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Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The two most common types of business combinations are purchases of shares in a limited liability company (LLC) or purchases of shares in a joint stock company (JSC). Depending on the type of JSC, shares may be purchased on the stock exchange or directly from the owners of such shares. Another form of acquisition is a status change, namely, merger by acquisition, merger by formation of new companies, division or separation. Assets are usually acquired through sale and purchase agreements, where one company transfers ownership of its assets to another company.
A typical transaction process will usually start with the signing of a non-disclosure agreement, followed by due diligence, negotiations regarding the terms and conditions of the transaction, the signing of a framework agreement and sale and purchase agreement, and the fulfilment of closing and post-closing conditions.
The duration of the transaction process will depend on the complexity of the issue. Nevertheless, the usual time frame for a transaction is approximately three months.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The laws regulating private acquisitions and disposals in the Serbian jurisdiction are as follows:
- the Law on Companies;
- the Law on Takeover of Joint Stock Companies;
- the Law on Capital Market;
- the Law on Protection of Competition;
- the Law on Contracts and Torts;
- the Law on Foreign Exchange;
- the Law on Procedure of Registration in the Serbian Business Register Agency;
- the Law on Electronic Document, Electronic Identification and Trust Services for Electronic Transactions;
- the Law on Pledge Rights over Movable Assets entered in the Register;
- the Law on Mortgages;
- the Law on State Geodetic Authority and Cadastre; and
- the Law on Ultimate Beneficial Owners Registry.
Usually, the procedure will be governed by the laws of Serbia. However, it is not prohibited to agree on a foreign law being applicable under an obligation to comply with the imperative norms of Serbian law. In the case of a sale of immovable property, Serbian law has exclusive jurisdiction.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
In respect of shares, the buyer acquires full legal title to the shares, which means it can freely dispose of them. Such title may be limited in terms of the rights of third parties where some of them are pledge or pre-emption rights.
Regarding assets, the buyer will also acquire full legal title, which may be limited in terms of the rights of third parties, these being pledge rights, preliminary injunctions (a prohibition on disposal and alienation) or pre-emption rights. In the case of immovable assets, title may also be limited by servitude.
Legal title is defined by law. The subject matter of negotiations may be the transfer of ownership rights conditioned by certain acts of the buyer. One such example is a transfer of ownership rights after payment of the entire amount of the purchase price.
Legal title to both shares in a company and immovable property is transferred by registration in public registers: for companies, in the Serbian Business Register Agency (SBRA) for LLCs, and the Central Depository and Clearing House for JSCs; and the Land Registry (Cadastre) for immovable property.
The Serbian legal system does not recognise beneficial title.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Unless otherwise stated in a company’s articles of association, shareholders of an LLC have a pre-emption right to equity interest subject to a transfer to a third party. Therefore, a transferor of equity interest should offer his or her equity interest to other company members prior to transfer to a third party. If no shareholder uses such pre-emption right, a transferor of equity interest may, within 90 days, sell his or her own equity interest under conditions that may not be more advantageous than those in the offer. Prior consent of the company’s general meeting of shareholders may be required for the transfer of an equity interest to a buyer who is not a company member, and the general meeting can deny its consent or designate a different acquiring party. As a result, a transferor may transfer his or her own equity interest solely to a designated acquiring party. Acting contrary to these rules may lead to the voiding of a share transfer instrument.
In a JSC, upon a proposal of a shareholder holding a minimum of 90 per cent of the share capital and a minimum of 90 per cent of the votes of all ordinary shareholders, the general meeting will pass a decision on the compulsory redemption of all shares of the remaining shareholders (minority squeeze-out). A controlling shareholder holding a minimum of 90 per cent of the company’s share capital shall have an obligation to purchase the shares of every remaining shareholder on his or her written request.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
The acquisition of a business in Serbia commonly occurs through the acquisition of an equity interest or a status change. A buyer and a seller can agree which assets and liabilities will be transferred, and this may require the formation of an SPV or the conducting of status changes before the actual transfer to ensure the lawful extraction of the desired target assets.
