010, a manager is entitled to perform a management task in a residential house only after acquiring the professional education necessary for managing a residential building. Persons who have concluded a contract for management of residential buildings may continue performing the manager’s obligations undertaken by the contract irrespective of whether their qualification complies with legal requirements but only until 31 December 2011.
PROJECT FINANCE & PPPFuture of PPP in Latvia
Issues of public private partnerships (PPP) in Latvia have already been attracting broad attention for several years. However, only recently have significant measures been taken to ensure the possibility of PPP as an instrument facilitating development.
The most important step is adoption of the Public Private Partnership Law in 2009. SORAINEN partner, attorney-at-law Ģirts Rūda, and attorney-at-law Rūdolfs Eņģelis as legal consultants to Riga City Council at Northern Transport Corridor (www.ziemelukoridors.lv) participated in development of the draft law in 2008 and 2009. The law also regulates issues that participants in particular projects might more easily have arranged in PPP contracts. However, the law does serve its main purpose – to disperse doubt whether PPP projects according to international practice are possible under Latvian law, for example, with a project finance structure, step-in rights of lenders, necessary flexibility in issues of amending and terminating contracts. The next task is to bring the law to life. This would involve:
Implementation of some projects in Latvia had been launched even before adoption of the PPP law. The most significant projects are the Northern Transport Corridor and the DBFO reconstruction of a section of the E77/A2 road near Riga.
Many experts have suggested that during the next two years, while possibilities of the state and municipalities to invest in infrastructure are very low due to their reduced budgets, PPP would be a good opportunity to implement measures for improving infrastructure vitally necessary for competitiveness without large payments or borrowing up-front. The two preconditions for this approach are: first, a cost-benefit analysis of the project must prove that the positive economic effect of the project makes it worth implementing, and second, a value-for-money analysis must prove that it is more beneficial for the public sector to implement the project through a PPP model instead of traditional procurement.
However, in the present circumstances an even more important aspect is the bankability of a project – whether the present financial state of the public partner and future prospects show that the public partner can afford the project, whether potential private partners and banks believe in it, and whether project structure, scope and risk division are sufficiently reasonable to cause interest in the private sector to implement and finance the project. Bankability will be the biggest challenge for Latvian PPP projects in the coming years; therefore project quality is of vital essence.
COMPANY LAWAmendments to the Financial Instrument Market Law facilitate participation at shareholders’ meetings of public joint stock companies
As of 1 January 2010, amendments to the Financial Instrument Market Law came into force as required by Directive 2007/36/EC of 11 July 2007 on the exercise of certain rights of shareholders in listed companies.
Under the amendments, further rights to participate at a shareholders’ meeting are granted to those shareholders who have been recorded as shareholders of a joint stock company six days before the shareholders’ meeting. The Central Latvian Depository sets a procedure for joint stock companies to identify shareholders owning shares for preparing a list of shareholders.
To ensure exercise of shareholders’ rights, especially in cases when shareholders are residents of another state, notifications of public joint stock companies on convening a meeting must be published on a specified internet webpage including information on convening the meeting and draft decisions to be reviewed that have been submitted prior to the meeting.
Likewise, the new wording of the law provides joint stock companies with an option to ensure shareholders’ rights to participate at a shareholders’ meeting, vote for issues included in the meeting agenda, elect or recall shareholder representatives by electronic means, and mailing services.
DISTRIBUTION & TRADENew part of the Commercial Law implemented
The Commercial Law has been supplemented with a new part on commercial transactions. The amendments mark a significant step in modernising Latvian commercial law. They foresee that, in addition to general regulation of civil law, special rules apply to transactions between merchants. After the amendments became effective on 1 January 2010, the rules of Civil Law apply to transactions between merchants except where excluded by special regulation of the Commercial Law rules. For example, claims arising from commercial transactions are subject to a time bar of three years unless the law sets a different time bar. The general time bar for any claim is ten years. The amendments regulate seven special types of transaction: commercial sales, commercial commission, forwarding, commercial leasing, factoring, and franchises. The new regulation establishes a commercial lien, which allows sale of a property under commercial lien at public auction.
