Multi-jurisdictional guide 2014/2015, Private mergers and acquisitions in Montenegro: overview, published by Practical Law, authored by Milena Rončević.
Corporate Entities and Acquisitions Methods
1. What are the main corporate entities commonly involved in private acquisitions?
The two main corporate entities commonly involved in private acquisitions are the limited liability company (LLC) or joint stock company (JSC).
In an LLC each member has a share that represents their allocated percentage of the share capital. Therefore the share capital is not divided into individual shares; instead it is a reflection of the percentage of ownership. An LLC must have a minimum share capital of EUR1.
A JSC can offer shares to the public and have its shares listed on a stock exchange. A JSC must have a minimum share capital of EUR25,000 (Article 17, Paragraph 6, Companies Law Official Gazette of the Republic of Montenegro, no. 6/02 and Official Gazette of Montenegro no. 17/07, 80/08 and 36/11).
2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?
Restrictions on share transfer
Shares issued by a JSC must be fully paid up before their issuance. Whenever a JSC's share capital is increased by monetary contribution, the shares must be offered on a pre-emptive basis to the current shareholders in proportion to the number of shares they own.
Only those shareholders that had pre-emption rights on the day of the adoption of the decision for the increase of capital will be deemed to constitute current shareholders. If the current shareholders sell their shares, they lose their pre-emption rights and these rights will not transfer to the buyer of the shares.
A decision on allocating pre-emption rights can only be adopted at a general meeting with a two-third majority of the shares represented (in person or by proxy). The terms of a subscription offer made on a pre-emptive basis, including the period within which this right must be exercised must be published in the Official Gazette and all the shareholders must be informed in writing.
Pre-emption rights must be exercised within a period of no less than 30 days from the date of publication of the offer in the Official Gazette or from the date of the written notice provided to the shareholders, whichever is the later.
Pre-emption rights can be modified or withdrawn only by an appropriate resolution adopted by the general meeting. To do this, the board of directors must present to the general meeting a written report indicating the reasons for a restriction or withdrawal of pre-emption rights and justifying the proposed issue price. The text of this resolution must be filed with the Companies Registry within seven days of its adoption.
The shares of an LLC can be registered and transferred to external parties only in accordance with the procedures established under the statute. Shares can be transferred between the members of an LLC without restriction subject to the statute. When a member proposes to transfer its share, the other members of the LLC and the LLC itself have pre-emption rights. Where no agreement to purchase the share is reached between the transferor and the LLC's members, the share must be divided among the members proportionately to their current share in the LLC, unless otherwise provided in the statute. Where the members and LLC itself have declined to purchase the proposed share within 30 days from the date of the offer, the share can be transferred to a third party under terms that are no less favourable than those offered to the LLC or the existing members. In the event of the share being transferred, the transferor and transferee are jointly and severally liable to the LLC for obligations associated with membership. The share is transferred by way of a written agreement (Article 74, Companies Law).
Foreign ownership restrictions
There are no foreign ownership restrictions provided under the Companies Law.
3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)?
Share purchases are the most common way to acquire a private company and are more common than asset purchases.
Share purchases: advantages/asset purchases: disadvantages
The main advantages of a share purchase/disadvantages of an asset purchase are:
- Simplicity (the entire business is transferred subject to change of control provisions). On an asset purchase, all the assets to be transferred must be identified and individually transferred. Third party consents and approvals are usually required.
- Business contracts are generally unaffected unless they contain change of control provisions (although restrictions in third party contracts may sometimes not reflect the precise structure used).
- There is a potential double tax charge for the seller on an asset sale (that is, on the sale of assets and on the distribution of the proceeds of sale to the shareholders).
- Unless there are specific information/consultation requirements under collective agreements or trade union recognition agreements, it is not necessary to inform or consult employees or unions on a share purchase. However, employee relations considerations still apply, particularly where the buyer's agreement depends on satisfactory arrangements for the retention of key employees.
- Only the general meeting of the shareholders has the right to make a decision on the disposition of the company's assets (purchase, sale, lease, replacement, acquisition or another disposition), whose value is greater than 20% of the book value of the company's assets (assets of great value). The exception to this is where a lower value is determined by statute.
