First published on CEE Legal Matters, 30.10.2020
Although, like many other CEE jurisdictions, Slovenia experienced major COVID-19-related market turbulence in the first half of 2020, the market has nonetheless seen some interesting developments as well – and more activity is likely to follow in Q3 and Q4.
Looking Back: The COVID-19 Shock of Uncertainty
Undoubtedly, the key factor shaping the M&A landscape in the first half of 2020 was the onset of the COVID-19 pandemic which, in terms of immediate consequences, translated into a practical standstill of public life (in the form of a lockdown) and economic activity in several industries – in particular, tourism and leisure – and, from a broader perspective, into a shock of uncertainty for both private market players and the public/legislative sector.
As a result, most M&A transactions pending at the time, especially those in a pre-signing phase, were put on hold or aborted altogether. On the legislative side, the Slovenian state was fairly quick to adopt a slate of measures aimed at tackling the immediate effects of the COVID-19 shock. In addition to various forms of temporary subsidies of employment and tax/social contribution costs for undertakings, the package notably introduced (i) amendments to the insolvency legislation which temporarily suspended the obligation to file for insolvent reorganization or bankruptcy (which, in practical terms, prevented – or, rather, postponed – a wave of insolvency petitions), (ii) a compulsory moratorium for bank debt (essentially forcing Slovenian lenders to prolong repayment terms upon request from eligible borrowers), and (iii) a framework state guarantee for COVID-19 liquidity support provided by banks to Slovenian undertakings.
Despite the circumstances, a few sizeable deals were closed in the first half of 2020 (notably within the financial, automotive/distribution, and technology sectors). Indeed, according to recent figures published by the Slovenian Central Bank, the quantum of foreign direct investment (FDI) – a useful proxy for M&A activity in Slovenia – in the first half of 2020 dropped only by some 15% compared to the first half of 2019.
Looking Ahead: Enhanced FDI Screening and Adapting to the New Reality
In the short- to mid-term, M&A activity in Slovenia will be driven primarily by legislative developments as well as by specific trends in the economy – particularly, consolidation.
On the legislative side, the hot topic in M&A circles is the newly introduced FDI screening regime. Although modelled on the EU’s FDI Screening Regulation (2019/452), the Slovenian FDI rules have drawn early criticism from investors and practitioners for reasons of substance and process. In terms of substance, Slovenia’s FDI rules – compared with those set out in the EU FDI Screening Regulation – expand both the scope of businesses/assets which trigger FDI scrutiny (notably including real estate assets located "near" critical infrastructure) and the range of acquirers subject to the obligation to notify the transaction (notably including EU-based entities). Perhaps more importantly, in terms of process, because the Slovenian FDI rules do not envisage an obligatory issuance of a clearance decision, unless the competent authority – the Ministry for Economic Affairs – based on a prima facie assessment, initiates a review proceeding in relation to a notified acquisition (which then results either in a clearance or prohibition), parties to a transaction can find themselves faced with the potential risk of having their transaction reviewed and prohibited retroactively (within five years from closing).
While it is too soon to speak of a common response of the M&A market, it seems logical that, in terms of deal documentation, this risk will increasingly be allocated to the buyer (similarly to merger control), as this is in many respects a buyer-idiosyncratic risk.
The general drivers behind M&A activity in the mid-term will be, in particular: (i) the secondary effects of COVID-19, which will presumably bring about an increased number of distressed transactions (ranging from distressed disposals of non-core businesses by large corporations and secondary debt (loan-to-own) driven acquisitions), (ii) growth-driven acquisitions, especially in the technology sector, and (iii) the continuing trend of consolidation in the financial industry.