Corporate M&A 2020

Last Updated April 20, 2020


Law and Practice


Ostermann & Partners LLP is a fully independent, Zagreb-based, full-service law firm that advises public and private companies, ranging from multinational corporations to start-ups, private equity and boards of directors. The firm's lawyers are experienced in acquisitions and dispositions in a wide range of industries, including those that are highly regulated. Its team is recognised for dedication and innovation; traditionally, all its lawyers, before advising on transaction work, undergo dispute resolution practice, which gives them not only experience but also a broader perspective. Ostermann is praised by clients and peers for its particular expertise in debt markets and restructuring, which are often combined in its M&A work.

After a very successful 2018, the M&A market remained very strong in 2019. There was a slight decline in volume but the value of M&A transactions in 2019 was reportedly higher.

As in the preceding year, the food and beverages industries were very popular, however, in 2019 M&A transactions were also particularly noticeable in the telecoms sector and the energy and utilities industry.

As a result of the successful conclusion of the settlement with Agrokor's creditors, a new holding company, named Fortenova Group, started operating in April 2019 saving critically important business for Croatia (and the wider region) both from an economic and an employment point of view. In the third quarter of 2019, Fortenova announced they would start selling parts of non-core businesses and consequently there are four deals pending to that end. However, after Fortenova refinanced the roll-up through the administration procedure, the key question is whether former creditors, which are now shareholders, will start selling their stakes. Should this happen, this will, without a doubt, be the biggest transaction in the region.

The most memorable deal of 2019 was undoubtedly the EUR220 million acquisition of Tele 2 (the third largest mobile carrier in Croatia) by the United Group (BC Partners), the largest media and telecommunications provider in South-East Europe.

The positive trend of M&A transactions in the food and beverage industries continued in 2019 with several significant M&A’s, such as Kraš (candy industry) being taken over by regional meat industry player Pivac, Mlinar (bakery) being taken over by Mid Europa, Klara (bakery) becoming a part of Mlin i pekare. Furthermore, there has also been some interesting M&A activity in the hospitality sector (Liburnia Riviera Hotels) as well as in the manufacturing sector (Rimac Automobili).

In Croatia, it is more common for the acquisition of a company to be through the purchase of its shares than its assets. One of the reasons the latter is a less attractive option (especially for foreign investors) is that capital gains on the sale of assets are taxable and there is therefore a risk of double taxation on the remittance of the proceeds of sales.

In the case of publicly listed companies, the acquirer has to follow strict takeover rules, so the offeree cannot structure its offer differently.

Given that the aftermath of the 2008 financial global crisis remained present in Croatia until recently, the acquisition of non-performing loans or restructured loans has proved a popular strategy for converting them into equity and, by such means, acquiring control over the debtor company.

The primary regulators for M&A activity in Croatia are:

  • The Croatian Financial Services Supervisory Agency (HANFA) –a state agency which supervises capital markets, financial services and supervised entities providing those services (all financial institutions except banks (insurance companies, stock exchanges, etc) are regulated and supervised by HANFA); the principal objectives of HANFA are fostering and safeguarding the stability of the financial system and supervising the legitimacy of supervised entities' operations.
  • The Croatian Competition Agency (AZTN) – the merger control authority whenever the relevant turnover thresholds are met (see the thresholds under 2.4 Antitrust Regulations).
  • The Zagreb Stock Exchange (ZSE) – a company which lists companies’ securities and has authority over the listing and delisting of securities; it lists more than 150 companies and is comprised of two stock markets: the Regulated Market and the Multilateral Trading Facility.
  • The Court Registries of the Commercial Courts are in charge of the registration of the shareholders in a limited liability company and other corporate changes in the company (ie, mergers, share capital increase or decrease, squeeze out).
  • The Central Depository & Clearing Company (SKDD) – a company which operates as a central securities depository and a registry of dematerialised securities, where data on issuers, securities, securities accounts, securities holders and other legally required data is kept in the form of an electronic record.
  • The Croatian National Bank (HNB) regulates and supervises credit institutions which will have to acquire the HNB’s approval and/or notification in case of M&A activity.

Pursuant to the Companies Act, domestic and foreign companies are allowed to pursue a business under equal conditions, meaning that the foreign investor may incorporate, or participate in establishing, a company and may acquire rights and/or commitments in the same manner as any domestic investor.

