1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Of the three major types of deal structures used in Slovenia, the share purchase agreement is by far the most common, with asset deals a distant second. Due to the relatively small size of the Slovene market, there is no demand for classic merger deals, which are relegated to the status of consolidation tools for tax or operational purposes.

Most mid-level deals are driven by sellers opting for a semi-open negotiation process, with invitations to potential buyers suggested by the seller's business consultants. A buyer-driven deal is subject to an exclusive negotiation process, based on an acceptable indicative offer to the majority shareholder.

In terms of the types of sale procedures, hostile takeovers are practically non-existent, due to the hiding of shares in shell companies and the difficulty of enforcing laws against concerted action. Most major transactions of publicly traded companies may be considered as friendly takeovers or at least neutral takeovers.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

An asset deal limits exposure to the target's debts and agreements with other parties. It is especially viable in cases where only part of the company is for sale (eg, logistics; storage; the production of source materials), where a share deal would require a carve-out. An asset deal may also be favoured for companies with large cash reserves, due to tax optimisation on the seller's end. On the other hand, an asset deal is relatively complex, due to the necessary listing of the assets; and it may not limit all debts of the underlying business due to certain legal limitations. Additionally, an asset deal does not allow for the transfer of licences of the target, except in some insolvency-related cases.

A share deal involving a publicly traded target is subject to several legal requirements, such as:

  • a public offering;
  • rules restricting insider trading and market abuse; and
  • the compulsory public disclosure of certain information.

In the case of non-publicly traded companies, a share deal may have to address relations with different shareholders and their interests. In recent cases, some share deals of limited liability companies have been fast-tracked thanks to increased use of robust drag-along and tag-along clauses.

Due to the prevalence of share deals, sometimes the seller will require a pre-emptive statutory change, such as a carve-out of certain assets, which is done exclusively to facilitate the transaction and to make the offered assets more appealing to potential investors.

1.3 What factors commonly influence the choice of sale process/transaction structure?

As explained in question 1.2, we see a major difference between sale processes started by the seller and those started by the buyer. In the former, the seller will prefer at least a semi-public call for indicative bids to companies that are perceived as most interested in the target. The process is usually supported by a financial adviser, which steers the sale. Where the seller is government owned, a transparent call for bids is usually publicised – although with reservations not to sell as an insurance policy should the transaction becomes politicised. Where the sale is started by the buyer, the latter will usually bid for a controlling share of the company, with a requirement for an exclusive negotiation period clause.

We believe that this difference in sale procedures reflects the seller's need to drive up competition among potential bidders; while in the case of a buyer-driven deal, the buyer must compete against the seller's estimate of the future value of the company.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

As Slovenia is a small market, the international usage of all related documents is followed; and thus no localised names are given to the initial documents.

Usually, if the seller starts the sale process, it will begin as a call for bids or an invitation to express interest, with an attached teaser containing financial data and an overview of the offer. An indicative offer by the buyer is given (supported by proof of funds, if the buyer is not well known), with an invitation to sign a letter of intent (also known as a 'memorandum of understanding'). The letter of intent is usually not binding, except for clauses such as exclusivity, confidentiality, possible break fees and so on.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

There is no judicial case law on break fees in transaction negotiations, but the Code of Obligations foresees liability for damages in case of fraudulent negotiation or negotiation without intent. In our view, there is no hard legal limitation on the agreement of break fees that would inure to each party; but as they are considered contractual penalties, they should be reasonably limited. The case law relating to break fees in real estate transaction supports a 10% limit.

In practice, the break fees are set by the seller's financial advisers, usually in an amount that will cover the transaction costs. Government-owned sellers do not generally enter into legally binding letters of intent, except where necessary.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

Due to the small size of the Slovene market, most M&A transactions are of an international nature, with the local company as the target. Hence, we cannot provide a definitive answer to this question. We do believe, however, that the Bank of Slovenia's decision to introduce cash deposit fees and historically low interest rates has made M&A transactions a very viable growth strategy for successful companies with low dividend expectations. Initial public offerings are not used for equity financing of M&A transactions; whereas debt is mostly in the form of bank loans for smaller transactions and syndicated loans for larger targets.

