Dealing with the challenges of conducting the merger and acquisitions (M&A) process in Bosnia and Herzegovina

1. Bosnia and Herzegovina as an investment area

In recent years, Bosnia and Herzegovina have become an attractive investment location, which records a higher degree of interest of foreign investors in investing in this area. A small open economy like Bosnia and Herzegovina can only reach its full economic potential through close integration with wider regional markets. Some of the reasons why Bosnia and Herzegovina seem economically challenging are: BiH region is rich in energy resources, is on the development path to the EU, there is a trend of placing production capacity from the Far East to EU markets, a certain degree of macroeconomic stability anchored exchange rate KM-EUR; high level of economic differentiation; high standard of education of the population.
Some of the reasons why Bosnia and Herzegovina have economic potential are: B&H region is rich in energy resources; the country is located on the development path to the EU; there is a trend of placing production capacity from the Far East to EU markets; a certain degree of macroeconomic stability caused by a fixed exchange rate system (BAM/EUR); high level of economic differentiation; high standard of education of the population… This was also recognized by foreign investors in the previous period. Based on data published by BiznisInfo, it is concluded that the total value of the “merger and acquisition” of companies in Bosnia and Herzegovina in 2018 amounted to 404.6 million.

However, despite the numerous advantages that characterize Bosnia and Herzegovina as an attractive investment location, the complexity of the geopolitical environment has produced a seemingly complicated system of regulation, in which foreign investors without adequate local legal advisors can hardly quickly and efficiently implement the planned project. Namely, legal regulations exist at the state, entity, cantonal and local (city and municipal) levels and the regulations often intertwine and differ, which creates distrust of foreign investors in the relevant legal framework and gives the impression of legal uncertainty.

If we add to the above the fact that the acting bodies often do not have a uniform and consistent practice in dealing with cases of similar/same factual and legal qualification, it is clear why Bosnia and Herzegovina do not reach its full investment potential.
In addition to the above, social relations are often vaguely regulated, without a clear goal of regulation, which results in a flat interpretation of regulations by inspection/administrative bodies, and later by the courts. Therefore, it is extremely important to react in a timely and preventive manner during the implementation of each individual legal transaction, so that possible risks are eliminated or significantly reduced in the beginning. In addition to all the above, it can be noticed that the future regulation of social relations, especially in the economy, is characterized by the lack of awareness for the interests and goals of the economic community.
Also, the hierarchy of laws is accompanied by a complex administrative apparatus, and relevant institutions are established at all levels where regulations exist, which can be an obstacle for entities that do not know the state system and it can slow them down in planned activities. There is no systemic one-stop-shop as a service that will enable the submission and retrieval of all requests/decisions/approvals in one place.
Since there is no clear, sustainable strategic policy for attracting and maintaining investment policy, even local businessmen, without systemic and continuous legal assistance, find it difficult to implement the planned activities in full scope and capacity. On the other hand, the challenges faced by interested foreign investors are incomparably greater, which is especially evident during the acquisition process, as one of the most demanding and complex forms of investment. This brochure recognizes and summarizes the most significant acquisition risks identified in key legal areas whose synergistic connection represents the necessary elements of any due diligence analysis and the basis for the implementation of any successful capital investment, especially acquisition procedures. The risks are presented exhaustively in basic form (individually are not subject to special legal analysis) intending to form a general picture of the investment area and clearly defining the roadmaps that should be recognized in the implementation of acquisition procedures in Bosnia and Herzegovina.

Certainly, the range of risks can be further expanded depending on the circumstances of each individual case, which is why it is necessary to point out that this is a general overview of the challenges related to the investment area, in which it is necessary to position and to realize each acquisition.


2. Special risks that do not arise from the applicable regulations, and which are very often present in practice in complex legal proceedings and M&A transactions that take place in Bosnia and Herzegovina

 Inconsistent/unequal decision-making of the competent authorities – some of the reasons are based on the fact that EU regulations are largely “rewritten” in B&H, but that the competent authorities in practice face major problems in their application;

 High level of corruption at all levels. Transparency International’s Corruption Perceptions Index for 2020 ranks Bosnia and Herzegovina among the countries in the world where the state of corruption is deteriorating the most. B&H is worst positioned in the Western Balkans region and shares a place with Northern Macedonia;

 Slow, inefficient and uncertain proceedings before the competent authorities;

 Lack of will and “hearing” by the competent authorities to solve potential obstacles creatively and practically – this in practice manifests itself as a “template” way of working of the competent authorities, lack of resources and unwillingness to further explore and apply best practices and practices from the EU, etc.


3. Risks in the field of competition law and state aid law

 In case of violation of the competition law in B&H, there is a risk of imposing a fine of up to 10% of the value of the total annual income of the business entity from the previous year preceding the year in which the violation happened;

 In case of illegal state aid, the competent state body may request the return of illegal state aid together with statutory default interest whenever it is granted contrary to the provisions of the law, i.e. without or contrary to the decision of the competent state body;

 An economic entity that violates the rules on the protection of competition and state aid in B&H, also risks the submission of compensation claims by injured third parties, economic entities, etc.