A buyer acquiring property on a contractual basis will be liable for any debts relating to such property alongside the former owner and jointly with it. The limitation or exclusion of the buyer’s liability has no legal effect. When acquiring business or assets through a status change, the buyer will be obliged to take over the employees of the seller together with all effective general acts (such as the collective agreements), which must remain in force for at least one year following the acquisition. A buyer that acquires leased assets in the physical possession of a lessee assumes its predecessor’s place, and he or she cannot require the lessee to hand over leased property before the expiration of the lease period or without a notice period.
A transfer of assets or a business may require a previous consent from the competition protection authority or other regulatory authorities (eg, the National Bank of Serbia (NBS), the Securities Commission), or that counterparties to commercial agreements agree to the assignment of such agreement.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
In general, the Serbian market is open, and is accessible to both foreign and domestic legal entities and individuals. When agricultural land is in question, an individual foreigner may be an owner of up to two hectares of agricultural land only if he or she is an EU citizen and fulfils certain additional criteria (mainly related to the fact that he or she is a farmer). Otherwise, a foreigner may be a founder of a company that could hold agricultural land.
Particular industries, such as banks, companies operating in the field of financial leasing, insurance companies, insurance brokers and insurance agents, associations for the management of pension funds, investment funds and broker companies, must comply with sector-specific rules. They are subject to the control of the NBS, which has the authority to give permission for their establishment, to control their business operations, as well to issue approvals on acquisitions of shares or the establishment of control over banks, and insurance, financial and leasing companies. Stock exchanges, investment funds, custody banks, companies for investment funds and broker companies are under the control of the Securities Commission. In addition, if transactions satisfy certain thresholds, they must apply for merger clearance, which is to be filed before the Commission for the Protection of Competition.
Serbia does not subject private transactions to any public or national interest considerations. However, for reasons of national security and foreign policy, if a foreigner wants to invest in a company dealing with the production of weapons such investment is subject to the approval of the Ministry of Defence.
Are any other third-party consents commonly required?
The consent of other shareholders is typically required in share transfer deals in LLCs. If a buyer acquires an ongoing business, the assignment of the relevant contracts will be possible only with the counterparty’s consent. The acquiring party will typically require the transferor to enable the transfer of assets free of any burdens, and formal written release statements of the transferor’s creditors will be necessary if target assets are pledged or mortgaged. Different regulatory consents and approvals can also be required, such as an approval for a concentration from the Serbian Commission for the Protection of Competition in the case of an acquisition of assets or a business through a merger or other status change or through share deals. The NBS issues its consent with respect to an acquisition of direct or indirect ownership in a bank, thereby enabling the acquiring party to acquire a certain percentage of the voting rights. In the case of acquiring the assets or business in a JSC through a purchase of more than 25 per cent of the JSC, the consent of the Serbian Securities Commission is required.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
A buyer that has acquired shares in a company must file a registration request with the SBRA and pay the prescribed administrative fees, which amount up to €30. When an application for merger clearance needs to be filed with the Commission for the Protection of Competition, the applicant will pay a fee amounting to up to €50,000.
To obtain Securities Commission approval of a bid announcement, a buyer is obliged to pay a fee of not less than approximately €2,500.
If a buyer acquires real estate, registration of its ownership title in the Real Estate Cadastre is necessary. The administrative fee for this service is, at a minimum, €50.
The effectiveness of all regulatory and registration filings is conditioned on the payment of the instructed fees.
Costs related to the services of a notary public for notarisation of a share transfer agreement or an agreement based on which the buyer acquires real estate may amount to up to €5,000.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Apart from lawyers, buyers and sellers would usually appoint financial advisers, as well as advisers that will conduct a ‘technical’ due diligence. If a transaction involves a JSC with shares listed on the stock exchange, then the transaction cannot be conducted without the participation of a brokerage house, as only a brokerage house is authorised to communicate with the Central Depository and Clearing House.
