I. Legal history, foreign inspirations and recent development in Croatian company
law
Croatian legislation took over German
company law in its entirety
There are only a few contents that were changed:
not accepting limited partnership as a stock
company
permitting one founder, that is, member of a
joint stock company
the establishment of each type of company
requires different minimum capital
optional participation of union representatives
in the management
The Croatian Companies Act entered into
force in 1995, and was amended on several
occasions
The most recent amendments were
introduced in 2010 & 2011
The most important accompanying legislation in the field of company
law are the following: The Court Register Act (1995, amendments in
1996, 1999, 2003, 2005, 2007, 2010, 2011) Bankruptcy Act (1996, amendments in 1999,
2000, 2003, 2004, 2006, 2010, 2012) Capital Market Act (2008, 2009) The Act on the Takeover of Joint-Stock
Companies (2007, 2009) Insurance Act (2005, 2008, 2009) Investment Funds Act (2005)
The most important accompanying legislation in the field of company
law are the following:
Crafts Act (1993, amended in 1995, 1996, 2001, 2003, 2007)
Associations Act (2001, amended in 2002) Cooperatives Act (1995, amended in 2001, 2002,
2011) Institutions Act (1993, amended in 1997, 1999,
2008) The Competition Protection Act (2003, amended
in 2009) Banking Act (2002, amended in 2006) Audit Act (2005, amended in 2008)
Alignment of the national law with the EC-Directives
The screening of the company law with EU
legislation started in 2006
It presupposes the analysis of EU directives
relating to company law
The First Directive on company law includes:
safeguards prescribing the conditions for obligatory disclosure of information,
limiting the reasons for the nullity of obligations entered into by companies and limiting the reasons for nullity of joint stock companies and limited liability companies
The Second Directive concerning
company law specifies rights about
the formation of public limited
liability companies and maintenance
and alteration of their capital
The Third and Sixth Directives concerning company law harmonise national rules for the protection of stockholders and trustees in the context of domestic mergers and divisions of public limited liability companies
The acquis communautaire provides for certain European legal formations regulation, in particular the European Economic Interest Grouping (EEIG) and the European Company (Societas Europaea or SE) but Member States may regulate in their national legislation some aspects of their internal organisation and business operations
Regulatory framework includes rules for the evaluation and appearance of balance sheets and profit and loss accounts for annual (Fourth Directive concerning company law) and consolidated (Seventh Directive concerning company law) financial statements of joint stock and limited liability companies
Croatia stated in its report that it is prepared to take over the acquis communautaire relating to company law and that no difficulties are expected in the implementation of the acquis communautaire until the accession to the European Union
Who is a merchant?
1. A merchant is a legal or natural person.
2. A merchant must perform an economic activity
independently, in his name and for his account.
3. A merchant must perform an activity continuously.
4. A merchant must be engaged in an economic activity.
5. This activity must be carried out with the aim of making
profit.
6. The economic activity and the making of profit may result
from production, trade in goods or provision of services on
the market
a company into which two or more persons are
joined with the aim of continuous performance of
activities under a common firm name
each member of the company has unlimited
and joint liability to creditors of the company
with all his assets any natural or legal person may be a member
of the company
The main characteristics of the general partnership are the following: it must have at least two members members of the company may be natural and
legal persons the company’s activity must be permanent the activity must be carried out under the joint
firm name it is based on a contract all members of the company share unlimited
liability for the company’s debits, jointly with all their assets
the application for entry into the court register is
accompanied by the contract on the
establishment of the company – the company
agreement
members regulated their relations on the basis of their own will and such application of the Companies Act confirms the principle of
OPTIONALITY
The Companies Act contents:
1. name, surname and personal identification number of a citizen and residence, that is, firm name and seat of each member of the company who was the founder of the company at the moment of its establishment
2. firm name3. company seat4. subject of business activities5. contribution that members of the company are
obliged to make in order to achieve the company’s goal
A company member who does not pay his
contribution in due time or does not deliver the
money received for the company to the company
in a timely manner, or unjustifiably takes money
belonging to the company or is in delay with
making other contributions, shall pay the
statutory default interest to the company
Every member of the company has the right and
the obligation to manage company business
Each company member is entitled to be informed about the company business
The profit and loss account is prepared at the end of each financial year One-third of profits made in the current year
shall be divided among company members in such a way that each member receives the part corresponding to his share in the company capital (CAPITAL PRINCIPLE )
Two parts of profits is divided in equal parts among members of the company regardless of their share in the company (PERSONAL PRINCIPLE )
Reasons for the dissolution of the company:
expiry of the time for which it has been established
decision of company members bankruptcy of the company final court decision establishing that the