With respect to acquiring real estate, foreign citizens are allowed to do so in Croatia if there is a reciprocal agreement with their country of origin allowing Croatian citizens to do the same. The latter does not apply to citizens and legal entities coming from the EU. They can have ownership rights over real estate under the same assumptions that apply to Croatian citizens and legal entities headquartered in Croatia, with the exception of some specific forms of real estate (ie, agricultural land protected by a special law and protected nature reserves). However, foreign investor can incorporate a company in Croatia that will be allowed to acquire real estate without limitations.

The antitrust regulation in Croatia is stipulated by the Competition Act, which establishes the competition regime and regulates the powers, duties, internal organisation and proceedings of the AZTN.

The antitrust regulations in Croatia apply to all forms of prevention, restriction or distortion of competition by undertakings within the territory of the Republic of Croatia or outside the territory of the Republic of Croatia if such practices have effect on the market of the Republic of Croatia.

Furthermore, mergers above a certain financial threshold must be notified to AZTN for assessment, meaning that an undertaking is obliged to notify any proposed concentration to the AZTN where the following criteria are cumulatively met:

  • the total turnover (consolidated aggregate annual turnover) of all the undertakings party to the concentration, realised by the sale of goods and/or services in the global market, amounts to at least HRK1 billion in the financial year preceding the concentration and in compliance with financial statements, where at least one of the parties to the concentration has its seat and/or subsidiary in the Republic of Croatia, and;
  • the total turnover of each of at least two parties to the concentration realised in the national market of the Republic of Croatia, amounts to at least HRK100 million in the financial year preceding the concentration and in compliance with financial statements.

Additionally, ever since Croatia became a member of the European Union, Croatian competition regulation is fully aligned and harmonised with the EU acquis communitaire (the accumulated body of EU law). Moreover, the AZTN is obliged to co-operate with the European Commission and other national competition authorities through the European Competition Network.

Regular share deals and changes of control in general do not have an impact on employment agreements. However, in the case of asset deals, employment agreements are transferred, by virtue of law, together with the business unit which is the subject of the transfer.

In the case of a transfer of the employment agreements, the employees and employees’ council (provided that the target company has one) have to be notified in writing about the transaction. In cases of the transfer of the employment agreements to the new company, both parties to the transaction are liable, jointly and severally, for the employment-related labilities as of the transaction becoming effective.

If the company that is undergoing the transfer of assets is party to a collective agreement, that agreement will remain in force in the new company for a maximum period of one year.

According to Croatian law, foreign investors are subject to the same regime as domestic ones. There is no screening mechanism for inward investments, even for reasons of national security.

Public Deals

The Takeover Act stipulates that all the mandatory approvals (if any) have to be obtained beforehand and submitted, together with other bid documentation, to HANFA for takeover bid approval. Such stipulation implies that the merger control approval would have to be obtain from the AZTN prior to the publication of the takeover bid. Otherwise, HANFA will not approve the publication of the takeover bid. On the other hand, the general rule in the Competition Act is that merger control is notified to the AZTN before the implementation of the concentration in question but after the undertaking has entered into the agreement on the basis of which control or decisive influence has been acquired by the controlling undertaking or after the publication of the takeover bid. However, there is an exception to the rule which allows for prior notification if the parties to the concentration can demonstrate, in good faith, the actual intention to conclude the contract or publicly announce the intention of a takeover. Due to the conflicting legislation, as a market practice, the offeror would undertake the prior notification of the merger control.

In April 2019, the AZTN rendered an opinion for the case of prior merger control notification, deciding that it will not review an application for merger control in which the undertaking has not made it probable that it will be successful with the takeover bid. However, HANFA, despite this recent precedent still expects that the offeror will, before submitting its takeover bid for approval, obtain either approval from the AZTN that the merger is acceptable or obtain an opinion stating that the concentration cannot be reviewed at the stage the notification was submitted.

Private Deals

In the case of a voluntary squeeze out, minority shareholders have often challenged the general meeting’s resolution on the squeeze out to drag out the process of registration of the squeeze out in the court-registry, since to obtain the final court’s ruling in such litigation will take up to five years. The Companies Act envisages the possibility of registering several types of general meeting resolution (among others on squeeze out) even if there is ongoing litigation challenging such resolutions. The company has to prove, in a special procedure, that the claim against the general meeting’s resolution: (i) is vexatious and frivolous; (ii) is capable of causing substantial harm to the company and its shareholders, which outweighs the claimant's damages; or (iii)concerns shares representing less than HRK1,000. The benefit of such a procedure is that the courts are obliged to make a ruling within short deadlines (the first instance decision has to be handed down within three months of filing and the decision on the appeal within 30 days). The first such case with respect to squeeze out was initiated at the end of 2016, arguing that the claim against a resolution on a squeeze out was vexatious and frivolous. The company successfully defended its arguments and the final decision was rendered in February 2017, while the final decision on the minority shareholder’s claim to declare resolution on the squeeze out null and void is still pending.