The amendments to the Civil Law change some rules on formation of contracts. Until now the law stated that where a contract is made between parties that are not present, the contract is formed when acceptance is notified, even if the acceptance has not reached the party who made the offer. Now the law states that where a contract is made between parties who are not present, it is concluded from the moment when the acceptance has actually reached the party who made the offer.
The amendments also provide that when accepting delayed performance of obligation without objections, the creditor does not lose the right at a later stage to raise other claims related to the debtor’s delay, unless the creditor has expressly waived such claims. Previously, by accepting delayed performance without reservations the creditor lost the right to claim, for example, interest.
Finally, one of the most important changes in the contract law is the possibility to decrease the amount of contractual penalty. Although court practice had already established that it is possible to decrease an excessive contractual penalty, now this possibility is explicitly stated in the law. A party that has to pay a contractual penalty can ask to decrease it to a reasonable amount if the contractual penalty is unreasonable compared to losses caused by undue performance, or failure to perform the obligation, or considering other circumstances.
PUBLIC PROCUREMENTAmendments to Public Procurement Law
Amendments to the Public Procurement Law increase the threshold for applying the procurement procedure. Now the law applies if the value of the supply or service contract is LVL 20,000 (approx EUR 28,460) or more and the value of a public construction work contract is LVL 120,000 (approx EUR 170,750) or more. The law is subject to certain exceptions. The amendments also provide new regulation on provision of information about public procurement and compliance criteria in evaluating offers. A new procurement procedure has been introduced – dialogue – which should be used in case of public-private partnership arrangements.The amendments also establish an obligation to pay a security deposit for filing an application with the Procurement Supervision Office. The amount of the security deposit, the procedure for paying and repaying the deposit, and the procedure for relief from payment of a security deposit, are covered by regulations issued by the Cabinet of Ministers.
TAXAmendments to tax laws
Starting from the second quarter of 2009, Latvian tax law has undergone many material changes that came into force on 1 January 2010. For more detailed information please refer to SORAINEN Tax Newsflashes. These are available electronically at our website: www.sorainen.com/Practice area/Tax/Publications, where you can also subscribe to Tax Newsflashes in several languages. You can also follow our tax news on Twitter (“Nodokli” – in Latvian, and “Sorainen_tax” – in English) and use the opportunity to ask tax-related questions to the experienced SORAINEN Tax team in the interactive Latvian Tax Forum section on the SORAINEN website here.
BANKINGLaw on Financial Stability adopted
The Law sets specific measures which the government or its authorised institutions may take to strengthen financial stability, as well as aims, conditions, and procedures of applying these measures. The following measures aimed at strengthening financial stability may be applied: 1) state guarantee; 2) redemption of a bank’s property; 3) participation of the state in a bank’s capital; and 4) expropriation of a bank’s shares for public needs. With regard to applying the measures, this is established when requested by a bank, by shareholders controlling the bank, an entity which established a branch of a foreign bank in Lithuania, and also where the Bank of Lithuania issues a conclusion (as laid down by the Law) to the Lithuanian Government or an authorised institution.
The Law states that the government applies measures to strengthen financial stability during a limited period and their cost is determined considering the market value, risk, and other factors which might affect the cost.
The Law was adopted with regard to communications of the European Commission on ensuring stability of financial companies during the financial crisis.
COMPANY LAWAmendments to the Law on Companies
On 17 July 2009, the Lithuanian Law on Companies (the Law) was amended. Some amendments were intended for implementation of Directive 2007/36/EC on exercise of certain rights of shareholders in listed companies.
The Law supplements the list of shareholder rights by entitling a shareholder to deliver to the company in advance questions associated with agendas of general meetings of shareholders. Questions delivered at least three days before the date of the general meeting must be answered before the meeting. Under the amendments, a shareholder must return to the company not only dividends, but also an annual bonus if paid in violation of mandatory rules and the company proves that shareholders knew or ought to have known about it.
In addition, the procedure for calling the general meeting of shareholders is amended. The term for the general meeting to take place, after the board (or the manager, if no board exists) receives an application from its initiators, is shortened from 30 to 40 days. Moreover, the number of votes entitling a shareholder to propose additional issues for the agenda is down from 1/10 to 1/20. Proposals with additional issues to the agenda must be provided at least 14 (instead of 15) days before the date of the general meeting.
