This article, authored by Nihad Sijerčić, was originally published in Private mergers and acquisitions in Bosnia and Herzegovina: overview, which is distributed by Practical Law.
Corporate entities and acquisition methods
1. What are the main corporate entities commonly involved in private acquisitions?
The main corporate entity commonly involved in private acquisitions is a limited liability company (LLC) (društvo sa ograničenom odgovornošću (DOO)). The minimum share capital in an LLC is about BAM 2,000 in the Federation of Bosnia and Herzegovina, whereas in the Republic of Srpska there is a minimum capital requirement of only BAM1.
The second most common corporate entity used is the joint stock company (JSC) (dioničko društvo (DD) in the Federation of Bosnia and Herzegovina or akcionarsko društvo (AD) in the Republic of Srpska). The minimum share capital for a JSC is about BAM 50,000 in the Federation of Bosnia and Herzegovina, while in the Republic of Srpska the minimum share capital for a closed JSC is BAM 20,000 and for an open JSC is BAM 50,000. The capital threshold may be higher depending on the JSC's registered activity. The threshold amount will be contained in the substantive law governing the specific activity that the JSC undertakes. For example, a minimum share capital for a bank is about BAM 15 million.
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 subject to conditions cannot be transferred without first obtaining corporate approval in writing. The law also entitles shareholders to a right of first refusal where there is a share transfer. Additionally, specific laws may provide for other restrictions for companies that are registered to carry out specific activities (for example, in banks and insurance companies) by requiring that the transfer must receive the approval of the relevant Bosnian regulatory body. The shareholders are also free to incorporate additional restrictions in respect of a share transfer in the incorporation documents.
Foreign ownership restrictions
Foreign nationals (both individuals and legal entities) can acquire share(s) in Bosnian companies under the same conditions as Bosnian individuals or legal entities.
However, the Law on Foreign Investments provides restrictions on foreign investments in the capital of:
- Companies engaged in the production and sale of arms, ammunition and explosives for military purposes.
- Companies engaged in the production and sale of military equipment.
- Media companies.
These investments cannot exceed 49% of the capital of the company.
For certain foreign investments, the government of the respective entity may adopt a decision on exemption from the above mentioned restrictions.
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)?
The most common ways to acquire a private company are to purchase its share(s) or its assets under an agreement executed between the seller and the buyer. Signatures must be certified before a notary.
Share purchases: advantages/asset purchases: disadvantages
The main advantages of a share purchase are:
- The buyer acquires the target company (its share(s)) with all of its assets, agreements, IP rights, licences, insurance policies and so on, and there is no need for additional formalities relating to such transfers.
- Shares of a company that owns the asset are transferred free of local taxes. Transfer of immovable property in the Federation of Bosnia and Herzegovina is subject to a 5% transfer tax, while the same transfer is not subject to tax in the Republic of Srpska.
- An asset purchase could attract VAT, while a share transfer is not subject to VAT. VAT on an asset purchase is triggered both where:
- the ownership under new and unused immovable property is the subject of the first transfer;
- the transfer is of movable goods.
By exception, if the asset purchase fulfils the criteria for the purchase to be treated as a Transfer of Going Concern (TOGC), the asset purchase is not subject to VAT. A share transfer is not subject to VAT in Bosnia and Herzegovina.
- Tax losses generated in the target company can be carried forward for five years.
Share purchases: disadvantages/asset purchases: advantages
The buyer can pick and choose the assets that it wishes to acquire and generally leaves liabilities with the seller. This also protects the buyer from any hidden liabilities undiscovered by its due diligence.
4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.
An auction is mandatory for a sale in an enforcement procedure in cases where the Law on Enforcement Procedure is applicable. For joint stock companies the shares can be subject to auctions on the stock exchange markets, when the conditions prescribed by the law are met, though these are not common. Public auctions most commonly take place with regard to the sale of assets, rather than companies, as part of a collection or a company winding-up procedure.