In April 2019, amendments of the Companies Act enacted certain changes in respect of disclosure requirements for public companies and the exercise of voting rights in all joint stock companies. However, the major change closely connected to M&A is one regarding limited liability companies and the form in which share purchase agreements (SPAs) have to be concluded.

The market practice has always been to have a share purchase agreement that regulates extensively the rights and obligations of the parties separately from the share transfer agreement, which the parties would sign in the short form for registration purposes (to prevent publicly disclosing the particularities of an acquisition). Until the latest amendment to the Companies Act, both agreements had to be executed in the form of notarial deed or solemnised private document. This was troublesome for international investors (no matter whether they were on the sale or purchase side) as this implied not only that the SPA had to be translated into Croatian, but also that Croatian text would prevail against the English text. Investors would circumvent this impediment by agreeing on non-Croatian governing law and accepting jurisdiction of courts or arbitration tribunals outside Croatia. This was, however, still risky if the investor had to enforce the judgment in Croatia. Under the new regime, the risk of not having notarised an SPA is much reduced, as even though the same form is still required for the SPA, the need is obviated after the transfer agreement has been notarised.

The acquirer will usually procure a controlling stake from the majority shareholder which will then trigger the publishing of a mandatory takeover offer (so-called negotiated bids). A negotiated purchase of a majority stake usually eliminates the risk of a competing offer as any competing bidder would be precluded from acquiring majority ownership. For private deals the strategy is more or less the same, with the exception of the publishing of the offer. Depending on the shareholder structure, and especially in private deals, the acquirer will try to reach the 95% of share capital required to carry out a squeeze out.

The Croatian M&A market is not that developed and seldom is there more than a single willing buyer. In our recollection, there have only ever been three competing takeover bids in Croatia.

Reaching, exceeding or falling under the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of voting rights in the listed issuer by natural person or legal entities (directly or indirectly) triggers the obligation of disclosure which results in the obligation to notify HANFA and the ZSE of such circumstances. The above-mentioned thresholds do not apply exclusively to shares but also include other financial instruments and derivatives. Breach of the aforesaid restrictions or disclosure obligations could trigger liability for offences and also the supervision of the regulatory body, which is authorised to invalidate the offer.

Reporting requirements are statutorily mandated; thus it is not possible for a company to effectively stipulate different requirements or procedures in its articles of association.

From the moment that the acquirer is under the obligation to publish the takeover offer, up until the expiry of that offer, it may acquire the shares only through the takeover process.

Dealings with derivatives are not common, although they are envisaged by law.

The obligation to report that applies to shares (see 4.2 Material Shareholding Disclosure Thresholds) is, mutatis mutandis, applicable to the other financial instruments including derivatives if the mentioned financial instruments meet the following conditions envisaged in the Capital Market Act:

  • they entitle their holder to unconditional acquisition rights or discretionary acquisition rights of already issued voting shares of the listed issuer; or
  • they refer to shares of the listed issuer and have a similar economic effect to the above-mentioned instruments, regardless of whether they entitle their holder to a physical settlement or not.

For private companies it is not necessary to make the purpose of the acquisition of shares known, or any intentions in respect of the control of the company. For publicly listed companies, however, such an obligation exists.

In the case of the takeover procedure, the mandatory part of the takeover offer entails a declaration of the acquirer’s intentions regarding future operations and strategic plans for the target company, including the possible effects of their implementation on employment policies and the status of the employees, as well as the acquirer’s intentions regarding the management board.

While private companies have no specific disclosure obligations, public companies are obliged to publish any information which may affect the price of their shares (inside information). However, public companies should not mislead the public, so they have to carefully consider at what time it could be determined that the intention to acquire the company is serious. It can be argued that the information is not precise enough to constitute inside information at the time at which the company is first approached or when the negotiations start. If a non-binding letter is signed, it is very likely the company’s management could be held liable for non-disclosure. In such cases, the target company may delay disclosure provided that: (i) disclosure is likely to prejudice its legitimate interests; (ii) delay in disclosure would not be misleading to the public; and (iii) it is able to ensure the confidentiality of the information.

