MERGERS & ACQUISITIONS IN CROATIA: LEGAL DUE DILIGENCE AND COMMON PITFALLS FOR FOREIGN BUYERS

Key Considerations for Foreign Investors When Acquiring Croatian Companies

 

Introduction

The Croatian market, as part of the EU single market, continues to attract foreign direct investment across a range of industries—particularly tourism, real estate, energy, ICT, and manufacturing. According to the World Bank and the American Chamber of Commerce (AmCham), foreign investment in Croatia is experiencing strong growth since 2024, with a notable shift in its structure — capital is increasingly moving away from the banking sector and into tourism and the IT industry. In the first quarter of 2024, foreign investors injected over one billion euros into the Croatian economy. If this trend continues, it is expected to surpass the 2021 record of approximately four billion euros. From 1993 to date, Croatia has received more than 46 billion euros in foreign capital, primarily in finance, manufacturing, and real estate — and over time, the country is increasingly perceived as an attractive investment destination.

Mergers and acquisitions (M&A) remain a preferred entry strategy for international investors looking to gain local market presence swiftly. However, the legal and regulatory environment in Croatia requires a careful and strategic approach to due diligence, especially when acquiring an existing company. This article outlines the key legal aspects and common pitfalls that foreign buyers should consider when acquiring Croatian companies, with a particular focus on ownership issues, employment law, regulatory approvals, and hidden liabilities.

1. Legal Due Diligence: Scope and Strategic Importance

Comprehensive legal due diligence is the cornerstone of any successful M&A transaction. In Croatia, the process typically covers:

·       Corporate and ownership structure

·       Real estate and assets

·       Contracts and liabilities

·       Employment and labor law compliance

·       Regulatory matters and licenses

·       Litigation and dispute history

In major transactions, legal due diligence is often — if not always — conducted alongside financial and economic due diligence, which includes an analysis of financial statements, tax liabilities, cash flows, profitability, debt levels, capital structure, the target company’s market position, and general economic and sector-specific risks.

The purpose is not only to verify what is being acquired, but to uncover any legal, financial, or reputational risks that could affect the valuation or future operations.

2. Ownership and Title Issues

A particularly sensitive area in Croatian M&A transactions is ownership verification, especially when real estate is involved. This process is often complicated by the fact that Croatia maintains a dual system for recording real estate rights—the land registry (zemljišne knjige) and the cadastre (katastar), which are frequently misaligned or outdated. In practice, discrepancies between legal ownership, actual possession, and cadastral data can create significant legal uncertainty.

Key risks include:

·       Unclear or incomplete title chains in the land registry, particularly for older properties

·       Encumbrances such as mortgages, easements, or pre-emption rights

·       Ownership disputes involving heirs, co-owners, or restitution claims (especially in coastal or agricultural areas)

Foreign buyers must ensure that corporate share registers, land registry entries, and cadastral records are fully harmonized, and that any share or real estate transfers are properly executed and duly registered with the competent authorities.

3. Labor and Employment Law Considerations

Labor law in Croatia is heavily regulated and employee rights are protected by law and collective agreements. In the context of an M&A transaction, foreign buyers must assess:

·       Validity of employment contracts, particularly for key personnel

·       Compliance with labor laws, including working hours, minimum wages, and health & safety regulations

·       Existing collective bargaining agreements, which may remain binding after the acquisition

·       Severance pay and termination risks, especially where restructuring or downsizing is anticipated

Additionally, under the Croatian Labor Act, a change in company ownership does not terminate existing employment contracts. Instead, all employment relationships are automatically transferred to the new employer by operation of law, along with all associated rights and obligations, including accrued seniority, unpaid wages, and social security entitlements. The new employer steps into the legal position of the former employer without interruption, and employees must be informed in advance of the transfer, including any implications for their terms of employment. Dismissals solely on the grounds of the transfer are prohibited. As such, foreign buyers should carefully assess the full scope of inherited employment obligations and factor them into post-acquisition integration planning and HR strategy.

4. Regulatory Approvals and Sector-Specific Risks

Depending on the sector and the structure of the transaction, certain regulatory approvals or notifications may be required prior to closing an M&A deal in Croatia.

 

Merger control clearance must be obtained from the Croatian Competition Agency if the statutory turnover thresholds are met, regardless of whether the parties are domestic or foreign. The transaction cannot be implemented until clearance is granted or a decision of non-intervention is issued.

In addition, sector-specific approvals or notifications may be necessary in regulated industries such as banking, energy, telecommunications, and insurance, where the acquisition of qualified holdings or control triggers supervisory procedures under special laws (e.g., the Credit Institutions Act, the Energy Act, or the Electronic Communications Act).

Furthermore, Croatia introduced a foreign investment screening regime in 2023, aligned with EU Regulation 2019/452, which applies to transactions involving non-EU investors acquiring control or significant influence in companies operating in sensitive sectors, such as defense, dual-use goods, critical infrastructure, and real estate located near state borders. In such cases, the Ministry of Economy and Sustainable Development may initiate a screening process and impose conditions, or even prohibit the investment, if it poses a threat to public order or national security.

5. Hidden Liabilities and Contractual Protections

One of the most common mistakes made by foreign investors when acquiring Croatian companies is underestimating hidden or contingent liabilities, which can have a significant impact on the value of the transaction or the future operations of the target company.

Such liabilities may include undisclosed debts, off-balance-sheet obligations, and pending litigation or administrative proceedings that may result in substantial financial loss. In certain sectors—particularly industrial and energy, there is also considerable risk from latent environmental liabilities, including obligations related to pollution remediation. In addition, tax irregularities, whether stemming from past periods or ongoing audits, can lead to retroactive assessments and financial penalties.

To mitigate such risks, it is recommended that the buyer insists on comprehensive representations and warranties in the Share Purchase Agreement (SPA), covering all key legal, tax, and regulatory matters. In the event of inaccuracy or omission, the buyer is entitled to compensation under contractually agreed indemnity clauses.

Additional protection mechanisms may include the establishment of an escrow account, whereby a portion of the purchase price is withheld for a defined period to cover any potential buyer claims, as well as price adjustment clauses based on the company’s financial position at closing or on its post-closing performance (earn-out structures). A retention mechanism is also commonly used, whereby the seller agrees to temporarily retain part of the price to secure potential post-closing liabilities.

6. Post-Closing Considerations

Once the transaction is complete, buyers must not overlook post-closing obligations, such as:

·       timely registration of share transfers in the court register (a prerequisite for legal effect)

 

·       notification of relevant regulators and tax authorities.

·       integration of compliance systems, especially AML, GDPR, and corporate governance policies.

 

Prepared by: Anja Juršetić Šepčević, managing partner