I OVERVIEW OF M&A ACTIVITY
Post-crises, since the beginning of 2013, Lithuania’s M&A market has begun to show signs of recovery. Improved profitability of Baltic companies started to slowly revive the number of transactions, and the tendency towards the forced selling of businesses was fading away. However, 2015 may be seen as the year of stagnation for M&A transactions. In comparison with 2014, the total number of transactions decreased by about 38 per cent, down to 69 deals each with a value exceeding €100,000. The majority of the transactions were completed during the fourth quarter of the year.
Generally, most transactions were completed in the production, service and trade sectors. Companies were mostly merged or acquired to expand and diversify their activities and improve their competitive edge in the market. It is worth mentioning that private equity and venture capital funds continued to be active players in the market. Private equity and venture capital funds were interested in start-up technology and finance companies, and provided seed and growth financing in Lithuania. Furthermore, during 2015, local companies gained attention from well-known worldwide investors such as Polish fund MCI, Baltnetos komunikacijos and MP Pension Funds Baltic. Despite the positives aspects, in general, 2015 showed that Scandinavian and western European companies remain more attractive to investors, which was a key obstacle for more investments in Lithuania and also the Baltic region.
Some major acquisitions were completed in 2015. A consortium of investors (including funds of Deutsche Bank) acquired the loan portfolio of Bank Snoras. AB TEO LT purchased mobile operator Omnitel. An Estonian company, Starman, acquired cable TV company Cgates. Moreover, the acquisition of insurance company PZU Lietuva by Gjensidige Forsikring ASA was determined by undertakings imposed by the competition authority on the owner (Polish financial services provider Powszechny Zaklad Ubezpieczen), due to its recent acquisition of Lietuvos Draudimas, to sell part of its business. The acquisition of major mobile operator Bitė by private equity fund Providence Equity Partners has been announced but is not yet completed.
Finally, tensions between Russia and Ukraine appeared to be minor due to domestic demand and strong trade links within the EU. However, Russian sanctions negatively affected Lithuanian exports, and caused oversupply and a reduction of prices in the domestic market. The weak euro additionally contributed to difficulties for Lithuanian export-oriented businesses.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
Lithuania is a civil law legal jurisdiction whose fundamental laws are regulated by the Civil Code. Together with the Law on Companies, the Law on Securities, the Law on Markets in Financial Instruments, the Law on Cross-Border Mergers of Limited Liability Companies and the Law on Competition, this legislation forms the legal basis for the purchase and sale of corporate entities. Other acts may be applied depending on circumstances. The most important primary legislation is described in greater detail below.
The Civil Code regulates pre-contractual and contractual relations between parties. It also governs company acquisition and sale agreements. The Civil Code provides at least three models of sale of a business: shares, asset and enterprise deals. Enterprise is a number of assets independently used in an economic activity (e.g., a store in the retail chain). A sale of an enterprise must go through some very complex procedures that must be attached to the agreement, such as the conclusion of the auditor, deposit for creditor protection and approval of a notary public. These requirements make this type of transaction very unattractive to market players, who usually choose other alternatives: a sale of shares or sale of key assets.
Reorganisation by way of merger (joining and consolidation) foreseen in the Civil Code may be also considered as a business acquisition model. Joining is a merger of one or more companies to another existing company, while consolidation is a merger of two or more companies into a new company. Since reorganisation involves complex procedural steps and requirements, and is extremely time-consuming, it is rarely chosen as a way to acquire a business and is usually used as a post-closing remedy to optimise the management of the acquired company. The Law on Companies identifies that the decision on reorganisation must be taken by the general shareholders’ meeting, which must also outline the requirements for the preparation of reorganisation conditions. An audit company must prepare a report on the verification of the reorganisation conditions unless all shareholders agree that such report is not needed in that particular situation. In addition to the report, the boards of the companies participating in the reorganisation must prepare a report outlining the aims of the reorganisation, explaining the circumstances, time frame, and legal and economic grounds. Again, if all the shareholders agree, the report is not necessary. The decision of the shareholders’ meeting must be submitted to the Register of Legal Entities. Reorganisation by way of a merger is completed upon the registration of the new articles of association of the company to which another company has been joined, or upon the registration of the articles of association of the company newly established on the basis of the consolidated companies that have ceased to exist.
From the perspective of the Competition Law, acquisition of business may also be regarded as a concentration. The Competition Council of the Republic of Lithuania (Competition Council) must be notified of a concentration if the combined aggregate income of the companies concerned exceeds €14.5 million in the previous business year, and the aggregate income of each of at least two companies concerned is more than €1.45 million in the previous business year. The Competition Council also holds the power to request a merger filing even for companies below these thresholds. Once the notification is submitted, the Competition Council must evaluate it and issue its opinion not later than four months after filing. However, the Competition Council must issue an approval of the merger or decide that it will further evaluate the situation no later than one month after a receipt of merger filing. After assessing the scenario, the Competition Council must issue one of the following resolutions: approve the concentration as described in the notification; approve the concentration with certain conditions and obligations for the companies or their controlling bodies; or refuse to grant permission for the concentration.
If the participating company fails to get the Competition Council’s approval prior to completing the concentration, a fine may be imposed of up to 10 per cent of the company’s gross annual income. However, decisions of the Competition Council may be challenged before an administrative court no later than 20 days after receipt of a resolution or publication of such resolution on the Competition Council’s website.