Even though the general rule is that all ad hoc and inside information has to be published without delay, target companies commonly disclose information a a later stage, except in rare cases of parallel hostile takeover.

The Takeover Act does not require the target to allow due diligence to be conducted, but the target’s management may permit due diligence by the bidder if it deems this to be in the target’s best interest. In such cases, however, it is very difficult for the company to satisfy condition of confidentiality to justify a delay in disclosure of inside information as noted in 5.1 Requirement to Disclose a Deal, given that troops of lawyers, auditors and other consultants would hardly go unnoticed. For the latter reason, standard due diligence has not been common for public companies, and instead the buyers rely on publicly available data (financial statements, court registry, real estate and other ownership registries, etc).

Standstills are more likely to be agreed in public takeovers, while exclusivity is standard for private companies only. After the non-binding phase, it is customary to agree on exclusivity, for a limited period of time, with the selected bidder.

In the case of a takeover bid, the law envisages those cases where the offeror is able to withdraw the takeover bid and which terms of the bid are subject to further amendment. The rules on takeover bid withdrawal and change of the takeover bid conditions are very restrictive. The offeror is allowed to withdraw the takeover bid only if there is an announcement of a competing bid at a higher price or in case of bankruptcy of the offeree company. With respect to changes to the published takeover bid, the offeror is allowed to change the price by an increase of at least 2%.

There are various factors that can affect the length of the merger or acquisition. One of the determining factors is certainly the type and size of a target company. In the case of large companies or companies doing business in a highly regulated sector, the process of acquisition might be longer, due to both the length of the due diligence process and merger controls. Other important concerns involve the (financial) creditors of the target as many acquisitions in Croatia are subject to refinancing.

In practice, the process for private companies ranges from six to twelve months.

For public companies, as noted above, due diligence is rare, but the offeree has to ensure formal approval of the takeover by HANFA. It takes at least three months from submitting the request to HANFA to the end of the acceptance period. The main stages of the offer process being:

  • filing of the offer documents with HANFA within 30 days after the thresholds are met;
  • publication of the offer documents within seven days after they are approved by HANFA;
  • offer period of at least 28 days from the publication of an offer;
  • settlement of the offer price within 14 days from the end of the offer period;
  • announcement of the takeover within the following seven days; and
  • three-month sell-out period.

After the takeover, merger control may take an additional four to six months in complex cases. In some cases, in which the acquirer can prove that it will acquire control over the target company, merger control may be completed before the takeover.

As a general rule, obtaining a controlling threshold in a target company (ie, one entity, or several acting in concert, directly or indirectly having over 25% of the voting rights) triggers the mandatory offer requirement. However, the law envisages several exemptions from the general rule:

  • Acquisition of a controlling interest is exempted from the mandatory offer requirement if the general meeting approves the takeover:
    1. in the process of a capital increase with the issuing of new shares; or
    2. if shares are granted instead of dividend payments.
  • The acquisition of a controlling interest is exempted if no change of control in economic terms has occurred (intra-group or related party transfers, or transfers through reorganisation).
  • Certain types of so-called "passive acquisitions", including acquisitions of shares by inheritance, by division of marital assets or as a creditor in bankruptcy proceedings are also exempted from the mandatory offer requirement.
  • Acquisitions of shares in situations where the target company is undergoing a process of financial recovery.
  • Provided that the sale or transfer occurs within six months after the acquisition, the sale or transfer of shares in a credit institution acting as a fiduciary creditor are exempted.
  • A person that, through acquisition of shares, acquires a percentage equal to, or smaller than the percentage that another person holds in the target company is also exempted from the mandatory offer requirement.

Generally, cash is the most common form of consideration in M&A transactions. However, making a comparison between private and public deals, in private deals it is more common to have forms of consideration other than cash but such different consideration will likely entail a delay in the closing of a deal since different consideration would be subject to an audit (ie, if the acquirer assumes part of the debt and converts it into equity).

In public deals, however, the offeror has the right to choose cash, substitution in shares or a combination of the two but, if the primary contribution is substitution in shares, or a combination of cash and substitution in shares, the cash has to be offered as an alternative to the substitute consideration.

In public takeovers, in principle, the offer cannot be conditional.

