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M&A Overview

April 2007 - Corporate & Commercial. Legal Developments by BABIC & PARTNERS Law Firm .

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Market and Legislative Trends

The year 2005 was marked by low volume of large transactions. Smaller or mid-size deals prevailed. A larger number of these were in fact real estate driven investments.

As a contrast, in 2006 several large deals took place. The acquisition of HVB Splitska banka by Societe General appeared as the largest deal in the first half of the year in terms of value (Euro 900 million has been mentioned in the press as the final purchase price). The second half of the year witnessed a largest public takeover battle in Croatian history between Actavis and Barr Pharmaceuticals for majority control over Croatian pharmaceutical giant Pliva. The final purchase price paid by Barr Pharmaceuticals was in the range of EUR 2 billion.

As a result of further consolidation is certain sectors, such as banking and food industry, an even higher level of M&A activity may be expected in the future. This assumption has already proven as correct, since the large merger of equals between Agrokor and Delta, largest Croatian and Serbian retailers has been announced. It still remains to be seen whether and when this deal will go through.

With opening of accession negotiations with EU, the Croatian laws are currently in the state of tremendous flux. As a result, the regulatory framework governing business combinations might be affected. However, as the legislative developments are aimed at bringing the Croatian laws more in line with EU standards, this may at the end provide further comfort to foreign investors.

Framework of an M&A Transaction

Framework of a private M&A transaction typically falls into one of the two standard patterns.

First pattern is a seller-initiated M&A transaction, where the seller usually engages an investment bank or other consultant to prepare the transaction. The investment bank will prepare a detailed information memorandum describing the target and will contact the potential buyers with a request to express interest and submit non-binding preliminary offers.

After receiving preliminary offers, an auction is typically set. Seller, together with its investment advisor will prepare the data room for due diligence and assign time slots for different bidders. In addition, interviews with target management and key personnel are usually scheduled as well. Also, the seller and its investment advisors will typically prepare the first draft of the share purchase agreement, and potential bidders will be required to present their mark-up versions of the agreement together with their bid. Based on the information gathered during the due diligence phase, potential buyers submit their offers together with some other documents that may be required by the seller (e.g. description of financing). The seller ultimately chooses the most attractive bid, which is not necessarily the one with the highest price offered.

Second pattern is a buyer initiated M&A transaction, where the buyer identifies a potential target and approaches its management or major shareholders to establish willingness for a transaction. The initial stage is usually signing of the "Letter of Intent" or similar documents, followed by an agreement on confidentiality and due diligence of the target. Upon the completion of the due diligence review, extensive negotiations on transaction documents usually follow.

The transaction framework may significantly differ in the event of public bids, especially if the transaction is hostile.

Structuring the M&A Transaction

In general, private transactions may be structured as either an asset deal or as a share deal. Public transactions can generally be structured as mergers or tender offers.

Mergers and divisions have to be approved by the Shareholders Meetings of the respective companies. The resolution on the approval requires a qualified majority. By way of example, the resolution on the conclusion of the merger agreement has to be rendered by the majority of at least 75% of the share capital represented at the Shareholders Meeting. Acquisition of shares is not subject to special approval procedure by the Shareholders Meeting, unless the Articles of Association mandate otherwise.

As for the asset deals, the Companies Act mandates approval by the Shareholders Meeting if the transaction would result in the transfer of all or substantially all assets of the company. The law sets detailed rules on requirements and procedures in this respect. Any such transfer of assets needs approval by the majority of at least 75% of the represented share capital.

If a business transaction involves share exchange ratios or payment of some kind of cash compensation (e.g. mergers), these ratios and amounts of cash to be paid as consideration are subject to judicial review if challenged by the unsatisfied shareholders. However, if the challenges are launched only against the exchange ratio or only against the amount of cash compensation, these challenges can not block the transaction itself.

Finally, every resolution of the Shareholders Meeting can be challenged on the grounds that it violates applicable laws or provisions of the company's Articles of Association. Any challenge on these grounds may result in a significant delay of the transaction, as the business combination may generally not be finalized before the competent court rules on the challenge.

Hostile Transactions

Generally, the hostile takeover may be attempted through a public tender offer launched in accordance with the provisions of the Takeover Act. The Takeover Act contains detailed provisions as to the mandatory elements of the bid, deadlines to be observed, disclosure obligations, controlling powers of the Croatian Financial Services Supervisory Agency (hereinafter: "HANFA") and actions to be taken by the bidder and the target. Furthermore, there are provisions limiting the maneuvering space of the Management Board of the target company, however only in broad terms.

Due to the character of the securities market in Croatia, structure of the shareholdings in Croatian companies (controlling stakes held by one larger shareholder or by more shareholders acting jointly) and generally low free float of the shares, unsolicited bids have been very rare. One notable exception was Actavis' offer for shares of Pliva, which resulted in a public takeover battle between Actavis and Barr Pharmaceuticals.

Both mandatory and voluntary takeover bid can be (i) limited to the purchase of only unencumbered shares and (ii) conditioned with the success in acquiring the majority of voting rights in the target. Other than that, public tender offers have to be unconditional.

If the acquisition is to be executed through a public tender, conditional financing is not allowed. The bidder has to (i) deposit the whole sum required for the purchases of shares with the bank; or (ii) conclude with the bank a credit arrangement especially for the purposes of share purchases or (iii) obtain unconditional bank guarantee in favor of shareholders that would deposit their shares in accordance with the tender procedure. 