The minimum period for notice of the general meeting is shortened from 30 to 21 days.
Separate amendments affect listed companies. The amended Law allows shareholders by electronic means to authorise a natural or legal person to participate and vote at the general meeting of shareholders in the name of the shareholder. Authorisation does not need to be certified by a notary.
The amendments also set that shareholders of listed companies holding shares acquired in their name but as nominee for other persons must, before voting, disclose the identity of their end-client, the number of shares used for voting, the content of instructions given for voting, and other explanations regarding client-related participation and voting at the general meeting.The majority of amendments to the Law came into effect on 31 July 2009 and certain provisions on 1 August 2009.
EMPLOYMENT LAWDifferent procedure on issuing work permits for foreign nationals
On 14 August 2009, the Minister of Social Security and Labour approved the record of conditions and procedure for issuing work permits for non-EU foreign nationals (the Record) which replaced the previously effective records.
Amendments to the Law on the Legal Status of Aliens (the Law) adopted on 22 July 2009 led to certain changes in the Record. Since 4 August 2009, when the Law came into effect, a co-owner of a c ompany registered in Lithuania is required to hold at least LTL 50,000 (approx EUR 14,500) of the share capital (until now 10% of the share capital or voting rights of the company were enough) to legally undertake business in Lithuania without a work permit
Certain requirements for issuing a work permit have also changed in the Record. The major changes affect the former requirement of three-year work experience in the sphere of the professional qualification which is now substituted by two-year documented experience. Employers wishing to hire a non-EU foreign national who comes for temporary work and whose permanent place of employment remains in a foreign state (on a business trip) will no longer need to register vacant jobs at the Labour Exchange.
Requirements concerning citizens of EU Member States are not affected by these amendments. As before, they are allowed to work in Lithuania without obtaining a work permit.
The Record came into effect on 19 August 2009.
In July 2009, the Seimas amended the Labour Code (the LC) to regulate legal labour relations more flexibly. It should be noted that the majority of amendments to the LC will be effective until 31 December 2010, that is, temporarily, for the estimated period of the crisis.
One significant amendment to the LC is associated with establishing a broader notion of illegal work. In addition to work without entering into an employment contract, work performed by persons whose employer fails to notify the territorial division of social insurance of their employment will be considered illegal. The amendment came into effect in August 2009.
Further amendments to the LC allow employees and employers to agree in a collective agreement on more favourable terms for employers than previously provided for in the LC. Here is a list of things allowed to be agreed in a collective agreement:
Furthermore, the LC amendments enable an employer to settle with an employee who is being dismissed within three months (and not on the day of dismissal as used to be the case), but only if the employee is entitled to severance pay of at least five monthly average wages.One more important amendment changes overtime conditions. A rule is established that an employee may work up to four hours overtime in one working day (shift). The same four hours of overtime used to be allowed only over two working days. However, the annual overtime limit, 180 hours per year, remains unchanged.
COMPETITIONLaw on Competition amended
On 24 September 2009, the Seimas adopted the Law amending the Law on Competition. The Law amends the definition of the term “dominant position” by separately distinguishing undertakings engaged in retail trade.
Under the amendments, it is considered that unless proven otherwise, an undertaking engaged in retail trade holds a dominant position if its market share accounts for at least 30% of the market. From now on, if not proven otherwise, each of three or fewer undertakings engaged in retail trade and holding the largest market shares which together constitute 55% of the market is considered as having a dominant position.The amendments came into effect on 1 January 2010.
TAXAmendments to the Law on VAT
On 22-23 July 2009, the Seimas amended the Lithuanian Law on Value Added Tax (the Law). The major change is an increase in the standard VAT rate from 19% to 21% from 1 September 2009. Application of a reduced VAT rate of 9% to heating energy supplied for domestic heating (including heating energy transmitted through the hot water supply system) is extended until 31 August 2010 and to books and non-periodical information literature until 31 December 2010.The amendments came into effect on 1 September 2009.