In the past, many M&A transactions were initiated because of creditors' requirements to resolve the pre-insolvency status of the seller, with the transfer of accrued debt thus playing a major role in the transaction structure.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

It is unusual for a transaction to be attempted without each side engaging its own financial and legal advisers. If the target is large or state owned, or if it has a major social impact, PR agencies are sometimes used to address possible public issues such as potential layoffs and restructurings.

The buyer's financial adviser will provide:

  • financial analysis and financial due diligence (auditing) services;
  • offer structuring;
  • analytical insight of possible competitive offers;
  • tax advisory services; and
  • pre and post-transactional tax optimisation.

The seller's financial adviser will:

  • typically advise on preparatory activities (window dressing) and pre-sale financial consolidation; and
  • primarily identify possible interested buyers, prepare the teaser and structure the negotiation process.

The buyer's legal adviser will:

  • perform the legal due diligence review;
  • identify and estimate legal risks;
  • support the negotiations through share purchase agreement amendments; and
  • support the pre-closing activities.

The seller's legal adviser may:

  • conduct preparatory activities, such as statutory changes, spin-offs or union negotiations;
  • draft a pro-seller share purchase agreement; and
  • in particular cases, provide an independent report on due diligence to all potential buyers. This may be required to mitigate the exposure of sensitive information, such as banking or trade secrets.

Depending on the nature of the target, additional experts might be engaged, such as IT experts for IT due diligence or environmental experts.

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

The target must always pay the cost of its own advisers; paying the costs of the buyer's advisers would be considered a non-essential expenditure and would thus expose the management to liability against the remaining shareholders and creditors. Additionally, the cost would not be considered tax deductible, thus limiting its scope.

In such cases, we do not see an issue with the rules against financial assistance, as the adviser costs are usually paid after the transaction and are marginal compared to the transaction value.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

(a) Commercial/corporate

All of the regular issues, such as title and registration of officers. The publicly available Court Registry provides information on encumbrances and shares; while the Central Securities Clearing Corporation provides information on encumbrances on stock, such as pre-emptive rights, options and so on. A review of change of control clauses of major contracts is usually suggested, subject to their availability.

(b) Financial

This is usually supported by a warranty given by the seller that the financial statements are true. Most medium-sized to large companies have yearly audit reviews, which might be either publicly available or provided on request. All tax-related reports may be available through the e-tax system, which is compulsory for all companies.

(c) Litigation

Some information on litigation is available through local credit score providers, but this may be unreliable. Either litigation procedures and inspection procedures by authorities will be disclosed or the seller will give a warranty as to their non-existence. A materially relevant litigation or inspection procedure might be subject to additional focus in the due diligence review. The seller's liability for non-material litigation is usually limited, to eliminate the need for in-depth due diligence.

(d) Tax

Tax-related warranties are the norm in M&A proceedings, as the Tax Authority has the power to reopen past tax reports. If such warranties are not given, specific tax due diligence may be conducted to identify price-sensitive past practices of the seller. In this case, access to e-tax reports may support a less demanding review process.

(e) Employment

Employment agreements are reviewed against a standardised employment contract, with a focus on non-compete clauses and branch collective agreements. A review of operational risk for post-termination claims must also be performed (eg, supplementary payments; overtime). The accuracy of past payroll calculations is usually verified by the tax adviser.

(f) Intellectual property and IT

All patents, trademarks and models are reviewed in the relevant IP registers (eg, the EU IP Office; TMview; the European Patent Office); any in-depth assessment must be outsourced to patent attorneys. Copyright of value requires more extensive due diligence of the supporting documents.

(g) Data protection

The target's system of compliance with the EU General Data Protection Regulation will be comprehensively reviewed if the company's business model relies on databases of personal data or data manipulation. If the target is a publicly traded company, ongoing compliance with the Market Abuse Regulation is mandatory and will be reviewed on a systematic basis (bylaws and policies on inside information).

