Corporate M&A 2019 Comparisons

Last Updated June 10, 2019

Contributed By LEGATE, s.r.o.

Law and Practice

Authors



LEGATE, s.r.o. is a medium-sized law firm with an M&A team composed of ten experienced lawyers, including two partners, working mostly within the projects, energy and natural resources (oil and gas), real estate, transport and infrastructure industries in the EMEA area. The team regularly designs all-purpose transaction structures for inbound investors as well as Slovak clients performing cross-border and domestic M&A deals, securing legal, accounting and tax shields as part of a complex package of services necessary for successful transactions including joint ventures, corporate restructurings and privatisations. It frequently provides related transactional services such as tax and accounting advice and complex deal management, as well as general corporate advice. LEGATE is a member of the Globalaw network, which provides clients with legal services across 108 jurisdictions, giving unrivalled opportunity to support clients in cross-border M&A and related transactions.

The growing economy is ensuring a rather positive trend in the M&A market in the Slovak Republic. Reluctance to ensure succession plans is forcing owners to bring their businesses to the market.

Market expansion and consolidation are among the top trends.

IT, property, energy and agriculture enterprises were the top trending industries in 2018/2019.

Under Slovak law, a company can be acquired through either a stock acquisition or an asset deal (asset acquisition).

In a stock acquisition, the acquired company operates as a subsidiary of the acquirer or merges with the acquirer as the survivor. In private companies, the purchase is pursued through a negotiated M&A transaction, mostly as capital entry (eg, IT, start-ups) or a management buyout. In publicly traded companies, an acquisition must be effected through the (mandatory) public offer.

Typically, operational divisions of a target company, which are not consolidated into a separate legal entity (subsidiary), can be acquired through an asset deal. This is common in property or during bankruptcy. After the deal, if not all the assets and liabilities have been acquired, the seller (the original target entity) operates with the remaining assets. If the buyer has acquired all the assets and liabilities, the seller usually dissolves. 

Locally, the Antimonopoly Office of the Slovak Republic has responsibility for business combinations, with respect to protection of competition on the market. Concerning Europe, the European Commission protects competition and the National Bank of Slovakia oversees the stock market, including (mandatory) public offers.

Besides any European Union (EU)-based restrictions that may from time to time be imposed by the European Parliament and the European Council with respect to the single market, there are certain areas of industries that are not accessible to investors, whether local or foreign.

These include investments in regulated or restricted State-owned properties such as the mining of minerals or other geological materials, the use of underground and surface waters, forestry, postal services, railway, airport operation and other State-owned assets. 

Attempts have been made to restrict access to agricultural land by foreign investors to protect local farmers and bar non-farmers from acquiring agricultural land.

The Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (the EC Merger Regulation) applies to concentrations with a community dimension. Slovak legislation further covers the control of concentrations in the Act on Protection of Competition, which includes relevant antitrust provisions.

Concentrations qualify for examination under the Slovak merger control system by the Antimonopoly Office of the Slovak Republic if they fall within the turnover thresholds. That is:

  • if a combined aggregate Slovak turnover of all the undertakings concerned is more than EUR46 million and the aggregate Slovak turnover of each of at least two of the undertakings concerned is more than EUR14 million; or
  • the worldwide turnover of one of the undertakings involved is EUR46 million and the Slovak turnover of at least one of the undertakings involved is EUR14 million.

In an M&A transaction involving employees acquirers need be primarily concerned with the Slovak Labour Code, a comprehensive labour law regulation in the Slovak Republic. The Code incorporates the TUPE Directive (Council Directive 2001/23/EC on the approximation of the laws of the member states, relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses).

Generally speaking, a national security review applies to transactions involving a target company disposing of classified information in accordance with the Act on the Protection of Classified Circumstances. Before disposing of any such information, an industrial security certificate must be granted. This may affect companies in the defence industry, armed forces or nuclear (power) facilities. 

In 2018, the Grand Chamber of the Court of Justice of the European Union rendered its decision in Slovak Republic v Achmea, BV (Case C 284/16), ruling on the incompatibility with EU law of the dispute resolution provisions included in bilateral investment treaties (BITs) concluded between member states (Intra-EU BITs).

