Mergers and Acquisitions Guide in Serbia 2024

Key Considerations in M&A

Mergers and acquisitions (M&A) are transformative business moves that enable companies to expand, consolidate, and enter new markets. For some, M&A offers a path to rapid growth, while for others, it’s a strategic tool to eliminate competition or acquire valuable assets like technology, intellectual property, or human capital.

In Serbia, M&A activity has experienced substantial growth due to increased foreign direct investment and Serbia’s role in regional economic integration. However, the M&A process in Serbia is highly regulated, with complex legal requirements and oversight from multiple authorities. Navigating this process requires a clear understanding of the applicable laws, the relevant regulatory bodies, and the key steps involved in a successful transaction.

This guide provides a comprehensive overview of the M&A process in Serbia, highlighting regulatory authorities, transaction types, approval processes, legal challenges, and emerging trends. Whether you are a buyer, seller, or investor, understanding Serbia’s M&A framework is essential for a successful transaction.

M&A are business strategies that involve combining companies to achieve growth and market expansion. Although they are grouped together, they differ in structure, goals, and process.

A merger combines two companies into a new, single entity, where both companies cease to exist as independent units. The shareholders of both companies typically receive shares in the newly formed entity, reflecting their prior ownership stakes. Mergers are often driven by achieving synergies, such as increased efficiency, cost savings, or entering new markets. For example, two technology companies might merge to pool resources and broaden their customer base.

In contrast, an acquisition involves one company purchasing and taking control of another. The acquiring company remains intact, while the acquired company may either operate under its own brand or be fully integrated into the acquirer’s operations. Acquisitions often aim at gaining market share, technology, or operational capacity. The acquirer may purchase shares of the target company or its assets, and sometimes acquisitions can be hostile, bypassing the target’s management. The main objective here is typically to expand or eliminate competition rapidly.

Both mergers and acquisitions are powerful tools for business growth, but they involve distinct legal and operational frameworks. While mergers combine the strengths of two companies into one new entity, acquisitions allow one company to absorb another to expand its reach or capabilities.

Usual types of M&A

Most M&A transactions in Serbia are structured as straightforward asset-for-cash or share-for-cash deals, while share-for-share transactions are less frequent. To optimize taxes and facilitate universal succession, some asset-for-cash deals involve a spin-off or split-up followed by a share deal. Occasionally, share-for-share deals are structured via contributions in kind (e.g., shares or fixed assets) for the issuance of shares.

Mergers are a common approach, where the target company is absorbed by the acquirer, or parts of the business are merged, forming a new entity.

Legal transformations, such as converting a joint-stock company into an LLC, are sometimes carried out pre- or post-closing. This is particularly common in cases where public companies are privatized after acquisition, with a delisting and conversion to a private entity to avoid regulatory challenges, such as takeover laws and securities regulations.

Legal Framework for M&A in Serbia

M&A in Serbia is governed by a well-defined legal framework designed to ensure legal certainty, protect stakeholders, and promote fair competition. Several essential legal acts regulate the process of mergers, acquisitions, and company reorganizations.

1. The Companies Act – The Blueprint for Mergers and Corporate Changes

The Companies Act serves as the foundational regulation for corporate governance in Serbia. It sets out the rules for establishing, operating, and restructuring companies, including mergers, demergers (divisions), and status changes.

Some of the key provisions for M&A we explain below.

• Corporate Restructuring: The Companies Act governs mergers, acquisitions, and transformations of companies. It outlines the procedures for uniting two or more companies into a single entity (merger) or splitting one company into multiple new entities (demerger).
• Shareholder Approval: Shareholders play a pivotal role in the M&A process. The Companies Act requires the approval of shareholders through a formal vote at a general meeting. The merger plan must be presented to them in advance, allowing them to make informed decisions.
• Merger Reports and Independent Auditors: Companies must prepare a merger report that provides shareholders with detailed information on the financial, operational, and legal implications of the merger. Independent auditors review and verify the accuracy of the report, ensuring fairness and transparency.
• Protection of Minority Shareholders: The Act grants minority shareholders the right to challenge decisions that they believe may be harmful to their interests. This provision ensures that controlling shareholders do not abuse their position of power.

2. The Law on Obligations – Defining the Deal Itself

The Law on Obligations focuses on the contractual aspects of M&A transactions, providing a legal foundation for key agreements such as Share Purchase Agreements (SPA) and Asset Purchase Agreements (APA).

Below, we outline some of the key provisions related to M&A.

• Contractual Obligations: This law governs the contractual relationship between the buyer (acquirer) and the seller (target) in an M&A deal. It defines the rights, duties, and liabilities of both parties.
• Warranties and Indemnities: Sellers often provide warranties (promises that certain facts are true) as part of the M&A agreement. If these warranties turn out to be false, the buyer may have the right to seek compensation through an indemnity clause.
• Dispute Resolution: The Law on Obligations outlines mechanisms for resolving disputes, whether through litigation or settlement. Dispute resolution clauses are often included in M&A agreements to provide certainty and avoid delays.

