TerraLex Cross-Border Guide to Cross-Border Merger & Acquisition Guide

Investment matters in Serbia are regulated by the Investment Act which guarantees national treatment of foreign investments, meaning that foreign legal entity or foreign private individual investors enjoys equal status in terms of their investments, and have the same rights and obligations as national investors. An investor may acquire ownership rights and other real rights to movable and immovable property located on the territory of the Republic of Serbia, in accordance with the Constitution and specific conditions set forth in the appropriate acts.

The Constitution of the Republic of Serbia also guarantees that foreign nationals shall be equal on the market with Serbian nationals. Besides that, foreign investors wishing to spend longer periods in Serbia must obtain a residence permit.

Various transactions between Serbian companies and non-residents are strictly regulated by the Foreign Exchange Transactions Act. This Act is strictly enforced by the National Bank of Serbia, and in particular, the following areas are regulated:

1. payments, collections and transfers between residents and non-residents in foreign currency payment and dinars;

2. payments, collections and transfers between residents in foreign currencies;

3. purchase and sale of means of payment between residents and non-residents, as well as purchase and sale of foreign currency payments between residents;

4. unilateral transfers of means of payment from and to the Republic of Serbia which do not have the characteristics of transactions performed between residents and non-residents;

5. regular bank and deposit accounts of residents abroad and of residents and non-residents in the Republic Serbia;

6. credit facility operations in the Republic Serbia executed in foreign currency and international credit facility operations.

Under Act, when it comes to the capital transactions payment, collection and transfer between residents and non-residents shall be executed freely. Also, regarding direct investments, the Act stipulates that payments and transfers of capital concerning direct investments of residents abroad, and direct investments of non-residents in the Republic shall be executed freely in line with the Investment Act.

In recent years, Serbia has offered foreign investors and business entities many opportunities for business development, especially for foreign investment. The State Aid Control Act provides that state aid is any actual or potential public expenditure or reduced realization of public revenue granted by the state aid provider in any form, which puts a certain market participant in a more favorable position compared to competitors or gives preference to the production of certain goods and/or services, which distorts or there is a danger of distortion of competition on the market and affects trade between the Republic of Serbia and the member states of the European Union.

State aid can be granted through the following instruments and should be approved by the competent regulator:

1. subsidy (grants) or subsidized loan interest rate;

2. fiscal relief (reduction or exemption from taxes, contributions, customs duties and other fiscal duties);

3. State guarantee, guarantee of any legal entity that disposes of and/or manages public funds, or another state aid provider guarantee, given on terms more favorable than market;

4. waiver of profits and/or dividends from the part of the state, local authority or legal entity that manages or disposes of public funds;

5. write-off of a debt to the state, local authority or a legal entity that manages or disposes of public funds;

6. sale or use of publicly owned property at a price lower than the market price;

7. the purchase or use of property at a price higher than market price by the state, local government or a legal entity that manages or disposes of public funds, and

8. other instruments in accordance with State Aid Control Act.

There is also a list of the categories of state aid that may be granted, defined in the Decree on the Rules for Granting State Aid as follows:

1. Regional state aid;

2. Horizontal state aid;

3. Sectoral state aid;

4. State aid of small value (de minimis state aid);

5. State aid for the providing of services of general economic interest.

For investors, probably the most interesting type is regional state aid, which is determined according to the primary objectives of the grant, namely: regional investment state aid, regional state aid for newly established small businesses, regional state aid for operational business.

In Serbia the Labor Act governs an employee’s rights in the event of the change of employer. In the event of a status change, meaning a change of employer, the successor employer assumes from the predecessor employer the internal employment acts and all employment contracts that are valid on of the day of the change of employers.

The predecessor employer is obliged to notify, completely and truthfully, the successor employer on the rights and duties stipulated in the internal employment acts and the employment contracts being transferred.

Also, the predecessor employer is obliged to notify, in writing, the employees whose employment contracts are transferred, about the transfer of employment contracts to the successor employer. If an employee refuses the transfer of the employment contract or fails to respond within five working days from the service date of the foregoing notification, the predecessor employer may terminate that employee's employment contract.