The Takeover Act implies that all the mandatory approvals (if any), including the merger-control approval, have to be obtained beforehand and submitted together with the other bid documentation to HANFA for an approval. Otherwise, HANFA will not approve the publication of an offer. Recently, the AZTN rendered an opinion in one particular case, stating that the notification of the merger control can be submitted prior to the publishing of the takeover bid if the offeror can make it probable that the takeover bid will be successful. It seems obvious that, when there is no majority shareholder with whom the offeror could sign the option agreement that the undertaking cannot make probable the success of the takeover bid and consequently should not be under the obligation to obtain the merger control approval from the AZTN. Despite this opinion, HANFA would still request the AZTN’s opinion that the merger is acceptable or that it cannot be reviewed at the time when the notification was submitted. See 3.1 Significant Court Decisions or Legal Developments for more detail.

However, if the thresholds for merger control notification are not met, HANFA will approve the takeover offer if the offeror provides it with a statement, given before a public notary, declaring that the intended transaction does not exceed the prescribed thresholds which would trigger the notification.

With respect to private transactions, conditions precedent are very commonly used, especially if the merger control filing is mandatory or if there is some other regulatory approval that the target company has to obtain.

As a form of derogation from the principal rule that, in general, a takeover bid cannot be conditional, the offeror may state in a takeover bid that encumbered shares are not part of the subject of a takeover bid.

The voluntary takeover can be made conditional on reaching a certain success threshold that cannot be lower than 25% (performance threshold). If the total percentage of deposited voting shares, together with the total percentage of voting shares which an offeror already holds, does not exceed the performance threshold, the offeror is not obliged to take over the deposited shares. If the deposited shares exceed the performance threshold, the offeror shall be obliged to take over all the deposited shares, under set and disclosed conditions.

The offeror must ensure that financing for the entire transaction is in place prior to launching the takeover offer (assuming full acceptance) by means of: (i) a cash deposit; (ii) a bank guarantee; or (iii) shares deposited with the depository exchange (for non-cash and combined offers).

In principle, as Croatian law is founded on the principle of free contracting, the parties to a transaction may agree upon any type of security to the extent its provisions are not prohibited by law or moral principles.

The Takeover Act, however, imposes restrictions that, in essence, prevent the target company committing to security measures that are commonly used in transactions with private companies. The Act itself provides a single form of deal protection that may be applied by a target and that is a breakthrough rule (pravilo proboja). The measure is applicable if the articles of association of the target company contains the breakthrough rule. The breakthrough rule can be entered into the articles of association, even after the takeover bid is published, by a decision of the general meeting which must be rendered by qualified majority. This measure provides, inter alia, that during the offer period, restrictions on the transfer of the target’s shares and restrictions on the voting rights of the target’s shares – as prescribed by: (i) the target’s s articles of association; (ii) an agreement between the target and its shareholder(s); or (iii) an agreement between the target’s shareholders – can be temporarily suspended for the duration of the offer period.

On the other hand, prior to triggering the mandatory offer, the offeree may agree some security measures with the shareholders (such as break-up fees or non-solicitation), but if, in the takeover period, a competing offer is made, there may be grounds to invalidate prior obligation to sell the shares to the first bidder.

If the shareholders of the target company rendered the decision on the application of the breakthrough rule, the mentioned rule would guarantee the offeror acquisition and realisation of control in the target company, not only during the takeover but also after completion of the takeover procedure.

Furthermore, if the offeror has obtained 95% of the voting shares after the takeover process, it will be entitled to start the squeeze-out process (see 6.10 Squeeze-Out Mechanisms)

In private company transactions, it is customary to arrange corporate governance by shareholders agreements if one party does not have full control or if minority shareholders are key to the business of the company.

In Croatia, shareholders can vote by proxy. The power of attorney is to be given in writing unless it is permitted in the articles of association to give it orally. The invitation to the general meeting has to contain the details of the proxy voting procedure. The power of attorney should be handed over to the company and kept for at least three years.

After a takeover offer in which the bidder has acquired 95% or more of the voting shares, and during a three-month period following the end of the offer period, the offeror has the right to acquire the shares of minority shareholders by providing fair consideration. The request must be submitted to the SKDD (depositary). Consideration is adequate if it is equal to the offer price. The bidder must deposit the consideration for the squeeze out onto a special account with the SKDD or deposit a bank guarantee amounting to the squeeze-out consideration.