(h) Cybersecurity

Several audit companies provide cybersecurity and IT assurance services, including a possible due diligence check. There are no inherent legal issues connected to this.

(i) Real estate

Real estate ownership and encumbrances are registered in the land register; hence, a review of excerpts from the register is mandatory if the target owns real estate. Public searches are also conducted on the estate cadastre and local authority land zoning e-portals.

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

Please see question 3.1.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

Pre-sale vendor legal due diligence is not common in Slovenia. It is reserved for major transactions where a level playing field is preferred – usually where the seller is a sovereign holding. In such cases, a reliance provision that allows for the vendor due diligence to be made available in a virtual data room is given. A reliance letter usually includes an exclusion of liability and a liability cap in line with the due diligence provider's insurance policy.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

The Competition Protection Agency (CPA) is responsible for merger control clearance. Notification of a concentration is legally required if:

  • the total annual turnover of the undertakings involved exceeds €35 million; and
  • the annual turnover of the target in the preceding business year exceeds €1 million.

Alternatively, if the target controls 60% of the market, it must inform the CPA of the transaction before closing, giving it discretion to request notification.

In specific industries, foreign direct investment (FDI) above a threshold of 10% of the voting rights in the target is controlled by the Ministry of Economy. Affected industries include:

  • critical infrastructure, such as energy, transport, water, health, communications, media, data processing and storage, aerospace, defence, electoral and financial infrastructure, and sensitive facilities, as well as land and real estate that is crucial for the use of such infrastructure or close to such infrastructure;
  • critical technologies, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, nanotechnologies and biotechnologies, as well as health, medical and pharmaceutical technologies;
  • the supply of critical inputs, including energy and raw materials, food security, medical and protective equipment;
  • access to sensitive information, including personal data, and the ability to control such information; and
  • the freedom and pluralism of the media.

Transactions that are subject to FDI control must not be closed without a positive opinion by the Ministry of Economics, which will be issued no later than two months after the initial request.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

Following receipt of notification, the CPA will examine whether the concentration is compatible with the competition rules; and once the procedure has concluded, it will approve, prohibit or conditionally approve the concentration.

The Ministry of Economy may issue a decision on whether FDI in the relevant sector should be approved, prohibited, unwound or made subject to conditions.

The Securities Market Agency is responsible for:

  • supervising the capital markets;
  • issuing authorisations; and
  • ensuring compliance with the Takeovers Act, which applies to transactions involving the shares of publicly traded companies

4.3 What transfer taxes apply and who typically bears them?

In the case of share deals, no transfer taxes apply. In the case of real estate asset deals, the seller bears the real estate transfer tax of 2% by law, unless the value added tax rules apply.

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

  • Power and authority;
  • No conflicts;
  • Ownership of shares or assets and no encumbrances;
  • Ownership of subsidiaries;
  • Financial statements;
  • Books and records;
  • Assets;
  • Accounts receivable;
  • IP rights;
  • Taxes;
  • Conduct of business;
  • Customers and suppliers;
  • No material changes;
  • Litigation;
  • Employees;
  • Labour disputes and compliance with labour laws;
  • No change of control;
  • Ownership of real property;
  • Compliance with laws;
  • Environment;
  • No insolvency;
  • No corruption; and
  • Disclosed information.

In case of a remediable breach, the seller should have a grace/notice period in which to remedy the situation to the buyer's reasonable satisfaction. If the breach is non-remediable or the seller does not remedy the breach in a timely fashion, the seller will be liable for monetary compensation. In our view, the business valuation model used in the negotiations should be applied in calculating damages according to the effects of the breach.

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

The liability cap in the range of 10% to 30% of the transaction value applies to all transactions in general. De minimis clauses (minimal claimable amount – individual) and basket clauses (minimal claimable amount – total) are most often included and negotiated, with the amount depending on the value of the transaction.