Typically, buyers and sellers will agree on a fixed fee with their adviser. The amount of the fee depends on the value of the company or business being acquired. The amount of fee to be paid may also be determined at an hourly rate, based on, inter alia, the number of hours spent on the inspection of documents, drafting and negotiations.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Negotiation under the principles of good faith and honesty is a general principle of contractual obligations, and negotiations should be conducted in good faith. However, negotiations are not binding, and each party can terminate them at will. If a party has engaged in negotiations without any actual intention to enter into an agreement, such party shall be liable for any damage caused by the negotiations. This also applies to a party participating in negotiations with the intention to conclude a contract and quitting the negotiations without a justified reason, thus causing damage to the other party.
A company’s owners and directors must comply with special duties towards the company in all activities related to the company, including negotiating a transaction. These special duties are:
- a duty to act in good faith, with due diligence and in the reasonable belief that they are acting with the company’s best interest in mind (duty of care);
- a duty to report transactions involving personal interests;
- a duty to avoid conflicts of interest;
- a duty to keep trade secrets; and
- a duty of non-competition.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
When acquiring shares, business or assets, parties to a transaction will customarily enter into:
- a non-disclosure agreement regulating the exchange of confidential information and documents relating to the transaction;
- a memorandum of understanding regulating the framework of the transaction;
- an offer letter containing the price and the conditions that need to be fulfilled on the buyer’s side so that the seller will enter into the transaction;
- a framework agreement regulating the scope of the transaction, time frame and conditions precedent (usually closing, signing and post-closing conditions); and
- a sale and purchase agreement setting out the principles of the subject matter of a transaction and its price, and also, inter alia, a list of representations and warranties, a non-compete clause, terms and conditions).
The documents used for acquiring shares as opposed to acquiring a business or assets usually would not differ that much, especially when large businesses or assets are acquired.
Are there formalities for executing documents? Are digital signatures enforceable?
Most commonly, contracts are executed in written form. Contracts that are the basis of share transfers or transfers of ownership on real estate, share pledges or mortgage agreements must be signed and notarised by a notary public to be effective. In addition, the execution of these contracts is preceded by the rendering of relevant corporate decisions approving their signing.
It is common practice in Serbian companies for the registration of a limitation on the representation of a company (including in the signing of contracts) by a director in the form of a mandatory co-signature of another person: this means that the contract must be co-signed by all designated signatories in order to be valid. Usually, this type of limitation applies to loan and credit agreements as well as arrangements creating security over a company’s assets, or to any type of contact exceeding a certain value. A particular benefit of the registration of a mandatory co-signature is that it becomes publicly available information, thereby protecting the company from potential issues concerning the scope of the signatories’ authorisations.
One of the most significant changes concerning executing documents relates to the mandatory use of a company stamp (seal). As of 1 October 2018, companies and entrepreneurs will no longer be obliged to use a stamp (seal) in business activities, including executing documents.
While the use of electronic signatures is allowed, and is governed under the Law on Electronic Document, Electronic Identification and Trust Services for Electronic Transactions, which replaced the former Law on Electronic Signature, any document referring to the transfer of an ownership title on real estate or the establishment of other property rights shall not be considered valid and effective if executed in electronic form. In other words, the acquisition of an equity interest in a company or an asset deal should be executed on paper documents, signed by hand and notarised.
Electronic filing to the tax administration is mandatory.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
In most scenarios, the buyer would be interested in the legal, financial, tax and, sometimes, technical position of a company, business or assets. Full legal due diligence would cover the corporate standing of a company, as well as its ownership titles, encumbrances, concluded agreements, labour issues, competition issues, intellectual property rights, data protection and regulatory compliance. Red flag due diligence is also very common, especially when certain parts of a business or assets are acquired.
