Corporate acquisitions in the CEE region

Why due diligence is conducted differently in the region

The specific challenges begin with language and documentation. Contracts, extracts from registers and official notices are often available only in the local language; some key documents date back to a time when transactions were documented more briefly and corporate law procedures were recorded less consistently. Anyone who relies solely on translated summaries can easily miss the nuances in which the actual risk lies.

Added to this is the historical development of many target companies. Numerous companies emerged from privatisations in the 1990s. Their shareholding and ownership history therefore dates back to a period in which transfers, capital measures or government approvals were not consistently documented to today’s standards. The due diligence must trace this chain back to its origin, because an error made in the past can also call into question the validity of the current acquisition of legal title.

Due diligence therefore places its emphasis elsewhere: more on title, ownership, previous transfers, the quality of registers and operational licences; less on merely working through a standardised German questionnaire. What matters is not whether a document looks different from what is expected in formal terms, but whether there is a substantive risk underlying it.

Furthermore, sellers in the region occasionally interpret the scope of a due diligence process as a sign of mistrust. An experienced local adviser knows which documents are usually available, which missing documentation is a genuine warning sign, and which simply reflects local practice. This distinction separates risk from a mere formal deficiency.

Chains of title, the Land Register and restitution

The region’s greatest inherent risk relates to ownership of land and shares. In several countries, assets expropriated after 1990 were returned to their former owners or their heirs. In some cases, this restitution process has not yet been completed. A plot of land registered in the target company’s land register may be subject to an ongoing or future claim for restitution.

Furthermore, cadastral entries and land registers do not always offer the same level of reliability as the German land register. Old rights of use, unclear boundaries or unregistered encumbrances only come to light upon close scrutiny. Anyone acquiring a property or a manufacturing site must verify the title beyond the information provided in the register alone.

For the transaction, this means an in-depth title search, tracing the history of ownership and – as soon as a risk of restitution cannot be definitively ruled out – specific safeguards in the contract of sale. A general guarantee of title is often insufficient; a specific indemnity, a retention of part of the purchase price or another form of valuable security may be required.

Where the risk of restitution cannot be ruled out, in addition to a contractual indemnity, title insurance can help by covering the loss of ownership resulting from a restitution claim recognised at a later date. It is not available in every country, but where it is offered, it is an effective means of pricing in a historical risk rather than bearing it.

History of privatisation and reliability of the register

In a share deal, the purchaser takes over the company along with its entire history. Consequently, the validity of previous share transfers is a key consideration. Was the privatisation carried out in accordance with the law? Were all capital measures validly resolved? Are the shares free of encumbrances? Any error in this chain of events affects the current acquisition.

Although the commercial registers in the region are public, their reliability and up-to-date status vary. A register extract does not prove the same thing everywhere as it does in Germany. Permits, licences and environmental decisions on which the business operates must be examined separately, as they are linked to the company and, in some cases, to individuals.

Locally qualified advisers must therefore not only obtain documents, but also assess their evidential value and practical significance. Their findings should then be consolidated in accordance with a uniform red-flag and reporting standard. Only the combination of detailed local knowledge and centralised transaction management yields a robust overall picture.

Operational licences constitute a separate point of review. Environmental, planning and operating licences are often subject to conditions, and the buyer may only become aware of the need to comply with these after the acquisition. If a key licence expires or is tied to an individual who leaves with the seller, operations will come to a standstill after closing.

Currency, financing and capital movements

One issue that is rarely encountered in the German market is a defining feature of the region: foreign currency. Many companies and projects over the past few decades have been financed in euros or Swiss francs, whilst the revenues are generated in local currency. These loans carry an exchange rate risk that weighs on the balance sheet, and in some countries they have been the subject of extensive legal disputes regarding the validity of the clauses.

Due diligence must therefore scrutinise the target’s financing structure closely: currency, fixed interest rates, collateral and the question of whether the loan agreements will stand up to subsequent legal scrutiny. A loan with a foreign currency clause that is open to challenge affects the value of the company.

Added to this is the subsequent repatriation of profits. Whilst there is free movement of capital within the EU, withholding tax, documentation requirements and specific regulatory provisions determine how much ultimately reaches the parent company. This mechanism must be factored into the purchase price considerations.

The financing of the acquisition itself warrants closer scrutiny. Security over the target company’s assets – the standard instruments of acquisition financing – are subject to restrictions in some countries designed to protect the company’s assets (financial assistance). What is taken for granted in Germany may be prohibited in the target country and could undermine the financing structure.

The Sale Agreement: Warranty, Indemnity and W&I Insurance

Local law often provides the purchaser with less statutory protection when purchasing shares than German law does. Statutory warranties for the purchase of shares are less robust, which is why the contract must itself provide protection through an explicit list of warranties and indemnities. The seller is generally not liable for anything that is not expressly warranted.

The list of guarantees must therefore be more comprehensive: ownership of shares and land, the validity of privatisation, the existence of permits, freedom from restitution and tax risks, and the reliability of financing. For the individual risks identified, specific indemnities must be included in the contract, supplemented by escrow or a purchase price retention clause as a safeguard.

Where the seller is no longer contactable after completion or is unable to adequately secure the warranties, warranty and indemnity (W&I) insurance fills the gap. It transfers the risk from the list of warranties to an insurer and has become an established instrument in the region.

The catalogue of warranties is only effective if it remains enforceable. For this reason, liability limits, limitation periods and de minimis thresholds must be included in the contract, as must the applicable law and the dispute resolution mechanism. Arbitration in accordance with the rules of a recognised institution is often the more reliable option for enforcement than proceedings before a local court.

Enforcement: Notarial form, registration and official approvals

Completion is subject to local formal requirements. In many countries, share transfers and property purchases must be notarised and only become effective upon entry in the relevant register. There is therefore a process between signing and effectiveness, the duration of which must be factored into the timetable and the conditions of completion set out in the contract.

In addition, there are regulatory approvals. Alongside merger control under competition law, many countries in the region have introduced a procedure for reviewing foreign direct investment. In the case of sensitive sectors or foreign acquirers, such approval may be a prerequisite for completion. It must be identified at an early stage, as it determines the timetable.

Between signing and closing, approvals, notarial steps and registration procedures must be consolidated into a binding completion roadmap. This should specify, for each closing condition, who is responsible for the necessary action, which documents must be submitted and by when proof must be provided. A closing memorandum setting out clear responsibilities prevents any signatures, approvals or registration applications from being missing on the closing date, which could otherwise prevent the purchase price from being paid as planned.