MERGERS & ACQUISITIONSChanges in list of privatisation subjects
The Belarusian Government has amended the list of state-owned enterprises subject to privatisation in 2008-2010. Two first-rate Belarusian banks – Belinvestbank and Belpromstroybank (BPS Bank) – were added to the list. The government has already sold its shares in BPS Bank to Russia Sberbank and plans to sell its shares in Belinvestbank before the end of 2010.
Several other companies were added to the list. These include Minsk Industrial and Trading Complex “Veras” (textile production) and Grodnooblavtotrans (passenger operations). Some enterprises were removed from the list, including Gomselmash (a leading producer of agricultural machinery), Gomel Plant of Casts and Normal Lines, and Svetlogorsk Agricultural Equipment Plant.
Estimated privatisation terms were also changed from 2009 to 2010 for some companies.
REAL ESTATEChanges in lease regulations
From 1 January 2009, rental rates for the lease of state-owned buildings should be set according to the Edict of the President of Belarus No 518 of 23 October 2009. Rental rates should be calculated in basic units (a special amount approved by the Council of Ministers, now equivalent to approx EUR 8) on the basis of a basic rate set by the Edict and taking into consideration the coefficients specified in the Edict. The general rule is that state-owned buildings may be leased only at auction.
Rental rates for leases of privately owned retail premises should also be calculated in compliance with the Edict. Types of additional payments compensated by tenants of retail premises to the landlord are also set out in the Edict (for example, heating, water supply). Charging other fees not provided in the Edict should be additionally agreed with the local authority.From 1 January 2010, information on real property owned by the state and offered for lease should be available on the internet (at web-sites of regional and Minsk City executive committees).
CONSTRUCTIONParallel design and building stages of construction projects allowed by law
Resolution of the Council of Ministers of 30 July 2009 No 1001 allows parallel design and building of construction project stages. A decision on parallel design and construction can be made either by the customer or the developer, and should be contained in a project statement.Specific stages of construction can be isolated from the whole architectural or construction project. Each stage of construction may pass the State Inspection independently, but sequentially. Additionally, the whole cost of construction (not independent costs of each stage) should be approved. A building permit can be issued for each stage.
COMPANY LAWAdditional privileges for investors
Decree No 10 on Creation of Additional Incentives for Investment Activity in Belarus issued by the President of Belarus came into force at the beginning of November 2009.
The Decree further promotes use of investment agreements between Belarus and investors specifying requirements concerning their contents. These should include, for example, provisions on the object and amount of investment, the project term, liability of the parties, compensation for damage arising from unlawful acts by government officials, and dispute resolution (which may be referred to a foreign court or international arbitral tribunal).
Investors acting on the basis of investment agreements receive certain privileges and exemptions, including allocation of land for leasing without the need for an auction, exemption from customs duties and VAT with regard to goods imported for investment project needs, as well as exemption from duties for recruiting foreign labour.
The institution of investment agent was implemented in Belarus under Edict of the President of Belarus No 413 of 6 August 2009. A natural person or a legal entity experienced in implementing investment projects – including non-residents of Belarus – may be designated as an investment agent by the Belarus Council of Ministers. On the basis of an agreement with the government, the investment agent undertakes to attract foreign investors on a free-of-charge basis in the interests of Belarus. The investment agent will also service investment projects by providing marketing, legal, consulting, and other services.
COMPETITIONChanges in Merger Clearance Procedure
On 13 October 2009, the President of Belarus issued Edict No 499 introducing changes in the merger clearance procedure. The Edict entered into force on 14 January 2010 and should facilitate the situation, as previous antimonopoly regulations add a significant burden to M&A deals involving Belarusian companies.Transactions subject to merger clearance will be limited to acquisitions of shares amounting to at least 20% of the authorised capital of the target. Additionally, either the assets of the target should exceed 100,000 basic units (approx EUR 870,000) or the turnover of the target in the year preceding the transaction should exceed 200,000 basic units (approx EUR 1,740,000).
Edict of the President of Belarus No 510 sets up a unified procedure for controlling and supervisory activity in Belarus. The Edict entered into force on 1 January 2010 and contains an exhaustive list of government bodies entitled to inspect the business of legal entities and individual entrepreneurs.
