Serbia: Paving a path to the West

Author: | Published: 1 Apr 2012
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

The Legal framework for M&A transactions in Serbia is quite complex and a number of different laws and regulations have to be considered and observed in this area, for example with regard to companies, takeover bid regulations, the protection of competition, capital markets, and so on.

In particular, in the process of accession to the European Union over the last several years Serbia has made significant efforts in harmonisation of its laws with that of the acquis communautaire. As a result of this, a large number of new laws are being enacted, which on the one hand modernises Serbian legal system, but on the other hand inevitably causes an initial decrease in legal certainty due to a lack of consistent judiciary practice under the newly-adopted laws and regulations.

Foreign investments

The protection of foreign investments is mainly regulated by the Law on Foreign Investment (LFI), which in principle permits foreign direct investment in any commercial field, save for certain fields where the possibilities for foreign investments are to varying degrees restricted. The basic forms of foreign investments are the establishment of a company in Serbia, and the acquisition of the shares of an existing company in Serbia. In addition, foreign investors may also obtain concessions for certain activities, or enter into BOT (build, operate, transfer) arrangements for the construction and operation of certain properties or facilities.

The LFI confers various rights upon foreign investors. One of the most significant is the right to customs exemptions according to which the import of equipment on the basis of foreign investor's contribution (apart from cars and gaming machines) is in principle free from customs and other import duties. Disputes relating to foreign investment may be resolved by domestic courts in Serbia, or by way of domestic or international arbitration.

It is noteworthy that Serbia has executed (or inherited from the former Yugoslavia) many bilateral investment treaties with other countries conferring additional rights and/or guarantees to the investors from those countries, including often the right of foreign investors to bring any potential investment dispute before Icsid arbitration.

Key laws and regulations

The main piece of legislation governing M&A transactions in Serbia is the Company Law (applicable as of February 1 2012). Additionally, some other important regulations with regard to M&A transactions are the Law on Capital Markets, the Takeover Law, the Law on Contracts and Torts, the Law on Privatization, the Law on Bankruptcy and the Law on the Protection of Competition.

When structuring and implementing M&A transactions it is usually necessary also to consider the rules and regulations rendered by the Securities Exchange Commission, the Central Securities Register and the Belgrade Stock Exchange.

There are certain sectors which are subject to specific legal regimes and where realisation of the transactions might be subject to additional specific requirements. These specificities are particularly present in the financial sector, in the sector of activities of public interest and in the event of privatisation procedures.

For example, the acquiring of the direct and indirect ownership in a bank, which carries 5% to 20%, over 20% to 33%, over 33% to 50% and over 50% of the voting rights, requires the prior approval of the National Bank of Serbia (NBS). The obtaining of this approval is subject to substantial disclosures of the acquirer and the fulfilment of various other requirements. The acquisition of shares without the consent of the NBS (when required) may result in the forced alienation of such ownership, the acquirer being prohibited from exercising their voting rights or even the possibility of the annulment of the legal transaction.

Likewise, for the acquiring of the qualified shareholding (10%, 20%, 33%, 50% and above 66%) in an insurance company, an acquirer is obliged to obtain the prior consent of the NBS under the threat of the suspension of voting rights based on the shares acquired should the required consent not be obtained.

The carrying out of business activities of public interest is governed by the specific legal regime set out under the Law on Public Companies and the Performance of Activities of Public Interest. Activities of public interest are defined as activities which are determined under the law in the areas of the production, transport and the distribution of electricity; the production, transport and distribution of coal, telecommunications, and so on. A precondition for performing these kinds of business activities is the execution of an agreement for the performance of the public interest activities with the Serbian government. In addition, entities carrying out public interest activities may be subject to the government's approval for various corporate decisions (the change of the articles of association, for example).

The subject matter of a privatisation is the sale of state (or socially)-owned capital in companies and other legal entities, as well as the sale of the assets of companies/entities that are the subject of a privatisation. In principle, the Privatization Law anticipates two basic methods of privatisation: a public tender procedure and a public auction procedure. However, on some occasions the Serbian Government tends to utilise case-specific ad hoc privatisation procedures, which do not fully correspond to any of the regulated methods of privatisation. Also, in some instances the government tries to carry out privatisations through the formation of a joint venture with a strategic partner. As these kind of privatisation procedures are not regulated, their legality may be dubious and therefore the additional scrutiny and caution of the prospective investors is always well-advised in these kind of situations.

Share purchase agreements

The institutes of representations and warranties (R&Ws) in share purchase agreements are regularly used in business practice, although they are not explicitly regulated in Serbian law. As a result, it may often happen that lawyers and business persons from other jurisdictions may be misled by the use of these notions into believing that they have an implied meaning under Serbian law which is the same or similar to that under the laws of England and Wales. Due to a lack of the relevant case law, it is not clear what meaning (implied-in-law) and effect Serbian courts would recognise when it comes to the standard of R&Ws and the disclosures made against them.

The same would apply also with regard to the notions of the disclosure letter, fair disclosure, or remedies in the case of the breach of the representations of warranties. Consequently, until relevant case law is developed, it is advisable that the parties regulate in detail when drafting the share purchase agreement document, the meaning and effect that they wish to give to the R&Ws, disclosures and remedies in the case of a breach of the R&Ws.

