M&A Guide 2024: Slovenia

In 2024, the Slovenian M&A market has remained at a similar level to 2023. Recently, there has been an increase in the number of restructurings and reorganisations, such as spin-offs and demergers, of companies with headquarters in Slovenia, and reorganisations of entire groups across Europe with a presence in Slovenia. There are two main factors: internal governance or preparation for the sale of the spun-off part of the business.

The most prominent reorganisation of 2023 was that of Novartis Group, which spun off its generics and biosimilars business across the globe into an independent Sandoz Group. In Slovenia, a reverse spin-off occurred; namely, the Novartis business was spun off from LEK (belonging to Sandoz Group) to a newly established Novartis entity.

2022 and 2023 were busy years in the telecommunications sector, where one trend was companies separating their infrastructure (towers) business from the business of the provision of telecommunication services. Telemach Slovenija and A1 Slovenija opted to do so, and United Group subsequently sold its towers business in Slovenia, Croatia, and Bulgaria to Tawal, a Saudi-backed investor.

Reorganisations are also happening on a smaller scale, especially involving small and mid-size limited liability companies, where executives are entering the ownership structures.

M&A activity is further driven by family-owned or partially employee-owned businesses, where the shareholder owner/directors are nearing retirement age. This has led to sales to a third-party investor (mostly strategic ones) or the transfer of the business to the younger generation and/or key employees.

Some new ideas have been floated with respect to generational employee ownership of companies in Slovenia recently. The arrangements are similar to co-op structures, whereby employees would own the company while they remain employees. However, that opens up legal and practical questions, and will require legislative involvement, particularly regarding the tax implications.

The Slovenian M&A market is predominantly driven by private transactions, where the target companies are mostly limited liability companies. However, public M&A transactions are gaining pace. The Slovenian takeover rules that apply to unlisted joint-stock companies above a certain size result in an increased amount of public takeover bids. This trend has led to different transaction structures, where the regulatory aspects are becoming increasingly important.

While the reorganisation of the Novartis Group was the largest transaction in 2023, another prominent deal was Datalab, a Slovenian provider of accounting software solutions in the wider region, being taken over by a group of investors led by Luxembourg-based Rucio Investment and Andrej Mertelj, the CEO of Datalab. The transaction involved a joint takeover agreement between Rucio Investment, Mertelj, and over 100 other persons acting in concert.

On November 15 2023, Slovenia’s largest fast-moving consumer goods retailer, Mercator, signed an agreement to acquire a rival, Engrotuš. While approval by the competition authority is still pending, the transaction would be an important consolidation in Slovenia’s retail space.

Although it was expected that inflation, high interest rates, and the effects of the COVID pandemic would lead to reorganisations and restructurings of companies in financial distress on a large scale, this has not yet happened.

While several recent major transactions have involved institutional investors – mostly private equity (PE) funds – investing in Slovenian companies, investments by strategic investors have regained significant traction (for example, the Spanish Gonvarri taking over H&R, the owner of Hidria, which develops innovative solutions for automotive and industrial applications).

As mentioned above, corporate restructuring and reorganisations due to financial distress do not yet seem to be at the forefront of deal generating, although this can be, to some extent, expected due to elevated interest rates (e.g., non-performing bank loans, and distressed and non-core assets). The monthly minimum wage has also again been increased, from €1,203.36 gross to €1,253.90, and this is expected to have a material impact on several labour-intensive industries.

Financial investors have been acting, and continue to act, in the market as deal originators, primarily looking for undervalued local businesses with significant growth and expansion potential, and with a particular focus on the IT sector. Slovenia has a strong entrepreneurship base and many local companies are targeted by financial investors looking to acquire them and exit after consolidation with other players in global markets.

Most share deals in Slovenia involve limited liability companies or joint-stock companies, both of which are regulated by the Companies Act. The Companies Act also regulates mergers, demergers, cross-border mergers, and spin-offs of these companies.

Pursuant to the Companies Act, sale and purchase agreements for shares in limited liability companies are entered into in the form of a notarial deed. 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 permission by a majority, or all, of the shareholders is required for a transfer. Transfers of shares in limited liability companies are registered with the court (business) register upon the transaction.

Sale and purchase agreements for stocks in joint-stock companies do not need to be entered into in the form of a notarial deed. No statutory right of first refusal of 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 refusal to issue permission are significantly more limited for public than for private joint-stock companies, and different consequences apply to these companies if permission is not obtained before the transfer.

Asset deals are regulated in the Companies Act and Obligations Code. 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., the buyer) shall be liable – in addition to, and jointly and severally with, the previous holder (e.g., the seller) – for any debts relating to that property up to the value of that property unit’s assets. This liability of the buyer (albeit limited) may be a deterrent for investors wishing to enter an asset deal.

Takeovers of public and certain private joint-stock companies are regulated in the Takeovers Act, which prescribes rules for mandatory and non-mandatory (voluntary) 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 a third of the voting rights in that company. The shareholders under the obligation to submit a mandatory takeover bid who fail to do so will have their voting rights suspended and may not vote at the general meeting of the company until a successful bid is submitted.

Compliance with the Takeovers Act is monitored and breaches thereof are sanctioned by the Securities Market Agency. In Slovenia, takeover legislation applies to any joint-stock company that has over 250 shareholders or over €4 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 pursuant to the Prevention of Restriction of Competition Act, or the European Commission pursuant to the applicable EU regulations. Transactions have to be notified to the Competition Agency if 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. The Competition Agency may also request the transaction to be notified if the parties to the transaction (with affiliates) hold a combined market share of over 60% in Slovenia.

