Buying and selling companies is a process that has been taking place intensively in Serbia for the last 20 years. The purchase itself can be done in several ways, where the main division can be made between the purchase of public and private companies. While the purchase of public (state) companies is mainly related to the privatization process that occurred as a result of the transition from a socialist to a liberal capitalist system that is still taking place today, to a lesser extent, what is the rule in our country is the sale of private companies. In this regard, in this article we provide key information on the different modalities and ways of selling and buying a company and a comprehensive guide so that your transaction can be successfully implemented and approved by the relevant institutions.
Introduction to M&A in Serbia
As is generally known, the most common legal form for business in Serbia is the limited liability company, which is why in this article we focus on the sale of these companies. The purchase or sale of the company itself can be done in several ways.
The two main ways to purchase companies that we single out are the purchase of shares, that is, the purchase of company assets.
Differences between buying shares or property
The purchase of a share implies the acquisition of part of the ownership in the target company and thus the indirect acquisition of its business, property and rights. By acquiring a stake in the target firm, the buyer automatically indirectly acquires the business, assets, rights, liabilities and obligations of the target firm. The consequence of the above is that the transferor of the share is jointly and severally liable with the acquirer of the share for obligations to the company based on his unpaid or unsubscribed contribution to the company’s share capital, as well as for the obligation of additional payments in respect of that share, according to the situation on the day of the transfer of the share. Additionally, legal actions undertaken towards or by the transferor of the share prior to the registration of the transfer of the share in accordance with the law on registration with respect to that share or relationship in the company, are considered actions undertaken towards or by the acquirer of the share, unless this is incompatible with the nature of the undertaking legal actions.
In the case of the purchase of the company’s property, the buyer can “choose” the property he is interested in and avoid acquiring the seller’s property that he does not need, that is, one that is burdened with certain burdens. Therefore, it can be said that the purchase of property is in principle “safer” for the buyer, considering that he does not acquire the entire property of the transferor, but performs the so-called “cherry picking”, i.e. the selection of what actually suits him based on detailed due diligence. However, it should be borne in mind that the Law on Obligations stipulates that the person to whom a property unit of a natural or legal person is transferred on the basis of a contract, or a part of that unit, is responsible for the debts related to that unit, i.e. to its part, in addition to the previous owner and jointly with him, but only up to the value of its assets. Therefore, the acquirer remains responsible for the property in question and it is not possible to limit this responsibility of the acquirer. This rule does not apply to property transfers in bankruptcy and enforcement proceedings, where the property can be acquired without obligations and encumbrances.
Key differences between buying a share or property
Although each purchase or sale of a company is a case in itself, the general rule is that the purchase of shares is simpler and requires less documentation than a contract on the transfer of company assets.
In the case of the purchase of a company, the procedure after the due diligence is completed on the day of registration of the share transfer. The share transfer is carried out on the basis of the share purchase agreement, which is stipulated to be certified by the competent public notary, but as a rule, a simple certification, i.e. signature certification, is performed.
On the other hand, in the case of the purchase of company assets, the share purchase agreement itself requires a detailed identification of the various assets being purchased and transferred and often requires the preparation of several separate contracts, given that different property rights rules apply to different assets. For example, the transfer of immovable property requires the solemnization of the contract on the transfer of ownership rights to immovable property, as well as the individual registration of each transferred immovable property before the competent real estate cadaster (which can be a lengthy process). In addition, if it is desired to assign the contract as a property unit of the company, as a rule, the consent of the other contracting party is required, which makes the transaction in question even more uncertain.
The consequence of the mentioned difference is that costs are usually lower when transferring shares than when selling company assets. For example, in the case of a share purchase agreement, the amount of the fee paid for signature verification is fixed and symbolic (regardless of the value of the share being transferred), while in the case of property transfer, the notary fee is based on the value of the property being transferred and due to which can be significantly high.
Are there any restrictions on buying shares for foreigners?
In general, the Serbian market is open and accessible to foreign natural and legal persons, who can buy shares in Serbian companies under the same conditions as natural or legal persons in Serbia.
However, there are exceptions to the above rule that apply to certain industries (for example, the military industry, games of chance, the financial sector, energy, etc.).
