Understanding Serbia’s Merger Control: Regulatory Hurdles and Best Practices

Why May the Rules on Merger Control Affect You More Than You Expect?

Learning that a merger notification procedure exists in Serbia may not be news for you but realizing that merger notification requirements apply to your business may come as a surprise. While we can safely say that the Serbian legal framework on protection of competition is formally harmonized with EU regulations, at least for the most part, certain intricacies in applying such rules by the domestic Commission for Protection of Competition (CPC) remain to this day. Namely, while in some cases the CPC makes an explicit reference to Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (the “Notice”)¹, they are still reluctant to apply certain interpretations from the Notice, especially in cases where they deem that the Law does not explicitly allows for such an interpretation. So even if you made the assessment in accordance with the EU competition rules, it may still be necessary to consider certain specifics of the Serbian law.

The above result stems from two separate but related issues:

1. Low thresholds
2. The absence of the lack-of-effect doctrine in assessing concentrations in Serbia.

Namely, although the Serbian Law on Protection of Competition (the “Law”)² explicitly says that its provisions apply to acts taken within the territory or Serbia, or even outside its territory, provided they affect or could affect competition in Serbia, the case law shows that the only condition relevant for assessment of obligation to file a merger notification in Serbia is the annual turnover threshold.

Considering the CPC’s increased interest in investigating gun jumping and the broad list of tools the CPC officials started using when assessing gun jumping (including online press releases), it may be useful to familiarize yourself with obligations that you may not have been aware of – if you are a company generating turnover in Serbia. The CPC has been quite understanding of undertakings’ failure to comply with merger filing obligations in Serbia in cases where the concentration in question is not related to Serbia. However, this may be set to change considering their recent case law and enhanced advocacy activities, which are intended to raise awareness of such obligations.

Conditions and Thresholds for Merger Filings

Merger filings are usually automatically related to multinational companies and near-dominant undertakings, whose M&A activities are under the scrutiny of competition watchdogs.

This is not the case in Serbia. Namely, the thresholds for merger filings were set in 2009 and have not been changed to this day. They have been regularly criticized as being too low, and such an objection becomes more significant as time passes.

Namely, the thresholds for merger notifications in Serbia are as follows:

a) the aggregate worldwide turnover of all participants in the year preceding the merger is at least EUR 100 million, provided that at least one of the participants achieved a turnover of at least EUR 10 million in Serbia; or

b) the aggregate turnover in Serbia of at least two participants is at least EUR 20 million in the year preceding the merger, provided that each of at least two participants achieved a turnover in Serbia of at least EUR 1 million.

Now, this conclusion may not come to you at first glance, but the thresholds under point a) may be met by only one party in the transaction – the acquirer, as there is no explicit mention of the target. This is the reason why foreign-to-foreign concentrations are subject to merger filing requirements in Serbia.

Therefore, if you are a foreign undertaking generating turnover in Serbia (through a local subsidiary or directly) of over EUR 10 million and a worldwide turnover of over EUR 100 million – your M&A transaction must be notified to the CPC.

Calculation and Allocation of Turnover

Total annual turnover represents the sum of operating, financial, and other income before taxation. The rules on turnover calculation are similar to those in the EU – the turnover of a group of companies to which the undertaking in question belongs is considered when calculating the turnover. This also means if, for example, you generate turnover through several companies in Serbia (through one subsidiary and import of services of two other companies, for example), the turnover of all of these will be considered. On the other hand, the value of the export of your services/goods from Serbia to another country will not be considered.

The turnover is calculated based on FS for the year preceding the year of the filing. Note that this may not be the same as the year of the concentration if, for example, a concentration emerges at the end of the calendar year, but the merger notification is filed at the beginning of the following year – this may be relevant for planning the timing for the transaction as it allows for certain flexibility to otherwise strict rules. Although, according to the EU rules, any divestments or acquisitions completed after the end of the financial year that the turnover calculation is based on should be taken into account, the CPC is still reluctant to apply those rules, under the explanation that such an interpretation be explicitly derived from the Law, and there is lack of any guidelines/bylaws with more details on this.

When it comes to calculating the turnover of the target, only the turnover attributable to the acquired part of the target business is relevant, be it a whole group of target companies, one company, or only one part of a company’s business.

It should also be noted that there are separate rules for the calculation of turnover of undertakings in the finance and insurance sectors, which will not be elaborated here in more detail.

If you are an investment fund or an asset management company and have a portfolio of undertakings operating in different areas, you may wonder if the above rule on calculating the group turnover still applies to you, considering that you are generating turnover on different markets. The answer is – yes, the rules still apply to you, as it is irrelevant whether the income comes from one industry – or, to be precise, more than one relevant market, in terms of competition rules.

In the past few years, there has been significant discussion as to whether thresholds related solely to turnover are enough to reflect undertakings’ market power, especially when it comes to digital business (online intermediation services), which may hold significant market power without generating significant turnover. Serbia, at least for now, keeps only turnover thresholds, but it should be noted that the CPC is authorized to investigate any concentrations post-closing, where the participating undertakings hold at least 40% of the relevant market, that is if the CPC can safely presume that the concentration is not allowed under the Law. This authorization would allow the CPC to investigate concentrations where the participants did not meet the thresholds but had a combined market share of 40% or more.