3.1. General recommendations to avoid violations of regulations in the field of competition and state aid in B&H:

 Perform an in-depth analysis of all aspects of the relevant M&A transaction and potential risks in the light of competition and state aid rules;

 Realization of all preparatory legal actions, before starting due diligence, following the rules of the law of competition;

 Development of complete documentation and “rules of conduct” to protect the confidentiality of participants in the transaction, development of NDA contracts, recommendations for avoiding prohibited sharing of commercially sensitive information and the formation of Clean Team, recommendations for avoiding gunjumping;

 Carry out an analysis of the fulfillment of conditions for notification of concentration (relevant M&A transactions, cross-border merger) to competent regulatory authorities in different jurisdictions (B&H, EU, Serbia, Montenegro, Macedonia, Albania, Kosovo and other countries), and possible submission of notification of concentration;


4. Tax and customs risks

 Certificates of the non-existence of tax debt on direct or indirect taxes or certified customs declarations on proper import/export of goods, do not represent legal certainty, all depending on whether and when the controls were performed. Therefore, regardless of the existence of the certificates in question, there is a risk of determining the tax and customs debt five years back from the control in question. Also, in addition to tax and customs debt and the obligation to pay, there is a potential risk of offense and even criminal liability for investors, given that certain actions in the field of taxes and customs are standardized as either an offense or a criminal offense.

 Actions of inspection bodies for the same institutes in different tax periods have different approaches and decisions due to an arbitrary and different interpretations of legal regulations.

 Decision-making of inspection bodies in the first degree very often means identical decision-making in the second degree, and an administrative dispute before a competent court, considering uneducated judges in the field of customs and taxes, very often leads to essentially the same decision-making as by inspection bodies.

 Initiation of offense proceedings and passing of a court decision, even before the appeal administrative procedure is completed, i.e. before the adoption of the final administrative act.


5. Property risks

 Legal uncertainty can arise if public data on the property are not consolidated, i.e. due to the fact that in B&H there are multiple records of property ownership, whose data often differ significantly. The above is further complicated by the fact that the actual situation on the ground often deviates from the situation that can be determined by inspecting the mentioned public property registers, which results in violation of the principle of trust in public registers, and in this regard different case law.

 Overcoming this issue requires an in-depth analysis of historical data (legal bases of registration) within the mentioned public registers, to determine both the legal and factual state of affairs and, if necessary, recording (unifying) it with the competent public registers.


6. Corporate risks

 Significant inconsistency of regulations governing the business and management of companies, then the fact that existing regulations do not regulate or only partially regulate many issues, allows the competent authorities to interpret them differently, which results in uneven treatment in practice (especially in situations where the founding act of the certain company does not fundamentally regulate all issues of importance for business).

 In order to overcome real and potential legal problems, it is necessary to analyze local legal regulations (in the field of company activity) as well as founding acts, and timely eliminate all observed irregularities and regulate all issues relevant to regular and uninterrupted business operations.


7. Financial and other risks

 In-depth analysis of financial and other commercial contracts may have substantive limitations of rights in case of status changes and other significant changes in the company, especially when changing founders, establishing new legal entities or acquiring a controlling interest in other legal entities, which changes may directly/ indirectly (prior notice or consent of the contracting party) prevent regular and uninterrupted execution of the M&A transaction.

 Specific provisions within financial agreements may result in deterioration of the Borrower’s credit rating and creditworthiness and changes in regulations and/or conditions by regulatory authorities resulting in a change in the conditions under which financial support is granted

 Rigid decisions, etc. legal acts of regulatory bodies of financial organizations (obligatory in application), which enable banks to introduce their internal methodology and rules of credit risk management procedure, which is a flat and non-transparent way makes it more difficult for clients to repay loans and obtain new financial support.


8. Risks in the field of intellectual property

 Lack of uniform practice of actions of competent authorities in the application of regulations in the field copyright regulation for computer programs as a subject of legal transactions;

 Lack of general awareness about the obligation to deposit computer programs in the book of records of copyright works/acts to acquire copyright protection. Therefore, in practice, copyright works/acts are often traded without adequate protection from the rights of third parties.

 Very slow and inefficient procedures of recognition and protection of intellectual property rights, non-opening of the public national database of intellectual property (according to the example in the Republic of Serbia), which leads to the slow and expensive procedure of searching national data of registered intellectual property.

 Non-application of regulations on the protection of privacy and personal data, which leads to violations that can result in very expensive disputes, starting from damaging the company’s reputation, banning the registered activity for a certain period , all the way to criminal charges and criminal liability.