5. What preliminary agreements are commonly made between the buyer and the seller before contract?
Letters of intent
The most common preliminary agreements are letters of intent (or a memorandum of understanding), term sheets or heads of terms. They represent a non-binding form of exchange in negotiations, unless otherwise stipulated. In general, the negotiations preceding the execution of an agreement are not binding. However, a party that has negotiated or broken off negotiations contrary to the principles of good faith and fair dealing is liable for the damage caused to the other party. It is contrary to the principle of good faith and fair dealing for a party to enter into negotiations with the other party with no real intention of reaching an agreement with the other party. Generally, each party bears its own expenses in connection with any preparations for entering into a contract. Any joint expenses are covered in equal proportions. However, if preliminary agreements are in the form prescribed for the agreement and with all the elements of an agreement, they could be considered to be binding.
The Law of Contract and Torts does not recognise different types of preliminary agreements. In practice, these types of agreement are mostly concluded in cases with a foreign element (that is, where one of the parties is a foreign entity).
Exclusivity agreements (also known as lock-out, shut-out or no-shop agreements) refer to agreements between the parties to a prospective transaction where they agree that the deal negotiations will be carried out solely between them for a certain period of time. The intention is to give a particular party some protection from another party outbidding them for a specific period of time. This kind of provision can sometimes be included in the letter of intent.
A pre-contract agreement is a binding agreement whose parties undertake the obligation to subsequently enter into a main agreement.
A non-disclosure agreement is essentially a confidentiality undertaking given by the parties involved in the respective transaction (that is, a transfer of share(s) or assets). The most important part of the non-disclosure agreement is the clear definition of confidential information and the obligations of the parties (the recipients of the confidential information) regarding non-disclosure of any or all information related to the transfer of share(s)/assets, purchase price, timetable of the transaction, and so on, as well as the duration of the confidentiality undertaking.
6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?
Under the local legislation, an acquirer of assets (or part of those assets) will be liable for the debts relating to those assets (or part of those assets) jointly and severally with the previous holder of those assets, up to the value of the acquired assets. Any contractual provision between the transferor and transferee excluding or limiting this liability will be deemed null and void. Although in order to trigger the acquirer's liability the debts must be sufficiently connected to the pool of assets that are subject to the transfer, it should be noted that there are no clear guidelines in the law or in court practice as to what constitutes a sufficient connection between the debt and the assets.
7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?
Creditors generally do not have to be notified of an asset sale. However, if an asset sale represents asset stripping that leads to the seller's bankruptcy, or otherwise makes the seller unable to pay its creditors, the creditors are entitled to challenge the sale within statutory limits and subject to proving certain conditions. In principle, the disposal of assets can be challenged if, at the moment of the disposal, either the seller was aware, or could have been aware, that such a transaction would inflict damage on his creditors, or if a third person (that is, a buyer) with whom or for whose benefit such a legal transaction was undertaken was aware, or could have been aware, of that damage.
Additionally, in loan agreements there is a general practice to contract a provision to prohibit further sale or disposal of assets that are subject to a lien for a benefit of creditor without the prior written consent of the creditor.
8. What common conditions precedent are typically included in a share sale agreement?
Conditions precedent usually address the due diligence findings and formal preconditions to the sale, such as:
- Pre-emption rights and options waivers.
- Release of shares pledge escrowed, conditional upon receipt of payment.
- Clearance of industry-specific requirements.
- Fulfilment of certain repairs.
A failure to fulfil the conditions precedent usually leads to a payment of liquidated damages or the agreement's termination.
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?
A seller's title is registered in the public registry. There is no specific wording necessary to be included in a share and purchase agreement relating to a seller's title of shares. In practice, however, the share and purchase agreements include numerous warranties from the seller, evidencing, among other things:
- Its title to shares.
- The non-existence of pre-emption rights of other shareholder(s) or a company or any third party.
- The seller's legal authorisation to enter into a share and purchase agreement.
- Compliance with the applicable laws and acts of the target company (for example, if the sale of shares requires the prior approval of the company's corporate bodies).
- The non-existence of disputes related to title to shares, or any encumbrances or other third party's rights over shares (other than those disclosed by the seller).
10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?
A seller can be liable for fraudulent misrepresentation. Liability for fraudulent misrepresentation cannot be excluded. Further, in the context of negotiations related to the conclusion of the agreement, a party to negotiations can be liable if either:
- They conducted negotiations without the intention of concluding an agreement, which resulted in damage to the other party.