It is not usual for sellers to provide due diligence reports to buyers. Buyers would usually engage their own consultants and rely on their own findings.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Should a buyer conclude a contract based on a seller’s pre-contractual statements that were inaccurate, or if a seller misleads a buyer with respect to important attributes of a contract’s subject whereby the buyer would not have entered into such a deal had it been correctly informed, a seller can be liable for damage suffered by a conscientious buyer. On the other hand, it is possible and very common for parties to exclude liability for a seller’s pre-contractual statements by stipulating, for example, the agreement’s effective date to be a reference point as of which time all the seller’s representations and warranties will be evaluated in terms of their truthfulness and accuracy.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
In Serbia, all companies are registered within the SBRA. Its register is publicly available, and access is free of charge. The SBRA collects and publishes the following information:
- general corporate data on companies;
- data on their capital;
- data on their directors and legal representatives, and their limitations as regards representation;
- data on their management bodies;
- data on the shareholders of LLCs (shareholders of JSCs are registered within the Central Depository and Clearing House);
- their articles of association and their amendments;
- their financial statements; and
- data on bankruptcy and winding up.
Other searches that the buyer would customarily carry out are checking:
- the register of bank accounts maintained by the NBS to ascertain whether accounts are blocked;
- the registration of any promissory notes;
- the land register regarding data on immovable property;
- the registration of pledges;
- the registration of financial leasing;
- the registration of preliminary injunctions;
- the registration of court injunctions;
- the registration of value added tax (VAT) taxpayers;
- trademark registration;
- patent registration;
- the registration of graphic design;
- the central registration of personal databases; and
- the registration of building permits.
Until 1 October 2019 all companies will have to register the address for receipt of electronic mail within SBRA. As from January 2019, Serbia will introduce a central registry of ultimate beneficial owners that will keep the data on both domestic and foreign ultimate beneficial owners. Apart from harmonisation with national standards, the purpose of this register is to ameliorate a system for prevention and detection of money laundering and the financing of terrorism.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
A buyer’s knowledge of deficiencies would have an impact on any potential claim that it wants to bring against a seller. A difference is made between publicly available data and any knowledge that the buyer acquired during its performance of due diligence. When publicly available information inscribed in the public registers is in question, such information would prevent the buyer from being successful in a claim case. Information that the buyer acquired during its due diligence process that was not publicly available would also have an impact on the buyer’s future claims. However, the level of impact would also depend on the scope of the representation and warranties clause, as well on the knowledge that the buyer acquired during its due diligence process.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Both closing accounts and locked-box mechanisms are used as pricing methods in transactions in Serbia. However, fixed pricing in share transfer deals is more common, but does not exclude use of closing accounts particularly if a targeted business operates with losses. Price adjustment mechanisms, on the other hand, are typically implemented in transactions where a buyer acquires an ongoing business, particularly if this is done in the form of an asset deal.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
The most common form of consideration in private M&A transactions is cash. Other forms are used very rarely and can be considered as exceptions.
The price and its payment method are formed by the agreement of the buyer and the seller. However, the following exception applies: under a pre-emption right, a shareholder that wants to sell his or her shares in an LLC has a duty to offer them first to the other shareholders. If they refuse to buy the shares, a third party cannot be offered better conditions for such sale. When a mandatory takeover bid is in question, all shareholders shall be paid the same consideration. The same applies to a minority squeeze-out, where all ‘squeezed out shareholders’ shall be paid the same consideration.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
The most common feature of a transaction is escrow: earn-outs and deposits are not that common in transactions in Serbia. Escrows are mostly used for acquisitions of companies, but also not uncommonly for acquisitions of large businesses. In cases of acquisitions of immovable property, sometimes the buyer and seller would opt for a deposit with a notary public, which will be deposited from the time the pre-contract is signed until the agreement on the property transfer is signed.
How are acquisitions financed? How is assurance provided that financing will be available?
Acquisitions are commonly financed with funds obtained from financial institutions. Participants in a transaction may agree for the party acquiring equity interests, business or assets of a target company to deposit a portion of or the entire purchase price into an escrow account or a special account of a notary public. A bank guarantee or a money deposit in the amount equal to the value of a public bid should be given by a buyer who has made a public announcement that it is acquiring more than 25 per cent of a JSC’s shares. A money deposit into a special account is also required in the case of a minority squeeze-out.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
It is prohibited for Serbian JSC and LLCs to provide direct or indirect financial assistance of any kind to their members, employees or third parties regarding the acquisition of stakes in such companies.