Participation exemption has been introduced relating to capital gains arising on the sale of shares. As of 1 January 2018, a tax exception applies to capital gains from the sale of shares made 24 months after acquiring at least a 10% direct share in a target entity.

Disclosure of the ultimate beneficiary owner is currently required in all capital companies registered in a commercial registry. 

Legislation was passed to deepen the protection of a company’s creditors from illicit or fraudulent mergers involving companies that are indebted, bankrupt, in the process of liquidation, restructuring or winding up. Further, in relation to limited liability companies (LLCs), it has put a ban on the sale of shares in companies that are bankrupt and in the process of restructuring.

Stakebuilding is not customary, except in hostile takeovers. However, the consolidated market makes it difficult for bidders to build a stake prior to an offer.

In a target joint stock company, if 100% of the shares is acquired, the acquisition and identity of the shareholder is disclosed through publication in the commercial registry, freely available to anyone. In a target LLC, the shareholding of a fully disclosed shareholder is made public through the same registry.

In a traded company, with respect to a (mandatory) public offer, the initial shareholding disclosure occurs upon publication of the offer after approval by the National Bank of Slovakia. Thereafter, during the validity of the offer, an acquirer must make public his or her shareholding in the target entity on a weekly basis until completion of the offer.

A material shareholding threshold is triggered when a person acquires ownership of at least 5% in any allotment of shares.

Reporting thresholds are mandatory for publicly traded companies and cannot be deviated from in the bylaws.

Dealings with derivatives are underdeveloped in the local market. Global depository receipts, however, are becoming frequent.

There are no filing or reporting obligations for derivatives.

The purpose and the goals of the acquirer in the target entity have to be divulged in case the shares are purchased through a (mandatory) public offer, which applies to the traded joint stock companies. Disclosure is made through publication of the offer in newspapers.

With private joint stock companies, no disclosure of a deal is necessary unless and until 100% of the shares is acquired in a target private joint stock company. At this time, the acquisition is disclosed after the effective date in a public commercial registry.

In a LLC, each acquisition, even of a minor shareholding, is made public as a result of the acquisition in the registry. If a majority shareholding is acquired, a publication through registration is a mandatory condition precedent to the acquisition becoming effective.

Terms and conditions of the acquisition remain private. Disclosure is limited to the stake acquired and the identity of the acquirer.

In a publicly traded company, in addition to notifying the intention to launch a (mandatory) public offer to the target company’s board of directors and to the National Bank of Slovakia, a notification of the offer must be made public through publication in newspapers. This occurs before the acquirer's submission of a written draft offer to the National Bank. In this way, the shareholders and the public become aware, without much further detail, of the intention to launch an offer. 

The offer itself, including all its mandatory details, must be made public through publication in newspapers if and only after the National Bank has granted approval.

Timing of disclosure is mandatory. Therefore, unless otherwise provided or allowed by applicable law, timing will be as prescribed by law.

The scope and extent of a due diligence usually depends on the target company. Due diligence can be limited or exhaustive: the extent depends on the client's mandate; the nature of the transaction, the target company, the type of business and its prior track record further determine the scope and extent.

The scope usually includes each aspect of the target company's day-to-day affairs. The scope commonly encompasses legal, financial and tax matters.

It is common for the parties to an acquisition to agree not to solicit or engage in acquisitions with other parties for a certain period of time.

Exclusivity clauses typically bar a party from engaging in negotiating with third parties to sell or purchase a competing target company. These are usually limited to the duration of the negotiation, or can even be extended beyond its closing.

Terms and conditions of a (mandatory) public offer with respect to shares of a traded company are documented in a draft offer submitted to the National Bank of Slovakia. Following the bank's approval, the acquirer may publish it. Therefore the offer itself includes the terms and conditions and it is not common for (mandatory) public offer terms and conditions to be documented in a form of agreement.

As regards private companies, terms and conditions of a purchase are documented in a definitive SPA entered between the acquirer and the selling shareholder of the target entity.