On July 1 2023, a new regulation regarding the screening of foreign direct investment took effect. The new regime seeks to balance promoting a business-friendly environment and legal certainty for investors with the protection of critical infrastructure and safeguarding of national interests. Importantly, the law no longer imposes a notification obligation on investors from the EU.

A foreign investor is considered a natural or legal person established in a third country (a non-EU country) who intends to make a direct or an indirect investment in Slovenia, or has already made such an investment, resulting in the acquisition of at least 10% of the capital or voting rights in a Slovenian company in which the business activities are predominantly in the field of critical infrastructure; critical technology or dual-use items; the supply of critical resources; access to sensitive data; media; or projects and programmes in the interest of the EU. Investors from third countries are required to submit a notification, even if they are indirectly involved in the ownership structure, if they meet the criteria set above.

The amended law includes procedural changes. Namely, in contrast to the previous regulation, the Ministry of the Economy, Tourism and Sport will now make a substantive decision through an administrative procedure to approve an investment, approve an investment with conditions (remedies), or prohibit an investment entirely. The ministry is also required to issue a decision if it considers that:

• The applicant is not a foreign investor;

• The transaction does not involve direct foreign investment; or

• The activities of the target or acquired company (or newly established company) in Slovenia are not related to the above-mentioned critical sectors.

The law provides a list of non-exclusive remedies that can be imposed on a foreign investor, for a maximum duration of 10 years.

Foreign investors entering the Slovenian market are sometimes surprised by the lack of precedents and established case law on M&A (although this is not uncommon in the region). This is primarily due to the customary market practice of entering into arbitration agreements instead of leaving cases to be adjudicated by the courts, and to settle disputes in private rather than in public view.

Furthermore, as transfers of shares in limited liability companies (the predominant form in Slovenia) need to be entered into the court register upon the transaction, this often requires complex closing mechanics that need to be appropriately drafted in the deal documentation and includes certain risks. Furthermore, a sale and purchase agreement for the purchase of the business shares in a limited liability company needs to be concluded in the form of a notarial deed, so the presence of the notary is always necessary in deals involving a limited liability company.

Pursuant to Slovenian legislation, all the deal documentation (e.g., share and purchase agreements, and articles of association) and information on the ultimate beneficial owners of the company is, in principle, publicly available and published online or easily accessible at the court register or the land registry. As the parties are generally hesitant to publicly disclose all the information on the deal, they ordinarily opt to enter into separate short-form documents for delivery to the court register that only contain a limited amount of information.

Contrary to the mandatory takeover regimes in larger economies, the rules in the Takeovers 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 be overlooked but may have significant consequences (fines of at least €80,000 and potential loss of voting rights) is adequate wet ink reporting of acquired voting rights thresholds and option and futures agreements to the Securities Market Agency.

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’s workers’ representatives of the anticipated transaction at least 30 days before the decision for the transaction is adopted, and perform consultations with them; i.e. not before an agreement is closed, but before the decision is made to enter into the transaction. A relic of Slovenia’s era of transition into a market economy and private ownership at the beginning of the 1990s, this statute is often at odds with modern conceptions of corporate decision making and deal progress. As it is not always clear at what time the decision for a transaction was ‘adopted’, it is advisable that the parties are sufficiently cautious and make a timely notification.

Jadek & Pensa’s experience is that 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 for 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%).

Some dilemmas for sellers who are natural persons have been resolved by the recent case law, stating that, in principle, taxation of the disposal of capital is not affected by an agreement being concluded under a condition precedent, provided that the condition was agreed between the parties and is not explicitly determined under the law. Thus, as a rule, the capital is deemed to be disposed of already at signing and not at closing (when the condition precedent is fulfilled). Nevertheless, these cases shall be interpreted on a case-by-case basis.

Advisory companies in Slovenia 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 implemented 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, which reduces the time and effort needed to analyse significant volumes of land registry data.

In the public market, the key factors for a successful acquisition are the economic conditions of the offer, especially the purchase price, and, at times, 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 12 months before the publication of the bid. Generally, the shareholders in competitive/hostile takeovers expect from the acquirer an above-market price and are less willing to sell than in a friendly takeover.

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

A takeover bid may only include the conditions stipulated in the Takeovers Act, which mainly relate to the 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 that is under the obligation to make the mandatory bid shall be suspended until a successful bid reaching that threshold is made.

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.

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 a significant administrative and accounting/discrepancy resolution burden on the parties and are thus more common in large and complex deals, particularly in PE transactions.

While a locked-box mechanism is easier to execute and more often used in smaller transactions, the mechanism has also been deployed 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 expensive and excessively limited in the risks covered).

Earn-outs are more often used by PE funds than strategic and other investors, and do not often end up in the deal documentation as the sellers are unwilling to accept the uncertainty of economic performance of the company under the new owner’s management.

Agreements on escrow mechanisms are common in transactions with a small number of sellers (5–10 % of the purchase price, for one to two years) 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.

A large 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.

Due to relatively high interest rates, there are predictions that M&A activity in 2024 will remain on a similar level to that in 2023. Predictions of reorganisations and restructurings of companies in crisis due to high interest rates, a higher minimum wage, and the impact of high electricity prices on companies' business may also materialise. However, companies with cash on hand and well-prepared strategies will be able to make bold transactional moves during such uncertain times and have the upper hand in the M&A market.

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 for exit. Jadek & Pensa also expects that ownership changes will continue in so-called family-owned businesses due to generational changes.