A newly registered organisation cannot be subjected to inspection within two years after state registration, except for unscheduled inspections which may be carried out only on a limited number of grounds set by the Edict.
Each business organisation is to be assigned to one of three different risk groups. This categorisation should be based on types of business activity and criteria set in the supplement to the Edict. High risk organisations (for example, companies in gambling, insurance, construction) are to be inspected not more often than once a year, medium risk organisations not more often than once in three years, and low risk organisations not more often than once in five years.The period of activity to which inspection can be applied is limited to three years preceding the start of the inspection (except tax and some other types of inspections). The period for carrying out inspections is also limited to 3-30 days depending on the type of inspection.
DISTRIBUTION & TRADEAbolition of regulation of retail prices
From 29 October 2009, regulation of most retail prices in Belarus was cancelled, except for 50 socially important goods. The measure was implemented by Resolution of the Ministry of Economy (No 141 of 19 August 2009).
Prices for some goods remain regulated in the shape of establishment of limits on traders’ price margins. These goods include certain foods (for example, meat and dairy products, fruit), goods for children, and medicines.At the same time, a special formula applies to selling prices for goods of foreign origin for onward sale to companies for own production and (or) consumption, temporary imports for processing purposes. The formula for calculating the selling price implies adding a margin not exceeding 30% to the base amount. The base amount consists of the following elements: contract price, customs duties, transportation costs, other costs associated with compliance with legal requirements on import of goods, insurance costs, loan interest, if applicable.
RECOGNITIONSORAINEN gains high acknowledgment in Bloomberg M&A legal advisory rankings 2009
Bloomberg Global Legal Advisory on Mergers & Acquisitions Rankings 2009 has ranked SORAINEN in 11th place among the Eastern Europe Announced Deals League Table. Rankings are based on the value and number of M&A transactions in 2009. This is a noteworthy achievement for SORAINEN as the only Baltic and Belarusian law firm both in Eastern Europe and overall to earn a mention in this recently published Bloomberg advisory, a highly regarded report in the global M&A industry.
SORAINEN was mentioned along with other leading M&A legal advisors in Eastern Europe in 2009, such as Allen & Overy, Freshfields Bruckhaus Deringer, and Clifford Chance. In 2009, the SORAINEN M&A team assisted Polish oil concern PKN Orlen in becoming full owner of Mažeikių Nafta: this was one the largest share acquisition transactions in the Baltics last year. Among others, SORAINEN also advised the EBRD in various deals in the Baltics and Belarus, and represented the Latvian state in the bailout of Parex banka. To view the full report of the Bloomberg rankings, please click here.Bloomberg M&A league tables provide a one-stop shopping source for constant and timely access to the most comprehensive information available on financial and legal deal representation, from mega-deals to the smallest private transactions.
SORAINEN: Best Law Firm in Estonia for Banking & Finance and Competition legal work
SORAINEN Estonia was chosen as the winner of the Corporate INTL Magazine practice awards by online magazine Corporate INTL in two categories – “Best Law Firm in Estonia for Banking & Finance Legal work 2009” and “Best Law Firm in Estonia for Competition Legal work 2009”.
In 2009 one of the most noteworthy cases in the banking and finance field led by partner Reimo Hammerberg involved advising LHV on obtaining a pan-Baltic credit institution licence. In the competition field led by partner Kaupo Lepasepp, some of the bigger cases involved Gaasienergia, Modesat Communications, and Eesti Gaas.
These awards strengthen SORAINEN’s position as the leading law firm in the region.Corporate INTL is firmly established as one of the leading monthly titles for business leaders, professional advisers, and providers of finance throughout the world.
