Company Law and Corporate Governance in the Enlarged Europe

Prof. dr. sc. Hana Horak

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

Legislative framework

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

EU common law secondary sources

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

The system of Croatian company law

I. Structure of company law and its legal environment

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

General partnership

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

Limited partnership

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

Economic interest grouping

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 Company

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

Establishment of a company:

SIMULTANEOUS ESTABLISHMENT

SUCCESSIVE ESTABLISHMENT

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

Limited liability company

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

A limited liability company may be

established only simultaneously.

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

Commercial register

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)

Enforcement law

a branch of law regulating

enforcement proceedings and

securing proceedings

Bankrupcy law

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

Reasons for bankruptcy :

insolvency

overdebtedness

Securities Market Act

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

Role of the courts

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

III. Company formation and creditor protection

Joint stock company

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

Limited liability company

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.

Increase in share capital

There are two ways of increasing

share capital:

EFFECTIVE AND

NOMINAL

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

IV. The system of corporate governance

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

Supervisory Board

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

General Meeting

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