We can safely conclude that, even though the thresholds are quite low and are defined in a way that enables their application to a number of concentrations that will not substantially cause any market disruptions, such thresholds will enable the CPC to also contemplate the so-called “killer acquisitions”, based solely on the market power of the acquirer.

What Constitutes Concentration and How Do You Evaluate Its Permissibility?

The following transactions constitute a concentration:

a) A merger or other statutory change resulting in the consolidation of two or more undertakings into a single entity;

b) The acquisition of direct or indirect control by one undertaking (sole control) or multiple undertakings (joint control) over another undertaking(s) or parts thereof, provided that these parts constitute an independent business unit;

c) The establishment of a joint venture or the joint acquisition of control over an existing undertaking, where the entity will operate as an independent business entity on a long-term basis. Change of control from joint to single control also requires merger notification.

Except in the case under point c) above, the Law does not require that the change of control is made on a long-term basis, so even a temporary change of control is subject to merger notification (except in exceptional cases – more on that under part dealing with JVs and VCs).

In any case, a change of control is an inherent part of concentration and is defined as the ability to exert a decisive influence over an undertaking’s operations, based on:

a) a controlling shareholding;

b) ownership or proprietary rights over an undertaking’s assets (or parts thereof); and

c) contractual rights or rights stemming from securities, receivables, encumbrances on receivables, or business practices established by the controlling entity.

Therefore, the acquisition of a controlling shareholding is not the only event giving rise to competition concerns, as control may arise in other types of transactions as well. For example, the acquisition of a minority shareholding will, in general, not constitute a concentration, but if such acquisition is followed by veto rights enabling a decisive influence over an undertaking’s operations (that are essential for the business), this may be considered as concentration. Similarly, asset deals will generally not fall under the scope of rules on concentrations, unless these same conditions are met.

Once you identify that you meet the thresholds and that the transaction in question is indeed concentration, the next step would be to assess its permissibility. Concentrations of market participants are permitted unless they would significantly restrict, distort, or prevent competition in the market of the Republic of Serbia or a part thereof, particularly if such restriction, distortion, or prevention would result from the creation or strengthening of a dominant position. The permissibility of a market concentration is contemplated based on the structure of the relevant market, actual and potential competitors, the market position and economic and financial strength of the parties to the concentration, the availability of choice for suppliers and customers, legal and other barriers to market entry, the level of competitiveness of the parties involved, trends in supply and demand for relevant goods or services, trends in technical and economic development, and consumer interests.

Concentrations that qualify for a short-form merger notification are usually those that do not give rise to serious competition concerns and that are set to be approved in phase I:

a) A shift from joint control to sole control;

b) The parties to the concentration do not operate in the same markets, or if they do, their combined market share does not exceed 20% in the same market (horizontal overlap), and none of them holds an individual market share exceeding 30% in any vertically related market;

c) The total market share of all merging parties in a horizontal overlap remains below 40%, with a delta HHI of less than 150.

If the above is the case, the concentration will usually be cleared unconditionally within 1 month as of the day of filing.

Specifics of Joint Ventures in Merger Filings

As noted above, JVs (whether those newly established, or as an acquisition of joint control over an existing undertaking) are subject to merger notifications. However, JVs, especially when made between competitors or companies operating in vertically integrated markets, may be subject to further scrutiny. It is also important to make a distinction between JVs that require merger notifications and those that do not.

Namely, a JV is subject to merger notification only if it will operate as an independent business entity on a long-term basis – the so-called “full function” joint venture. On the contrary, JVs that are not intended to perform independent business activities long term but have as their object coordination of business activities of two or more undertakings, while holding on to their position as independent undertakings on the market, will be evaluated according to the rules on restrictive agreements.

Whether a joint venture is classified as “full function” or merely “cooperative” depends on the degree of its operational and financial independence from its parent companies, as well as the extent to which it has a standalone presence in the market. A “full function” joint venture must have sufficient resources, including financial, human, and physical assets, to operate independently as a distinct economic entity. Since there are no specific local guidelines defining what constitutes a “full function” joint venture, the criteria established under EU competition law would apply. According to the European Commission, a joint venture is considered “full function” if it performs on a lasting basis all the functions of an autonomous economic entity, meaning it must not be overly dependent on its parent companies for essential business operations – an undertaking must have the necessary facilities and be likely to obtain a substantial proportion of its supplies not only from its parent companies but also from other competing sources.