entry of the company in the commercial register was unlawful
death or dissolution of a company member, unless otherwise provided for in the company agreement
Reasons for the dissolution of the company:
initiation of bankruptcy proceedings over one of
the company members
rescission of one of the company members, or of
his creditor
final court decision
Liquidation
is initiated upon the occurrence of a reason to
dissolve the company unless the company
members have agreed upon a different manner of
settling accounts and division or unless a
bankruptcy procedure is instituted
it shall be carried out by all members of the
company as liquidators
a company in which two or more persons
are joined with the aim to permanently
conduct activities under the common firm
name it is formed by an COMPANY
AGREEMENT
Characteristics of a limited partnership:
the company is a person, a legal person and a merchant
at least two persons are joined members have different liability for the
company’s obligations the objective of the company is to permanently
perform activities under the common firm name the basis of association is the agreement the company is a person
it has two kinds of members whose position
differs in proportion to their responsibility
GENERAL PARTNER (at least one)
LIMITED PARTNER
Limited partners responsability:
a limited partner is not authorised to manage the company but has the right of supervision over the company business
a limited partner may not oppose decisions or actions of general partners, except for decisions or actions which go beyond the scope of the ordinary scope of business activities of the company
a limited partnership is represented exclusively by general partners (a limited partner is not authorised to represent the company )
Limited partners responsability:
profit is paid out to a limited partner if he has
paid his capital contribution in full
limited partner shall participate in the
compensation of loss incurred by company’s
business, but only up to the amount of his share
in the company’s capital
a legal person established by two or more
natural or legal persons with the aim of
facilitating and promoting the economic
activities which form the objects of their
business activities, and to improve or increase
their effect, but in such a way that legal person
does not acquire profit for itself
the grouping is not established for the purpose of
acquisition of profit
Important characteristics of economic interest groupings:
a) at least two persons are joined
b) its goal is strictly prescribed by the Act and is
different from all other companies
c) the basis is the agreement
d) it is a legal person and a company
e) members are liable for the groupings'
obligations
The grouping shall have this bodies:
members acting jointly
management board of the grouping
other bodies that must be provided for in the
contract on the establishment of the grouping
the management board is the obligatory body of the grouping consisting of one or more members
members of the management board do not have to be the members of the grouping
management board shall perform the MANAGEMENT AND REPRESENTATION tasks
In all cases of dissolution of the grouping, except in case of bankruptcy, liquidation must be carried
out
Joint stock companies are regulated in
Title IV of the Companies Act which has
225 Articles out of which almost all are
very detailed and regulate separate issue
under their own headings.
The provisions about joint stock
companies make up one third of the total
Act
Share capital the smallest initial amount of company’s capital
defined in the Articles of Association a sum of nominal amounts of shares
The share capital is divided into shares and it must be made out to nominal amounts expressed in HRK.
-The lowest amount of share capital of a joint stock company is HRK 200.000,00
The meaning of the concept of a share is threefold:
PART OF THE SHARE CAPITAL OF THE
COMPANY
COLLECTION OF MEMBERSHIP RIGHTS AND
OBLIGATIONS BELONGNIG TO A SHARE’S
OWNER
SECURITIES
Bearer shares or registered shares
bearer shares do not specify the name of their
owner and they are transferred on the basis of
transfer of ownership (tradition).
registered shares specify the name of the
shareholder. They are transferred by
endorsement or in the manner prescribed by the
law regulating non-materialised securities
(cession).
Three classes of shares:
ordinary
preferred*
non-voting shares
Each share gives the right to vote at the general
meeting of the company.
*only preferred shares may be issued without the
right to vote
a company into which one or several legal
or natural persons have invested their
capital contributions, participating in the
share capital which was agreed upon
earlier so that the members are not
liable for the company's obligations
A limited liability company
a company a legal person a company of capital a commercial company members are not held liable for
company's obligations has share capital
members of the company are not called
shareholders but members of the company
the lowest prescribed share capital of the limited
liability company is HRK 20.000,00
the minimum amount of a capital contribution is
HRK 200.00
the share capital is divided into contributions that may be expressed in securities
the company agreement is the basic founding document of the company, and not the articles of association as is the case in the joint stock company
The obligatory bodies:
the management board (at least one member )
the general meeting
the Supervisory Board is an optional body of a
limited liability company
a public book containing data and information about entry subjects that must be entered into the register pursuant to the law (Article 2 of the Court Register Act)
Subjects in the court register:
unlimited partnership limited partnership economic interest grouping joint stock company limited liability company sole trader institution association of istitutions other persons as prescribed by the law (Article 6
of the Court Register Act)
is regulated by the provisions of the Bankruptcy Act (OG Nos. 44/96., 29/99., 129/00., 123/03. and 82/06., 116/10., 25/12.)