- They initially conducted negotiations with the intention to conclude the agreement but gave up that intention without a justified reason, which resulted in damage to the other party.
Liability of advisers is limited to their knowledge and negligence. Usually the seller will be liable and advisers can have a duty to indemnify.
11. What are the main documents in an acquisition and who generally prepares the first draft?
The main document in a limited liability company acquisition is the share purchase agreement and share transfer agreement, usually prepared by the buyer. The sale and purchase agreement can be a single document. As the share purchase agreement is deposited with the registration court and publicly available at the registry, the parties to the agreement usually opt to execute the share purchase agreement with specific, non-mandatory conditions agreed between the parties, in addition to the share purchase agreement mandated by the law.
In general, in the Republic of Srpska a purchase of shares in a joint stock company (JSC) is conducted by the brokers and banks that have obtained a licence to trade with shares in accordance with relevant regulation (that is, stockbrokers).
The seller of the shares must conclude a written agreement with a broker. Trades with publicly issued shares can only be performed by the brokers on the stock market or other regulated market under acquisition agreements.
This also applies in the Federation of Bosnia and Herzegovina where trading of shares in a JSC is conducted on a stock market, another regulated market or, in a limited number of cases, out of a stock market that has the purchase agreement executed by a professional intermediary (that is, the broker).
12. What are the main substantive clauses in an acquisition agreement?
The sale and purchase agreement includes:
- Execution location and date.
- Share identification.
- Price and possible adjustments.
- Conditions precedent.
- Closing mechanics.
- Signing and closing interim period provisions and post-closing actions.
- Warranties and representations.
- Boilerplate clauses concerning confidentiality, assignment, governing law and jurisdiction, language and so on.
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?
The share and purchase agreement must be subject to Bosnian law. If the parties agree to have a separate agreement governing non-mandatory terms of the sale, they can sign a separate agreement stipulating for the application of a foreign law, provided that one party to the agreement is a foreign individual or entity.
Warranties and indemnities
14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?
It is common to provide for representations and warranties in both share and asset deals. Warranty/indemnity provisions generally cover compliance issues specific to the sale (see Question 9).
15. What are the main limitations on warranties?
Limitations on warranties
The parties can limit the warranties to the seller's knowledge and specific thresholds. However, under the local law, no limitations are applicable where damage has been caused either intentionally or by gross negligence.
Qualifying warranties by disclosure
Warranties are usually qualified by disclosure and the list of documents/matters disclosed is appended.
16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?
The usual remedies are a price reduction, damages and/or termination of the agreement.
Time limits for claims under warranties
The statutory limitations are three to five years as of the closing of the transaction in the Federation of Bosnia and Herzegovina, while in the Republic of Srpska it is between three to ten years.
It makes sense to align certain warranties (such as the ones on tax) with the statute of limitations.
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, where the payment mechanism is agreed between the parties (for example, payment could be made in full, after the closing of the transaction, in several instalments, and so on). Cash is usually provided out of the buyer's own resources, or by taking a loan from a bank.
The form of consideration can also be shares in the buyer or its parent company, which can be used as the entire consideration or can be combined with a cash element.
Factors in choice of consideration
The main factor is what the seller wants from the transaction (receiving its money and getting out of the business, or having an opportunity to maintain a stake in the business by obtaining shares from the buyer).
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?
If a buyer in Bosnia raises cash to fund an acquisition by an issue of shares, the issue is typically structured as a public offer. The supervisory board of a joint stock company must submit the request for approval of a public offer of shares to the Commission for Securities of the Federation of Bosnia and Herzegovina or the Commission for Securities of the Republic of Srpska.
Consents and approvals
Approval is required from the Commission for Securities of the Federation of Bosnia and Herzegovina and the Commission for Securities of the Republic of Srpska, depending on the facts of the individual transaction.
Requirements for a prospectus
In general, the publication of a prospectus is required for companies where they issue shares by way of a public offer.
Normally a prospectus must provide information on the following:
- Full, correct and objective information on the company.
