28 Sep 2017

Cross Border M&As to Be Explicitly Regulated – Looking Towards the Amendments to the Companies Act

The public debate on the Draft of Amendments of the Companies Act, suggested and prepared by the Ministry of Economy in April, will take place in Belgrade on 4th October 2017. As part of the drafting procedure, the Ministry tried to identify and address business sector`s concerns regarding the Companies Act and identify areas where amendments to current regulatory framework might be needed.  In order to facilitate the above-mentioned, the working group also included representatives of the Chamber of Commerce and Industry of Serbia, with more than 60% of the comments submitted by the companies to the Ministry, being adopted. President of the Chamber of Commerce, Mr. Marko Čadež, highlighted the importance of this cooperation, confirming that the Government, the Chamber of Commerce and representatives of the private sector are intensely discussing issues of importance.

As explained by the Chamber of Commerce, the main goals of the amendments are to remove obstacles in implementing certain provisions of the current Companies Act, to enable faster and more efficient running of businesses, as well as to harmonize domestic law with the EU acquis. Namely, adoption of the proposed amendments would contribute to the harmonization of Serbian law regulating commercial entities with EU regulations; more precisely with: Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG) and Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005, which is in accordance with the Negotiating Position of the Republic of Serbia for the Chapter 6 “Company Law”, under which the Republic of Serbia committed to adopt the EU acquis regulation of commercial entities by end of 2017.

The draft amendments prescribe numerous changes, and in particular:

  • Introduce new forms of business formations (European company and European Economic Interest Grouping),
  • Improve minority shareholders` rights (by imposing new obligations for companies when entering transactions which entail personal interest of the shareholders that have a significant share in the company’s capital; by reducing the share percentage necessary for convening a session of the Shareholders` Assembly of L.L.C.s – from 20% to 10%; by increasing the percentage of shares necessary for squeeze-outs in joint-stock companies – from 90% to 95%, with the explicit rule that shares will be counted towards the percentage regardless of any burden, prohibition or restrictions of disposal and rights of third parties, etc. pertaining to such shares),
  • limitations regarding deadlines for the payment of dividends (no longer than 6 months from the day of issuing the payment decision),
  • more specific and detailed regulation of procedure for reduction of an L.L.C.`s share capital (given that the model of regulating the matter by reference to provisions regulating joint-stock companies proved inadequate in practice),
  • defining the term “related acquisition”,
  • more specific and detailed regulations regarding compulsory liquidation, an area which thus far created a number of practical issues, etc.

In addition to the aforementioned and numerous other amendments to the Companies Act proposed in the Draft, we would like to point out one other novelty which we consider to be of significance and deserving of a more detailed elaboration – Cross Border M&A. New articles 514a – 514m regulate Cross Border M&As among commercial entities established in the Republic of Serbia and commercial entities from EU member states or states signatory to the Agreement on the European Economic Area. These provisions shall start to apply from the date of Serbia`s accession to the EU.

Namely, Cross Border Acquisition is defined as an acquisition in which at least one commercial entity is registered in Serbia and at least one commercial entity from EU member states or states signatory to the Agreement on the European Economic Area take part.  A Cross Border Merger is defined in the same manner (merger among aforementioned subjects), while the Companies Act`s provisions regulating mergers and acquisitions shall apply, unless otherwise regulated under provisions on Cross Border M&A. Therefore, the essence of the new concept lies in the parties to the transaction – commercial entities, but from different states.

The very procedure of the Cross Border M&A is arranged in a similar way as with the “local” M&As.  Corporate bodies of companies participating in an M&A will prepare a joint draft merger/acquisition contract, which is, then published on the company’s website and submitted to the appropriate Business Register of the Serbian Business Registers Agency for publication, no later than one month before the date of the Shareholders` Assembly meeting at which the decision on merger/acquisition is scheduled to be adopted.