Bankrupcy Act regulates:-the conditions for the initiation of bankruptcy
proceedings-bankruptcy proceedings-legal consequences of its initiation and
implementation-the bankruptcy plan
The Securities Market Act regulates:
the procedure for the issuance of securities
transactions with securities and persons authorised to conduct business with securities
conditions for organised public trading in securities
protection of investors and holders of rights from securities
non-materialised securities the organisation and powers of the
Central Depository Agency the stock exchange and regulated public
markets
transactions with securities may be performed in Croatia only by authorised companies:
a brokerage firm
a bank licensed by the Agency and
entered into the court register
In the Republic of Croatia the government is divided into three branches of power:
legislative
executive
judicial (independent and autonomous )
Judicial power in the Republic of Croatia is exercised by:
misdemeanour courts municipal courts county courts commercial courts High Misdemeanour Court of the Republic of
Croatia High Commercial Court of the Republic of
Croatia Administrative Court of the Republic of Croatia the Supreme Court of the Republic of Croatia
Acquisition of shares
the decision on the issuance of shares is made by the General Meeting or the founders of the company in accordance with the statute
The company’s own shares are shares held by the company and the rights of which are not in effect
The company may acquire its own shares only in the following cases:
if such acquisition is necessary to avoid immediate
and serious damage threatening the company;
- if shares are to be offered in order to provide
them to company employees or to employees of
companies affiliated with the company;
- if shares are acquired with the aim of
compensating the severance shareholders in
accordance with the provisions of this Act;
- if the acquisition is made without consideration
or if by the acquisition the financial institution
purchases the shares on commission;
- on the grounds of universal legal succession;
- pursuant to the decision of the general meeting to
redeem the shares, in accordance with the rules on the
reduction of the share capital of the company.
- on the basis of the authority of the General Assembly
to acquire shares which is worth 18 months at the most
and determines the lowest and the highest price that
may be paid for those shares and the amount of share
capital referring tho those shares in such a manner that
it may not exceed the tenth portion of the mentioned
capital
Relations between shareholders and the company
The rights of shareholders may be divided into:
economic rights
management rights
preferred rights
Distribution of profits
basic economic right of shareholders is the right to participate in the distribution of profits
a dividend only in joint stock companies paid from net profits
profits are shared in proportion to the par value of shares
a different method of distribution of profits may be prescribed by the Articles
of association
Increase in share capital:
a company may acquire funds necessary for investments and other purpose by taking an interest loan and obligation to return it or on the basis of systematic
provisions of company law
– increase in capital
-by issuing new shares
The advantages of such an increase in capital are the following:
new shares or increase in their nominal value belong to shareholders on the basis of distribution in proportion to their share in the company,
new shares are valid as paid in full special financial statements are required for
such an increase such increase in capital shall not affect the
obligations of the company towards third persons and additional obligations of shareholders
Share capital reduction
The reasons for capital reduction transactions are always of economic nature: Capital surplus Significant loss
Regular reduction of share capital - effective reducation
Simplified reduction of base capital - a form of nominal reducation
Withdrawal (depreciation) of shares - one of the special legal
techniques of regular, effective capital reduction
Legal and technical reduction may be carried out in the following manner:
by reducing the nominal share amount;
by consolidating the shares, which shall
be allowed only if the minimum par value
may not be lowered any further;
by withdrawal (depreciation) of shares
The Act requires that the decision specifies the purpose of such capital reductions, which may be the following:
to compensate for a decline in value, to offset losses or transfer assets to capital gains
Dissolution of a company
The Act regulates the reasons and procedures for the dissolution of a joint stock company. Other reasons for the dissolution of the company may be prescribed by the Articles of Association
The company is dissolved after the completion of liquidation proceedings regulated by the law
There are different cases of
dissolution: final decision of the court referred establishing
that the entry of the company in the commercial register was illegal
final court decision denying the initiation of bankruptcy proceedings due to a lack of bankruptcy assets to cover the costs of bankruptcy
dissolution of the company as an exceptional case possible only when proposed by the Government of the Republic of Croatia, and when the court adopts a decision on the dissolution
company without assets may be dissolved by deletion from the commercial register
Relations between members and the company
The rule is that funds corresponding to
the amount of share capital defined by
the company agreement must be
contributed to the company
The Companies Act regulates legal relations between the company and its members in two separate subsections:
- CAPITAL CONTRIBUTIONS
- BUSINESS SHARES
Distribution of profits
The main economic right of members is to request the payment of annual profit and of undistributed profit (minus losses) from the previous years for as long as the company exists
The basis for the distribution of profits, unless otherwise provided for in the company agreement, is the ratio between actual capital contributions of members
Business shares
Unless otherwise determined by the company agreement, the business share of a company member shall be determined in accordance with the amount of capital contribution that has been taken over
The Companies Act differentiates between the possibility of acquisition and pledge of company's own business shares for which the capital contribution has been fully paid and for which it hasn't:
1. The company shall not acquire or to take in pledge its own business shares for which the capital contribution amount has not been fully paid
2. The company may acquire its own business shares for which the capital contribution amounts have been fully paid, provided that the following conditions have been cumulatively fulfilled:
- the capital contribution amounts have been fully paid
- the price of the capital contribution is paid by the assets exceeding the share capital of the company
- provided the company is able to set up the reserves for acquiring its business shares, pursuant to law, without reducing the company’s share capital or reserves it is obliged to maintain pursuant to the company agreement, and which may not be used for payments to company members.
