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Cross-entity Mergers

Cross-entity Mergers

Bosnia and Herzegovina
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Corporate restructuring and transformations, such as status changes, are part of the business cycle of companies and represent their natural way of growing, adapting to changes in the market and exploring new business opportunities.

The importance of status changes, especially from the perspective of protection of shareholders (but also employees, creditors and other stakeholders) and the need to create a legal framework governing the implementation of status changes of resident companies of different Member States, was recognized at the European Union level. Thus, in 2005, Directive 2006/56/EC on cross-border mergers was adopted, and repealed in 2017, with the adoption of the Directive 2017/1132 on certain aspects of company law. The procedure for cross-border mergers is regulated within a special section of the latter Directive, which regulates the respective matter in the EU in a uniform way. The creation of a single legal framework for cross-border mergers has resulted in increased mergers in the EU and the European Economic Area (“EAA”): the number of cross-border mergers increased by 173% between 2008 and 2012, showing that the Directive has significantly increased cross-border activities. Consistent implementation of the Directive in national legislation differentiates the competencies of national authorities, determines national law, optimizes the costs of cross-border mergers, and protects shareholders and third parties.

Taking into account the specifics of the constitutional order of Bosnia and Herzegovina, and that the business operations of companies is regulated at the entity level, the issue of the applicable legal framework and in general the possibility of implementing status changes of companies based in different entities arises. Additional questions arise if the companies participating in the status changes are subject to special regulations (depending on the activities they are engaged in), either at the state (e.g. telecommunications, air transport, etc.) or entity level (e.g. financial activities, insurance activities, etc.).

Thus, for example, in the event that companies are participants in the merger of companies engaged in financial activities, there will be an obligation to obtain prior approval from the regulator (Banking Agency), for both (or more) companies.

The current legislation in the FBiH recognizes and separately defines three types of status changes: mergers, acquisitions and divisions. In the literature and other legislation (e.g. Republika Srpska) there is another type of division of status changes – merger (where the merger, and merger with the incorporation are differentiated) and division, which can also occur in several variations, i.e. as (i) division with merger, (ii) division with incorporation or (iii) division with merger and division with incorporation. Hereinafter, the term “merger” will be used in reference to the merger status change (incorporation of a successor company) and an acquisition status change (merger with a successor company).

The procedure for merging companies is different in the FBiH and RS. Therefore, if the companies participating in the merger have their registered office in two different entities, each of the companies is obliged to follow the prescribed steps according to the legislation of the entity of which it is a resident. There may be some inconsistencies and practical obstacles in implementing all legal guidelines (e.g. in FBiH companies compile a Reorganization Plan containing a written auditor’s report, while in RS they compile a contract subject to independent audit; in RS independent auditors of merging companies are appointed by the court in an out-of-court proceeding, while in the FBiH companies elect auditors, etc.). However, the decisive criterion for resolving disputed issues (i.e. whether to adapt to the legislation of FBiH or RS) would in this case be the address of the head office of the successor company.

In essence, although mergers of companies based in different entities are not explicitly regulated, there are no legal obstacles to conduct such process. Undoubtedly, a single regulation regarding status changes in both entities would facilitate and increase the number of status changes of companies. However, the option left to companies with the aim of “facilitating” the merger procedure is to change the registered office before initiating a status change. Consequently, the participating companies would have their registered office in the same entity, and the same merger procedure would apply to the participating companies. If, on the other hand, a change of registered office would cause disproportionate difficulties (e.g. the need to obtain additional approvals / permits if the company is subject to special regulations), companies would most likely decide to skip this step and follow the merger procedures prescribed by entity regulations.

In addition to special restrictions and rules prescribed for companies participating in status changes (if they exist due to the type of activity in which the company is engaged), it is necessary to take into account the regulations on market competition, which are prescribed at the BiH level.

Thus, for example, the companies participating in the merger, which do not belong to the same group or are not under the same ultimate control, will be required to report the intended change to the Council of Competition if*:

a) the total annual income of all participants in the merger generated by the sale of goods and/or services on the world market is BAM 100,000,000 according to the closing accounts in the year preceding the merger; and

b) the total annual income of each of at least two companies participating in the merger realized by selling goods and/or services on the market of Bosnia and Herzegovina is at least BAM 8,000,000 according to the closing accounts in the year preceding the merger, or if their joint share in the relevant market exceeds 40%.

*If the companies participating in the merger are financial institutions or (re)insurance companies, special provisions of the Competition Act of BiH shall be applied for the calculation of their total income.

In addition to the legal implications that should be considered, the merger procedure may have significant tax repercussions. E.g. if the participants in the merger are registered VAT payers, it is necessary to perform a detailed check whether the factual situation meets the conditions for non-taxable transfer of all or part of the taxpayer's property. If this is not the case, the transfer of one taxpayer's assets to another would be considered VAT taxable supply in BiH, resulting in a potentially significant increase in costs.

Furthermore, from the aspect of corporate income tax, it is important to determine whether there is the continuity in taxation, in which case the tax liability would be determined as if there was no status change.

As far as the organizational presence is concerned, upon completion of the status change of the merger, the successor company will have its registered office in one of the entities. However, if the successor company intends to retain employees and continue to operate in another entity, it is necessary to establish a form of organizational presence in that entity as well (e.g. a branch). Therefore, the question of the purposefulness of cross-entity merger arises, because the same has a purpose only if the predecessor company will completely cease to exist in one entity. But on the other hand, status changes are generally aimed at expanding the market and opening possibilities for new business opportunities.

The lack of a single legal framework for cross-entity mergers makes it difficult for companies to grow and expand naturally in the market, and results in additional costs on the part of shareholders. The need for uniform regulation of the subject matter in a way that will protect employees, founders, as well as other stakeholders is increasingly noticeable, and activities with the competent authorities should be intensified to initiate its creation.

The potential for status changes, as facilitators of economic development, in Bosnia and Herzegovina due to the existence of legal and procedural barriers is unfortunately still undiscovered.

By Aida Hamur, Attorney at Law, Legal Partners in cooperation with Deloitte Legal

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