Acquisition or merger of companies (M&A — Mergers & Acquisitions) is one of the most complex legal and business transactions a company can face. The difference between a well-structured M&A process and a “blind” takeover can be measured in millions of euros — in losses or gains. Due diligence (DD) is a systematic review that maps all risks, obligations and values of the target company before any binding document is signed.
In Serbia, where registry data is not always up to date, court proceedings are lengthy, and the contractual documentation of historical dealings is sometimes sparse, quality due diligence carries particular weight. A buyer who skips this phase does not know what they are actually buying.
This text is informational in nature and does not replace individual legal advice.
What is due diligence and why it is indispensable
Due diligence is a structured process of gathering, analysing and verifying information about the target company (target). The goal is not only to identify risks, but also to:
- Determine the realistic value of the transaction (valuation support)
- Negotiate price and terms based on findings (representations & warranties)
- Define post-acquisition obligations and integration requirements
- Establish the basis for potential indemnity claims in the future
The DD process is initiated after signing the Letter of Intent (LOI) or Term Sheet, which defines the framework terms of the transaction and opens the period of exclusive negotiation.
Legal due diligence: The core of the review
Legal review is the most extensive part of DD and covers the following areas:
Corporate structure and ownership Review of founding documents, registered data with the Business Registers Agency (Agencija za privredne registre — APR), history of ownership changes, and analysis of whether the current seller is actually the person authorised to sell. It is particularly important to check whether any pledges exist over equity interests or shares.
Contractual relationships Review of all significant contracts (client, supplier, lease, licence, partnership). Special attention to: automatic renewal, change of control clauses, penalties for early termination, and undisclosed agreements that have not been mentioned.
Employment relationships Analysis of employment contracts, collective agreements, unpaid arrears, employment-related litigation, and potential obligations regarding termination of employment upon a change of ownership.
Disputes and court proceedings Review of court registers, inspection of active litigation (as claimant or defendant), arbitration proceedings, and potential future claims. Some proceedings are not actively pursued but may escalate following a change of ownership.
Intellectual property Verification of the registration and ownership of trademarks, patents, copyrights and software. Does the IP actually belong to the company or to the founders personally? Are there licence agreements that restrict use?
Financial and tax due diligence
The legal team works in parallel with financial analysts who analyse:
- Balance sheets and income statements for the past 3–5 years
- Cash position and free cash flow
- Receivables collectability and ageing of debts
- Tax obligations and any tax debts owed to the Tax Administration
- Open tax inspections or pending tax audits
In Serbia, it is particularly important to check the status of mandatory social insurance contributions — the limitation rules applicable to regular taxes do not apply to these obligations, meaning they may not be immediately apparent.
Encumbrances on assets: Mortgages, pledges and fiduciary transfers of real estate or equipment must be identified. Registries that must be checked include: the Pledge Register maintained by the APR, the real property cadastre maintained by the Republic Geodetic Authority (Republički geodetski zavod — RGZ), and the Unified Register of Taxpayers maintained by the Tax Administration.
Due diligence and regulatory aspects
For certain transactions, M&A requires prior regulatory approval:
Commission for Protection of Competition (Komisija za zaštitu konkurencije — KZK): Concentrations exceeding revenue thresholds must be notified to the KZK prior to implementation. Implementing a concentration without approval may result in a fine of up to 10% of total annual revenue generated in the Republic of Serbia. The thresholds are defined by the Law on Protection of Competition and must be verified for each specific transaction.
Sector regulators: Acquisitions in the banking sector require the approval of the National Bank of Serbia (Narodna banka Srbije — NBS); in the energy sector — the Energy Agency of the Republic of Serbia (Agencija za energetiku Republike Srbije — AERS); in telecommunications — the Regulatory Agency for Electronic Communications and Postal Services (Regulatorna agencija za elektronske komunikacije i poštanske usluge — RATEL). Each of these processes has its own specific requirements and timelines.
Foreign investments: Serbia does not have a general regime of prior screening of foreign investment (FDI screening) — the Law on Investments (Zakon o ulaganjima) places domestic and foreign investors on equal footing. However, in certain regulated sectors (banking, insurance, media, energy), sector regulations provide for specific approvals that apply regardless of whether the acquirer is a domestic or foreign entity.
Representations & Warranties and buyer protection
Following the DD, the buyer negotiates the representations and warranties (R&W) that the seller provides in the Share Purchase Agreement (SPA). These representations cover all significant aspects of the review and form the basis for an indemnity claim if subsequent discovery reveals that the seller provided inaccurate information.
A typical SPA contains: – Indemnity clauses for specific risks identified in the DD – Escrow mechanism — a portion of the purchase price is retained for a defined period as security for potential R&W claims – Earn-out provisions — a portion of the price tied to future business results (relevant for companies with projected growth) – Limitation of liability — upper and lower caps on indemnity claims, as well as limitation periods
Practical organisation of the DD process
Modern DD is conducted through Virtual Data Rooms (VDR) in which the seller deposits documentation in an organised manner. The buyer and advisers carry out their analysis, and communication is conducted through formal Q&A processes that remain documented.
Prior to opening the VDR, the parties sign a non-disclosure agreement (NDA) protecting the seller’s trade secrets in the event that the transaction is not finalised.
The DD report prepared by the attorney is not an end in itself — it is a tool for negotiation and decision-making. The buyer must understand which findings are “deal-breakers”, which are manageable through price adjustment, and which require specific contractual protections.
Frequently Asked Questions (Q&A)
How long does the due diligence process take for a typical domestic mid-sized company? For a medium-sized enterprise (annual revenue of EUR 5–50 million), a complete DD typically takes 4–8 weeks, depending on the organisation of documentation and the availability of key information. Poor documentary history may extend this timeframe.
Is the buyer required to notify the employees of the target company about the acquisition? During the DD phase, information about the transaction is confidential. The Labour Law requires employees to be informed in certain cases of status changes (upon transfer of the enterprise as a whole), but this differs from an acquisition of equity interests or shares where the company as a legal entity remains the same. The specific obligations depend on the nature of the transaction.
What happens if a risk is discovered only after the acquisition has been completed? If the seller has provided inaccurate R&W representations in the SPA, the buyer is entitled to an indemnity claim within the timeframes and limits defined in the SPA. This is the reason why precise drafting of R&W and indemnity clauses is equally important as the DD itself.
Is it necessary to engage both a domestic and a foreign attorney in an acquisition? For cross-border M&A transactions (foreign buyer, domestic target), it is typical to engage a local attorney (Serbian law, regulatory aspects) and the buyer’s foreign counsel (coordination with R&W insurance, international structural aspects). Coordination between the teams is essential for consistency of findings.
Conclusion
M&A due diligence is not a cost that can be optimised by cutting back on expert engagement — it is an investment in protection against potentially far greater losses. Every company has its hidden history: undocumented disputes, tax obligations awaiting inspection, contracts that renew automatically.
A structured, thorough due diligence, accompanied by a well-negotiated SPA, is the only way to adequately define and protect the value of a transaction.
Schedule a consultation with the VertexLaw M&A team and enter your next acquisition with full insight into what you are buying.
Sources: – https://www.paragraf.rs/propisi/zakon_o_privrednim_drustvima.html – https://www.paragraf.rs/propisi/zakon_o_poreskom_postupku_i_poreskoj_administraciji.html – https://www.apr.gov.rs/registri/privredna-drustva/statusne-promene.123.html – https://www.kzk.gov.rs/rs/akta-i-propisi/zakoni
