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07 August 2002
Privatization Process Hampered by Ownership Issues reported on the obstacles inherent in the legal framework in Serbia which are hindering the progress of privatization. The Parliament of the Federal Republic of Yugoslavia (FRY) has now passed some amendments and additions to the 1996 Law on Enterprises (published in the Official Gazette of the FRY 36/2002), which relate to the conduct of privatization of state and socially owned enterprises. These amendments remedy some of the problems which the Privatization Agency and its advisers were encountering in their attempts to find solutions to the problem of converting socially owned capital into share capital to be transferred to buyers in the process of privatization.
Recent discussions between Serbia and Montenegro have focused on the creation of a 'looser' federation between the two republics, and agreement has been reached in principle with the backing of the European Union and other Western governments. However, the FRY still stands as the constitutional entity governing relations between Serbia and Montenegro in many social and commercial spheres, and the FRY Law on Enterprises is the principal piece of legislation which governs the formation, operation and liquidation of legal entities in the FRY, including socially owned enterprises (SOEs). This law still has primacy over republican law enacted in Serbia on the same subject-matter.
The new amendments to the FRY Law on Enterprises, which came into force on July 4 2002, have an impact on privatization in four main areas:
Until now, neither the Law on Enterprises nor the Serbian Privatization Law has given much scope for creative or flexible solutions in the sale of loss-making or heavily indebted companies (eg, by encouraging creditors to participate in the sale process via debt-for-equity swaps or recapitalizations). Nor is there any halfway-house in bankruptcy law - such as US Chapter 11 administration - giving such companies time and space to solve the debt problem without going into bankruptcy or liquidation. Some of the amendments to the Law on Enterprises recognize that banks (in particular) can play an important part in privatization: for example, Article 287 does allow debt-for-equity swaps, but limits the resultant capital increase to half the then current capital. A new amendment lifts this restriction for companies in the process of privatization.
Other changes to the law:
While these last two items appear to be over-restrictive on creditors, they will actually encourage a more formal approach to enterprise restructuring by allowing the Privatization Agency to organize and supervise these activities for enterprises which are to be privatized.
One of the main areas of weakness in the Serbian Privatization Law was the fact that the Privatization Agency was not given any serious enforcement powers in respect of the activities of SOEs in the process of privatization. The amendments to the Law on Enterprises provide for:
This is the area in which most of the technical difficulties lie: because socially owned capital is not real share capital, and because the government of Serbia did not convert by law all socially owned capital into share capital when the Privatization Law was passed last year, the actual process of share transfer is very complex and problematic. It basically entails converting an SOE into a joint stock company during the privatization process, utilizing the capital subscription provisions of the Law on Enterprises for public joint stock company formation (eg, the use of pro forma shares pending final registration of subscribers). As the SOEs to be privatized already exist and are not being newly created, this causes certain anomalies with the law.
The amendments try to clarify those anomalies by:
These last two items are necessary because of the requirement to hold a general assembly between signing and closing in order to adopt new articles of association and appoint new management - the buyer must vote at this assembly and must therefore have the proper legal basis to do so.
The Serbian Privatization Law does provide a basic framework for restructuring of SOEs in order to allow them to be sold, but this does not go far enough, and neither is it very flexible in its application. Amendments to the Law on Enterprises take matters a little further in this regard and are a welcome extension of the powers of the Privatization Agency to speed up the privatization process. In brief, an SOE holding company can now 'spin off' its subsidiaries, subject to certain restrictions.
The Law on Enterprises also had a concept known as the 'affiliate under direct management', whereby a company which is more than 75% controlled by another company was deemed under direct management of the parent. This involved, among other things, joint and several liability for affiliate obligations on the part of the parent, and made proper restructuring more difficult. The new changes relax this provision by raising the required percentage holding from 75% to 90%, and by allowing the 'direct management' relationship to be more easily severed in certain circumstances.
While these amendments go some way to alleviating some of the significant problems encountered in the privatization process in Serbia, it is clear that the government can still be accused of tinkering at the margins rather than grasping the nettle of reclassification of socially owned capital in order to ensure the necessary volume and speed of sales. At this point, the government's ambitious privatization programme is still on track, with tender and auction transactions coming to market in increasing numbers. It remains to be seen whether the new amendments above will significantly accelerate that programme, as is so badly needed.
For further information on this topic please contact Nicholas Towle at Altheimer & Gray's London office by telephone (+44 20 7786 5700) or by fax (+44 20 7786 0000) or by email (firstname.lastname@example.org). Alternatively, contact Obie Moore at Altheimer & Gray's Bucharest office by telephone (+40 1 312 4950) or by fax (+40 1 312 4951) or by email (Moore.O@altheimer.ro).
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