Both the predecessor employer and the successor employer are obliged to notify the representative trade union at the employer, at least 15 days before the change of employers, about: i) the date or proposed date of change of employers; ii) the reasons for the change of employers; iii) legal, economic and social consequences of the change of employers in respect to the status of employees, and measures for their mitigation. The predecessor employer and the successor employer are obliged to, at least 15 days before the change of employers, in cooperation with the representative trade union, take measures to mitigate social and economic consequences relevant for the position of employees. If there is not any representative trade union at the employer, the employees are entitled to be directly notified on circumstances referred in points i), ii), iii).

While employees may unilaterally terminate employment without restrictions except for the notice period, which may not be shorter than 15 nor longer than 30 days, employers are allowed to terminate employment agreements only on grounds stated in the Labor Act. Broadly speaking, these grounds may refer either to employee’s work capacity and conduct, wilful breach of work obligations, disrespect of the work discipline, refusal to sign annex of the employment agreement, or to reasons of restructuring and redundancies. According to the Labor Act,in general, an employment relationship terminates: i) by expiry of the period it was concluded for; ii) when an employee reaches 65 years of age and a minimum of 15 years of social insurance coverage, unless otherwise agreed between the employer and the employee; iii) by agreement between the employee and the employer; iv) by cancellation of employment contract by the employer or the employee; v) at the request of a parent or custodian of an employee younger than 18 years; vi) in the event of death of the employee; vii) in other cases specified by the law.

In the context of the M&A, employment contract termination by an employer due to technological, economic, or organizational changes is the most important ground for termination to bear in mind and most important provision regarding termination by an employer.

An employee’s employment relationship may be terminated if there is a valid reason relating to the employer's needs, as follows: i) If as a result of technological, economic or organizational changes, the need to perform a specific job ceases, or there is a decrease in workload; ii) if he /she refuses to conclude the annex of the contract due to the needs of the process and the organization of work.

Termination of an employment agreement as a result of technological or organizational changes, requires an additional explanation. This provision cannot be used in a simple manner by the mere statement of the employer that economic and organizational changes have occurred in his business. Namely, the dismissal for the above stated reasons also implies an explanation of the change manifestation from which the cessation of the need for the employee's work had emerged. If an employee has received a decision on termination of his employment agreement, or an employer is preparing to deliver such a termination in which this provision is just transcribed without further explanation, the validity of such decisions will be subject to review. The Serbian Supreme Court of Cassation stated in its Decision that employees cannot be laid off solely because the employer is expecting to suffer financial losses meaning that employer must prove it actually incurred that losses. They must be reported in the financial statements and disrupted cash-flow. Employers are not entitled to lay off employees on the basis of anticipation of a business loss. It has to be appropriately reasoned in order for dismissal to survive courts review.

The Labor Act also provides examples of breaches of work obligations and work discipline which justify termination of employment by employers, but employers are free to specify additional work obligations and work discipline whose breach entails termination of employment in bylaws or employment agreements.

Moreover, the Labor Act protects certain categories of employees from dismissal. To that effect, expectant mothers, parents on maternity leave, childcare leave and special childcare leave may not be laid off. Likewise, employees who are engaged in trade union activities or otherwise represent employee requests cannot have their employment terminated due to such activities.

Labour Act expressly prescribes that employment may be terminated if termination is justified on grounds relating to employer’s business needs, i.e. if due to technological, economic or organizational changes workload decreases or certain jobs become redundant.

The employer is required to prepare a Redundancy Plan, after establishing that, due to technological, economic or organizational changes, within a period of 30 days the need for work of employees hired for an indefinite period of time shall cease, concerning at least: i) 10 employees with an employer who employs more than 20, and less than 100 employees engaged for an indefinite period of time; ii) 10% of employees with an employer engaging a minimum of 100, and a maximum of 300 employees engaged for an indefinite period of time; iii) 30 employees with an employer employing more than 300 employees engaged for an indefinite period of time.