Depending on the companies involved, a negotiated small-scale acquisition can be a matter of a fortnight or few weeks. The disclosure procedures are fairly straightforward and not time-consuming.

Middle-scale acquisition can be arranged within a few months, depending on the scope and extent of due diligence. Large-scale acquisitions may take up to one year. Eventual antitrust proceedings may extend the process by one-four months.

The duration of negotiated acquisitions depends of various factors, eg, the scope and extent of due diligence, the extent of disclosure made during due diligence, resulting conditions precedent to the closing of transaction, etc.

Acquiring shares carrying 33% or more of the voting rights in the publicly traded target company triggers the mandatory public offer procedure. Mandatory public offers do not apply to private companies.

Cash seems to be the more frequent consideration. In a (mandatory) public offer and squeeze-out, the acquirer can offer securities as consideration, although always with an alternative cash payment. 

A takeover offer is a regulated process. Applicable laws require notification to the target company and approval of the bid conditions by the National Bank of Slovakia before launching the offer to purchase shares of publicly trade companies.

Rights resulting from a takeover offer triggering a threshold concentration may not be exercised until after the regulator, the Antimonopoly Office, has approved the concentration.

The control threshold with respect to a publicly traded company is defined as acquiring shares carrying 33% or more of the voting rights in the target company. Acquiring the control share triggers the mandatory public offer procedure.

With respect to (mandatory) public offers to purchase shares in a publicly traded company, the source of financing of the offer must disclosed in the draft offer.

The private negotiated acquisitions can be conditional on the bidder obtaining financing. Such a term is consensual, however, and likely to be combined with a break-up fee for the seller.

Deal security measures in negotiated acquisitions are consensual and can include a break-up fee, limited exclusivity, non-solicitation provisions or similar security measures. Security measures can be negotiated to secure the position of either or any of the contracting parties.

Additional governance rights can be sought and are usually secured through a shareholders' agreement that describes how the target is operated, shareholders' protection and shareholder's privileges, including management control (nomination and representation through board members).

A shareholder may vote by proxy and be represented in a general assembly by another person who is granted the necessary Power of Attorney.

In a publicly traded company, the squeeze-out mechanism is available for those acquirers who purchase at least 95% of all vote-carrying shares and achieve a 95% share on the registered capital in a traded company through a (mandatory) public offer. The acquirer can exercise the squeeze-out right within three months of the expiry of (mandatory) public offer validity. A squeeze-out must be notified to the National Bank of Slovakia in advance and must be made in cash and/or securities and a cash alternative.  After 95% of the votes of all shareholders cast in favour of the squeeze-out at the general assembly of the target company and within 30 days of the registration of the resolution with the commercial registry, all shares of the remaining shareholders pass to the acquirer. The central depository must be notified of this.

In the circumstances that entitle an acquirer to a squeeze-out, shareholders remaining after a (mandatory) public offer can require the acquirer to purchase all their shares in the target company (sell-out). The right to a sell-out can be exercised within three months of the expiry of(mandatory) public offer validity. Where the acquirer fails to accept an offer made by the shareholder, the court must rule to grant acceptance of the offer, whereby the sell-out is deemed accepted. 

A parent-subsidiary merger or a short-form merger between a parent company and its more than 90%-owned subsidiary does not require approval of the shareholders of the surviving company. The process is further simplified by omitting certain reporting, review/appraisal duties, disclosures, approvals or registrations.

In a negotiated transaction, an irrevocable commitment to sell is usually secured by exclusivity provisions undertaken to that effect. It is common to restrict exclusivity to a period of time.

The right of first refusal is usually undertaken in a shareholders' agreement, triggering the duty to sell the shareholding to the entitled shareholder upon announcement of an anticipated transaction to sell.

A non-binding Memorandum of Understanding or Letter of Intent usually still provide an out for the shareholder if a better offer is made, commonly after expiry of the period of exclusivity. Negotiated transaction documents do not provide an out for the shareholder if a better offer is made, not event during a lengthy closing period.