- Information on the company's assets and obligations.
- Information on the company's losses and gains.
- The company's financial position and perspectives.
- Potential risk factors.
- The rights attached to the shares.
In the Republic of Srpska a prospectus can only be published after obtaining the approval of the Commission for Securities of the Republic of Srpska.
The requirements for a prospectus, the procedures for their issuance, and the mandatory content for a prospectus are prescribed by the Republic of Srpska and the Federation of Bosnia and Herzegovina Laws on the Securities Market, as specified by the various bye-laws that have been adopted by the Commission for Securities of the Republic of Srpska and the Commission for Securities of the Federation of Bosnia and Herzegovina.
19. Can a company give financial assistance to a potential buyer of shares in that company?
Financial assistance restrictions apply to the purchase of shares in both a joint stock company and a limited liability company. These restrictions are specifically provided in the Law on Corporations, which states that a company cannot provide or guarantee advances, loans and credits in the process of selling its shares.
There are no exemptions from the applicable restrictions.
Signing and closing
20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?
The following documents are produced:
- Share purchase agreement.
- Disclosure letter.
- Powers of attorney (where an attorney executes the documents in the name of the seller and/or buyer).
Signing usually involves the parties signing the share purchase agreement and having their signatures certified before the notary.
The following documents are produced:
- Share transfer instrument (if not contained as a conditional instrument within the share purchase agreement).
- Decisions of the shareholders on resolving the existing director(s) or resignation letters of the existing directors.
- New memorandum/articles of association and other corporate documents for the target company.
- Certain service agreements.
- Closing minutes.
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 on Notaries prescribes a mandatory notary form for certain types of documents (for example, memorandum of association). Supporting documents are mostly signed with certified signatures. Personal attendance can be replaced with a power of attorney for all participants.
22. What are the formalities for the execution of documents by foreign companies?
All foreign-language documents must be translated by official court interpreters. A foreign company executing a document before a Bosnian court or municipal authority must provide an extract from its (foreign) commercial registry if it is a party to the transaction, and the extract may need to be apostilled (depending on the specific country in question). This is to prove that the person representing the foreign company has the representative power needed to execute the relevant documentation. If the extract does not provide the information on representative powers, the foreign company must submit its articles of association.
23. Are digital signatures binding and enforceable as evidence of execution?
Although generally admissible and recognised as valid in the governing legislation, digital signatures are not yet used in practice as the procedures governing their use have not yet been put in place. As a result, digital signatures are currently only used in the Republic of Srpska government administrative departments.
24. What formalities are required to transfer title to shares in a private limited company?
To transfer title to shares in a private limited company, the following formalities are required:
- Execution of a share transfer instrument and proof of signatories' identity (individuals are identified on the basis of their IDs or passports) and representative powers.
- Registration of the share transfer (that is, registration of the change of the shareholder of the target company before the relevant municipal court).
- Post registration formalities, which are not necessary for the transfer of title to shares but are required for the course of business activities (for example, notification to the tax authorities, banks and so on).
25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?
In the Federation of Bosnia and Herzegovina no transfer taxes apply. Income tax is payable on the difference between the selling price and the purchase price of the shares (capital gain).
In general, VAT in Bosnia and Herzegovina will be charged at a sale of assets (currently at a rate of 17%), including the sale of immovable property if it is the first transfer of the property.
Transfer taxes apply to the sale of immovable property and IP rights in the Federation of Bosnia and Herzegovina, as defined in the regulation of each canton. Transfer taxes do not apply in the Republic of Srpska.
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?
No transfer tax exemptions or reliefs apply.
The transfer of assets as a contribution in kind to the share capital of a company eliminates transfer tax. Exchange of immovable property is not subject to transfer tax in the Federation of Bosnia and Herzegovina if the exchanged property is of equal value.
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?
Tax is paid on the capital gains acquired from selling a specific share. The tax rate is 10%.
Capital gains tax is paid by a seller under the 10% tax rate. Transfer of immovable property or IP rights is also subject to 5% transfer tax in the Federation of Bosnia and Herzegovina as provided in cantonal regulations.
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?
There are no particular corporate income tax exemptions.