Duties of Target' Directors in M&A Transactions

In general, members of the Management Board are managing the business of the company within the limits set out in the Companies Act and company's bylaws (e.g. some transactions might need the prior approval of the Supervisory Board and/or of the Shareholders Meeting). They should act with the care of diligent and prudent businessmen. Although the Companies Act does not contain the express provision to that effect, the Management Board owes a fiduciary duty to the company and should take into account the interests of the shareholders, creditors and employees as well as the public interest. Breach of statutory duty triggers the personal responsibility of the members of the Management Board. Similar duties and consequences for the breach are provided for with respect to the members of the Supervisory Board.

In the context of business combinations, the obligations of the Management Board towards the company's stakeholders are further reinforced by legal provisions aiming at the preservation of the rights of (minority) shareholders and creditors of the company. In addition, the step list for most of the business combinations regulated by the Companies Act includes the duty of the Management Board to prepare and make available to the shareholders a report explaining the legal and economic background of the transaction.

Takeover Act contains further obligations imposed on the Management Board of the target company in respect to the announced takeover bid. While the bid is pending, the Management Board of the target is not allowed to increase the share capital of the company by issuing new shares or to decide on the acquisition of the treasury shares unless prior resolution of the Shareholders Meeting to that effect is obtained. Furthermore, the company must not perform any extraordinary activity that might result in the substantial alteration of its assets or liabilities. It is the express duty of the Management Board to familiarize the employees of the company with the takeover bid. The Supervisory Board of the target company is obliged to draft and publish a reasoned opinion on the takeover bid.

On the other hand, duties of the bidding company include: (i) treating all the shareholders of the target company equally; (ii) providing the shareholders of the target company with information necessary for the reasoned decision on the offer and disclosing prescribed data to the HANFA, target company and to the public; (iii) closing the transaction without unnecessary delay and not obstructing the business of the target company; (iv) securing the financing for share purchases in a manner prescribed by the Takeover Act; (v) publishing the report on the takeover.

Members of the Management and Supervisory Board may not use insider information in the trading with the shares of the company or to give investment advices in this respect. They have to report to the company, HANFA and stock exchange (or other regulated market) every acquisition of the shares of the company within 15 days following the transaction.


The squeeze out can be initiated by a shareholder holding shares that in the aggregate represent at least 95% of the company's share capital ("principal shareholder"). The Shareholders Meeting may, upon the request of a principal shareholder, resolve to acquire the shares of minority shareholders in consideration for reasonable cash compensation.

The amount of the cash compensation is determined by the principal shareholder. Although the compensation must be based upon the company's situation at the time when the share transfer resolution is adopted by the Shareholders' Meeting, there is no prescribed method for calculation of the amount of compensation.

A minority shareholder is entitled to file an action to set aside the resolution on the transfer of shares to the principal shareholder. Such action can in practice impede or delay the registration of the resolution with the commercial register.

The adequacy of the cash compensation itself may be opposed only in a specific procedure governed by the Companies Act. Such procedure may be initiated by a minority shareholder within two months from the registration of the resolution on the transfer of shares. It does not prevent the registration and, therefore, the transfer of shares itself, from becoming effective. If the court finds that the cash compensation is not adequate, it shall rule on the adequate amount, and (assuming unsuccessful appeals by the principal shareholder of said court ruling) the principal shareholder must pay the difference to the minority shareholder.

In general, the whole squeeze out process from the date of convening the Shareholders Meeting until the day of registration should not take more than 3 months. Of course, if minority shareholders challenge the decision on the squeeze out, the whole transaction can be substantially delayed.

Cross-border Transactions

Generally, there are no specific rules designed to cover cross-border transactions and their structure and course usually complies with well established international business practice. However, if the business transaction involving cross-border element can be qualified as a foreign investment (e.g. acquisition of the Croatian company by a non-resident), the Croatia-seated target company has to report to the Croatian National Bank.

Furthermore, cross-border transaction shall typically include detailed tax and accounting considerations. Finally, due consideration has to be taken regarding the compatibility of legal forms of entities involved.

Basic Tax Considerations

When structuring the business combination, numerous tax implications have to be taken into account. Corporate tax, personal income tax, VAT and applicable accounting rules (International Financial Reporting Standards) will be of utmost importance in this respect.

In addition, certain other taxes, such as the Real Estate Transfer Tax, can play an important rule. By way of example, due to the tax imposed on transfer of real estates, the need may arise to repackage the outright asset deal transaction as a share deal by transferring the real estates into the share capital of the special purpose vehicle (the "SPV") company. This hive down and subsequent transfer of shares of the SPV company can mitigate the tax load.

The gains realized through the sale of shares shall not be taxable when the seller is a Croatian individual. On the other hand, if the seller of shares is a Croatian company the gains realized through the sale of shares shall be treated as a taxable income. 

The Corporate Tax Act provides for thin capitalization rules. Therefore, if SPV company is used as an acquiring vehicle, due regard must be taken of these rules. In addition, withholding tax is levied on interest rates paid by a Croatian company to a foreign non-financial institution. Certain comfort in this respect may be provided through double-tax treaties.

Finally, various other tax and accounting issues must be taken into account For example, VAT taxation may arise in the context of asset deals.  Further tax/accounting issues might prove to be of importance, such as the issue of goodwill.



Contributed by Babic & Partners

Authors:           Boris Babic

                        Marija Gregorić

                        Luka Tadić ÄŚolić

                        Katarina Ĺ kvorc

                        Boris Andrejaš



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