Private companies (LLCs and joint-stock companies) do not necessarily make their bids public. They usually just address potential carefully selected investors to whom they deliver a prepared Teaser and Information Memorandum, disclosure of which is subject to confidentiality agreements and the execution of a non-disclosure agreement. Such bids are usually not publicly available and are classified.

As mentioned previously, the control threshold with respect to a traded joint stock company is defined as acquiring shares carrying 33% or more of the voting rights in the target company. Acquiring the control share triggers the mandatory offer on takeover procedure.

Provided the mandatory threshold is reached, the shareholder is obliged to inform the target company’s board of directors and the National Bank of Slovakia in writing and without delay. In this mandatory offer on takeover, the petitioner also notifies the day and the reasons for the offer on takeover, plus a request to appoint an expert or an expert opinion to determine the amount of the consideration.

The petitioner makes the mandatory offer on takeover public in the daily national newspapers or by other methods to ensure publicity within the Slovak Republic and in EU member states, where the shares are admitted to public trade.

In a business combination, the draft merger agreement must be deposited in the collection of documents of the commercial registry for each of the companies involved in the business combination. Notice of the deposit of a draft merger agreement into the Collection of Documents must be made public at least 30 days before the date of the general meeting that will decide on whether to approve the merger. If the exchange ratio of shares and any cash bonuses subject to the business combination is not appropriate, each shareholder of one of the merging companies has the right to receive a reasonable cash payment from the acquiring company. The shareholders must be notified about this right and the terms of its application in the invitation to the general meeting.

In the case of a cross-border merger, the right receive reasonable cash payment is granted by shareholders of the Slovak entity participating in the merger.

The proposer (petitioner) of the mandatory takeover bid is obliged to submit a draft copy of the mandatory offer, as well as a copy of the audited company's final accounts (not pro-forma), to the National Bank of Slovakia, prior to the obligation to declare a mandatory takeover bid. These audited final annual accounts must meet International Financial Reporting Standards (IFRS) standards.

In addition to the actual takeover offer and the extract from the commercial registry, the proposer of a voluntary takeover bid must submit to the National Bank:

  • the relevant document proving that it has sufficient funds to provide cash consideration to the sellers;
  • information on the origin of the money (bank statement, bank guarantee, etc);
  • the statement of account from the central depository, showing that he or she has sufficient stock to provide consideration;
  • an extract from all accounts from the central depository, from which it is clear that the petitioner (or petitioner together with persons acting in concert) have reached or exceeded the control interest of 33%; and
  • documents proving the amount of the consideration the petitioner together with persons acting in concert have provided for the shares of the target company in the last twelve months before the obligation to make a mandatory takeover bid arose.

Full transaction documentation is disclosed to the Antimonopoly Office, provided the transaction is subject to its approval. However, the applicant may indicate which information or documents presented to the Antimonopoly Office are considered to be trade secrets or confidential information. This information and or documents may not then be made available to any third parties.

The directors of each of the merging companies in a business combination must draw up a detailed written report explaining and justifying the merger. The report must detail the legal and economic aspects of the business combination, the details of the merger agreement; in particular the exchange ratio of the shares. The directors are not obliged to draw up this written statement if all the shareholders of all companies taking part in the business combination waive this obligation.

The directors are obliged to make available the draft merger contract, financial statements of companies from the last three years, a pro-forma financial statement if the last one is more than six months old, written reports of directors and audit reports to all shareholders in the seat of the company at least 30 days prior to the general meeting. The shareholders are entitled to receive copies of these documents.

Directors of both companies in a business combination are obliged to inform the general meeting and the board of directors of the other company involved in the merger of any substantial change in the business assets and liabilities of the company that occurred between the date of drafting the contract on the merger and the date of the general meeting that decided to approve the draft contract.

Following the registration of the merger of the companies in the commercial registry, the directors of the successor company must immediately arrange for its shares to be exchanged for the shares of the extinguished companies or for the payment of the cash surcharge.

In general, directors are required to exercise their duties competently and with professionalism and due care and attention.