In addition to the mandatory squeeze out as explained in the preceding paragraph, standard voluntary squeeze out can be exercised by the 95% majority shareholder (it has to hold 95% of the registered share capital of a joint stock company, excluding the treasury shares, if any, from that calculation). It has the right to propose a resolution on squeeze out to the general meeting. The majority shareholder determines the fair severance payment for the minority shareholders’ shares. The adequacy of the payment must be reviewed and confirmed by auditors appointed by the court.

Only a few Croatian listed companies do not have either majority shareholders or shareholders that have a controlling stake in the company. For that reason, it is obvious that, when contemplating a takeover, acquirers should make a prior agreement with such shareholders to, afterwards, make a takeover bid. Such commitments would be binding until the takeover bid is launched. During the takeover bid, by virtue of the Takeover Act, each shareholder may not waive its right to withdraw acceptance of the offer. Henceforth, if the commitment has not been exercised beforehand, it might be challenged during the takeover period. One could argue that a proportionate liquidated damages clause should, in such cases, survive the test of validity, but there is no court practice to that end yet.

In the case of mandatory takeover bids, a natural or legal person by whom the obligation to announce the takeover bid has been incurred, is obliged to notify HANFA about it without delay and make the announcement of the takeover to the stock exchange (ZSE) on which the target is listed and through the Croatian Official Gazette (Narodne novine).

In the case of voluntary takeover bids, the natural or legal person who intends to perform a takeover is obliged to notify HANFA about it. After HANFA is notified and announcement of the takeover to the ZSE and Narodne novine is made, the natural or legal person will be under an obligation to publish the takeover bid.

Within 30 days following the date on which the obligation to announce a takeover bid has been incurred, the offeror is obliged to submit their takeover bid to HANFA for approval. HANFA shall issue its decision on the takeover bid approval within 14 days following the date of receipt of the duly submitted application. The offeror shall announce a takeover bid within seven days following the date of receipt of HANFA’s decision with the ZSE and Narodne novine.

The principal disclosure document in a public deal is the takeover offer itself. The Takeover Act lists the mandatory content of the takeover offer which, inter alia, has to contain: basic information on the target and acquirer, data on the number of votes, a clear statement that the bid is submitted to all shareholders of the target company, as well as the price the acquirer undertakes to pay per share, with the time period and manner of payment, data on the depository, the validity period of the offer, etc.

The mandatory content of the takeover offer has to include, among other things, the business information of the offeror and information on its financial position. The Takeover Act does not explicitly stipulate that such information has to be supported by the financial statements.

However, most of the takeover offers made contain information copied from the financial statements (copied balance sheet and profit and loss account) and/or make reference to the publicly available financial statements on the website of the Financial Agency (in the case of domestic companies that have the obligation to publicly disclose financial statements).

If the information given by the offeror in the takeover bid is not supported with documents that HANFA deems to be satisfactory, HANFA is entitled to request that the offeror deliver additional documents. Thus, HANFA could ask for the official financial statements of the offeror.

In public deals the offeror is submitting takeover bids for approval to HANFA that contain the relevant information (as envisaged by the Takeover Act) for the takeover based on which the target shareholder can decide whether or not to opt for the takeover, and which information will be publicly disclosed after HANFA’s approval. Apart from the takeover offer, the offeror is obliged to submit all the transaction documents one year prior to the day the obligation to publish the takeover offer was incurred, including the documents relating to the persons acting in concert with the offeror, to HANFA. This transaction documents are submitted only to HANFA and will not be publicly disclosed after HANFA’s approval of the takeover bid.

In private deals where the change of the shareholding structure is only registered with the court registry or the SKDD, the management board of the target company will only submit the share transfer agreement but not the share purchase agreement.

Most of the joint stock companies adopted the dual system of corporate governance, which implies a two-tiered board system: a management board and a supervisory board. Limited liability companies are, under certain conditions, obliged to have the supervisory board but can, in any case, voluntarily decide to establish the supervisory board. When performing its duties, the management board must apply the duty of care of a prudent businessman (fiduciary duty) by acting in the best interest of the company.

The management and the supervisory board of a joint stock company are more independent of the shareholders than the management board of a limited liability company (as the limited liability company shareholders’ instructions and supervisory board’s instructions are binding upon its management board).