A Redundancy Plan (“Plan”) must also be prepared by an employer who determines that there will be no more need for work of at least 20 employees within a 90 day period, on the aforementioned grounds, regardless of the total number of employees.

The employer is bound to deliver a draft of the Plan to the relevant trade union and to the National Employment Service, not later than eight days from the day of finalizing the draft Plan, in order to obtain an opinion. On behalf of the employer the Plan is prepared by the responsible authority with the employer, meaning the person determined by law or employer's bylaw.

Employees may not be made redundant if absence from work due to being temporarily unfit to work, pregnancy, maternity leave, parental leave, and special parental leave.

Finally, the employer shall, prior to terminating the employment contract due to technological, economic or organizational changes, pay the employee severance pay which may not be lower than the sum of thirds of employee’s salaries for each year at work with that employer. Change of ownership of capital shall not be considered as a change of employer in terms of exercising the right to severance pay.

At this point, we will give a brief overview of the types of taxes that can burden participants in an M&A transaction. Capital gains tax

When a seller of share/stock is a private individual, capital gains tax will be regulated by the Personal Income Tax Act. Capital gain or loss, in terms of the Personal Income Tax Act is the difference between the sale price of rights, shares and securities and their purchase price, realized by the transfer of, among others, shares, stocks and other securities.

A taxpayer is any private individual, including an entrepreneur, who has transferred, shares and securities and is taxable at 15%, with the key exception being persons holding shares and securities for more than 10 years without interruption.

When a seller of share/stock is a legal entity, capital gains tax is regulated by the Corporation Tax Act. In the terms of this Act, a resident taxpayer is a legal entity registered or having a place of actual administration and control on the territory of the Republic of Serbia. A non-resident taxpayer is a legal entity that is registered and has a place of actual administration and control outside the territory of Serbia. The taxpayer realizes the capital gain through sales or other forms of the transfer with a fee of shares in equity of a company, stocks and other securities. As with private individuals, capital gain is the difference between the selling and purchasing price which a legal entity obtains in the transfer, and is taxable at 15%.

The status change of resident taxpayers made in accordance with the Companies Act, postpones the occurrence of tax liability on the basis of capital gains.

Value-added tax (VAT)

VAT Act provides that the subject of VAT taxation shall be the delivery of commodities and providing of services which the taxpayer performs in the Republic for a fee, within the scope of business activities. A taxpayer is a natural person or legal entity, including those who don’t have a seat or residence in the Republic of Serbia, who independently performs trade in goods and services, within the scope of business activities. In the case of turnover of goods or services, which constitute an investment in a company, the tax basis is the market value of those goods and services on the day of their delivery, which does not include VAT. The general VAT rate for the trade of goods and services is 20%.

The Competition Act provides for rather low merger control thresholds, compared both to EU law and countries in the region. Namely, a concentration of undertakings is to be notified to the national Commission for Protection of Competition if:

1. A total annual turnover of all parties to a concentration generated on the global market in the preceding financial year exceeds EUR 100 million, provided that the turnover generated by at least one party to the concentration on the market of the Republic of Serbia exceeds EUR 10 million, or

2. A total annual turnover of at least two parties to the concentration generated on the market of the Republic of Serbia exceeded EUR 20 million in the preceding financial year, provided that the turnover generated by at least two parties to the concentration on the market of the Republic of Serbia exceeded EUR 1 million per undertaking, in the same period.

Signing and closing meetings documents are not regulated by Serbian law and so they are subject to the contractual rules in any specific case, if this mechanism (signing - closing) is agreed at all. However, the document required in the signing phase is the Share Purchase Agreement (hereinafter “SPA”). Before the signing phase, usually steps include, among others, negotiations, exchange of non-binding letters of intent, and of course due diligence of the target company.

After due diligence, the purchaser may decide to include some conditions precedent into the SPA. Which conditions would be agreed, is also left to the will of the parties.

The legal nature of conditions precedent corresponds to suspensive conditions from the Contracts and Torts Act. Accordingly, if the SPA includes conditions precedent, it will produce legal effects after all conditions precedent have been met.