Provided a business combination is performed by two or more entities and employees of these entities are represented by labour unions or employees' representatives, the entities shall discuss the business combination and inform representatives of the proposed date and other important business, labour, economic and social aspects affecting employees at least one month prior to the business combination taking place. However, the employers are not obliged to form any special not ad hoc committees if the labour unions or other employees’ representatives are not active within an entity.

A notary public will check that there was compliance with the legal requirements for a cross-border merger with a Slovak company before it is registered in the commercial registry. The notary will issue a notarial deed stating that the conditions were met.

If there is a cross-border merger with a successor company with a registered base in the Slovak Republic, a special employee committee must be established. This special employee committee is a special negotiating body that together with the directors of the participating companies will determine by written agreement the manner in which the employees participate in management.

The directors may unanimously decide on the application of standard rules on employee participation in management, which will prevent negotiations being initiated by the special employee committee. The directors of each of the participating companies are required, without undue delay after the publication of the draft of cross-border merger agreement, to take the necessary steps to start negotiations with the employees' representatives on future employee involvement and to provide the representatives with all necessary information.

The courts in the Slovak Republic do not defer to the judgement of the board of directors in takeover situations.

A member of the board of directors is not liable for damages if he or she proves that he or she has acted in the performance of his or her duties in the interest of the company and with professionalism, due care and in good faith. The board is not responsible for the damage caused to the company by the conduct of the general meeting resolution; this shall not apply if the resolution is inconsistent with the law or the articles of association or the conduct of directors breaches the obligation to file a bankruptcy petition. The board of directors is not discharged from its responsibilities if the supervisory board has approved its conduct.

Agreements between a company and a member of a board of directors to exclude or limit the liability of a director are forbidden; statutes cannot limit or exclude the liability of a board member. The company may waive claims for damages against the members of the board or conclude a settlement agreement with them no earlier than three years after their origination and only if the general meeting so agrees, and if shareholders whose nominal value of shares reaches at least 5% of the registered capital in joint stock company and 10% in a LLC do not file a protest against this at the general meeting.

In a business combination, the entities taking part usually seek outside advice in the form of legal (performing legal due diligence), tax adviser, and independent audit of the company's books and statements.

In a business combination a draft of merger agreement must be reviewed for each of the merging companies by an independent expert independent of the company who shall be appointed on the proposal of the board of directors by the court. Such independent expert may be auditor, authorised expert or other independent expert.

The breach of a conflict of interest by company directors can be subject to judicial review provided directors (in LLCs) or members of a board of directors (in joint stock companies) breach the non-competition obligation as specified in the Commercial Code. This non-competition obligation can be extended to shareholders of a LLC, if agreed in the articles of association. Breach of a non-competition obligation, if the damage caused by such a breach exceeds EUR2,660, is a criminal offence according to the Criminal Code.

Hostile tender offers are not forbidden in the Slovak Republic. The term ‘hostile tender offer’ or ‘hostile takeover’ is not recognised in Slovak law.

In a LLC, the transfer of shares is not subject to directors’ approval. The transfer of shares may be subject to approval of the general meeting, but a director may block the granting of approval only if he or she also holds a majority share in the LLC.

The company bylaws of a private joint stock company may limit, but not exclude, the transferability of the registered shares. Where the company bylaws make the transfer of the registered shares subject to the consent of the board of directors, they must also set out the reasons the board may refuse to grant the consent and the period within which the company is required to decide on the request for consent, and the board must notify the shareholder of that decision. The board decides to grant approval for the transfer of registered shares unless the company bylaws provide otherwise.

However, the transferability of publicly negotiable shares on the regulated market may not be limited.

The most common defensive measures against a hostile takeover are:

  • limitation of a transfer of shares in the company bylaws of a joint stock company, although this applies only with publicly traded shares. In a LLC the articles of association may require the consent of the general meeting before the execution of an agreement on the transfer of a business share;
  • pre-emptive rights, where the seller of shares is obliged to offer to sell his or her share to another shareholder/shareholders under the same conditions before the sale to any third party; and
  • call options (agreed between shareholders), when a shareholder's shares may be bought by remaining shareholder/shareholders under specific agreed conditions, the application of which shall overrule any potential hostile offers by third parties.

