M&A Report 2023: Slovenia
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M&A Report 2023: Slovenia

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Jadek & Pensa
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Ožbej Merc, Nastja Merlak and Ana Bokalič, Jadek & Pensa

Despite the significant drop of M&A deals in 2022 compared to the record number of deals in 2021, the M&A market was still very active in 2022. Positive trends are expected to continue in 2023. However, there are also several predictions for a much more subdued level of M&A activity in 2023, mainly due to the increase of interest rates. In the light of this, investments are mostly expected as a measure against inflation. 

On the legal side, the foreign direct investment (FDI) screening regulation, adopted in 2020 as part of Slovenia’s COVID legislation, requires mandatory filings to be made by foreign investors. The FDI legislation is interpreted quite broadly by the authorities and as a result catches many more deals than would normally be expected (for example EU investments, including domestic Slovenian). Nevertheless, pursuant to publicly available information, no foreign investment has been refused yet. As the FDI screening legislation expires in June 2023, the legislator is planning to regulate the FDI screening regime in a separate law. 

The Slovenian market is strongly driven by private M&A transactions. Large public transactions have been scarce in the post-privatisation era, as the focus has shifted to the consolidation and reorganisation of the previously acquired businesses. Notable recent privatisations include the sale by the Slovenian Sovereign Holding of Abanka Bank to Apollo and a consequent merger with Nova KBM Bank (which recently closed in 2023), and the sale of the investment in BIA Separations to Sartorius. Additionally, the establishment of a joint venture of Slovenske železnice and Czech EP Logistic International was closed in January 2022.

In 2022, following the purchase of 43.3% share in Sava holding by the Slovenian Sovereign Holding, the State now holds an 89.96% share. The Slovenian Bank Asset Management Company acquired almost 84% of shares in Mladinska knjiga by a way of takeover. Slovenske železnice further acquired a 50% share in transportation company Nomago after almost two years, whereby they intend to purchase the remaining shares in two years.

Deal highlights

Significant trends in the market include exits by domestic entrepreneurs from their companies that were established in the late 1990/early 2000s and have now reached the maturity stage, as well as cross-border joint ventures in various industries. Slovenia has seen significant banking and investment sector consolidation in the last couple of years. In 2021, Hungarian OTP Bank, which already owns SKB banka, acquired Nova KBM (combining formerly separated Nova KBM and Abanka); the deal received merger clearance on 1 February 2023. Furthermore, we have seen a takeover of the Slovenian Sberbank branch by NLB as the consequence of Ukraine war-related sanctions implemented by the EU and US. The takeover took place over the course of a weekend (including regulatory approval from the Bank of Slovenia and the Competition Protection Agency), following a run on Sberbank by retail clients concerned with sanctions imposed on it by the EU and US.

Pipistrel, a lightweight aircraft manufacturer, was sold to Textron Aviation, and Gonvarri, a Spanish automotive supplier, has entered Hidria, the leading Slovenian provider of customised innovative solutions for selected automotive and industrial applications. 

Alfi skladi acquired Merkur, the Slovenian leading retailer of home, garden and workshop furnishings, Sportina, the clothing store chain (which Alfi acquired jointly with NLB and other creditors of Sportina), as well as several veterinary hospitals. Moreover, Alfi skladi took over the management of the Generali GEF fund at the end of 2022, which, inter alia, acquired the largest dental center in Slovenia. 

Slovenia is particularly strong in the IT and technology sector where M&A activity has been strong in the past and has continued to be in 2022 (we also expect this to continue in 2023). One of the more notable transactions included the acquisition of Vasco, a software development company for accounting and commerce, by SAOP group. Slovenia seems to be a very successful exporter of knowledge in the IT sector, and we expect the M&A activity to strengthen in 2023. 

COVID

As mentioned above, in 2021 Slovenia joined the global trend of the booming M&A market, particularly in comparison to 2020 when most transactions were either stopped or put on hold. Takeover activity was extremely dynamic both in 2021 and 2022, even compared to the financial crisis about a decade ago.

Nevertheless, COVID continues to have an impact on the M&A landscape, the most significant being the response and adaptation of the parties to the possible long-term effects of the pandemic. It has become customary to include in M&A transactions appropriate limitation language considering the effects of COVID as well as carefully review the receipt of any COVID-related state aid in the due diligence process. It is also important to consider profit distributions and management bonuses, which are restricted in certain cases and can trigger refund obligations for all COVID-related state aid. FDI clearance approval has also become a regular condition precedent set out in cross-border M&A transaction.