With respect to M&A activity, the board neutrality rule is applied for undertaking defensive measures in the case of public deals. This means that the target management or the supervisory board may not, without prior approval of the shareholders:

  • increase or decrease the share capital;
  • enter into operations outside of regular business;
  • act or enter into operations that could significantly jeopardise the future business of the target;
  • decide on the target’s acquisition or sale of treasury shares; or
  • take any actions that would frustrate the bid.

A decision of the target’s general meeting, approving the above listed decisions of the management board and/or the supervisory board, will be effective only if passed by a three-quarters majority of the share capital represented at the general meeting. However, the decision of the target company’s management board or supervisory board to search for another bidder (a “white knight”) would not be prohibited and would not require shareholder approval.

It is not common to have special committees within management and supervisory boards, even though the Companies Act envisages the possibility of the supervisory board establishing special committees to assist it with the preparation of the decisions that it renders and to monitor their implementation.

Some companies have the obligation to establish a committee for an audit according to the Accounting Act, which obligation is imposed, inter alia, to public companies.

Furthermore, the ZSE and HANFA enacted a new Code of Corporate Governance in 2019, which should apply to public companies (soft obligation). This Code of Corporate Governance recommends that a supervisory board should establish at least three committees (one for appointment, one for renumeration and one for audits) and ensure that the members of each committee have the necessary knowledge and skills. However, such committees do little to resolve the issues around conflicts of interest that arise in business combinations.

A business judgement rule was introduced in the Companies Act in 2008 stipulating that a member of the management board is acting in line with their fiduciary duty if that member, based on information received, was in a position to reasonably conclude that he or she was acting for the benefit of the company while rendering the business decision.

If the member of the management board is acting under the business judgement rule, he or she will generally not be liable to the company or its shareholders. Furthermore, the board members will also not be held liable if they acted upon a shareholders' resolution.

In the case of a public deal, the opinion that the management board has to render with respect to the takeover offer is subject to the business judgement rule. However, there is no relevant case law with respect to such opinions. The reasons for this might be the lack of hostile takeovers and the active role of HANFA, which issued the guidelines on the respective opinions.

Members of the management board would generally seek the advice of an independent expert if they had to take an action they believed might endanger their position in the management board.

The external expert is always consulted if the shares were not traded for a sufficient number of days (ie, non-liquid shares) in order to determine the price of non-liquid shares.

It was not until 2015 that a rule on conflicts of interest was expressly incorporated into the Companies Act. The rule generally requires the prior approval of the supervisory board for an action that a member of the management board who is conflicted must undertake. Whether or not a member of the management board is actually participating in a decision on a potentially self-interested transaction, such a conflicted member is obliged to notify other members of the management board and supervisory board of the conflict of interest.

Because the conflict of interest rule was only recently introduced into statutory law, the case law is pretty scarce. The same goes for the case law on conflicts of interest in public takeovers.

However, in the case of a conflict of interest in a public deal, the members of the management board will have to disclose that fact in the opinion which they have to render after the takeover bid is published and, if the member of the management board is acting in concert with the bidder or is a bidder, that member of the management board will have to exclude himself or herself from the opinion.

Croatian legislation does not differentiate between hostile and friendly takeovers. Most transactions are negotiated in advance and, as such, can be classified as friendly, while hostile takeovers are rare.

In public deals, as stated in 8.1 Principal Directors' Duties, the board neutrality rule is envisaged in legislation. Thus, for the majority of the defensive measures the shareholder’s approval must be obtained in advance. This however does not prevent the board from looking for a white knight.

With respect to the defensive measures that members of the management board can use to safeguard their position on the board after the takeover, the dual-board system itself is a defensive measure. Common tactics, such as directors’ golden parachute arrangements are not often activated in practice. As a general rule, the members of the management board can be removed if there is an important reason to do so. Thus, the main protection for directors is their management/service agreement, which continues to be in effect until the directors’ revocation and has to be fulfilled or compensated by the company. Members of the supervisory board, they can be removed with a qualified majority vote (three-quarters of cast votes).

The opinion on the takeover offer that the management board has to render can be used as a defensive measure as well since it can direct the shareholders to opt, or not, for the takeover offer.

Preventive defensive measures may be included in the company’s articles of association, this is more common for private deals. Some of these measures include restricting the share transfer of a company to the mandatory consent of other shareholders and stipulating the special rights of shareholders to appoint or revoke the members of the supervisory board.