Finally, your situation might involve elements of both cases – that is, filing a merger notification for a joint venture doesn’t mean you should overlook potential ancillary restraints agreed upon in such agreements, as they are an integral part of every merger. Such restraint and otherwise potentially anticompetitive agreements (when agreed upon outside of M&A deals) are generally deemed as an integral part of the merger notification and therefore the subsequent merger clearance decision (if and when obtained), however, only to the extent that such restrictions are directly related to and necessary for the implementation of a concentration. If the parties wish for the CPC to contemplate the ancillary restraints specifically (for example, if the parties are not sure if such restraints are proportionate to the purpose), the acquiring entity – applicant, is required to file a standard form merger notification (even if the conditions for short-form are met in that specific case).

What to Do if You Intend to Carry Out a Transaction in Stages?

Some transactions may be conducted in several steps, such as parallel (acquisition of control over several targets) and serial (acquisition of control over an undertaking, subject to its acquisition of another undertaking). These cases may fall under the scope of the rule of notifying a series of transactions as one concentration – provided that these are mutually interdependent and are completed within two years.

The structure of the transaction and the wording of the underlying agreements may therefore be of crucial importance to avoid unnecessary costs in terms of multiple merger filings and to properly handle competition compliance risks in such transactions.

Do I Have to Notify a Transaction Based on LoI Already?

Usually no – merger filings based on LoI remain a possibility, but the acquiring party is not obliged to file a merger notification before concluding a legally binding agreement to acquire control (except in the case of joint stock companies, where there are certain exceptions).

Filing based on LoI is advisable where, for instance, the concentration poses a certain risk for distortion of competition in the market and the parties would like to get approval before entering into the transaction. However, in such cases, the transaction documents should be drafted carefully to be fully in compliance with the LoI and the merger clearance decision (if obtained), since any substantial change to the transaction may require new merger filing.

Questions emerged as to whether put options constitute an unbinding agreement. That will, in most cases, not be the case, but the rules of the EU Notice would be applied in this case, according to which an option, together with other elements, may lead to the conclusion that there is de facto sole control.

Are There Any Exceptions for Short-Term Acquisitions of Control?

In general, no, the Law does not recognize short-term acquisition of control as a point relevant for deciding whether a merger notification will be required – so there is no general exception for acquisition of control that is only temporary. However, there are exceptions related to certain industries, allowing for more flexibility where regular merger filings would otherwise be expected and would present a great burden:

a) Banks, other financial institutions, or insurance companies whose regular business activities involve transactions and dealings in securities may temporarily hold interests in an undertaking, provided that the acquisition is made with the intention of resale. In such cases, they must refrain from exercising ownership rights in a manner that influences the undertaking’s competitive behavior, and the disposal of the acquired interests must occur within one year from the acquisition date. This deadline may be extended by the CPC for an additional six months.

b) When an investment fund or an investment fund holding company acquires an undertaking, provided that the voting rights associated with such acquisition may only be exercised to preserve the full value of the acquired entity and not to influence its competitive market behavior.

The Risk of Gun-Jumping Investigations

Considering that the Law requires merger filings even for foreign-to-foreign transactions, undertakings usually opt to conduct a risk assessment related to potential gun-jumping. However, taking on this risk is not worthwhile, especially in cases where you intend to continue and expand your business in Serbia and the region.

The acknowledgment that the approval of the CPC may hinder a transaction that has no connections whatsoever to Serbia, considering the standstill obligation (i.e. the prohibition to close the transaction before getting the approval) is what companies also take into account. However, such obstacles may be overcome by adding carve-out clauses to transaction documents, that will relate to Serbia only. Such clauses are neither expressly approved nor rejected by the CPC, but they are often used to overcome the burden that the merger filing in Serbia may pose to a transaction that is conducted abroad. These clauses must be drafted carefully, as the CPC’s approach in such cases is still unknown (these provisions are being tolerated for now, but not expressly approved), especially in a transaction that may have effects on the Serbian market.

Namely, the CPC uses different methods for investigating gun-jumping, including the review of press releases related to transactions in question. Some gun-jumping investigations, even for foreign targets and foreign acquirers, were initiated based on the knowledge obtained either from the media or press releases on the websites of the companies in question. In addition, you may be required to disclose any previous transactions, either explicitly or implicitly, in any subsequent merger notifications to be made.

Practical Compliance Steps

In conclusion, evaluating the requirements for merger filings in Serbia demands careful consideration and a thorough understanding of the regulatory landscape. While the CPC largely aligns its approach with EU competition law, there are notable distinctions that businesses must be aware of. These differences stem primarily from the CPC’s strict interpretation of the relevant legislation, which can lead to a more rigid application of the rules compared to EU practices.

Additionally, the absence of comprehensive soft law instruments, such as detailed guidelines specifically addressing merger control in Serbia, adds to the complexity of the process. This lack of interpretative guidance means that companies must navigate the filing requirements with extra caution, ensuring compliance with both formal legal provisions and the CPC’s established decision-making practices.

Given these factors, businesses considering mergers or acquisitions and meeting the described thresholds, even those that are not directly related to Serbia, should approach the process with diligence, carefully assessing whether a filing is required and anticipating potential regulatory challenges that may arise due to the CPC’s stringent approach.

By Zunic Law, Serbia, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact serbia@transatlanticlaw.com

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