A successful closure of a complex M&A transaction involving the sale of Serbian companies through an innovative escrow solution, overcoming trust issues, financing challenges, and regulatory requirements.
Client Background: Our client, a foreign company, sought to sell two target companies in Serbia to a Buyer. The transaction involved not only the sale of the shares in companies but also the assignment of shareholder’s loans that the Seller had extended to the target companies. These loans were subject to reporting requirements with the National Bank of Serbia (NBS), adding an additional layer of complexity to the deal.
The Challenge: From the outset, the transaction encountered significant challenges. Both parties—the Buyer and Seller—were cautious and distrustful of each other’s intentions. The Buyer was financing the majority of the deal through a credit line from commercial banks and intended to pledge future shares in the target companies to secure the loan. However, the Buyer demanded that the assigned loans, which were registered with the NBS be transferred before proceeding with the transaction.
Conversely, the Seller’s priority was securing the purchase price upfront. This created a deadlock, as neither party was willing to take the first step. Additionally, the financing banks, as a third party, had their own requirements to secure the loan, including the pledge of shares that were not yet in the Buyer’s ownership. The complexity of pledging future shares to the banks further compounded the risk and uncertainty, threatening to derail the entire deal.
Approach and Resolution: Faced with a standoff and the risk of the transaction collapsing, our legal team proposed a comprehensive and innovative solution—a complex escrow mechanism that would ensure both parties were protected while completing the transaction step-by-step. Our goal was to create a structure where the parties could proceed with confidence, knowing their interests were safeguarded at every stage.
The key elements of the proposed solution were as follows:
1. Escrow Account with Bank
We proposed the opening of an escrow account with a trusted bank, where the entire purchase price (both for the shares and for the assignment of shareholder’s loans) to be paid by the Buyer would be held. This provided the Seller with security that the funds were available and would be released only once all the agreed conditions were met.
2. Escrow Agreement with Public Notary
We structured a complex escrow agreement involving a public notary, the Buyer, the Seller, and the financing banks. This agreement outlined the conditions under which the transaction documents—specifically the Share Purchase Agreements (SPAs), Assignment Agreements, and Pledge Agreement—would be deposited with the public notary. The release of these documents to the Seller would occur upon the fulfillment of certain pre-agreed conditions.
3. Detailed Transaction Steps
We outlined a series of 9 complex steps that detailed the entire sequence of actions required to finalize the transaction. These steps were designed to ensure that all legal and financial requirements were met, and that both parties were protected at each stage. The release of the transaction documents was structured in stages, with certain documents being released to the Buyer and Seller only after the completion of key steps. The registration of the Buyer as a new shareholder and the registration of the pledge over shares in favor of the banks were tied to the final steps in the process—specifically, the release of funds from the escrow account to the Seller’s account. Only after the payment of the full purchase price from the escrow account to the Seller, the Public Notary was authorized to distribute all original counterparts of the subject of deposit to the parties.
Outcome: The transaction, which had been in serious jeopardy due to mistrust and delays, was successfully completed. The escrow mechanism provided a clear framework for both parties, ensuring that all conditions were met before any party took a significant step. The detailed and structured approach helped manage the risk, resolve the impasse, and ultimately led to the successful closure of the deal.
Thanks to the proposed solution, both the Buyer and Seller were able to move forward with confidence. The Buyer secured the shares and loans as per the agreed terms, and the Seller received the full purchase price.
This case exemplifies our firm’s ability to provide innovative solutions to complex M&A challenges, especially when trust and negotiation barriers arise. Our deep understanding of Serbian legal frameworks, combined with practical experience in dealing with multi-party transactions, was key in facilitating this successful deal.
By Veljko Dostanic, Partner, MMD Advokati