A legal transaction involving such financial assistance would be null and void and without any legal effect. Furthermore, a company providing financial assistance for acquisition of its stakes commits an economic infraction that is punishable by a fine of between 100,000 dinars and 1 million dinars.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
If no specific conditions are prescribed for a certain type of transaction, M&A transactions in Serbia typically come into effect on the date of their registration with the company registry.
However, M&A transactions may be, and in most cases are, subject to other closing conditions that are agreed upon by the parties. The most common conditions that sellers accept relate to fulfilling the legal conditions and obligations regarding the legality of the company’s business operations and corporate structure, including adherence to internal by-laws, decisions and other general legal provisions. With that respect, sellers usually agree to provide evidence of their fulfilment of conditions and of their capacity and authority to complete the transaction.
It is also common to stipulate the obligation of the seller to refrain from conducting any major changes within the company from the date of entering into a transaction. Sellers usually also provide relevant warranties regarding this obligation.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
In most cases, parties specifically agree on the conditions and consequences of non-fulfilment of such conditions. It is usually agreed that each party will use its best efforts to ensure that the conditions are fulfilled as soon as reasonably practicable. Parties most often resort to stipulating general and specific deadlines regarding the schedule, time and manner in which the parties will perform their respective obligations. It is also common for parties to undertake to cooperate with and provide reasonable assistance to each other in fulfilment of the stipulated conditions.
Apart from mandatory conditions that affect the validity of transactions regardless of the will of the parties (eg, the submission of mandatory notifications or the acquiring of approvals of competent government authorities), the parties are free to subsequently agree to waive certain conditions in order to close a transaction.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Sellers normally undertake to refrain from certain actions, or to take certain measures to maintain the ordinary business operations or to alleviate risks deriving from their previous business activities. Such covenants of a seller typically include:
- to refrain from reducing the share capital or payment of distributions to its shareholders;
- to refrain from encumbering or disposing of the company’s assets;
- to refrain from waiving any claims or initiating litigation or arbitration proceedings;
- to refrain from acquiring shares or participation interests in another company;
- to conduct its business activities in accordance with the law;
- to provide access to the target company’s business documentation and to notify the buyer of its actions regarding the fulfilment of the conditions;
- to take necessary measures to remedy any irregularities in its corporate structure or business operations; and
- to obtain necessary approvals and permissions.
A seller may also undertake to resolve any employment issues, and to refrain from entering into non-mandatory long-term employment arrangements without the buyer’s consent. In addition, parties tend to arrange the sequence and terms of their mutual and individual actions in regards to the effects that the transaction shall have on employment relationships of the seller. Further, it is not uncommon for an agreement to contain a confidentiality clause, barring the parties from disclosing certain information or announcing the transaction details prior to closing.
Unjustified non-fulfilment of conditions by one party authorises the other party to demand indemnity for costs and damage incurred. The other party can also terminate an agreement if fulfilment of such conditions is deemed as a crucial element of the agreement or if such option is stipulated in the agreement.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Apart from the termination conditions contained in each agreement, parties may terminate a transaction after the signing by their mutual subsequent agreement. Further, each party is typically allowed to terminate an agreement if the fulfilment of stipulated obligations is no longer possible due to reasons for which neither party is responsible.
Also, a party may terminate an agreement after it has been signed and request indemnity of damages incurred, if it is evident that the other party will not fulfil its obligation from the agreement.
Moreover, a party may request termination of an agreement if certain circumstances occur after the signing that greatly impede the fulfilment of the obligations of that party, providing that said party was unable to take into account such circumstances prior to the conclusion of the agreement, or that it could not prevent or avoid their occurrence.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Pursuant to the Law on Contracts and Torts, the negotiations preceding the signing of a contract are not binding, and each party may terminate them at any point. Nonetheless, if a party took part in negotiations without the intention to conclude an agreement, it shall be liable for damage incurred by the other party resulting from conducting the negotiations. Additionally, a party that negotiates with the intention to conclude an agreement but abandons such negotiations without reasonable grounds will be liable for damages.
