Future dependent on regional election outcome, but firms not expected to close Barcelona offices as opportunities remain in real estate, tax and employment
With the Bank of Spain warning that the crisis in Catalonia
could cost the Spanish economy up to €27 billion in the next
two years, law firms in Spain are reporting a slowdown in M&A
activity, particularly in the real estate and automotive parts
sectors. As political tensions rise, some partners highlight the
fact that Barcelona is a "tough market" for Madrid-based
law firms at the best of times, with the clear implication being
that the Catalonian independence movement will make it an even more
difficult place for law firms from the Spanish capital to do
business. However, some partners also reject suggestions that any
law firms will close their offices in Barcelona as a result of the
turmoil. "If a law firm closes its office in Barcelona, it
will not be because of the political uncertainty, it will be for
other reasons," says one managing partner at a Madrid-based
law firm.
Uncertainty still prevails, with the general consensus being that
the situation will be given more clarity by the result of the
Catalonia regional election on the 21 December this year. Given the
sensitivity of the issue, many managing partners are reluctant to
speak on the record about the crisis, but one in the Madrid office
of an international firm, who notes that some M&A activity has
been delayed as a result of the Catalonia situation says: "If
the Catalonian election yields a result that favours political
stability, it is likely that business activity will be resumed and
those projects that were postponed will be started, so in the end
maybe there won't be a significant drop [in M&A activity in
2018]." However, the managing partner adds that activity is
decreasing and that "some investment banks have mentioned that
they have seen some slowdown too".
Potential double taxation
It has been reported that nearly 1,700 companies –
including notably CaixaBank, Banco Sabadell and Abertis –
have moved their registered offices from Catalonia to other parts
of Spain since the country's constitutional crisis developed.
One partner at a law firm based in Barcelona says companies based
in Catalonia have faced "commercial pressure" to relocate
their businesses. "The Spanish economy is interlinked; some
companies have been told that if they don't move their
domicile, some businesses won't continue working with
them," he explains. The partner adds that there are also
concerns among clients that, in the event Catalonia was to become
independent, there would be an impact on freedom of movement and
potentially double taxation.
While many Catalonian companies have re-registered their office in
other parts of Spain, one managing partner says that some
businesses could take the step of also moving their operations
– that is their staff and assets – out of the region if
the uncertainty continues, but the partner adds that this will
depend on the outcome of the 21 December election. The significance
of a company's registered office is that it determines the
nationality of the company. If Catalonia were in fact to become
independent, the companies with their registered office in
Catalonia would cease to be Spanish. Consequently, Catalonia would
no longer be a member of the European Union and therefore would not
be part of the EU single market, with the effect that exports to
elsewhere in Spain or the European Union would be subject to
tariffs and other restrictions.
However, such a scenario is purely hypothetical at present. But the
drive for independence has already had a significant impact on the
region's economy. For example, according to the Institut
d'Estadística de Catalunya, the number of trading
companies registered in the region in November 2017 was down 24 per
cent on the same period the previous year. Meanwhile, deal flow is
also slowing. "While difficult to measure, over the last few
weeks, we have sensed that new projects are being incepted at a
slower rate compared to the pace of previous months," says one
managing partner. But the partner adds: "Spain continues to be
an interesting market, but rather than start projects now, some
investors prefer to wait and see until they have a better grasp of
the macroeconomic situation in a few weeks' time."
Jose María Roji, managing partner of CMS Albiñana
& Suárez de Lezo in Barcelona, says some M&A
activity has been suspended, or even permanently abandoned, as a
result of the instability and uncertainty in Catalonia. However, he
adds: "We also have experience of other operations that have
completed or continued their natural course in spite of it."
Roji says the sectors currently experiencing a decline in M&A
opportunities include automotive components and real estate. Yet he
also points out that in the consumer products and food sector, some
investors have been using the uncertainty to negotiate improved
terms and conditions on deals, rather than pulling out of
transactions.
Roji says uncertainty usually results in a decrease in the number
of transactions in the short-term, but also a drop in the price of
assets in the medium-term. He continues: "We are optimistic
and confident that there will be a stable and secure environment
that will return Barcelona to the position it has held for
centuries as an economic and development centre."
Some partners argue that Madrid could attract more investment at
the expense of Barcelona as result of the Catalonia crisis.
However, others take a different view - Roji argues that in a
globalised market, while part of the business lost to Barcelona
will be captured by Madrid, "another non-quantifiable part
will be lost by Spain for the benefit of other [worldwide]
jurisdictions". He explains: "When a company considers
alternatives to an investment in Barcelona, it does not take into
consideration only other Spanish locations such as Madrid, but
other European cities or other places in the world depending on
what the investment requirements are. For example, if the
investment requires that it be a city that has an important port,
the alternative to Barcelona may be Valencia, but also Genoa,
Marseille or Le Havre. If the investment consists of creating a
shared services centre of a multinational group, it will compete
with other locations such as Poland or Romania but also India and
South Africa."
For law firms, a prolonging of the uncertainty will spell trouble.
"If the situation continues, it is likely to generate more
disadvantages than opportunities, as a lengthier crisis would mean
that transactional activity slows down for a longer period,"
says one managing partner. But one partner at an international firm
doubts that law firms will close offices in Barcelona due to the
crisis. "There has been uncertainty in countries like
Venezuela, Egypt and Turkey, but despite it, law firms have done
well in those jurisdictions," the partner says. "M&A
work in Catalonia may decrease, but there are opportunities in real
estate, tax, criminal law and employment as there will be
lay-offs."
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