Bulgaria: Disputes Over Second World War Reparations Thwart Bulgaria’s Privatisation Efforts

Buyers of assets in Bulgaria tendered through privatisation should be aware that, along with the standard legal risks related to any acquisition, there comes an idiosyncratic risk concerning the actual ownership of the assets. This risk dates back to the end of the Second World War.

The 1945 Potsdam Conference

At the 1945 Potsdam Conference, it was decided that Bulgaria, which had taken the side of the Axis, should surrender to the Soviet Union all German assets located on its territory. As a result, in May 1946, the Bulgarian government adopted a law "On transferring ownership of German property located in Bulgaria to the Soviet Union". The act provided that all assets of the German state, companies, and natural persons which as of 5 September 1944 were located in Bulgaria should be expropriated and transferred to the Soviet Union. The definition of assets encompassed shares, property, rights, and any other assets located in Bulgaria.

A blurring of ownership

There having been virtually no private business in Bulgaria since the mass nationalisation in 1947, the expropriated German assets, while owned by the Soviet Union, were managed by the Bulgarian state together with the nationalised assets. Thus, the line between what is state owned/nationalised and what is former German but now Soviet blurred over time.

Part of the problem is the absence of clear documentation on the history of ownership. For example, the Bulgarian state has acquired some of the former German assets under bilateral treaties with the Soviet Union. Then, however, there have been disputes over the validity and termination of such treaties, resulting in a plethora of letters, protocols, and various secondary documents exchanged between the states. The result is an unclear situation for which a political solution has been sought with the Russian Federation.

So far, no political solution has been found. For buyers of assets acquired through privatisation, this poses a risk that their ownership rights over an asset alleged to be a former German asset will be subject to Russian restitution claims. This creates a difficult situation for both parties in a privatisation process: the buyers want legal certainty while the Bulgarian state does not want to delay the privatisation by seeking certainty through legal battles with the Russian Federation.

Solution

This three-party dilemma may be resolved, at least for the potential buyer and the Bulgarian state. For a successful outcome of the privatisation negotiations, the Bulgarian state may not allocate the inherited risk of the Russian claims to the buyer. Instead, it can agree to compensate the buyer if this risk materialises. The privatisation transaction is thus risk-neutral for the buyer. For the Bulgarian state, the risk will not change (it remains with the state before and after the privatisation), but the state would have succeeded in privatising a risky asset. If the Russian restitution claims ultimately succeed, the Bulgarian state is no worse off.

Although a win-win-win situation for all parties might not be possible, a solution that does not place any stakeholder in a worse position while preserving the potential for success is nonetheless a win.

This article was originally published in the schoenherr roadmap`12 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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