The closing date and place shall then be stipulated in the SPA, including a provision regarding the steps to be taken during closing such as the signing of a transfer deed authenticated by a Serbian notary public, payment of the purchase price and execution of the closing certificate.

No mandatory gap between signing and closing is required. It depends upon the mechanics of each transaction. If signing and closing do not occur at the same time, closing day will usually depend on the fulfillment of conditions precedent. For example, it could be agreed in the SPA that closing will occur on the tenth day from fulfillment of all conditions precedent.

Just as with the entire signing and closing process, those matters are subject to agreement between the contracting parties. However, a typically used unregulated agreement is so called escrow agreement on the deposit of purchase price. For the needs of the purchase price deposit, an escrow account will be employed to hold the purchase price until the conditions precedent are fulfilled. A third-party intermediary will usually be a bank which will act as escrow agent.

Under Serbian law, a notary public confirms the identity of the parties to a transaction, primarily the transferor and the acquirer through verification of their signatures. The party whose signature is being verified must present themselves in person. The party signs a private document at the notary, whereas the signature is also entered in the Book of Legalization.

A valid passport is required for non-resident citizens as proof of identity, while an ID card will suffice for residents. When the contracting parties are legal entities (or one of them), transaction documents are signed by a legal representative on behalf of that legal entity, authorized for such acts, evidenced by way of an official copy from the respective companies register. If the legal entity is not Serbian resident, the official copy from the companies register must be accompanied by a Serbian translation (done by a court-sworn translator) and affixed with/accompanied by (i) an Apostille if the legal entity is from a country that is a signatory to the Hague Apostille Convention of October 1961, or (ii) full diplomatic legalization certificate if the country is not a signatory to the Hague Apostille Convention, or (iii) with none of those two if the country has a bilateral treaty with Serbia.

When it comes to the M&A transfer of shares i.e. stocks, the crucial transaction document is the sale and purchase agreement. In both cases, the agreement is mandatory in written form and signatures on the agreement are mandatory verified by the notary public. It is not executed in a form of the notarial deed.

Under the Contracts and Torts Act, the vast majority of agreements are not required to be in writting than rather requires consent of will between parties, expressed even orally. However, certain agreements such as: service agreements, license agreements, loan greements, real estate sale and purchase agreements, agency agreements mut be in writing to be legaly valid.

Real estate sale and purchase agreement, in addition to the requirement to be in writing, must also be done in the form of a notarial deed in order to produce legal effect.

Companies issue different decisions and documents that are important for their business and legal compliance. Depending of the corporate governance structure, directors, board of directors, supervisory board, AGM and other corporate bodies make decisions within their remit.

Those decisions are executed by respective signatories e.g. director, board chairmen, AGM chairman etc. The decisions may also be affixed with the corporate seal (optional as of October 2018). However, certain decisions such as for example decisions to increase/decrease share capital, decision to change an authorized representative, decision to change registered seat, decision to change of board members must be registered with the BRA in order to produce legal effect towards third parties.

If individuals execute documents before a notary public, be it a notarial deed or signature verification, individuals must prove their identity – non-residents by producing their passport, and Serbian residents by producing their ID card. Regarding documents that do not need to be presented to a notary public we do not see any other specifics to be elaborated in further details.

As for foreign companies, under Serbian law the legal representative of the foreign company executes the documents on behalf of the company. For M&A transactions and transfers of shares and stakes, two options are available: i) signatory is a foreign national acting on behalf of the company, proving his/her identity by way of a passport; ii) signatory is a Serbian citizen acting on behalf of the company, proving his/her identity by way of an ID card.

In both options, signatories will prove their capacity to execute by means of an official copy from the records kept by relevant commercial register. This must be accompanied by a Serbian translation (done by a court sworn translator) and affixed with/accompanied by (i) an Apostille if the legal entity is from a country that is a signatory to the Hague Apostille Convention of October 1961, or (ii) full diplomatic legalization certificate if the country is not a signatory to the Hague Apostille Convention, or (iii) with none of those two if the country has a bilateral treaty with Serbia.