All indications point to another dynamic year in the M&A market and economic optimism remains relatively high. Several transactions have already been announced or are already ongoing in various sectors. According to the Bank of Slovenia, Slovenian companies with FDI tend to have higher capital returns, higher wages and value added per employee. This will likely stimulate the M&A market activities in the future.

While several major transactions in recent years have involved institutional investors – mostly private equity (PE) funds – investing in Slovenian companies, investments by strategic investors have recently regained significant traction. Corporate restructuring and reorganisations do not yet seem to be at the forefront of deal generating, but it is expected to once the full effects of the pandemic, energy crisis and high inflation materialise. In other developments, the minimum wage has also been increased, and this is expected to have a material impact on several labour-intensive industries. M&A disputes are not common in Slovenia and COVID implications have not been witnessed in respect of M&A, although there have been COVID disputes generally (particularly with respect to the payment of rent for business premises).

Due to COVID uncertainty, the inclusion of contractual clauses considering the effects of COVID on deals has become quite common. ESG-related topics have mostly had impact on the scope of due diligence and representations and warranties, which has come to be expected, particularly from foreign investors. Due to the sanctions against Russia, representations and provisions related to sanctions lists and regimes have become more frequent.

Financial investors have been, and continue to be, acting in the market as deal originators. They are primarily looking for undervalued local businesses with significant growth potential, with a particular focus in the IT sector. Slovenia has a strong entrepreneurial base, and many local companies are targeted by financial investors looking to acquire them and exit after consolidation with other players in global markets. In 2022, there have been many family businesses that have grown beyond the family and have been sold to strategic investors. 

Legislation

M&A transactions are governed by several regulations, depending on the deal structure and other criteria. Most share deals in Slovenia involve either limited liability companies (družbe z omejeno odgovornostjo) or joint-stock companies (delniške družbe), both of which are regulated by the Companies Act (Zakon o gospodarskih družbah, ZGD-1). The Companies Act also regulates mergers, demergers, and spin-offs of these companies.

Pursuant to the Companies Act, sale and purchase agreements for shares in limited liability companies are entered in the form of a notarial deed. The non-selling shareholders have the right of first refusal in such transactions (which may be waived). Additionally, the articles of association of each company may prescribe that a permission by the majority or all the shareholders is required for the transfer, which may hinder some transactions. The transfer of shares in limited liability companies are registered with the court register upon the transaction.

The sale and purchase agreements for stocks in joint-stock companies do not need to be entered in the form of a notarial deed. No statutory right of first refusal of the non-selling shareholders applies to joint-stock companies, but the charters of the companies may stipulate that permission by the company (e.g. its management or supervisory bodies) is a prerequisite for the transfer of shares. The legally permitted grounds for refusing to issue the permission are significantly more limited for public than for private joint-stock companies, and different consequences apply to these companies if no permission had been obtained before the transfer.

Asset deals are regulated in the Companies Act and Obligations Code (Obligacijski zakonik, OZ). While the sale of assets is typically agreed in a single master agreement, additional transactions need to be performed for the transfer of individual types of assets. A significant provision with regard to asset deals is Article 433 of the Obligations Code, which stipulates that a person to whom a property unit (in full or in part) passes under the agreement (e.g. buyer) shall be liable, in addition to, and jointly and severally with, the previous holder (e.g. seller) for any debts relating to that property up to the value of that property unit’s assets. Such liability of the buyer, while limited, may be a deterrent for investors wishing to pursue an asset deal.

Takeovers of public and certain private joint-stock companies are regulated in the Takeovers Act (Zakon o prevzemih, ZPre-1), which prescribes rules for both mandatory and non-mandatory takeovers. The applicable threshold triggering a mandatory takeover bid of the shares of the target company by an individual shareholder or shareholders acting in concert is one-third of voting rights in that company. The shareholders under the obligation to submit a mandatory takeover who fail to do so will have their voting rights suspended and may not vote at the general meeting of the company until they submit a successful bid. Compliance with the Takeovers Act is monitored, and breaches are sanctioned by the Securities Market Agency (Agencija za trg vrednostnih papirjev). It is important to note that in Slovenia, takeover legislation applies to any joint-stock company that has either over 250 shareholders or over €4 million (approximately $4.8 million) of total equity, which is a relatively low bar.

M&A transactions exceeding certain thresholds are also subject to clearance by the Competition Agency (Agencija za varstvo konkurence) pursuant to the Prevention of Restriction of Competition Act (Zakon o preprečevanju omejevanja konkurence, ZPOmK-2) or the European Commission. Transactions must be reported to the Competition Agency if (cumulatively) the combined Slovenian turnover of the parties to the transaction (with affiliates) exceeds €35 million and the annual turnover of the acquired company (with affiliates, excluding the seller and its affiliates) on the Slovenian market exceeded €1 million in the previous financial year. Additionally, the Competition Agency may also request the transaction to be reported if the parties (with affiliates) hold a combined market share of over 60% in Slovenia.