If the National Bank of Slovakia discovers that stock exchange obligations in relation to certain publicly traded stock have been breached, it can temporarily suspend trading of the security on the stock market for up to six months. Such a suspension may signify a preventive defensive measure against hostile takeover.

Where directors enact defensive measures against a hostile takeover, they must ensure equal treatment of all shareholders and if approval for the transfer of shares is not granted, directors shall provide a valid reason stipulated in company bylaws (provided the transferability of shares is limited).

Even if the transfer of registered shares is limited and is subject to the previous consent of the board of directors, the board must always state its reason for not granting approval (one of the reasons stipulated in the company bylaws). Otherwise, the refusal to grant approval for a transfer will not be allowed.

The directors cannot ‘just say no’ and take action to prevent a business combination. If at least 5% of all shareholders request the addition of a certain issue (eg, approval for a business combination) to the agenda of the general meeting, the directors are obliged to include it.

The directors of the merging companies who have breached their obligations under the Commercial Code on preparation and execution of the merger of companies are jointly and severally liable for the damage caused to the shareholders of the merging company.

Litigation is quite common in connection with M&A deals in the Slovak Republic. The subject of lawsuits is most often the breach of contractual obligations in connection with declared representations and warranties, additional payments of the purchase price on the part of the seller and a reduction in price due to damages that occurs post-closing to the buyer.

Usually any litigation starts after some time has elapsed from the effective date of transaction, if any material breach of representation and warranties provided by the seller has occurred and a remedy is not reached and/or agreed by the parties. Litigation is usually the last resort for parties to resolve their disputes and it is common that parties of a business combination or M&A deal agree to resolve their disputes via arbitration.

Shareholder activism is quite common and often an important force in the Slovak Republic. Minor shareholders usually watch with close interest the possible depreciation of the value of their shares in a planned business combination or other M&A transaction.

Therefore, shareholder activism is present mainly within the minority shareholders group, to preserve the value of its investment. A typical lawsuit initiated by minor shareholders would include a motion to declare the resolution of a general meeting invalid or a motion for reimbursement of damages due to the decrease in value of their shares in connection with an incorrect determination of fair value, intragroup transfer-pricing or dilution of a company.

Shareholders may file a motion to the court to declare the resolution of a general meeting of a company ineffective, provided it breaches the law, the articles of association or the company bylaws, and such a breach could have restricted or limited the shareholders’ rights. Provided the shareholder is present at the general meeting, he or she may file a motion to the court only if a protest has been filed and is in the minutes of the shareholder meeting.

Usually minority shareholders do not encourage companies to enter into M&A transactions.

The usual interference in a business combination includes non-acceptance of the proposed exchange ratio of the shares or a cash surcharge for the exchange of shares to be paid, which shall result in the right of a shareholder to receive a further surcharge up to the fair value of his or her shares.

Fair value for the determination of an additional surcharge to the shareholder shall be subject to expert opinion, the cost of which must be borne by the company. The value of the cash surcharge to be paid to a shareholder will be determined as the difference between the value of the shares of the company involved in the merger and the value of the shares of the successor company.

LEGATE, s.r.o.

Dvořákovo nábrežie 8/A
SK - 811 02 Bratislava

+421 2 6252 7561

+421 2 6252 7562

info@legate.sk www.legate.sk
Author Business Card

Law and Practice

Authors



LEGATE, s.r.o. is a medium-sized law firm with an M&A team composed of ten experienced lawyers, including two partners, working mostly within the projects, energy and natural resources (oil and gas), real estate, transport and infrastructure industries in the EMEA area. The team regularly designs all-purpose transaction structures for inbound investors as well as Slovak clients performing cross-border and domestic M&A deals, securing legal, accounting and tax shields as part of a complex package of services necessary for successful transactions including joint ventures, corporate restructurings and privatisations. It frequently provides related transactional services such as tax and accounting advice and complex deal management, as well as general corporate advice. LEGATE is a member of the Globalaw network, which provides clients with legal services across 108 jurisdictions, giving unrivalled opportunity to support clients in cross-border M&A and related transactions.

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