3. A member of a limited liability company may have a type of legal relation with the company that is separate from its membership.
Share capital reduction
when a company has too much capital and wishes to reduce it
when it has suffered losses which it could not recover within a reasonable period of time
when, instead of dealing with the nominal share capital which has been objectively reduced, the company decides to reduce the share capital to the actual value of the company's assets
The reduction of share capital may be effectuated by:
a) returning basic shares to company
members;
b) through the reduction of par value of
those shares;
c) through complete or partial
exemption of company members or
their legal predecessors from their
commitment to full payment of their
capital contributions
Dissolution of the company
Reasons for dissolution of the company: the expiry of the time limit defined by the
company agreement, the decision of the company members merger of the company into another
company or consolidation with another company
a final court decision completion of bankruptcy proceedings register court decision adopted in relation to
shortened
Organisational structure of the company
according to the new legislation in this area, limited liability company is the only type of a company with three lawful management bodies:
the General Meeting
the Management Board
the Supervisory Board
Management Board
the Management Board is the main body of the limited liability company independent of the General Meeting and the Supervisory Committee
the Management Board consists of one or
more persons
the number of members is determined in the
Articles of association, and if there is more
than member of the Management Board, a
Chairman must be appointed
the members of the Management Board and
its Chairman are appointed by the
Supervisory Board for a period of five years
The members of the Management Board
realise the right to a remuneration for their work on the basis of a contract concluded with the company. The remuneration may be calculated in two ways:
in a fixed amount or
by participating in a certain extent of
profits, that is, in a share determined in a
different manner (bonus)
The members of the Management Board
may be cleared of their liability if it is
proved that:
they acted with the care of a prudent
businessman,
on the basis of the General Meetings'
decision
the main function of this body is to ensure expert and objective supervision over the overall effectiveness of the Management Board
the supervisory authority in the Croatian law are confidential
members of the supervisory board shall be elected by the general meeting of the company
Scope of work of the supervisory
board and its responsibilities
Supervision work
Representation function
The composition of the supervisory board must reflect two of its basic functions: a supervisor body for which majority
shareholders are primarily interested
an expert body capable of effective
supervision and influence on the successful
business operations, growth of the
company and increase in profits
Without the consent of the supervisory board, a member of the management board shall not: either for his account or for the account of
third persons, carry out activities from the object of activity of the company
act as a member of the management or supervisory boards in another company engaged in business similar to that of the company
use company premises to perform activities for his own or for another person's account
be a personally liable member of another company if the company carries out activities from the object of activity of the company in question
a company body in which
shareholders realise their rights and
in which the will of all shareholders
is shaped and expressed
Decision-making and business operations:
conclusion and amendments of business
contracts,
joining of a company,
merger of the company
transfer of assets
transformation of the company
General meeting: Shareholder democracy and decision making
in principle, every shareholder may
participate at the general assembly and in
the decision-making process, unless he is
the holder of shares that exclude this
right
shareholders must be informed about the
business operations of the company as a
precondition for voting and decision-
making before the general assembly
The right to information is protected: by the law in cases when the provision
of information may be denied (taxes,
information harmful for the company,
business secrets, etc)
by court protection of the right to
information
There are two possible majorities for the adoption of valid decisions:
simple majority
¾ of represented shareholders – a
qualified majority
a greater majority than a ¾ majority
Best practices in public companies
basic rules concerning the management, supervision and competence over companies are contained in different regulations, for the most part in the Companies Act and in other acts and regulations regulating the capital market.
for the purpose of development of best practice in corporate management in the republic of Croatia, the Croatian Agency for the Supervision of Financial Services and the Zagreb Stock Exchange have prepared a Code of Corporative Management
The basic principles of the Code are:
transparency of business operations
clearly defined procedures in the work of the
Supervisory Board, Management Board and
other bodies and structures responsible for
taking important decisions
avoidance of the conflict of interest
efficient internal control
efficient division of responsibilities