Firstly, notaries public play no role in the appointment of the director. The competent corporate body adopts the resolution appointing the director, the chairman of the competent body executes the resolution which is later registered with the BRA to give it legal effect towards third parties.

Notaries public play a significant role in share and asset (real estate) purchases. Namely, all signagory signatures to the SPA must be verified by a notary public.

Regarding asset purchases (real estate), the SPA must be solemnized before a notary public. Solemnization is a special form of notarial deed.

For the transfer of shares, the usual role of the notary is to verify the signatures of the parties to the transfer of shares and assets. Furthermore, the transfer of ownership of real estate owned by a company requires a qualified degree of legalization of the document, where the notary has a greater role and can examine the content of the contract and has the power to instruct to parties to amded provisions that are not in line with the law. Such a notarial form is necessary for the registration of a change title to the real estate in the register.

The Notary Public Act of the Republic Serbia provides for a Notary Public Tariff setting down the fees for their services, and it applies equally to all notaries public in Serbia. Notary public fees are payable immediately and there is no deffered payment option. Fees payable for notary public services depend on: i) money value of the legal transaction being executed; ii) the type of the certification; and iii) number of counterparts. Once the fee has been determined it is non-negotiable.

Although they play a significant role in M&A transactions, their services are only required at the tail-end of the process. Executions and notarization (i.e. signature verification) can be scheduled and the parties chose the best appointment window for finalizing the process.

New management may be appointed in the target company on the back of an M&A transaction. Once the new shareholder/stockholder is registered with the BRA, the AGM or supervisory board or other competent body may adopt the resolution appointing the new director (a) and have it registered with the BRA.

Title to shares will be transferred in line with the terms and conditions of the transaction documents. The title is transfered once the transfer is registered with the BRA.

Documents are signed by the legal representatives of the companies. They are free to authorize attorneys by way of PoAs to act as their agents.

A power of attorney (PoA) is a written authorization giving an attorney at law or other person power to represent or act on another's behalf in a legal matter. Under Serbian law, an attorney at law or other person may be authorized for any step in the transaction if they have the appropriate PoA.

The PoA can be limited to i) a definite period of time, and ii) a specific transaction or action ii) the name of a lawyer in a law firm.

Further, under Serbian law, the PoA should have the same legal form as the transaction document which shall be executed by the attorney at law or another person. For example if the transaction document needs to have signatures verified then the PoA should have the signature of the principal verified by a notary public, if the transaction document is to be executed in the form of a notarial deed, then the PoA should be issued in the form of a notarial deed.

Under the E-Commerce (Electronic Documents, Electronic Identification and Trust Services) Act an electronic document has the same status as a written one. A electronic document has the force of an original, so it can be used as evidence in Court.

An electronic document cannot be challenged for validity, probative value, or written form just because it is in electronic form.

Serbia's E-Commerce (Electronic Documents, Electronic Identification and Trust Services) Act allows for the execution of documents electronically, but with some exceptions. The Act distinguishes between electronic, advanced electronic and qualified electronic signatures. As with electronic seals, the Act stipulates that validity and probative value of electronic signatures cannot be challenged only because they are in electronic form, or because they do not meet the conditions for qualified electronic signatures. Qualified electronic signatures have the same legal effect as personal signatures. However, the Act explicitly provides that use of an electronic seal or signature is not possible in agreements and other legal affairs where a special regulation provides for the form of verification of a signature, publicly certified document or notary public deed (accordingly SPAs in an M&A transaction cannot be executed by means of electronic signature since signatures are verified by notaries public).

Of a particular importance is regulation of the electronic delivery, as the trust service, which can also be regular or qualified. Namely, the service in question is a form of alternative to the recommended sending service, since it ensures, with a high level of reliability, the identification of both sender and recipient, and is also followed by issuance of a certificate of electronic delivery. The Act explicitly states that data sent or received via an electronic delivery service cannot be challenged for its legal force and admissibility as evidence only due to the electronic form, or because it does not meet the requirement for qualified electronic delivery service.