Overview of the M&A Process: From Negotiation to Implementation
The very process of buying a company, whether it is done in the form of buying shares or assets, is long-term and requires the engagement of expert consultants, both lawyers who deal with M&A transactions and financial consultants in terms of evaluating the price itself. The procedure itself is not legally defined, but several steps have been defined through practice, which as a rule are carried out in order to realize transactions:
A letter of intent
A letter of intent, also known as a memorandum of understanding, is often the initial document that examines the existence of interest in purchasing a company. The letter itself does not have a legal form, but as a rule it contains the main points of the transaction in question, such as:
• Contract sides.
• Subject of future sale (shares or assets)
• The price, i.e. the method of its calculation;
• Terms, time frame and other main specifics of the transaction.
Letters of intent follow before the actual negotiations, they represent a framework for negotiations, but as such, they are generally non-binding for potential contractual parties.
Exclusivity Agreements
An exclusivity agreement is an agreement concluded between a transferor and a potential buyer, which gives the buyer exclusivity for the purchase of shares or assets for a certain period. Unlike the letter of intent, these agreements are binding, and their violation may lead to a request for the payment of a previously stipulated contractual penalty or to the initiation of a procedure for compensation.
Confidentiality Agreements
A nondisclosure agreement (NDA) is an agreement entered into between the parties to a transaction in its initial stages, to prevent the leakage of confidential information about the transaction and/or the parties to the public or third parties. These contracts can be drafted as contracts that impose obligations on both the seller and the buyer, or only on the buyer. Violation of these agreements may result in liability for damages or the payment of a contractual penalty.
All the previously mentioned stages represent the initial stages for entering into the process of drafting the company’s due diligence and preparing the share purchase agreement, that is, the contract on the transfer of the company’s assets.
Due Diligence and Business Compliance
Due diligence essentially represents a detailed analysis of the company that helps the customer in making business decisions, primarily whether to close the transaction and how to determine the price. There are different types of due diligence, the most common being legal and financial due diligence. Legal due diligence is a legal analysis of the company’s entire operation, its rights and obligations, contracts, property and the like, so that the buyer has clear information about the legal status of the company, i.e. its rights and obligations, i.e. what are the risks that it assumes by purchasing the company.
Because of all of the above, it is very important that companies regularly align their business with legal regulations, because messy legal documents can easily turn away a potential customer or investor, despite the successful financial results of your company.
Stages in the preparation of due diligence
Due diligence is usually carried out in several stages, including:
- Review and analysis of documentation;
- Asking questions and analyzing the answers given in the due diligence process;
- Preparation of due diligence reports.
A due diligence review generally includes an analysis of the following issues:
- General corporate matters;
- Regulatory compliance and licensing issues, including environmental, customs and data protection issues;
- Issues of competition and state aid;
- Material and financial contracts and arrangements;
- Issues related to labor and legal relations;
- Insurance;
- Intellectual property and IT;
- Property rights on real estate.
New trends in due diligence
Recently, there has been a noticeable trend of conducting due diligence of a limited scope. Potential buyers are often only interested in key areas of a particular firm’s business and therefore only require coverage of certain legal areas as part of due diligence. This is most common in cases where it is about the purchase of certain assets of the company or only part of the company with the application of the status change of allocation.
Share purchase agreement
The share purchase agreement is the basis for the sale of shares in the company. As we have already stated before, as a rule, the contract in question must be in writing and the signatures must be certified by a notary public. In the case of a Property Transfer Agreement, the form in question depends primarily on the type of property being transferred.
However, in order for the transfer of shares to take place, the contract is not enough, but it is necessary that the said transfer be registered in the Agency for Economic Registers, and on the day of registration, the transfer of shares actually takes place. Given that the Law on Business Companies stipulates that the share is transferred by a contract in written form with certified signatures of the transferor and the acquirer, it means that the contract in question cannot be concluded in electronic form, but we believe that this solution will also be subject to future changes in the law.
In the case of concluding a contract on the transfer of the company’s property, it depends on the type of property itself whether the rights are acquired at the moment of the conclusion of the contract or registration in the appropriate register.
Transaction Limits and Approvals
When concluding the Share purchase agreement, it is often necessary to obtain certain approvals, that is, to overcome the restrictions that apply when transferring shares of the company. All restrictions can be divided into regulatory ones, where the consent of state authorities and certain institutions (the military, banking, etc.) is required, the consent of third parties, which usually results from the Founding Agreement, i.e. the Agreement between the founders, as well as those concerning restrictions related to Competition law.