The creditor and the debtor may agree on the contractual penalty, meaning that the debtor is obliged to pay a certain sum to the creditor or to provide a certain other material benefit should it fail to fulfil or is late with performance of its obligation. The most notable limitation regarding contractual penalty is that it can be agreed upon solely for non-pecuniary obligations. The penalty amount should be reasonable and it is usually agreed that, apart from the costs incurred during the negotiations, it will also cover the costs of legal and financial due diligence and the cost of legal fees.
Also, it is possible for the parties to stipulate one-sided repudiation of an agreement, as a contractually agreed authority of either both individual party or one of the parties, by paying a rescission fee. The rescission fee must be paid simultaneously with the parties’ statement on repudiation.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
It is common for a seller to provide warranties and, if stipulated, indemnities for potential losses and damage deriving from the period prior to the completion of a transaction. However, representations are not typically given.
Warranties given by the seller usually refer to:
- the capacity and authority of the seller to enter into and execute the sale and purchase agreement;
- the seller’s ownership of the stakes in the subject company;
- the authenticity of the company’s financial statements;
- the legal compliance of the company’s business operations, including possession of all necessary permits and approvals, and employment contracts;
- the company’s solvency;
- the possession and validity of any necessary insurance policies;
- the validity of effective material agreements regarding the business activities and employment;
- compliance with the tax regulations and the regular submission of tax returns; and
- valid ownership over assets.
Inaccurate warranty may lead to a buyer’s claim for damages for breach of contract, a reduction of the sale price or termination of the contract if such breach of warranties is stipulated as a reason for termination.
Indemnity is usually agreed upon in cases of pending litigation or arbitration proceedings, third-party claims, or administrative proceedings arising from reasons that occurred prior to the completion of the transaction and that exceed the agreed amount. The seller usually undertakes to compensate all losses incurred by the buyer in this respect, including costs and legal fees. If the seller fulfils its obligation for indemnification, the buyer does not have the right to terminate the agreement or request compensation for damage.
In the case of misrepresentation, the buyer has the right of terminating the agreement or requesting compensation for damage, or both. This right of the buyer is prescribed by the Law on Contracts and Torts, and cannot be waived in advance. Therefore, it is not typically included in a sale and purchase agreement.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
The most common methods of limiting a seller’s liability under a sale and purchase agreement include:
- stipulating a maximum limit of aggregate amounts of claims above which the seller shall not be liable;
- stipulating a minimum limit of an aggregate or an individual amount of claims that must be exceeded to trigger the seller’s liability;
- stipulating a time period during which the seller is liable for losses;
- excluding the seller’s liability for circumstances disclosed in a disclosure letter or data room;
- excluding the seller’s liability for actions or omissions of the buyer, most commonly the failure of the buyer to file a notice of claims within a stipulated period of time;
- prohibition of double recovery; and
- stipulating the buyer’s exhaustion of other legal means for remedying damages.
A limitation of the seller’s liabilities arising from tax obligations, regulatory compliance and possession of mandatory permissions and approvals is usually not stipulated.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Insurance is usually provided regarding indemnities and warranties, and in most cases covers potential losses or damage arising from pending litigation or arbitration proceedings, unresolved third-party claims or claims of government authorities. The insurance covers solely those claims of a buyer that could be successfully made against a seller. In that respect, a policy would not typically cover damages arising from reasons disclosed to the buyer through a disclosure letter or within a due diligence procedure conducted by a buyer.