Share purchases: disadvantages/asset purchases: advantages
The main disadvantages of a share purchase/advantages of an asset purchase are:
- The buyer can pick and choose assets that it wishes to acquire and generally leave the liabilities with the target company. This also protects the buyer from any hidden liabilities that were not discovered by its due diligence investigation.
- An asset purchase avoids the problem of trying to locate missing minority shareholders.
4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.
The Companies Law does not provide for the sale of a company by auction.
5. What preliminary agreements are commonly made between the buyer and the seller before contract?
Letters of intent
Letters of intent are not commonly entered into on acquisitions, and are not legally binding. However, if the parties decide to enter into a letter of intent they record the main commercial points agreed and the basis on which the parties are prepared to proceed with the transaction. Key issues usually covered include:
- Shares or assets.
- Other major terms (for example, completion audit, non-compete, representations and warranties and employment agreements for key management).
- Costs and expenses.
Letters of intent may also address confidentiality and deal protection.
Exclusivity agreements where the seller agrees not to negotiate with or provide information to another prospective buyer for a period of time are permitted under the Companies Law, but only if any applicable pre-emption rights are respected and if this is expressly allowed by the company's statute.
Non-disclosure agreements are not commonly entered into in acquisitions. However, if the parties decide to conclude such an agreement, it must comply both with the statute and the Company Law.
The most relevant part of the non-disclosure agreement is clear definition of confidential information and the obligations of the parties (that is, recipients of the confidential information) regarding the non-disclosure of any and all information related to the transfer of share(s)/assets, purchase price and timetable of respective transaction, among other things.
6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?
There are no assets or liabilities that are automatically transferred in an asset sale that cannot be excluded from the purchase. However, in the event of the share being transferred, the transferor and transferee will be jointly and severally liable to the LLC for the obligations associated with the membership.
7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?
The creditors must be notified on an asset sale. Moreover, the target company must inform all creditors in writing at least 30 days prior to holding the general meeting of shareholders where the draft asset sale contract will be considered.
8. What common conditions precedent are typically included in a share sale agreement?
Conditions precedent may include:
- Shareholder approval.
- Approval of competition authorities.
- Advance clearance from tax authorities, for example where a seller receives securities and wishes to roll-over its capital gain.
- Reorganisation of target business.
- Any industry specific consents.
- Relevant third party consents (for example, change of control provisions in contracts).
Seller's Title and Liability
9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?
There are no terms implied by law as to the seller's title to the shares in a share sale. The law does not provide any specific wording necessary either.
10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?
A seller may be liable under the tort of deceit for fraudulent misrepresentation or for a negligent or innocent misrepresentation if it induces the buyer to enter into the contract (Law on Contracts and Torts).
Liability for innocent and negligent misrepresentation can be excluded by contract (usually in a so-called entire agreement clause) provided that the exclusion is reasonable. Liability for fraudulent misrepresentation cannot be excluded (and an attempt to do so can make an entire agreement clause invalid).
Advisers can be liable for negligent misstatements as well as under the tort of deceit. Increasingly, entire agreement clauses address this point, with the parties essentially agreeing not to sue the other's advisers.
11. What are the main documents in an acquisition and who generally prepares the first draft?
The main acquisition documents are:
Share purchase agreement (generally prepared by the buyer but can be prepared by the seller, depending on the parties' agreement).
Financial statements (or audit report) of the seller (prepared by the accountant or auditor).
12. What are the main substantive clauses in an acquisition agreement?
The key substantive clauses in a share purchase agreement are:
- Conditions precedent (such as shareholder approval).
- Agreement to purchase and sell.
- Price and price adjustments.
- Closing mechanics.
- How the business is to be run if there is a gap between signing and closing.
- Warranties and representations (warranties are often contained in a schedule to the agreement).
13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?
Theoretically, a share purchase agreement can provide for a foreign governing law, but this is extremely rare in a transaction being negotiated in Montenegro or relating predominantly to a Montenegro registered company.
Generally, where a foreign governing law is chosen, national law provisions do not apply. However, laws relating to the following, among other things, apply irrespective of the governing law:
- Employee protection.