SORAINEN Estonia: finalist in Swedish Business Awards
In October 2009, the Swedish Embassy in Estonia, the Swedish Trade Council, and Swedbank handed out Swedish Business Awards in the categories “Fastest growing Swedish company in Estonia”, “Innovator of the Year”, and “Best Company in Corporate Social Responsibility”. SORAINEN Estonia was one of the finalists in the “The Best Company in Corporate Social Responsibility” category alongside global giants Microsoft and ABB.The Swedish Business Awards aim to promote and strengthen the Corporate Social Responsibility (CSR) commitment among corporations. SORAINEN was nominated for the contest for several activities in the field of social responsibility, especially for development of ethics and respect among civil society. Speakers at the conference included Juhan Parts, Estonian Minister of Economic Affairs, Ewa Björling, Swedish Minister for Trade, Håkan Berg, Swedbank Head of Baltic Banking, and Jan Palmstierna, Swedish Ambassador to Estonia.
RECENT TRANSACTIONSAdvising on acquisition of Three Sisters luxury five-star hotel
SORAINEN Estonia advised Maslé Onroerend Goeb B.V. on its acquisition of a 100% shareholding in Kolm Õde, operator (and real estate owner) of the Three Sisters Hotel, a luxury five-star hotel in Tallinn Old Town. The SORAINEN team was led by senior partner Aku Sorainen and senior associates Piret Lappert, Paul Künnap, and Kadri Kallas.
SORAINEN Estonia advised Massi Miliano, an apparel biorobotics systems start-up, in obtaining seed capital from the Estonian Development Fund and a conglomerate of venture capital investors. The venture capital investment will aid the company's expansion of its innovative biorobotic shape-changing mannequin and its online fitting room solutions for fashion and clothing retailers in the international marketplace. SORAINEN Estonia advice included negotiating and drafting the transaction documents and advising the founders and the company regarding placement of shares with investors. The client was advised by partner Toomas Prangli and senior associate Stefano M. Grace.
Advising Signaux Girod and Girod International in acquisition of M-2 shares
SORAINEN Latvia steered Signaux Girod and its affiliate Girod International in buying a majority stake in M-2, a Latvian company engaged in designing, producing, and installing road traffic safety tools. Signaux Girod and its group companies’ principal activity is designing and producing road signs, tourist signs, road markings, and signs on enamel. Group companies also provide installation and regular maintenance service. The group operates in Europe and Canada. Assistance included advising on legal due diligence, shareholders’ agreement, and certain post-closing corporate issues. Transaction guidance was provided by partner Eva Berlaus and senior associates Lauma Bērziņa and Renāte Purvinska.
Assisting Kuehne+Nagel Latvia in sale and lease back
SORAINEN Latvia assisted Kuehne+Nagel, a global leader in international forwarding, in the sale and lease back of a warehouse in Riga (total size of premises exceeding 10,200 m2), and conclusion of a purpose-built premises lease agreement for a new warehouse. The lease back agreement will serve Kuehne+Nagel Latvia during the transitional period until the new warehouse is built and put into operation. The SORAINEN team consisting of partner Ģirts Rūda and senior associate Lauma Bērziņa assisted the client in drafting the purchase contract, lease back contract, and contract negotiations.
Assisting Burger King Corporation in securing rights to the burgerking.lt domain name
The SORAINEN Lithuania Intellectual Property team represented Burger King Corporation in its dispute with a Romanian company over the defendant’s registration of the domain name burgerking.lt in Lithuania. After a dispute lasting nearly a year, the domain was assigned and registered in the name of Burger King Corporation. The court also granted the claimant’s request to transfer the domain name burgerking.lt to the claimant free of charge.
This decision concerning cybersquatting (registering a domain name identical to the company name or trademarks – or both – of another party) is one of the few court rulings of the kind in Lithuania and will potentially affect the future development of such cases.Burger King Corporation was advised by partner Renata Beržanskienė and associates Laurynas Ramuckis and Vytė Danilevičiūtė.
SORAINEN Belarus is acting as legal counsel for the European Bank for Reconstruction and Development (EBRD) in connection with a EUR 15 million loan to Pinskdrev Holding Company in Pinsk, Belarus. The loan is being made available for upgrading manufacturing facilities, and for implementing new energy-saving and environment-friendly technologies. The SORAINEN team is being led by partner Maksim Salahub.