Also, the Act provides that data from an electronic message—sent or received through a qualified electronic delivery service—is subject to the legal presumption of data integrity, when it comes to sending by a designated sender, its receipt by a designated recipient, and reliability of the date and time of sending and receiving.

Serbian law does not stipulate the number of counterparts required. This matter is goverened the agreement in question and the will of the contracting parties. Agreements may be executed in two or more counterparts, each of which shall be deemed an original and constitute a single legal instrument.

Strictly enforced undertakings are not regulated under Serbian law. Unlike in some other jursidictions, enforced undertakings are not goverened under employment or other regulations in Serbia. So, there are no undertakings that are compulsory for the predecessor and successor by law. However, it is possible that some undertakings become compulsory for SPA parties if agreed under the SPA. For example, the predecessor could stipulate, as a condition subsequent in the SPA, that the successor may not lay off more than 10% of employees post-transaction. In that way, one of the parties will be obliged to assume such a commitment in order to fulfill one of the conditions subsequent.

Most often, the transaction closes once the purchase price is paid and the title is transferred. In the event of a time lag between the signing of a definitive acquisition agreement and the closing of the acquisition, the parties will have to agree on a set of conditions that must be satisfied (or waived) before the acquisition may be closed. The parties usually agree on certain other actions to be carried out at closing, for example entering into side letters which serve only for registering the transfer of title with the BRA, resignation by the directors of the target company or their dismissal etc.

With respect to a share transfer, there are no specific requirements or formalities. The transfer of title must be recorded by both parties in the BRA. In many cases, the directors of the target company are also shareholders or at least linked with them. They are expected to resign from their positions, and are replaced by directors appointed by the purchaser.

In a two-step approach, the SPA and board documents are typically signed at signing, while the closing memorandum, share register, minutes and ancillary agreements are typically signed at closing. When the parties execute a closing memorandum, they will confirm: (i) that the conditions precedent, if any, have been met; (ii) compliance with the relevant covenants between signing and closing; (iii) the proper implementation of any and all closing actions or formalities (partial completion is to be avoided in any event; therefore, the importance of a “conditional” closing should be stressed); and (iv) the transfer of the title and risk to the shares in the target company; (v) confirmation of receipt of the purchase price.

Under Serbian law legal opinions are not required for an M&A transaction to produce legal effect. On the other hand, it is advisable to engage the services of a quilified legal advisor, familiar with the state of play and procedures on the Serbian market, in order to avoid any issues during the M&A process.

Business transfers start with the execution of preliminary-agreements, followed by the due diligence process. After that, sale and purchase agreement negotiations take place. The final phase, in the context of a private M&A transaction, is the due execution and completion of the agreement. Finalization of the SPA can also be broken down into three phases: signing, conditions precedent and closing.

The non-compete clause can be examined in two ways. Serbian legislation allows an employer to apply a non-compete clause prohibiting employees, where permission has not been sought, from performing certain types of activities in his/her own name and for on their own benefit or in the name of and on behalf of other individuals or legal entities which would compete with the employer. A non-compete clause can have effect for the duration of the employment or for a certain period after termination of employment and on the territories prescribed in the employment agreement. Non-compete clauses are enforceable during the term of employment, and for a two-year period after termination of employment but only where if monetary compensation for the employee has been agreed on (otherwise it is unenforceable).

On the other hand, it is market practice that the seller agrees not to i) compete with the company or the business sold, ii) disclose or use confidential information concerning the business acquired, iii) solicit employees, suppliers or customers and iv) otherwise interfere with the business or impair its good will. The purchaser in an asset deal shall benefit from civil law protection, except for example confidentiality undertakings which must be explicitly provided for in an acquisition agreement. In light of the difficulties involved in proving damages resulting from a breach of the undertakings mentioned here above (and in particular the non-compete restriction and confidentiality), it is advisable to set down provisions for a lump sum indemnity in case of a breach (contractual penalty).