The concept of an indemnity is also not regulated under Serbian law and accordingly comments made with regard to the R&W's apply, as appropriate, with regard to an indemnity. Seemingly, the fact that the concept of an indemnity is not explicitly anticipated under the Serbian law should not prevent the parties from using this notion by relying on the party autonomy rule. As with the R&W's, until relevant case law is developed, however, it is advisable that the parties regulate in detail in the share purchase agreement the meaning and effect that they wish to give to the indemnities in their agreement.

Share options (such as put and call options), as well as tag-/drag-along provisions are often used in business practice. They are not explicitly regulated under the Serbian laws, however, and there is no consistent court practice with regard to their enforcement. Oftentimes enforcement of these provisions will be very difficult, unless they provide in detail the mechanics for their enforcement which would enable their beneficiaries to effectively rely on them.

Specificities in asset deals

Under Serbian law, the transferee of assets is jointly and severally liable with the transferor for all debts related to the assets (up to the net value of the transferred assets). Any contractual provision seeking to limit or exclude such liability would be ineffective towards the creditors, but the parties may agree on indemnification in case the transferee of the assets would be liable for any debts related to the assets. Furthermore, creditors of receivables related to such transferred assets would be entitled to require the settlement of their claims not only from the acquired property but also from the entire property of the transferee. In practice, this risk is usually mitigated by establishing the special purpose subsidiary of the purchaser, which then acquires the assets.

Serbian Labour Law contains certain provisions on the change-of-employer situation, which apply in case of statutory changes (mergers, divisions or spin-offs) and acquisition of company's capital. However, since Serbia has not yet fully implemented the EU Acquired Rights Directive, the transfer of a business or undertaking (or a part thereof) in Serbia does not lead to the automatic transfer of the employees. Therefore the acquisition of assets in Serbia should always be followed with the appropriate mechanism for the taking over of the employees, in cases when the acquirer of the assets wishes to take over (some of) the employees who work at jobs related to the transferred assets.

Concentration approvals

The completion of an acquisition in Serbia may require the obtaining of a merger clearance as a prerequisite for completion of the transaction. The market concentration must be notified to the Competition Commission when:

(i) the total annual turnover of all the parties to the concentration realized worldwide in the previous accounting year exceeds €100 million ($132 million), whereby at least one of the parties to the concentration has an annual turnover exceeding €10 million on the market of the Republic of Serbia; or

(ii) the total annual turnover of at least two parties to the concentration realized on the market of the Republic of Serbia exceeds the amount of €20 million in the previous accounting year, whereby at least two parties to the concentration each have a turnover exceeding €1 million on the market of the Republic of Serbia in the same period.

If these conditions are met, the market concentration must be reported to the Competition Commission in order to obtain the merger approval. Breach of this obligation may, among other things, result in fines of up to 10% of the total annual turnover in the previous fiscal year.

Takeover bids

According to the Takeover Law, a mandatory takeover bid has to be launched:

(i) when a person directly or indirectly, alone or acting in concert with other parties, acquires the voting shares of a target company so that combined with the shares it (or its concert parties) already holds, it controls more than 25% of the total number of voting shares of a target company;

(ii) when a person has acquired less than 75% of the total number of voting shares through a takeover bid, and it acquires any additional shares in the target company; and

(iii) when a person has acquired 75% or more voting shares through a takeover bid in the case that it acquires at least an additional 5% of the voting shares, or at least 3% of the voting shares in the course of 18 consecutive months.

Takeover bids may not be discriminatory and it is explicitly forbidden to launch takeover bids which are not open to all of the shareholders of a target company.

Voluntary takeover bids are possible, under the terms prescribed under the law.

The Takeover Law regulates in detail the terms and procedure for the takeover bids and there is an extensive practice of the competent authorities in this area, which makes takeover procedures quite certain and foreseeable.

Dr Slobodan Doklestic
  Dr Slobodan Doklestic is a partner of Karanovic & Nikolic, and a head of its corporate M&A team. He has practised in all areas of corporate, commercial law and property law in Serbia, Macedonia, Bosnia and Herzegovina, and Montenegro. His work has included privatisations, multinational acquisitions, takeover procedures, various M&A transactions, and complex energy projects. In addition, Doklestic has extensive experience in employment law.

Karanovic & Nikolic
Resavska 23
11 000 Belgrade, Serbia
T: +381 (11) 3094 200
F: +381 (11) 3094 223

Sanja Panjkovic
  Sanja Panjkovic is a member of the corporate department at Karanovic & Nikolic, and advises on all aspects of corporate and commercial law. She has experience in M&A transactions in Serbia, Macedonia, Bosnia and Herzegovina, and Montenegro. In particular, she focuses on the areas of restructuring, privatisation, and commercial transactions. Panjkovic holds an MSc with Distinction in Law and Finance and an LLM in International Commercial Law.

Karanovic & Nikolic
Resavska 23
11 000 Belgrade, Serbia
T: +381 (11) 3094 200
F: +381 (11) 3094 223