Since May 31 2020, most M&A transactions are also subject to an FDI screening procedure by the Ministry of Economic Development and Technology (Ministrstvo za gospodarski razvoj in tehnologijo). While the screening was introduced as part of COVID-related legislation, its application is significantly broader. It is set to expire in 2023, but the Slovenian legislator intends to permanently include the screening mechanism in the existing Investment Promotion Act (Zakon o spodbujanju investicij)). A draft of the Act amending and supplementing the Investment Promotion Act has just been introduced in February 2023. The proposed screening regulation is nearly identical to the current regime, save for certain more significant changes, including:

  • A new, preliminary examination procedure shall be introduced, based on which the ministry establishes whether the transaction is notifiable and shall be subject to further examination;

  • The ministry shall, when assessing the potential effect of transactions to the public order and security, consider certain additional factors, mostly related to the market share and the shareholding acquired by the transaction; and

  • The ministry shall have the right to set certain conditions under which the transaction is permitted (prohibit the sale of copyright and related rights or of certain assets, prohibit business cooperation with certain entities, obligation to reduce the shareholding to be acquired in the target, etc.).

Nevertheless, this is still a preliminary draft subject to comments until the end of March 2023, thus, further changes are possible and also very likely.

FDI filings are required for all foreign investments into critical infrastructure that could affect security or public order, or with acquisitions of 10% of the share capital or voting rights of the Slovenian target company. As the ministry has taken a significantly broader interpretation of investments falling under the screening regime, it has become customary for foreign investors to lodge the filings out of prudence in most cross-border transactions, regardless of the industry or transaction structure (and even when an indirect holding in the Slovenian company is obtained in the transaction). The transacting parties should also consider that the ministry has the power to terminate the transaction and declare it void for five years after the transaction (i.e. retroactively), which is a risk that cannot be fully mitigated by the parties. Notwithstanding this, pursuant to publicly available information, no transaction has been terminated or declared void since the adoption of the screening regime.

Market misconceptions

Foreign investors entering the Slovenian market are sometimes surprised by the lack of precedents and established case law on M&A. This is primarily due to the customary market practice of clients entering into arbitration agreements instead of court litigation, and to settle disputes in private rather than in public.

Further, as transfers of shares in limited liability companies (the predominant form in Slovenia) need to be logged with the court register upon the transaction, this often requires complex closing mechanics. These need to be appropriately drafted in the deal documentation and includes certain risks that have to be taken into account.

Pursuant to Slovenian legislation, all the deal documentation, as well as information on the ultimate beneficial owners of the company, is in principle publicly available. As the parties are generally hesitant to publicly disclose all the information, they ordinarily submit separate short-form documents to the court register that only contain a limited set of relevant information.

Contrary to the mandatory takeover regimes in larger economies, the rules in the Takeover Act do not only apply to public joint-stock companies, but also to joint-stock companies that are not listed if they have at least 250 shareholders or over €4 million of total equity. The mandatory takeover bid rules therefore apply to most potential targets in Slovenia that take the form of a joint-stock company.

Another aspect of legislation that can go overlooked, but may have significant consequences (fines in the minimum amount of €80,000 and potential loss of voting rights), is adequate wet ink reporting of acquired voting rights thresholds and option and futures agreements (both to the market regulator and target companies).

Another frequently overlooked aspect is that the Slovenian workers’ co-determination legislation requires the parties of certain transactions (such as business transfers via asset deals or demergers) to notify the target workers’ representatives of the anticipated transaction at least 30 days before the deal decision was taken. This includes performing consultations with them, not before an agreement is closed, but before the decision is made to enter into the transaction. A relic of a transitional era as Slovenia moved into a market economy and private ownership in the 1990s, this statute is often at odds with modern conceptions of corporate decision-making and deal progress. As it is not always entirely clear at what time the decision for the transaction was ‘adopted’, it is advisable that parties are sufficiently cautious and make a timely notification.

Parties often underestimate the importance of adequate tax structuring advice at an early stage of an M&A transaction, which can have major implications on the yield by the selling shareholders. For example, income related to the disposal of companies can be taxed between 0% and 27%, sometimes also as employment income which is taxed at effective rates exceeding 50%. Failure to consider tax matters at an early stage can materially impact the economics of the deal and can have major consequences for all parties involved. 