- Competition protection.
- The mechanics of transfer and securities regulation.
Warranties and Indemnities
14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?
It is common to draft a share purchase agreement with extensive warranty protection. The warranties usually cover all assets, liabilities and transactions of the target.
15. What are the main limitations on warranties?
Limitations on warranties
Common limitations on warranties are:
- Right to make disclosures against the warranties.
- Exclusion of small claims (on the basis that they are immaterial and a nuisance).
- Time limits for bringing claims.
- A conduct of claims provision.
- A qualification that some warranties are made "so far as the seller is aware".
Qualifying warranties by disclosure
Warranties are usually qualified by disclosure. The seller usually states in the share purchase agreement that warranties are subject to disclosure and prepares a separate disclosure letter qualifying the warranties.
The buyer will usually try to negotiate the inclusion of a clause in the sale agreement stating that the warranties are only qualified by matters specifically disclosed in the disclosure letter and not by any other information of which the buyer has knowledge. From case law, the ability of the buyer to rely on this type of provision, and to sue for breach of warranty where he has actual knowledge of a qualification, is open to doubt.
16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?
The remedy that can be sought for breach of a warranty is damages for breach of contract (subject to proving loss that is not too remote from the breach and the duty to mitigate unless the warranties are given on an indemnity basis).
Time limits for claims under warranties
For general warranties the time limit is usually set within three to five years as of the closing of the transaction (Law on Contracts and Torts).
Consideration and Acquisition Financing
17. What forms of consideration are commonly offered in a share sale?
Forms of consideration
The most common form of consideration is cash, either funded out of the buyers' own resources or funded by debt.
Factors in choice of consideration
The most relevant factor for the seller in the choice of consideration is whether it wants cash and a complete exit from the target business or to retain an interest in the combined business.
18. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?
Whenever the capital is increased by monetary contribution, the shares must be offered on a pre-emptive basis to the current shareholders in proportion to the number of shares they own (see Question 2, Restrictions on transfer).
Consents and approvals
Shareholder consent may be required to give directors the authority to allot shares. Further approvals at a duly convened general meeting would almost certainly be required in respect of any significant acquisitions.
Requirements for a prospectus
The prospectus must be a public invitation to subscribe for securities. It must contain all the information necessary for the investor to form a realistic opinion of:
- The shares.
- The rights and obligations associated with the shares.
- Profit and loss.
- Prospects of the issuer.
The required contents of a prospectus are outlined by the Commission for Securities (Commission).
If several securities are issued by way of a public offering in the same year, the issuer must submit a complete prospectus to the Commission for the first issue only. Any subsequent share issue in the same year merely requires an updated prospectus containing any differences from the first prospectus that would have an impact on the value of securities (a supplement to the prospectus). The original complete prospectus must be attached. Every new important fact or inaccuracy in the prospectus that could affect assessment of the security and that arises or that has come to light between publication of the prospectus and expiration of the period for subscription to and payment for securities, must be mentioned or corrected in a supplement to the prospectus, which must be accessible to the public in the same manner as the prospectus.
The prospectus must be approved by the Commission. By approving the prospectus, the Commission confirms that the prospectus contains all the data required by law. If the Commission does not make a decision on the approval of the prospectus within the prescribed period of 30 days it will be assumed that the prospectus has been approved. In the case of proving that a prospectus has not been duly approved, the burden of proof will fall on the Commission.
19. Can a company give financial assistance to a potential buyer of shares in that company?
A company cannot give loans, guarantees or provide any kind of financial assistance to a potential buyer of shares in that company (Article 60, Paragraph 16, Companies Law).
Exceptionally, limitations on giving loans, guarantees or providing any kind of financial assistance to a potential buyer of shares in that company do not apply to the activities of the financial organisations, as well as to the acquisition of shares in order to give those shares to the employees of the relevant company (Article 60, Paragraph 17, Companies Law).
Signing and Closing
20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?
Documents commonly produced and executed at signing meetings include:
- Acquisition agreement (the agreement to sell and purchase shares).
- Board resolutions of the parties approving the transaction and giving authority to enter into the transaction documents.