Privatisation of Gomel ice cream factory
SORAINEN Belarus advised Ingman Ice Cream on the privatisation of Gomel ice cream factory. In May 2009, Ingman Ice Cream and Belarus state-controlled company Rumianchevskoye founded joint venture Ingman morozhenoye, which will take over the activities of Gomel ice cream factory. Currently, the company is the fourth largest ice cream manufacturer in Belarus. The SORAINEN team was led by partner Maksim Salahub and associate Tatsiana Klimovich.
REGIONAL NEWSSORAINEN: first ISO-certified regional law firm in the Baltics and Belarus
SORAINEN Belarus is the first law firm, and among the first companies overall, in Belarus to receive the ISO 9001:2008 quality certificate from Lloyd's Register Quality Assurance. This new milestone now extends the unified quality management of SORAINEN from the Baltics to Belarus.
The ISO 9001:2008 certification means that all working procedures are documented, harmonised, and implemented between different offices. According to Aku Sorainen, the senior partner of law firm SORAINEN, excellent quality has always been a top priority for the company. “We are continuously working to further improve our working processes and quality standards with the aim of securing the same level of excellence in service for our clients in all offices. We are very happy that now our newest office in Belarus has also reached this quality standard,” notes Aku Sorainen.
To meet the needs of the fast growth of the firm, SORAINEN Belarus has moved into new office premises as of 25 January 2010. The new, larger premises are located in Business Centre Nemiga City on ul Nemiga 40, the centre of Minsk. The move does not involve a change of e-mail addresses, phone and fax numbers.
The new SORAINEN Belarus postal address is:
We are very glad to welcome all our friends, old and new, to visit us in the new and more comfortable office.
EMPLOYEESNew partner Alexey Anischenko joins SORAINEN Belarus
Alexey Anischenko has joined SORAINEN as a partner to lead and develop SORAINEN Dispute Resolution and Commercial Contracts practice areas in Belarus. His other fields of expertise are M&A, privatisation, banking and finance, and regulatory advice.
Alexey has been practising law since 1999. In his last position, as a partner with Vlasova Mikhel & Partners, he headed their Dispute Resolution team, while also co-heading their Mergers & Acquisitions team and advising in the commercial contracts and banking and finance fields. Maksim Salahub, co-managing partner of SORAINEN Belarus, comments: “We are very glad that Alexey further strengthens the SORAINEN team with his excellent experience in the dispute resolution and commercial contracts fields as well as in major privatisations and M&A transactions.”
Alexey has been recognised as a leading practitioner in Belarus by international legal directories The IFLR 1000 (for General Business Law), Chambers & Partners Europe (for Dispute Resolution) and PLC Which lawyer? (for Corporate and Commercial). Alexey is also a legal advisor to the Economic Court of the CIS and a regional World Trade Organisation expert for Belarus.
PUBLICATIONSFirst Baltic M&A Deal Points Study published
SORAINEN partner Toomas Prangli led the first Baltic M&A Deal Points Study. The results of the study have been presented at M&A roundtables in Estonia, Latvia, and Lithuania.
The first Baltic M&A Deal Points Study analyses M&A transactions completed in the Baltic States during 2007-2008, covering as many as 58 transactions. The survey is the first of its kind in the Baltic region and will serve as a benchmark for subsequent studies. It provides a valuable insight into M&A transactional practice in the Baltics and can also be used in negotiating M&A transactions and assessing further trends in the market. The survey also compares results with similar studies carried out in Europe, the U.S., and Canada.The study was carried out with the help of M&A teams from SORAINEN, Lawin, Raidla Lejiņš & Norcous, TLS Alliance, and Borenius Group. The survey results are available upon request (please contact Toomas via e-mail email@example.com).
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Please note that this legal update is compiled for general information purposes only, free of obligation and free of legal responsibility and liability. It does not cover all laws or reflect all changes in legislation, nor are the explanations provided exhaustive. Therefore, we recommend that you contact SORAINEN or other legal advisor for further information. The SORAINEN Legal Update is published periodically (every 4-6 months) and covers legal news of Estonia, Latvia, Lithuania, and Belarus. Electronic versions of SORAINEN Legal Updates are available and can be subscribed to on the SORAINEN website – www.sorainen.com.
© SORAINEN 2010