Approval of third parties
As we mentioned earlier, the transfer of shares or property is free. However, this does not mean that there cannot be certain restrictions that are overlooked by the founding or other act. With regard to restrictions that depend on third-party approvals, we can distinguish between corporate and contractual approvals.
Corporate approvals
Thus, as a rule, it is understood that co-owners have the right of pre-emption in relation to third parties, which means that the seller must first offer the share to members within the company under the same conditions as to the third party, and only if they refuse to conclude the contract, then he can conclude the contract with a third party.
It can also be foreseen the obligation to give the consent of the company to the transfer of shares or the right of the company to determine the future buyer of the company instead of consent. The due diligence analysis performed by lawyers who have experience in these transactions should determine the possibility and method of purchasing the company.
Contractual consents
As a rule, the company’s creditors do not have any rights, nor must they be informed in the case of the sale of shares or assets, unless the individual contracts stipulate otherwise. However, for the transfer of contracts or obligations in the case of the sale of the company’s assets, the consent of the other contracting party for the assignment of the contract or rights is required, i.e. the debtor’s notification for the assignment of claims.
Approval of the Commission for Protection of Competition
Competition law is a set of legal rules that ensure that business entities that operate and compete on the free market do not organize competition and thus prevent the development of normal market flows based on the principles of supply and demand. Therefore, the Commission controls transactions and approves them in the manner provided by the Law on Protection of Competition.
A transaction must be reported to the Commission for the Protection of Competition if it qualifies as a “concentration” in accordance with the Law on the Protection of Competition. Therefore, according to the aforementioned law, the concentration of market participants occurs in the case of:
1) mergers and other status changes in which there is a merger of market participants in the sense of the law regulating the position of business companies;
2) acquisition by one or more market participants of direct or indirect control over another market participant or several market participants, or part or parts of other market participants, which may represent an independent business unit;
3) joint investment by two or more market participants with the aim of creating a new market participant or acquiring joint control over an existing market participant, which operates on a long-term basis and has all the functions of an independent market participant.
It will be considered as one concentration of two or more transactions between the same market participants, executed in a period of time shorter than two years, whereby the date of execution of the last transaction is taken as the time of its occurrence.
There are also special cases that do not qualify as concentrations in accordance with the Law on Protection of Competition, such as cases involving banks, other investment organizations and investment funds.
In addition to the above cases, the concentration also stands in the event that:
1) the total annual income of all participants in the concentration achieved on the world market in the previous accounting year is greater than 100 million euros, with the fact that at least one participant in the concentration on the market of the Republic of Serbia has an income of more than ten million euros;
2) the total annual income of at least two participants in the concentration realized on the market of the Republic of Serbia is greater than 20 million euros in the previous accounting year, with the fact that at least two participants in the concentration on the market of the Republic of Serbia have an income of more than one million euros each in the same period.
When calculating the annual total income from paragraph 1 of this article, the income that these market participants achieve in mutual exchange will not be counted.
Registration of concentration
The concentration application (notification) is submitted to the Commission within 15 days from the date of execution of the first of the following actions:
1) conclusion of agreements or contracts;
2) publishing a public call, that is, an offer or closing a public offer;
3) acquisition of control.
The application can also be submitted when the market participants show a serious intention to conclude the contract, by signing a letter of intent, announcing the intention to make an offer or in another way.
When control over all or parts of one or more market participants is acquired by another market participant, the application is submitted by the market participant who acquires control, and in the case of a joint venture, the application is submitted by all market participants together.
Participants in the concentration are obliged to stop the implementation of the concentration until the decision of the Commission is made.
Bearing in mind the above, it is clear that the sale of a company, whether it is carried out through the sale of shares or assets, is a complex and time-consuming process that requires the engagement of not only legal but also financial consultants in order to realize the transaction in question in the expected manner and in the interest of both parties.
If you need advice and help for buying or selling a company in Serbia, you can contact us via our contact form.
This article is for informational purposes only and does not constitute legal advice. If you need additional information regarding the topic in question, please feel free to contact us by email at office@ncrlawyers.com or by phone at +381677049551.