- Power of attorney (if an attorney needs to be appointed to execute documents in the absence of one of the parties).
Documents commonly produced and executed at closing meetings include:
- Stock transfer forms (the instrument required to transfer title to shares).
- Irrevocable powers of attorney in favour of the buyer (to enable the buyer to exercise all voting and other rights attached to the sale shares pending registration of the transfer of shares).
- Share certificates for consideration shares/indemnities for lost share certificates.
- Resignation letters for the existing directors, company secretary (if any) and auditors.
- Closing minutes of the company.
- Shareholder resolutions for the target (for example, adopting new articles of association, approving the registration of the buyer as a shareholder).
- Release of any security and/or guarantees (if applicable).
- Retention agreement/escrow agreement (if applicable).
21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?
The law makes a distinction between documents that must be:
- Sealed and signed by a director or another person with authority on the company's behalf.
Both notarisation and apostilisation of a document are required for a company's documents that are executed abroad or for documents that are executed in Montenegro by way of a power of attorney. In addition, a share transfer agreement must be notarised irrespective of its place of execution.
22. What are the formalities for the execution of documents by foreign companies?
A foreign company must execute documents in one of the following manners:
- Authorised signatory or signatories, provided execution is in accordance with the certificate of incorporation or certificate of directors.
- Notarisation and apostil.
- Company's seal (where the company has its own seal).
23. Are digital signatures binding and enforceable as evidence of execution?
Although the Electronic Communication Act provides for digital signatures this method of signature is still not used in practice.
24. What formalities are required to transfer title to shares in a private limited company?
The following formalities are required to transfer title to shares in a private limited company:
- Execution of a share transfer agreement (notarisation and apostil).
- Amendment of the company's statute.
- Proof of payment by the buyer.
- Issuance of a new share certificate.
25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?
Capital gains tax must be paid on a share sale at the rate of 9%.
Stamp duty land tax must be paid on transactions involving a transfer of land or buildings at a rate of 3% of the value of the property as estimated by an independent tax appraiser.
26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?
It is not possible to avoid capital gains tax as the sale of shares must be registered in the accounting records and financial reports. However, share transfer agreements for no consideration are commonly used in practice to avoid capital gains tax.
It is not usually possible to avoid stamp duty tax. However, in the case of a company spin-off (with the incorporation of a new company that continues to perform the same activity as the existing company) the transfer of the land from the existing company to the new company is not subject to stamp duty tax.
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?
Capital gains tax is payable at the rate of 9%.
There is no corporate tax on an asset sale; only stamp duty is payable (see Question 25, Asset sale).
28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?
See Question 26, Share sale.
See Question 26, Asset sale.
29. Are other taxes potentially payable on a share sale and an asset sale?
Value added tax (VAT) is potentially chargeable on the sale of assets, but the sale of an entire business as a going concern is outside the scope of VAT.
A sale of shares is either exempt from VAT or also outside the scope of VAT. The standard rate of VAT is currently 19%.
30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?
Under the Capital Gains Tax Law, parent and subsidiary companies will constitute a group of related companies if the parent company has direct or indirect control over at least 75% of shares or equity of the subsidiary company. Related companies have the right to tax consolidation provided that those companies are resident in Montenegro. The parent company must submit a request for tax consolidation to the competent tax authority by 31st December of the relevant tax period. The competent tax authority must make a decision within 30 days from the day of the submission of the request.
Each member of the related companies group must submit its tax return to the competent tax authority, while the parent company must submit the consolidated tax return for the entire group. In the consolidated tax return, losses of the related companies must be offset against the profits of other related companies in the group.
Under the consolidated tax return, the taxpayers are the individual companies, whose liability is proportionate to the taxable profit from individual tax returns. Once approved, tax consolidation must be applied for a period not less than five years.
31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?
The parties must comply with respective labour regulations and inform the employees or their representatives of the asset sale, particularly if the asset sale will have an impact on the employees.
No employee consent is required.
The parties must comply with the respective labour regulations and inform the employees or their representatives on share sale especially if the share sale will have an impact on the employees.
No employee consent is required.
32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?
