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Go East: Financing and effecting a foreign investment in Central and Eastern Europe – how a law firm can help

Today, spreading business abroad, and particularly east, is typical not only for global companies but also for Slovakian ones. There is a growing number of Slovak entrepreneurs wanting not only to sell products or provide services abroad, but considering starting production or some other permanent activity abroad. In many cases they are primarily considering Central and Eastern Europe, for both historical reasons and because the membership of most Central and Eastern European countries in the EU motivates them to find new opportunities in these countries. Additionally, those with greater vision (and courage) head to Russia or its former satellites.

(Source: Source: Courtesy of PETERKA & PARTNERS Law Offices)

Today, spreading business abroad, and particularly east, is typical not only for global companies but also for Slovakian ones. There is a growing number of Slovak entrepreneurs wanting not only to sell products or provide services abroad, but considering starting production or some other permanent activity abroad. In many cases they are primarily considering Central and Eastern Europe, for both historical reasons and because the membership of most Central and Eastern European countries in the EU motivates them to find new opportunities in these countries. Additionally, those with greater vision (and courage) head to Russia or its former satellites.

In the EU the situation is relatively simple. The laws of the member states are harmonised to a greater extent. Nevertheless, individual jurisdictions still have their own regulations which must be observed. Going further east, assistance from professionals familiar with the local legal environment becomes crucial.

Although an investment can consist in acquiring an existing local company which requires much legal assistance, this article focuses more on investment in greenfield or brownfield sites.

After a decision to invest abroad is taken an investor usually contacts its bank and subsequently seeks a law firm which can advise on the target destination. From the client’s and bank’s point of view this is a cross border deal. From the law firm’s point of view the deal is multi-jurisdictional. A direct presence in all affected jurisdictions (most usually where the client is registered and the country of investment) is therefore an obvious advantage.
Either the client or the bank can instruct the law firm. Accordingly, the nature of services provided may slightly differ.


A law firm will initially be instructed to review the project company (usually the client’s wholly owned subsidiary) in the jurisdiction where the investment is to be made. In most cases the bank requires that in addition to other collateral the shares of this project company are provided as security and it is required to accede to the investor’s obligations. Legal due diligence of corporate matters is in most jurisdictions relatively straightforward. In addition to purely corporate issues due diligence can be extended, depending on the bank’s requirements and the nature of the investment in other areas, such as public and private liability, compliance and so on. Deficiencies are sometimes found in permits or authorizations as the investor may not be fully prepared for the requirements of local law.

In the cross-border deals and projects where a foreign based subsidiary is involved either as a co-debtor, pledgor or a party to other credit documents, banks almost always require legal opinions to be issued on the company’s capacity and status. The legal opinion is always given by a lawyer licensed in the jurisdiction where the given company is incorporated.

Consequently, banks will usually require the land in which the investment is to be made be checked in detail. The project company will purchase or lease the land on which the project is to be implemented. While Slovak law raises several legal issues regarding the ownership of real estate, mostly for historical reasons, the situation in other former Eastern bloc countries can be more complicated. Conducting an in-depth due diligence of land is therefore crucial. Reviewing all construction and other permits and authorisations is also important. Timing is essential at the same time. In some countries the authorities cannot be expected to meet deadlines for responses or providing information, which may delay the due diligence and slow down the investment.

If a loan is approved for an investment a law firm’s next task may be to ensure that all collateral or security is duly created and registered. This is normally governed by the law of the country in which the company is registered or the real estate is located, so expertise in the law of the country of investment is necessary.

If an investment takes place outside the EU and especially in situations where the foreign subsidiary is the final recipient of the funds lent by the bank, it is not uncommon for a bank to require a commercial investment agreement to be concluded between the parent company and its subsidiary through which the investment is being made. The investment agreement is a document which usually imposes, at the bank’s request, additional obligations on the investor’s subsidiary that are not part of the loan documentation. The bank may also require from a law firm an opinion on a bilateral investment treaty, such as between Slovakia and the country of the investment.

The involvement of the Slovak Export-Import Bank, which promotes and supports Slovakian investment abroad, mainly in the form of providing credits, bank guarantees, insurance or other finance, is common. A law firm may be instructed to provide assistance with the aim of ensuring compliance with the Export-Import Bank’s requirements.

The scope of advice, if the law firm is instructed by the investor, is similar to the above. The law firm naturally asserts the client’s best interests with the bank. In addition to the above, the law firm will advise the investor on negotiations with the bank regarding the credit documentation which is mostly governed by local law. However, the main goal is always to cooperate with the bank to ensure financing and the successful completion and operation of a project. It is usual for lawyers to simultaneously advise an investor on negotiations with local or the foreign suppliers.

Instructing a law firm with a direct presence in all affected jurisdictions may bring the client valuable benefits in the form of a single contact and coordinated management of all legal services, and consequently simplified communication, a uniform standard of legal services, expertise and experience for all jurisdictions, and knowledge of the client’s global needs.

Source: Ľubomír Leško, Associate, PETERKA & PARTNERS Law Offices

This article is for information purposes only. Under no account can it be considered as either a legal opinion or advice on how to proceed in particular cases or on how to assess them. If you need any further information on the issues covered by this article, please contact PETERKA & PARTNERS, Tel. +421 2 544 18 700; E-mail: office@peterkapartners.sk;
www.peterkapartners.com

* * *

Founded in 2000, PETERKA & PARTNERS has grown into a full-service law firm with 130 lawyers and nine offices in Prague, Bratislava, Kyiv, Sofia, Moscow, Bucharest, Warsaw, Minsk and Budapest and has built up a highly regarded practice within the CEE region.

PETERKA & PARTNERS has been consistently ranked among the best practices in the leading publications on the legal services market, such as Chambers, Legal500 and IFLR1000.

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