Brief but Active History
Primary Forms of M&A
Although just over seven years old, Slovakia has seen many changes in corporate financing including the three waves of privatization. During the first wave, small and medium-sized businesses became available for private ownership. During the second, large-scale wave, many large manufacturing concerns were privatized. The cancellation of voucher privatization by the Meciar government encouraged the direct sale of several large enterprises to private ventures and individuals, pursuant to a contract with the National Property Fund.
Many controlling interests in large companies were sold to groups of former managers of former state owned companies, paid for with proceeds from international and domestic bank loans. Companies that are still owned by the state (eg, the National Property Fund, ministries, other state controlled companies, or a combination thereof) have also financed much of their capital expansion and operational needs through loans with international syndicates and foreign and domestic banks. From 1996 to 1998 the international syndicated loan was a primary funding mechanism for large manufacturing concerns and state controlled monopolies, mainly due to the very high interest rates charged by domestic banks.
During late 1999 there was a wave of merger and acquisition activity. Often, the capital market is very tight for companies with high debt-to-equity ratios and interest rates have been high. Until recently there were very few examples of successful bond issues or initial public offerings in foreign markets, indicating an inability to tap into one source of capital. Examples of successful Eurobond issues include those for a major mobile telephony operator and of the government. These may be viewed as benchmarks in terms of interest rates. Eurobond issues appear to be an increasingly popular trend.
In order to position companies so that they can compete globally, the owners of many large enterprises (especially manufacturing concerns) have been more accepting of mergers and the sale of part or all of company ownership interests. Moreover, the government has made way for the sale of a strategic stake in the land-line telephony monopoly to the major state-controlled banks and discussions have begun regarding the restructuring and possible sale of the state controlled electricity company to foreign bidders. Sale to strategic investors (whether domestic or foreign) of some of the larger state controlled industries is limited to slightly less than a majority interest. The enterprises that continue to be subject to such protection are now, however, very few.
Slovak laws permit the sale of an enterprise, asset transfer, and sale of shares. The sale of shares appears to be the current preferred method for transferring ownership interest to foreign investors. The sale of an enterprise tends to be the simplest mechanism for transfer of full ownership of a domestic company, though it requires corporate resolution for the sale and adherence to wind-up procedures. The acquirer automatically assumes the debts and liabilities of the acquired company and this can be problematic; foreign investors do not want to be burdened with debts and the less productive assets of their target company.
Asset transfers may be set aside by creditors when whatever remains of the domestic concern becomes insolvent. The clawback period for assets transferred in an attempt to avoid payment of creditors is three years from the date of a bankruptcy declaration.
Under current tax law, capital gains on the sale of shares that have been held for more than three years are tax free. Domestic sellers of ownership interests in Slovak companies invariably prefer the sale of shares for this reason and thus most M&A activity involves a share purchase.
The acquirers of part or all of a domestic concern must consider the implications of the Anti-Monopoly Office. Because Slovakia is a notice jurisdiction, its rules on who must file are somewhat broad. For example, a concentration is subject to control by the authority if (i) the combined turnover of the participants of the concentration is at least SIKr300 million (approximately $6.6 million) and (ii) at least two of the participants achieved turnover of at least SIKr100 million each (approximately $2.2 million) for the previous accounting period.
Though legislation is not specific, the relevant provision is interpreted to include worldwide turnover. Jurisdiction is also proper where the joint share of the participants exceeds 20% of the total turnover in identical or interchangeable goods in the sector. The law exists to prevent abuses of monopoly power. Accordingly, concentrations that do not significantly change the market for the relevant goods should be, and usually are, approved.
Where a foreign producer is already competing in the sector, a combination with a Slovak competitor will not often change the face of competition for similar or interchangeable goods. A demonstrable intent to utilize production in Slovakia to more effectively compete in external markets is also a compelling reason for approval of a concentration.
Another major concern involves examining the facts and circumstances surrounding privatization of the company to be purchased or merged (in whole or in part by share purchase). Privatization entails a contract with the National Property Fund (including conditions such as payment amounts and dates, investment requirements, and forbearances where certain investments into the company are made). Failure to honour a contract could lead to its cancellation, leading to reversion of the company to the National Property Fund. Overall, the policy of the appropriate authorities has been to uphold privatization contracts rather than seek widespread return of assets for failure to honour them.
Permits and licences
Depending on the type of business that is conducted, special licences or permits may be required by the relevant authorities. Often such licences or permits are not transferable. Therefore, in cases of acquisition, the acquirer must acquire a newly issued licence or permit. In addition, certain forms of licences require the appointment of a responsible person (ie, someone who is an expert in a given field and who qualifies, on behalf of the company, for the grant of a licence or permit).
Ownership of material assets
In addition to consideration of privatization issues concerning the core of assets obtained from a privatization, it is important to verify ownership in assets (such as real property) and to determine whether any security interests, encumbrances or pledges exist over the property. Specifically with regard to real property, the list from the relevant real estate registers should be carefully checked in all areas where there is property ownership, and due diligence should be undertaken into potential restitution or hidden claims to ownership. Laws do not yet provide strong and clear guidance regarding security interests in movable property, although the Ministry of Finance and other governmental bodies are considering new laws to address the issue of security interests in movable property.
Some Slovak companies were once part of a larger conglomerate, whether prior to or after privatization. Details of any split-offs should be considered in determining whether there are potential claims by creditors in bankruptcy situations that the target company was formed with all valuable assets, leaving behind the less valuable assets in a split-off company. Both the Bankruptcy Act and the Civil Code contain provisions regarding the ability of a creditor to set aside transfers that were made with the intent to impair a creditor's rights.
In order to determine the true value of a company and its potential income stream, ivestigation into lucrative contracts with satellite companies or those owned by major shareholders/parties should be conducted. Reforms are being considered to increase protection of creditors and minority shareholders, including the potential of minority shareholders to seek redress against the responsible persons of a company in the case of, for example, contracts that were entered into without sufficient return consideration. As a practical matter, this is often a financial rather than a legal consideration.
Despite potential pitfalls, M&A activity has been on the rise since 1999. Percentages in several state monoliths, including the land-line telephony giant and several state banks, are scheduled to be sold to strategic foreign investors. Moreover, lack of cheap capital and technical know-how has led to many domestic companies being in debt and unable afford much needed capital investment. For this reason, continued M&A activity is expected over the course of at least the next several years.
For further information on this topic please contact Kevin Connor and Paul Carrier at Squire Sanders & Dempsey by telephone (+421 7 5441 7611) or by fax (+421 7 6280 2212) or by e-mail ([email protected] or [email protected]).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.