3. The Competition Act

The Competition Act is designed to ensure fair market competition. It regulates M&A transactions that may create “concentrations” of market power, such as when one company acquires a competitor. The goal is to prevent anti-competitive practices that harm consumers and competitors. Here are some of the essential provisions related to M&A that we will explain.

Below, we present some of the important provisions related to M&A and competition law.

• Merger Control: If a transaction meets certain thresholds (such as combined turnover or market share), it must be reported to the Commission for Protection of Competition (CPC) before completion.
• Notifiable Transactions: M&A transactions that reach specific turnover or market share thresholds require prior clearance from the CPC. Without this clearance, the transaction may be declared void.
• Sanctions for Non-Compliance: Companies that fail to notify the CPC before completing a merger can face fines of up to 10% of their turnover in Serbia.

4. Sector-Specific Legislation – Additional Rules for Regulated Industries

Certain regulated sectors, such as banking, telecommunications, insurance, and energy, have additional M&A rules that must be followed. This is because these industries are considered “strategic” and are subject to stricter oversight.

Below are some of the industries that have specific provisions related to M&A.

• Banking: The National Bank of Serbia (NBS) regulates M&A transactions in the banking sector. If a party acquires a “qualified shareholding” (a significant ownership stake) in a financial institution, the NBS must approve the deal.
• Telecommunications: M&A transactions involving telecommunications companies require approval from the Regulatory Agency for Electronic Communications and Postal Services (RATEL) to ensure that consumer interests are protected.

• Energy: The Energy Agency of the Republic of Serbia (AERS) oversees M&A activity in the energy sector, ensuring that energy security is maintained.

• Insurance: The acquisition of insurance companies requires approval from the National Bank of Serbia (NBS) to protect the stability of the financial system.

In addition to the primary laws regulating M&A transactions in Serbia, several other legal provisions may also be triggered. The Law on Takeover of Joint Stock Companies addresses the process of acquiring control over publicly traded companies. The Capital Markets Act, along with regulations from the Securities Exchange Commission, the Central Securities Register, the Depository and Clearing House, and the Belgrade Stock Exchange, governs securities trading and investor protection during M&A activities. The Employment Act governs employment rights and obligations during M&A processes. Additionally, the Privatization Act regulates the privatization of socially owned or state-owned companies, and the Bankruptcy Act applies to transactions involving companies undergoing insolvency proceedings.

Steps in the M&A Process in Serbia

1. Negotiate the Transaction

Negotiations begin by defining the general terms of the deal, though they continue throughout the entire process. This is especially true if a complex payment mechanism is involved, or if the price is subject to changes based on the findings of the due diligence (DD) report. Initially, the transaction type is determined—whether it will be an asset deal or a share deal. In an asset deal, the buyer acquires specific assets such as real estate, equipment, and intellectual property, whereas in a share deal, the buyer purchases the company’s shares.

These early negotiations often include discussions on the price, payment terms, and general conditions, setting the foundation for the deal. These discussions are typically formalized through a Letter of Intent (LOI) or Memorandum of Understanding (MOU), which, while not legally binding, outline the framework of the deal and establish mutual expectations. However, negotiations are highly fluid, especially as the due diligence process progresses and new information comes to light, potentially affecting the terms.

2. Conduct Due Diligence

In standard M&A transactions, due diligence is a critical process for identifying and mitigating potential risks. Buyers must thoroughly assess the target company’s ownership structure, ensuring there are no disputes over assets, shares, or encumbrances on the ownership interests, as these can significantly affect the deal terms. They should also review material agreements, financial documents, and debt obligations, to identify any liabilities or clauses that may impact the transaction. Additionally, it is essential to examine any change-of-control provisions in contracts that might require third-party consent or create other obstacles to the deal’s completion. A focus on these key areas helps avoid costly surprises and ensures a smoother negotiation process. Depending on the industry, insurance can be crucial—for instance, for IT companies, it’s essential to know whether there is insurance coverage for computer equipment.

Additionally, it’s important to address the significance of employment matters and regulatory aspects in the legal due diligence report. These factors play a key role in identifying potential risks or obligations that could impact the transaction.

3. Finalizing Negotiations

Following due diligence, the final negotiations take place. If any new information or potential risks are uncovered during the due diligence process, this will influence the final terms of the deal. The buyer and seller will address any issues that have arisen, particularly those that may impact the value or structure of the transaction. This phase is formalized in the drafting of the final Sale and Purchase Agreement (SPA) or Asset Purchase Agreement (APA), legally binding documents that finalize the terms and obligations of both parties and set the conditions for closing the transaction.