Potential issues that exclude or limit the seller's liability are generally included in disclosure schedules.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

Warranty and indemnity insurance is seldom used in Slovene M&A deals and is not provided as an insurance product by Slovene insurers. As the Slovene market is not as financially developed as the markets in major nations, we do not see potential traction for this kind of product.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

Most prevalent is the withholding of a certain portion of the purchase price and its successive release during the limitation period. Usually, this is supported by a bank guarantee issued on behalf of the purchaser.

Alternatively, the seller may put part of the purchase price into an escrow account, which is usually administered by a notary public. Specialised escrow agents are seldom used, given the good track record and state-controlled fees of Slovene notaries public.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

Non-compete and non-solicitation clauses are the norm and are not usually subject to negotiation. In some transactions, this goal is achieved by having a part of the payment withheld for a certain period to secure the client relationships or employment of critical personnel.

Non-compete clauses in share purchase agreements have not yet been the subject of judicial case law and no statutory law prevents their inclusion in these types of transactions. In our estimation, a three-year validity period would be accepted by a hypothetical court – especially since a two-year validity period for non-compete clauses in labour contracts is allowed by law.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

Bring-down clauses are common in M&A transactions, as most (minor) transactions do not involve an extensive gap period between signing and closing. If there is such a gap, the bring-down clause may exclude certain warranties that are not under the seller's control (eg, litigation, employees). MAC clauses are included in certain transactions, but the material adverse effect is usually defined at a high threshold.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

An offer is mandatory when a threshold of one-third of the voting rights is achieved by a single shareholder or a group of shareholders acting in concert; and is renewable by law each time an additional threshold of 10% of voting shares is achieved.

Within three days of reaching this threshold, the shareholder must announce its intention to launch a takeover. Within the following 30 days, a public takeover offer must be published, which remains valid for between 28 and 60 days, depending on the bidder's decision and other circumstances. Including the preparatory phase, a public offer typically takes three to four months.

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

Stake building before the public offer is acceptable under Slovene law. However:

  • the takeover bid must not be lower than the maximum price at which the bidder acquired securities in the last 12 months prior to publication of the offer; and
  • subject to a successful bid, the bidder must pay the sellers the difference between their bid price and the highest purchase price for acquisitions of shares made 12 months after the expiry of the public offer.

From the date of the announcement of the takeover bid to the expiry of the time allowed for acceptance of the bid, the bidder is only permitted to buy the respective shares in accordance with the public offer. Any purchase in violation of this rule is null and void.

The thresholds of significant shares are shares with voting rights in an individual public company that belong to an individual shareholder and represent 5%, 10%, 15%, 20%, 25%, 1/3, 50% or 75% of all voting rights in that company. A shareholder that reaches or falls below one of these thresholds must notify the shareholding company, which must publish this information immediately.

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to 'sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

In accordance with the Companies Act, a shareholder that holds 90% of the shares may squeeze out the remaining shareholders for fair consideration. If a shareholders' resolution is passed within three months of a successful takeover bid, the offer from the bid will be considered fair consideration.

The minority shareholders of a target in which an offeror has acquired at least 90% of all voting shares through a successful takeover bid may redeem their own shares within three months of the announcement of the outcome of the takeover bid and request compensation from the offeror.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

Prior to the announcement of a takeover bid, the offeror must either:

  • deposit the sum required to pay for all outstanding securities with the Central Securities Clearing Corporation; or
  • provide a bank guarantee on first demand.

6.5 What threshold/level of acceptances is required to delist a company?

A public company may adopt a resolution on the delisting of shares from trading on a regulated market with a 75% majority of the registered capital of the company. This decision must take effect two years after the passing of the resolution. If the resolution is passed by a supermajority of at least 90% of the registered capital, the delisting may take immediate effect.

Each shareholder that has registered an objection to the delisting of the company from the regulated market may require it to take over its shares against payment of appropriate cash compensation.

