Due Diligence in M&A projects in Slovenia

M&A processes (mergers and acquisitions) are extremely common around the world. What is particularly important for us, however, is that the number of such procedures has also increased significantly in Slovenia in recent years. This is largely the result of the increase in direct and indirect foreign investments in the market of the Republic of Slovenia.

In order to understand the role of due diligence reports in M&A processes (mergers and acquisitions), we must first understand what these procedures are and how they unfold.

M&A procedures

M&A procedures represent a set of complex business activities through which companies can pursue various objectives, most commonly the expansion of operations, revenue growth, and the strengthening of their position and role in the market.

To understand M&A procedures, it is important to know their key steps. Below, we will list them in chronological order and briefly explain them.

Steps of a merger or acquisition procedure

• Negotiations – their objective is to define the fundamental terms of the transaction. Negotiations are the step with which this procedure begins, while at the same time representing an activity that continues throughout almost the entire procedure and ends only with the completion of the transaction itself. The procedure is formalized by the conclusion of an appropriate Share Purchase Agreement (SPA). Initial negotiations are most often formalized through non-binding documents such as a letter of intent or a memorandum of understanding. Such documents generally do not create concrete obligations for any of the parties participating in the negotiations, but rather establish the basis for the continuation and implementation of the procedure.
• Conducting due diligence – due diligence represents an in-depth review, examination, and assessment of all aspects of the business operations of the company that is the subject of the merger or acquisition (colloquially also the “target company”). The due diligence analysis and report include a detailed review of the target company, primarily from a tax, financial, and legal perspective. Its objective is to identify as precisely and comprehensively as possible all risks that may arise for the buyer, while also helping to determine the real value of such an investment or transaction and its potential profitability and usefulness for the buyer. In order to achieve these objectives, the following relevant facts are determined within the framework of due diligence:
  • ownership structure of the target company;
  • existing short-term and long-term liabilities;
  • existence of possible encumbrances;
  • compliance of the target company’s operations with relevant regulations;
  • key financial aspects of the company’s operations.
• Conclusion of negotiations – once due diligence has been completed, the concluding phase of negotiations begins. This phase and its course largely depend on the due diligence report and its findings, since these significantly affect the conclusion of negotiations and the final agreement between the parties. Negotiations conclude with the alignment and preparation of the final text of the Share Purchase Agreement (SPA) and its execution.
• Preparation and execution of the SPA – the Share Purchase Agreement (SPA) is the most important document in the M&A procedure, as it governs the entire transaction in question, above all the finally agreed purchase price, the terms and dynamics of payment, security instruments (if agreed), the obligations of both parties participating in the procedure, and all other elements important for carrying out this procedure. The very process of aligning and preparing the final text of the SPA generally involves extensive negotiations and a series of corrections and additions to the text itself. The execution of the SPA represents the definitive conclusion of negotiations, but it does not yet mean the conclusion of the entire M&A procedure.

• Completion of the transaction and conclusion of the M&A procedure – the M&A procedure ends with the completion of the transaction, once all conditions and all obligations of the contracting parties set out in the Share Purchase Agreement (SPA) have been fulfilled. The completion of the transaction generally includes in particular the following actions:
  • payment of the purchase price (in full or in part);
  • transfer of ownership of the target company’s assets to the buyer in the appropriate procedure;
  • completion of the necessary entries in the competent registers (AJPES).

Legal framework of merger and acquisition procedures in Slovenia

Having presented the most important steps in the M&A procedure, it is also important for understanding this procedure to know the legal framework governing it in domestic legislation. M&A procedures in the domestic legal order are governed by several regulations, among which the following are the most important:

• Companies Act (ZGD-1), which represents the fundamental law in the field of status and corporate law and regulates corporate status transformations, management, and organization;
• Obligations Code (OZ), which regulates general contractual and obligations relationships within which negotiations, contract formation, and the performance of contractual obligations take place;
• Prevention of Restriction of Competition Act (ZPOmK-2), the purpose of which is to ensure effective competition in the market and which is important in merger and acquisition procedures primarily from the perspective of merger control.

Once we understand what the M&A procedure is, what legal framework governs it, and above all what the key steps and activities in this procedure are, we can also clearly see the role of due diligence in these processes. For each of the listed steps in the M&A procedure, it can be said that it is necessary for the implementation and completion of the entire procedure. As for due diligence, it can be said that it is crucial and that without it most of the other steps cannot be carried out. In fact, only the initial negotiations can be conducted without completed due diligence.

Due diligence and the merger or acquisition procedure

The due diligence analysis is therefore a key step in carrying out the M&A procedure. All essential elements of the transaction itself depend on this analysis. Whether the M&A procedure will be completed at all also depends in fact on the findings of the due diligence. Why is that? Only through this analysis is it possible to determine the “reasonableness” or economic justification of the transaction.

Frequently asked questions