 Failure to use available legal mechanisms for the legal use of trademarks in marking goods and/or services in commercial transactions, their protection against unauthorized use and copyright protection against unauthorized use, reproduction, or distribution of computer programs, which increases the risk in legal transactions, which is why the subject of the transaction is often not adequately protected.


9. HR risks

 The issue of a competition clause in employment contracts, which is often expressed during acquisitions, taking into account the intention of the acquirer to retain key employees with knowledge and experience, as well as the intention of the existing owner to transfer part of the employees to another company;

 Questionable compliance of internal acts with local HR regulations, which may result in possible inspections and penalties;

 The issue of regulating disciplinary regulations, and possible termination of employment in the previous period, regardless of the grounds, given that the courts in FB&H mostly decide in favor of the employee or former employee and use the least procedural or formal misconduct of the employer as a reason for ruling in favor workers.

 Discriminatory risks of employment and promotion;

 The question of adequacy and adjustment of working conditions in accordance with local regulations.


10. Obligations and contracts

 Existence of differently standardized limitation periods in the regulations of FB&H, Republic of Srpska and Brcko District;

 Inadequately contracted jurisdictions of courts and applicable regulations, as well as ways of resolving disputes, which leads to expensive and long terms processes of resolving possible disputes between the contracting parties;

 Lease agreements are usually not registered in the land register, due to which there is a risk that in case of initiating enforcement proceedings on the real estate, the lessee will lose the possibility of using the facility;

 In practice, contracts are often prepared by accountants, which are using contract forms that are not related to the circumstances of the case or contain regulations that are not in force, resulting in several risks arising from such legal act;

 The form of the contract is an element of the contract on which its validity depends. Notary processing of contracts is necessary for part of the business in Bosnia and Herzegovina, but the parties nevertheless conclude contracts in free form, resulting in their nullity.


11. Judicial and other proceedings

 Excessively lengthy proceedings in courts. In practice, the procedures for interim security measures are never harmonized with the valid regulations, and the processes for security measure can last up to a year, whereby the security measure loses its basic meaning;

 Court experts do not have uniform rules of procedure, and when preparing findings and opinions in court proceedings, two experts of the same profession can give opposed findings and opinions, following the requests of the party that hired him. Courts base their judgments on such expertise.

 Courts do not have a uniform practice, so two chambers of the same second instance court make completely different decisions in a legal matter of the same qualifications;

 The Constitutional Court rejects a large number of appeals coming from the field of commercial law, arguing that this is not a violation of human rights and that commercial law is not under the jurisdiction of the Constitutional Court;

 Proceedings before the European Court of Human Rights are often lengthy and there are no adequate mechanisms for enforcing the decision of the European Court of Human Rights at the local level.

 In proceedings for recognition of a foreign arbitral award, the competent courts act as second instance bodies, which often prevents the enforcement of arbitral awards;


12. Investment perspectives in Bosnia and Herzegovina

Law firm “IBRAHIMOVIC & CO” as the author of the text that summarizes the most significant investment obstacles in Bosnia and Herzegovina during the implementation of acquisitions, points out that the intention of this manual is not to recognize the risks as insurmountable obstacles. On the contrary, the acquisition risks identified in this text are roadmaps that need to be taken into account when implementing acquisition procedures in Bosnia and Herzegovina, so that interested investors can successfully achieve business intentions.

The long-term experience of the law firm “IBRAHIMOVIC & CO” in the implementation of these cases indicates that the identified risks can be eliminated or reduced, taking into account the fact that the team of the Law Firm monitors many foreign investors who have successfully implemented projects in Bosnia and Herzegovina, despite the risks and barriers. The identified risks and obstacles can be overcome through cooperation with an experienced local advisor from the earliest stage – acquisition intention, so that legal prevention and due diligence analysis form a clear course of acquisition and a schedule of necessary activities, until the conclusion of the acquisition contract and successful closing of the project.
Bosnia and Herzegovina are slowly using their investment potential, but there are undoubtedly positive changes in regulations and practices and the positive effects of it will form significant results in the future. However, taking into account the number of identified risks and obstacles, it can be concluded that Bosnia is still in its infancy, in which both the authorities and investors are looking for the most successful models for strengthening investment policy and achieving positive business results. Therefore, it is important to recognize the importance of preventive actions and to implement all necessary steps, so that local specifics of state organization are used as an advantage for rapid and efficient realization of business intentions, and not as an aggravating circumstance of the acquisition process. The first and most important preventive step is to establish cooperation of foreign investors with experienced local legal advisors, who will give recommendations and enable the prompt realization of the business idea, with maximum protection of investors’ interests from identified risks and challenges. In Bosnia and Herzegovina, due diligence analysis is not only an in-depth analysis of the company’s operations, but also requires the necessary identification of local risks, which must be targeted during the analysis. Only in this way can, a synergistic connection between the foreign investment intention and its realization under local regulations can be created.

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