The Law on Securities addresses issues relating to publicly listed companies. In general, shares of listed companies can be bought through a stock exchange on the basis of a public offer. However, transactions of such nature are widespread both for listed companies and non-listed companies, resulting from individual solicitations and negotiations. Meanwhile, this legislation regulates several takeover methods, including mandatory takeover bids, squeeze-outs and compulsory bids in a more detailed manner. In Lithuania, wide-ranging regulation and comparatively strict supervision can only apply in cases of mandatory takeover bids for listed companies. In such cases, the Bank of Lithuania supervises the whole procedure, including the adequacy of the price offered.
The Labour Code and the secondary legislation regulate the participation and rights of employees in M&A. The Labour Code also provides employees with certain protective measures that they can rely on during the transaction process. In particular, prior to taking a decision on the reorganisation of the company, sale of business or other decisions that are likely to have substantial effects on the organisation of the work or the legal status of the employees, the employer must inform the employees’ representatives and hold consultations with them about the reasons for such a decision, the legal, economic and social implications for the employees, as well as about any measures intended to avoid or mitigate the expected consequences. In addition, changes of the shareholding, reorganisation or transfer of a business may not constitute a legitimate reason to terminate employment relationships. In the event of transfers of businesses or parts thereof, the employment relationship remains under the same conditions in the business successor’s company. An employee must be informed about a transfer situation in writing no later than 10 days before the transfer, specifying the date of the transfer, the legal basis, economic and social consequences of the transfer to the employee.
During a merger or acquisition, different types of tax issues are involved depending on the circumstances of the deal. However, the most important taxation legislation in Lithuania regarding M&A is related to the Law on Corporate Income Tax. As a result of the completion of M&A transactions, the seller is obliged to pay corporate income tax. The general rate of corporate income tax is 15 per cent. However, agricultural companies (where the income from agricultural activity exceeds 50 per cent), and small businesses that have an annual income of €300,000 or less, may be eligible for a special 5 per cent corporate income tax rate. This benefit applies to small business where the listed average number of employees does not exceed 10 and the controlling shareholder does not control other companies.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
There have been no significant amendments to the main legislative acts regulating corporate and takeover law.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
i Foreign investments in Lithuanian companies
The real estate and start-up technology sectors were the most attractive sectors for foreign investors in 2015. Foreign investors participated in about 60 transactions concluded within the Baltic area, which situation was determined by the stability in Baltic economies and the improving business environment. The most important transactions were the purchase of the loan portfolio of Bank Snoras by a consortium of investors (including funds of Deutsche Bank) and the purchase of mobile operator Omnitel by TeliaSonera. According to the publicly available information, the value of these transaction amounted to €170 million and €220 million, respectively. Finally, the acquisition of 99.88 per cent of insurance company PZU Lietuva by Gjensidige Forsikring at a price of about €66 million should also be mentioned.
ii Foreign investment by Lithuanian companies
Lithuanian investors were also active in 2015. The most significant foreign investments made by Lithuanian companies were the acquisition of Swedish meat producer Lantmannen Doggy by NDX and the acquisition of a 40 per cent stake of Danish transport company Thermo-Transit by Girteka Logistic. The diversification of businesses and a reduction in the dependency on the local market were the most important reasons behind the foreign investments made by Lithuanian companies.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Significant transactions and hot industries
The energy sector contributed significantly to the value of the M&A market in 2014, but was fairly passive in 2015. Due to the specific nature of this sector, which has only a few major players, the amount of new transactions will take time to increase. Therefore, most transactions were concluded in the production (17 deals), service (16 deals) and trade (10 deals) sectors in 2015.
The finance sector was also remarkable in terms of the Lithuanian M&A market due to the sale of insurance company PZU Lietuva to Gjensidige Forsikring ASA.
The traditionally strong agricultural sector did not provide any major transactions in 2015. However, the acquisition of 9 per cent of the shares of Pieno žvaigždės, a leading producer of dairy products, can be mentioned.
ii Key trends
M&A transactions in Lithuania usually include the transfer of a controlling stake, and 2015 followed this trend. However, recent transactions show a growing number of non-controlling stake deals as well.
Finally, 2015 was noteworthy due to a remarkable decrease of M&A transactions in the energy sector.
During the crisis period, M&A market forecasts were always inconsistent; some analysts predicted the growth of the economy, while most maintained that all the uncertainties in the eurozone would not only leave the M&A market stable, but more importantly would bring an even greater slowdown in M&A. However, the mood is changing, and, despite the decrease in the number of M&A transactions, most Lithuanian analysts agree that the economy has more or less stabilised and expect an increasing number of transactions in 2016.
The number of transactions concluded in 2016 is expected to grow but, due to the political situation in neighbouring countries, growth is not predicted to be tremendous. However, an optimistic economic forecast for 2016 and the positive financial results of Scandinavian banks controlling the Lithuanian bank sector outweigh negative expectations. According to analysts generally, the most common acquisitions will be those that seek external funds to finance their development.
The Baltic Innovation Fund, under the JEREMIE framework and in cooperation with the European Investment Bank, and private equity funds seeking some investment opportunities in 2016, should continue to some of the main factors stimulating the M&A market.
Finally, the continuous growth of the economy and the ‘europhoria’ related to the introduction of the euro since 1 January 2015 shall positively affect the market, and the number of M&A transactions will increase, as has been seen in other Baltic states (Estonia and Latvia) that have already joined the eurozone. The main targets in 2016 are expected to spread across the communication and finance sectors. Local private equity funds will probably remain the main players at the seed, start-up and expansion stages of business, while foreign investors are not expected to be very active because of the reasons mentioned in Section 1, supra, and because of aggressive competition among local investors.
1 Giedrius Kolesnikovas is a partner and Michail Parchimovič is a senior associate at Motieka & Audzevičius.