The new provisions also regulate the obligation for corporate bodies of companies registered in the Republic of Serbia to execute special reports (on the objectives, economic effects and legal consequences of the transaction), as well as to secure an auditor’s report on whether the proportions, according to which the exchange of shares is carried out, are fair and appropriate (auditor`s report will not be  necessary if all participants expressly agree so) for all the companies participating in the Cross Border merger/acquisition – which all shall be prepared no later than one month prior to the day of the Shareholders` Assembly meeting at which the merger/acquisition decision is adopted.

After examining the above-mentioned reports and reviewing the opinion of employees’ representatives on the M&A, Shareholders` Assemblies of the companies involved in the transaction will decide whether to adopt the joint draft contract (the draft becomes a contract if accepted by all participating companies).

Furthermore, it is expressly stated that Shareholders` Assembly of each participating company have the right to condition the merger/acquisition by reaching an urgent agreement on the employees` participation in decision-making in the acquirer company. It remains unclear what exactly is meant by participation of employees, especially having in mind that another provision prescribes that employees in companies participating in a Cross Border merger/acquisition have the right to participate in decision-making in accordance with the regulations governing the participation of employees in decision-making. It remains somewhat unclear to which regulations the Act refers to (other than bylaws of participating companies) as well as the type and extent of such decision-making.

New statutory provisions also stipulate that, in case a Serbian company that will merge and cease to exist, while other participating companies have registered headquarters in EU member states (in which the possibility of conducting court proceedings contesting the proportion of share exchange, or court proceedings related to the exercise of special rights of shareholders that do not prevent the registration of the acquisition), the merger/acquisition shall be allowed only if the Shareholders` Assemblies of such companies expressly consent to conducting such proceedings in the Republic of Serbia.  Under this provision, the initiation of the merger/acquisition procedure in the given case is limited, i.e. conditioned by the consent of all the companies` Shareholders` Assemblies to the possibility of conducting the above-mentioned court proceedings in the Republic of Serbia.

Furthermore, new provisions also regulate preparation of a document by a notary public before registration of the merger/acquisition, which, at the request of the participating company from the Republic of Serbia, shall confirm that all the actions and activities related to the merger/acquisition were conducted in accordance with the Companies Act, i.e. that all the merger/acquisition conditions that are prescribed have been met and that, as the case may be, the above-mentioned court proceedings are in progress. Regarding the merger/acquisition registration, taking into account the existence of an external element in the transaction, in addition to the notary public document issued by a Serbian notary public for a Serbian company, a certificate from a competent authority of an EU Member State or a State party to the EEA Agreement in which the participating company is registered, shall be required. This certificate cannot be older than six months from the date of its issuance, and shall confirm that the conditions for Cross Border merger/acquisition, prescribed by the law of that state, have been fulfilled. Namely, if the acquirer company is from the Republic of Serbia, then the law of the Republic of Serbia on the registration of business entities will apply on the registration of the merger/acquisition.

The remaining provisions concerning the Cross Border M&A, regulate legal consequences of M&As as well as a simplified merger/acquisition process, in the same way as for “local M&As”. It is explicitly provided that if, in accordance with the regulations of the Member States in which the participating companies are registered, in order to transfer assets and liabilities from a company that is merged/acquired to the acquiring company, special conditions, procedures and procedures for the transfer to produce legal effect towards third parties are required, such conditions and procedures shall be fulfilled by the acquiring company.

Finally, cases where a merger/acquisition registration is considered null and void are also regulated. After the merger/acquisition registration enters into force, if the acquiring company is registered in the Republic of Serbia, the registration cannot be declared null and void.

As for the other amendments to the Companies Act, the question remains whether they will make businesses more efficient by removing excessive bureaucratic and administrative procedures. Moreover, time will tell how the newly introduced regulations will be implemented in practice.

However, besides the expected practical importance for the day-to-day operations of   businesses, the new solutions proposed in the Draft are also significant in terms of positioning Serbia on the World’s Bank Doing Business list.