This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine.
COVID-19 has changed so many things in our lives. Nothing has remained untouched, from social relations to business. Naturally, it has also heavily affected M&A activity in Serbia, just as across the entire SEE region.
At the very beginning, uncertainty fell on global markets and stock exchanges took a nosedive. While some certainty has since returned, things are still far from stable (especially in light of the new resurgence in numbers and new lockdowns, both in this region and across Europe). These fluctuations and recurring instability have obviously impacted all planned investments, including M&As.
The volume of transactions in Serbia decreased significantly. While most deals were not cancelled (although that happened as well by invoking material adverse change clauses (MAC), which regulate the ability of the buyer to terminate the contract due to significant change in business between signing and closing), they were either put on hold or continued at a much slower pace. Almost no deal was closed during the first wave of the pandemic, as contracting parties became increasingly cautious. However, a significant number resumed later.
Certain preventative measures introduced by the Serbian government have affected the implementation of transactions. A lot had to be done more flexibly and creatively – but also very often with delays. This was mostly because government and bank employees worked from home and communication with them took place exclusively by e-mail (which in many situations was not efficient and prompt) and even registered mail. However, some institutions adapted. For example, in Serbia the Registers Agency was able to continue to register corporate changes within the five-working-day deadline, even in the middle of the lockdown. In addition, the Registers Agency enabled electronic registration of entities during the crisis, which was great news.
The scope of due diligence of Serbian targets has also changed. Aside from the usual issues, the focus has somewhat shifted to risk management procedures, fiscal benefits and direct payments from the government, employment structures, protection from cyber-attacks, and so on. Diligence reports now also focus not only on the impact of COVID-19 on business, but also on various governmental measures.
As for the SPA, specific COVID-19-related clauses became mandatory. MAC clauses have seen a rebirth both in wording and significance, with special attention given to the scope and applicability of different force majeure events. Since the practice of Serbian courts cannot provide a general answer to the question of whether contracting parties are obliged to adhere to their obligations under a SPA due to the COVID-19 crisis, the specific wording of force majeure clauses has come into the spotlight of the transaction process, as have warranties on the non-existence or non-triggering of such clauses in the material contracts of the target.
While in the past we have seen both price adjustments and locked box mechanisms, price adjustments are not as common as they were before, which is unsurprising given the fact that in a world of uncertainty the buyers will try to avoid taking over the risks as of the signing.
Since negotiations are held predominantly online, the lack of face-to-face meetings is a significant challenge. Personal touch and coffee-break small-talk can break the ice and resolve many issues. On the other hand, negotiations have become increasingly efficient.
We also see changes in transaction structures, going from share to asset acquisition, with buyers trying to minimise risk and focus their investments on the most relevant part of the target.
At this moment, it is not possible to estimate what the consequences of the pandemic in Serbia will be, especially as the new wave is already at our door. However, what is indisputable is that this crisis has led Serbian legal advisors to fundamentally re-examine and reconside both future plans and past behaviours in the field of M&A transactions.