Typically, an insurance policy provides a more secure means for a buyer to execute claims arising from a share purchase agreement, and usually contains a higher maximum liability cap than that granted by the seller. An insurance policy can be arranged by either the buyer or the seller, depending on the particular circumstances and negotiating position of the parties.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
In most cases the parties agree to continue to cooperate after the completion of the transaction. Such cooperation is usually concluded on a good faith basis and for a definite period of time. The transaction may also include transfer of certain intellectual property of the seller such as trademarks or licences that the buyer is entitled to use for a specific period of time. It is also common for the parties to agree on refraining from competing with each other, provided that such agreement is in line with the Law on Protection of Competition and approved as such by the Serbian Competition Protection Commission. Goodwill and clientele post-contractual fees, which persist as an obligation of the buyer, are not common in Serbian law.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Share transfers in Serbia are transfer tax-neutral. This is also the case for an acquisition of shares, business and assets of the target company through a status change. Other transfers of assets with compensation will be subject to transfer tax at a rate of 2.5 per cent. The transferring party is the taxpayer. The acquiring party is, by virtue of law, a subsidiary taxpayer. If the buyer agreed in the contract to pay the transfer tax, the buyer will be liable to the tax administration jointly with the transferring party.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
A capital gain that a company accomplished through a sale or other transfer with compensation of assets or equity interests is calculated into taxable income and subject to company income tax at a rate of 15 per cent. Natural persons selling their equity interests are also obliged to pay 15 per cent capital gains tax. Both companies and natural persons can compensate their capital gains with potential capital losses. Sales and purchases of shares are usually not subject to value added tax (VAT). The transfer of the entire assets or a part of the assets, with or without compensation, will not be VAT-taxable if the acquiring party is a VAT taxpayer and continues to carry out the same business activity (transfer of a going concern).
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
In the case of an acquisition of shares under a change of status, or a change of employer due to an acquisition of its business, employees of the target company are taken over by the acquiring party under their existing employment contracts. Employees must be informed of the transfer and given a five-working-day period within which to decide whether they accept the transfer. Employment contracts of employees who refuse to be taken over or fail to reply within the given time frame can be terminated. Acquiring assets from a target company usually does not result in the transfer of its employees.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Private acquisitions or public offers for shares in a target company do not generally affect the terms of the employment contracts of the employees of the target company. The employees remain employed by the target company under the same conditions. However, senior executives may have a contractual right to, for example, resign or be paid an agreed sum if a change of control occurs.
Pursuant to the Labour Law, a company’s internal collective agreement must apply for at least one year from the moment the transaction takes place, except if the term for which it was concluded expires within a shorter time period or if a new collective agreement is concluded.
Both the new and the previous employer must inform union representatives, or employees directly if there is no union, at least 15 days prior to the transaction about the issues relevant regarding the status of the employees.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
As the employment status of employees is not changed in the case of a share purchase transaction, the pensions and other benefits are automatically transferred and no particular filings or consents are required. The Labour Law prescribes that a change of ownership of the capital of a company is not regarded as a change of employer in terms of the Labour Law.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
In the past year Serbia made several law amendments in order to accelerate and simplify the procedure in front of public authorities. Some of these amendments are related to the possibility of filing an electronic registration of entrepreneur, electronic registration of changes on immovable and electronic VAT submission. As from October 2018, it is expected that the SBRA will gradually introduce electronic registration of other forms of companies starting with single shareholder LLCs. Serbia is also introducing widespread use of electronic documents and electronic signatures making processes more efficient. As from January 2019, the Law on Financial Collateral will become applicable and will enable the use of special collaterals by participants in the financial market in line with the EU Directive on Financial Collateral Arrangements 2002/47/EC.
As of January 2022, Serbia will introduce new company types - societas Europea, European joint stock company and European economic interest grouping - and that will enable cross-border mergers of Serbian and the EU companies.
During the past 12 months, the Serbian M&A market has vastly expanded. This is mainly due to significant numbers of M&As in the banking sector - both when acquisition of banks and non-performing loans are in question. In addition, Serbia is yet to finish a privatisation process. Last year, Serbia sold its largest pharmaceutical company - Galenika - through privatisation. In March 2018, Serbia signed concession agreements for concession of Belgrade Nikola Tesla Airport with French company Vinci Airports. There are still around 100 companies whose privatisation is yet to come. Currently, the largest Serbian copper mine, RTB Bor Group, is going through a status change. After the status change is complete (which is expected at the end of the year), four companies will merge into one. Serbia is currently in search for its strategic partner who will invest additional funds in its largest copper mine.