Furthermore, some selling dilemmas of natural persons have been resolved by recent case law, stating that, in principle, that taxation of the disposal of capital is not affected by certain agreements concluded under a condition precedent, provided that such condition was agreed between the parties and is not explicitly determined by law. Thus, as a rule, the capital is deemed to be disposed of already at signing and not at closing. Nevertheless, these matters shall be interpreted on a case-by-case basis. 

Moreover, in light of tax legislation change effective since 2022, reducing the tax rate of capital gain tax from 27.5% to 25% and applying the 0% tax rate for those owning the capital for more than 15 years (instead of 20 years), tax related questions are still a hot topic in the M&A market. 

Technology

Advisory companies in Slovenia, including law firms, have increasingly been relying on technology for assistance in M&A deals. This particularly applies to due diligence where AI and other tools are being used in the document review process, which helps in simplifying the process and reducing costs. Jadek & Pensa, for example, deploys AI for due diligence processes, and has developed in-house code to parse and process Slovenian real estate land registry excerpts. This significantly reduces the time and effort needed to analyse significant volumes of land registry data (which is the norm in Slovenia).

Public M&A

Public M&A is not widespread in Slovenia and most changes of control occur in the private market. In the public market, the key factor for a successful acquisition is the economic conditions of the offer, especially the purchase price and securing broad enough support for the deal. Pursuant to the Takeovers Act, the price in the takeover bid may not be lower than the maximum price at which the acquirer acquired the shares of the target company in the last 12 months prior to the publication of the bid. Generally, the shareholders in competitive/hostile takeovers expect an above market price from the acquirer and are less willing to sell than in a friendly takeover.

Even where a takeover is mandated for a target company, typically block deals will be concluded in the lead-in to the mandatory takeover and amicable takeovers are the norm. This is because typically there will be takeover protections put in place that will have to be removed in a consensual manner before a takeover can proceed. If a takeover is mandatory and unsuccessful, loss of voting rights would ensue, making the investment effectively dead in the water. Care must be taken to avoid such consequences.

A takeover bid may only include the conditions stipulated in the Takeovers Act, which mainly relate to mandatory clearance requirements or the threshold for the bid to be successful. In mandatory takeovers, the Takeovers Act requires that the bidder conditions its bid on reaching a threshold of more than 50% of all voting shares. The voting rights from the shares of the bidder who is under the obligation to make the mandatory bid shall be suspended until a successful bid reaching that threshold is made.

Private M&A

As private M&A transactions are the norm in Slovenia, they are also most often subject to discussions on the legal instruments to be incorporated into the deals.

The choice of consideration mechanisms in private M&A transactions depends heavily on the sophistication and size of the transaction. The agreements on completion accounts impose significant administrative and accounting/discrepancy resolution burdens on the parties and are thus more common in large and complex deals and particularly PE transactions. While a locked box mechanism is easier to execute and more often used in smaller transactions, such a mechanism has also been used in major cross-border transactions, more commonly with strategic investors.

Warranty and indemnity insurance is sometimes considered by the parties but is typically not agreed on. It is generally considered as expensive and excessively limited in the risks covered by the fine print. Earn outs are more often used by PE funds than strategic and other investors, and do not often end up in the deal documentation. This is because the sellers are usually unwilling to accept the uncertainty of economic performance of the company under the management of the new owner. Agreements on escrow mechanisms are common in transactions with a small number of sellers and are ordinarily executed by public notaries and not banks. Arrangements whereby the sellers must continue with the firm following the sale are also increasingly common, especially in the IT sector.

It is not common practice to provide for a foreign governing law and/or jurisdiction in private M&A share purchase agreements. Using foreign governing law is much less common where shares in a Slovenian company are directly acquired; however, even in such case, many foreign investors opt for arbitration for resolving any disputes arising out of the transaction.

Looking ahead

A majority of exits in Slovenia happen through a sale of the company to a PE fund or a strategic partner. IPOs and other capital market transactions are less common. The last major IPO in Slovenia was of NLB, the largest Slovenian bank, in 2018.

As discussed, there are inter alia, also predictions for M&A activity to drop in 2023 due to the increase of interest rates. However, companies with cash on hand and well-prepared business strategies will be able to pull off bold transactional moves during such uncertain times and will have the upper hand in the M&A market.

Moreover, certain industries, such as technology, media and telecommunications, industrial manufacturing and automotive, financial services, energy and health may create several new opportunities in 2023 as part of technology development. It is also expected that PE funds that entered the Slovenian market in the mid-2010s will continue to consolidate their investments and gradually get ready to exit.

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