4. Obtain Approvals & Observe Regulatory Considerations

M&A transactions in Serbia often require various regulatory approvals, depending on the structure and type of transaction. Transactions involving state-owned enterprises, for instance, must be approved by the Serbian Privatization Agency. Additionally, if a deal crosses specific thresholds, it must be reported to the Serbian Commission for Protection of Competition (CPC), which assesses whether the transaction would harm competition within the Serbian market. If necessary, the CPC may impose conditions or remedies. Regulatory scrutiny also includes adherence to laws on foreign investment, industry-specific regulations (e.g., in telecommunications or banking), and securities laws if the company is publicly traded. Understanding these requirements early on helps prevent delays and ensures the deal proceeds smoothly.

5. Draft and Negotiate the SPA

Once the due diligence process is concluded and the regulatory approvals are obtained, the parties begin drafting the SPA. This document governs the entire transaction, including the agreed-upon purchase price, terms of payment, and the representations and warranties of the seller. The SPA also outlines conditions for closing, including any post-closing obligations (such as indemnifications or transitional support). The negotiating process can involve multiple rounds of revisions to ensure that all concerns of both parties are addressed, especially regarding liability and potential risks identified during due diligence. Legal and financial advisors play a key role in drafting and reviewing the document to ensure its alignment with Serbian law and the specifics of the deal.

6. Signing the SPA

The signing of the SPA marks a crucial milestone in the M&A process. It takes place once all key terms have been finalized and both parties have agreed on their respective rights and obligations. The SPA is the central legal document that formalizes the sale, specifying essential elements such as the purchase price, payment terms, and conditions for closing.

Unlike closing, signing the SPA does not immediately transfer ownership of the target company. Instead, it signifies the parties’ commitment to complete the transaction, provided that all conditions precedent are met. These conditions may include obtaining regulatory approvals, settling outstanding debts, or transferring intellectual property rights.

The signing is often the result of extensive negotiations and multiple revisions, as both sides seek to address liability issues and mitigate risks identified during due diligence. Once the SPA is signed, the focus shifts to fulfilling the conditions necessary for closing, which concludes the M&A process and legally transfers ownership of the shares or assets to the buyer.

7. Closing the Deal

The final step in the M&A process is the closing. This occurs once all conditions in the sale agreement are met, and both parties are satisfied with the terms. At the closing, the buyer transfers the agreed-upon purchase price to the seller, and ownership of the assets or shares is legally transferred to the buyer. Closing conditions may include the payment of outstanding debts, transfer of specific intellectual property rights, or necessary board approvals. Once the transaction is closed, legal filings, such as registering changes in ownership with the Serbian Commercial Register, are completed. This step officially concludes the M&A process, and the buyer assumes control of the target company. However, there may be post-closing actions or requirements, such as finalizing the transfer of intellectual property rights, executing additional documents, or fulfilling any remaining obligations outlined in the agreement, to ensure the smooth integration of the acquired company.

Essential Documentation for M&A Transactions in Serbia

In M&A transactions, buyers and sellers customarily enter into several key documents:

1. Non-disclosure Agreement: Protects confidential information exchanged during negotiations.
2. Memorandum of Understanding: Outlines the general terms and framework of the transaction.
3. Offer Letter: Specifies the price and conditions under which the seller agrees to the transaction.
4. Disclosure Letter: It outlines any exceptions or qualifications to the representations and warranties made by the seller in the sale and purchase agreement. This letter serves to disclose potential liabilities, legal issues, or risks that may affect the business, ensuring transparency.
5. Ancillary Transaction Documents: supporting transaction documents, such as Spousal Consent, Board Resolutions, Share Offers, Mandatory Notices, etc.
6. Framework Agreement: Defines the scope, timelines, and conditions that must be met for the deal to proceed.
7. Share Transfer Agreement: This agreement facilitates the formal registration of ownership transfer in the Business Registers Agency (BRA). It is narrower than a SPA, which governs the entire transaction.
8. Sale and Purchase Agreement: The core document specifying the transaction’s details, including price, warranties, representations, and terms.

In share acquisitions, documentation may be similar to asset acquisitions, but asset deals typically require more specific agreements concerning the assets being transferred. For share or real estate transfers, contracts often need to be notarized. Additionally, for certain transactions, such as equity interests or property rights, hand-signed paper documents, notarized for validity, are required—electronic signatures are not considered valid for these specific deals. However, electronic filings with the tax administration are now mandatory and can be done with electronic signatures. As of April 2019, it is possible to file electronically for registration at the Serbian Business Registers Agency (SBRA).

Conclusion

M&A transactions in Serbia offer a strategic pathway for business growth, but their complexity requires careful navigation of legal and regulatory hurdles. Each stage — from deal structuring and merger control to post-transaction integration — demands meticulous planning and expert guidance. With the right legal support, businesses can seize these opportunities with confidence, ensuring a smooth process and successful outcome. By partnering with experienced professionals, you can mitigate risks, protect your interests, and maximize the benefits of your M&A venture.