There are no particular tax exemptions in the Federation of Bosnia and Herzegovina. Transfer of assets as a contribution in kind into the share capital of a newly incorporated entity is not subject to income tax in the Republic of Srpska.
29. Are other taxes potentially payable on a share sale and an asset sale?
VAT is charged on the sale of certain assets (see Question 25). There are no other taxes potentially payable.
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?
A holding company and its subsidiaries can opt for tax consolidation provided that there is a direct or indirect control of at least 90% shares between them (this is 80% in the Republic of Srpska). Tax consolidation is only available to companies that are residents of either the Federation of Bosnia and Herzegovina or the Republic of Srpska.
Tax losses of each member of the group are offset with the taxable profits of other members. If interest expenses incurred by one member of a group result in a tax loss, that loss can be offset with the taxable profit of another member.
31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?
There is no obligation to inform or consult employees, their representatives or a trade union on an asset sale. If an asset sale is part of a sale of an undertaking, the employees and the employee council must be notified of the transfer before the transfer occurs. The buyer is jointly and severally liable with the seller towards the employees for liabilities that arose before the transfer.
No consent or notification is required. There is no legal obligation to consult employees' representatives unless the employer is bound to do so under the terms of a collective agreement or trade union arrangement. Where collective agreements are in place these must be respected and the local company should consult with the employees or their representatives before the sale. However, labour laws prescribe the need to obtain employees' consent for the transfer of employment agreements to a new employer.
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?
In the case of a business sale, employment agreements are automatically transferred to the buyer. Employment continuity is recognised as the legal entity remains unchanged (change occurs only in respect of the business founders). In cases where the change also includes a change of employer, see Question 31.
Employee status is unchanged. Employment continuity is recognised.
Transfer on a business sale
Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses (Transfer of Undertakings Directive) is not applicable in Bosnia and Herzegovina.
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?
Employees do not commonly participate in private pension schemes established by their employer.
Private pension schemes
Private pension schemes are not widely used in Bosnia.
Pensions on a business transfer
Private pension schemes are not widely used in Bosnia.
34. Outline the regulatory competition law framework that can apply to private acquisitions.
Under the Law on Competition of Bosnia and Herzegovina, if either of the following two thresholds is reached, a concentration must be notified to the Competition Council of Bosnia and Herzegovina:
- Aggregate annual worldwide turnover of parties to a concentration realised through the sale of goods and/or services amounts to BAM100 million according to the annual financial statements for the preceding financial year, where at least one economic entity, as a party to the concentration, is registered within the territory of Bosnia and Herzegovina (it operates on the domestic market of goods and/or services).
- Aggregate annual turnover of each of at least two economic entities as parties to a concentration, realised through the sale of goods and/or services on the market of Bosnia and Herzegovina, amounts to at least BAM8 million according to the financial statements in the preceding financial year, or if their common share on a relevant market exceeds 40%.
Notification and regulatory authorities
The completion of the transaction is subject to clearance by the Competition Council of Bosnia and Herzegovina. The merger notification, by way of a formal written notification, must be filed with the Competition Council within 15 calendar days from the occurrence of the triggering event.
When applying the substantive test, the Competition Council considers the following indicators in particular:
- Structure of the relevant market.
- Actual and potential competitors.
- The market position of the parties to the concentration and their economic and financial power.
- Whether there is a possibility to choose a supplier and consumer.
- Legal and other barriers to entry on the relevant market.
- Domestic and international level of competitiveness of the parties to the concentration.
- Supply and demand trends of relevant goods and/or services.
- Technical and economic developments/trends.
- Consumers' interests.
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 general rule is that the person (legal or natural) who causes pollution of the environment through its activities will be responsible for the environmental damage. In accordance with the environmental laws the general rules of the Law on Contracts and Torts apply.
In the case of a share sale all liabilities will remain with the acquired company, while in the case of an asset deal Article 452 of the Law on Contracts and Torts will apply (see Question 6).
The owner of the land at the moment the contamination is revealed is liable for the clean-up. The buyer may also be liable under the contract for sale, though the damage may also be covered by the seller's statutory liability insurance.