Provisions of the Labour Law protect the employees against dismissal in the context of a share or asset sale. Generally, in the case of statutory changes or changes of the employer, the employees are automatically transferred to the buyer in a business sale. The buyer must respect all rights and obligations of the employees from the current employment agreements. The seller must inform the employees in writing on the business sale at least five days before the transaction. The buyer must conclude employment agreements with the employees within five days of the transfer date and the new employment agreements cannot be any less favourable for the employees than the employment agreements that the employees had with the seller. However, if an employee refuses to conclude an employment agreement with the buyer or does not respond to the offer within the provided deadline, the seller can dismiss the employee (Article 87, Labour Law).
The seller and the buyer must inform the respective trade union of the following:
- Date of the business sale.
- Reasons for the business sale.
- Legal, economic and social consequences of the business sale and changes of the employer and their impact on the employees as well as mitigation measures.
If there is no respective trade union, the seller must inform the employees (Article 90, Labour Law).
No specific additional employment protection against dismissal is required as there is no change in employer.
Transfer on a business sale
See above, Business sale.
33. Do employees commonly participate in private pension schemes established by their employer? If an employee is transferred as part of a business acquisition, is the transferee obliged to honour existing pension rights or provide equivalent rights?
Private pension schemes
The employer is obliged to regularly pay social insurance (covering health, pension and disability insurance, and unemployment insurance) for all its employees on a monthly basis.
Aside from the obligatory state social insurance, Montenegro has several private pension funds. However, the employer is not obliged to pay social insurance to private pension funds; the contribution is voluntary. In practice, private pensions scheme are new and not very popular yet.
Pensions on a business transfer
The buyer continues to pay obligatory social insurance from the date of business transfer. If a private pension scheme were in place, the buyer would not be under an obligation to honour existing pension rights or provide equivalent rights.
34. Outline the regulatory competition law framework that can apply to private acquisitions.
The following are concentrations for the purposes of merger control:
- A merger of two or more independent undertakings or parts thereof in the relevant market.
- An acquisition, by one or more natural persons already controlling at least one undertaking, or by one or more undertakings, of indirect or direct control of the whole or a part of another undertaking.
- Two or more independent undertakings establishing a new undertaking or acquiring joint control of the existing undertaking that operates independently on a lasting basis and performs all the functions of an autonomous undertaking (joint venture).
A concentration must be implemented only on the basis of the approval that is issued by the Agency for Protection of Competition (Agency) on the request of the undertakings involved.
A request must be submitted provided one of the following criteria is met:
- The combined aggregate annual turnover of at least two parties to the concentration achieved in the market of Montenegro exceeds EUR5 million in the preceding financial year.
- The combined aggregate annual worldwide turnover of the parties to the concentration achieved in the preceding financial year exceeds EUR20 million, if at least one party's turnover in Montenegro achieved EUR1 in the same period.
In exceptional circumstances, the Competition Agency may independently initiate a merger control procedure if a concentration that had not been notified (and was not notifiable, according to the financial thresholds criteria), results in the merged undertakings having a market share above 60%. The market share threshold is not a jurisdictional threshold, that is, the parties are not obliged to file a notification with the Agency if their combined market share in any relevant market exceeds 60%.
The statute of limitations for initiating the fining procedure in Montenegro is two years from the implementation of the concentration without clearance. In any event, no fine can be issued after four years from the date of implementation (absolute statute of limitations).
Notification and regulatory authorities
The parties to the concentration deemed responsible for filing are:
- In mergers and joint ventures: all parties to the agreement.
- In acquisitions: the acquirer(s).
Requests for merger clearance must be submitted to the Agency.
The test used by the Agency is whether the concentration would cause a "significant prevention, restriction or distortion of competition, particularly as a result of the creation or strengthening of a dominant position'' (SIEC test).
35. Who is liable for clean-up of contaminated land? In what circumstances can a buyer inherit and a seller retain liability in an asset sale and a share sale?
The owner of the land is liable for clean-up of contaminated land. The seller is obliged to clean the land and the buyer inherits this obligation from the moment of the purchase. The seller retains liability in an asset sale if the land was not cleaned-up in accordance with the agreement.
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