6.6 Is 'bumpitrage' a common feature in public takeovers in your jurisdiction?

Bumpitrage and other campaigns focused on the activities of publicly listed companies are mainly led by the PanSlovenian Shareholders' Association and the Small Shareholders' Association of Slovenia. Both mainly conduct PR and legal activities against certain decisions that affect the minority shareholders of Slovenian companies; although their track record is often inconsistent with their values, raising concerns of hidden conflicts of interest.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

Please see question 6.2.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

If the prospectus provides for this possibility, the offeror may withdraw its bid following the announcement of the takeover bid and before the expiry of the time limit allowed for its acceptance if:

  • another offeror makes a competitive bid; or
  • circumstances arise that would make its obligations so difficult to comply with that the purchase of securities would no longer meet its expectations and maintaining the validity of the contracts would be generally deemed unfair (basically, a 'changed circumstances' doctrine).

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

The Takeover Act and the Securities Market Agency guidelines do not address the issue of regulatory compliance with irrevocable undertakings. An undertaking by a shareholder to accept a formal takeover bid is possible between parties in the capital markets; however, under Slovene obligations law, such an agreement would be considered a pre-contract and would therefore subject to termination in case of a change in circumstances. We assume that an irrevocable undertaking given under foreign material law must be acceptable, since it is compliant with European Securities and Markets Authority guidelines and, by extension, with the Securities Market Agency guidelines.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

There have been few hostile bids in public takeovers in recent years in Slovenia. Most publicly traded companies have the sovereign holding as a shareholder, which limits the feasibility for public bids and especially hostile bids.

There is no distinction between a friendly takeover bid and a hostile bid from a legal perspective; both are considered public bids.

7.2 Must hostile bids be publicised?

In all public bids, including hostile bids, the decision to issue a public offer and the public offer itself must be published. If the investor acquires shares in the target that exceed the statutory thresholds of voting rights, the public offer must be published.

7.3 What defences are available to a target board against a hostile bid?

A target must have implemented passive (preventive) defences before the bid, as curative defences are limited by law. Most Slovene public companies have enacted stock repurchase plans up to the statutory limit of 10% of shares, which may be used in the event of a hostile takeover. Several changes to the articles of association may be implemented, such as:

  • staggered board;
  • preferential shares; and
  • a supermajority for certain assembly votes.

The following actions are prohibited by the management board, unless they have a positive resolution of the shareholders' meeting with a three-quarters majority vote:

  • increasing the company's share capital;
  • entering into transactions outside the ordinary operations of the company;
  • taking actions or entering into transactions that could seriously jeopardise the company's future operations;
  • acquiring own shares or securities that entitle it to such own shares or securities; and
  • taking actions that might impede a bid.

That said, a 'white knight' defensive strategy seems to be the go-to approach, as this limits the 'official' involvement of the management board. A major role in public takeovers must be given to the debt financers (banks), which customarily include change of control clauses in loan agreements. These may be invoked in case of a successful hostile takeover.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

The M&A landscape is picking up speed after the recent slowdown due to the COVID-19 pandemic. Many deals had revised timeframes and postponed longstop dates. Certain modifications had to be made to main deal terms, such as price adjustments; but this has also resulted in shorter limitation and warranty periods.

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

We believe that there will be a major restructuring of many successful family-run companies that were established after Slovenia gained independence in the 1990s, as their founders are now approaching retirement. This in turn will open up new small and medium-sized M&A opportunities on the Slovene market.

On the legislative front, we do not foresee any major changes, due to an upcoming super-election year, in which M&A-related legal issues are unlikely to take precedence in the administration of public resources.

On the other hand, we see rising utility prices, broken supply chains in world trade and looming inflation as major drivers for change in the corporate landscape, which will provide many opportunities for the winners to acquire the losers.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

First and foremost, engage at least one local financial adviser with a robust track record. An experienced local legal adviser will also help to smooth out bureaucratic issues, warn of potential pitfalls and speed up the process. As Slovenia is a small economy, it relies heavily on personal relations.

Any transactions involving market clearance procedures by the Slovenian Competition Protection Agency should be thoroughly structured. In such procedures, it is advisable to request a non-binding anticipatory opinion which can help to structure the deal and avoid foreseeable risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.