In public deals, seeking a white knight is the most common reactive defensive measure since it does not require shareholders' prior approval. For other reactive defensive measures, prior approval from the shareholders is mandatory.

Apart from when searching for a white knight, the management board of a target company has to have the prior approval of shareholders when enacting reactive defensive measures. Any decisions of the management board or the supervisory board that are contrary to the rules applicable to the defensive measures as stipulated in the Takeover Act are null and void.

Special attention must be paid when convening the general meeting in which the shareholders vote on defensive measures. Issuing powers of attorney for voting should be simplified to the extent allowed by the articles of association and the law. All communications and propositions made to the shareholders must be made available to shareholders and published in abbreviated form, so that the shareholders may reach an informed decision on defensive measures.

The management board is obliged, under the Takeover Act, to publish a substantiated opinion on the takeover bid, covering the following points:

  • the type and amount of the offered consideration;
  • the offeror’s intention with regard to the future business of the target company;
  • the strategic plans of the offeror with regard to the target company and possible repercussions of the implementation of these plans on the employment policy;
  • statements of the management board members on their intention to accept or reject the takeover bid; and
  • statement of the management board members concerning the possible existence of any agreement with the offeror in relation to the takeover bid, and if there is one, the content of such an agreement.

The board members are allowed to defy the takeover bid in the opinion, but such objections have to be substantiated with valid arguments and explanations.

HANFA’s guidelines for the management board opinion stipulate that members of the management board who are also shareholders of the target company have to express in the opinion whether they intend to accept or reject the takeover bid.

Notwithstanding the opinion, any action that may result in an impediment to the takeover bid must be first approved by the shareholders.

Litigation with respect to M&A activity is not that frequent. There is a much higher percentage of private deals than public and for which it is common to have arbitration clause negotiated. Disputes are thus commonly settled through negotiation. However, litigation in cases of squeeze out is more common.

While the Croatian market has had less than three hostile takeovers in its short history, there have been many cases in which HANFA established there was an unpublished takeover intention (most of which included board members of target companies) and ordered such persons to make a takeover bid. All such persons disputed HANFA's decision and most of the respective cases were brought all the way to the Constitutional Court.

Litigation is most commonly brought after the deal is done (after the closing) in the case of private deals due to breach of representations and warranties. In the case of a squeeze out, the minority shareholder(s) will litigate after the general meeting resolution on the squeeze out and will almost always challenge the amount of severance that is to be paid in the voluntary squeeze out. For public deals, litigation will usually be triggered after the acquirer has failed to publish the mandatory offer.

In Croatia, which has experienced the transition from planned to market economy, minority shareholders are still showing high level of passivity and inertia. Historically, the companies which emerged from formerly public-owned enterprises during the socialist period (ie, before the 90s), and which constitute more than half of the publicly listed companies in Croatia, have former employees as shareholders. The reason is that during the privatisation of these companies, the government offered employees shares at discounted price. As most of those employees are now retired and as those people grew up under socialism, they are not well versed. As a consequence, the large majority are passive, while a minority group cannot accept the new market reality, this has proved difficult for new investors in the companies who wish to have a constructive dialogue. For that reason, investors usually seek to reach a 95% stake to enable the performance of a squeeze out.

The collapse of the Agrokor group, however, which consisted of nearly a dozen publicly traded companies, has led to shareholder activism gaining in popularity. Still, even though there were several thousand shareholders who lost the full value of their shares (as all assets of subsidiaries were transferred to newly formed companies in the administration procedure), their activism was primarily financed by the creditors that were opposing the settlement in the administration procedure. After those creditors eventually settled, the shareholders' opposition sharply declined and there were just a few lawsuits filed.

In companies in which there is some kind of activism, this activism mainly revolves around obtaining economic rights in the company, such as pay-outs of dividends and similar.

Activism with the agenda of creating value for the company (suggesting opportunities in which the company should invest) is something that is not considered to be a right of a shareholders but more of a management board business.

Activists' interference with the completion of transactions is prevalent in the squeeze-out process where minority shareholders attempt to challenge the general meeting resolution on squeeze out. These have been, mostly, vexatious claims. In other cases, activists are trying to create negative publicity for the company. In practice, we have more often seen unions or competitors trying to prevent the closing of a deal.

Ostermann & Partners LLP

Ulica grada Vukovara 284
10000 Zagreb

+385 1 559 9800

+385 1 559 9808
Author Business Card

Law and Practice


Ostermann & Partners LLP is a fully independent, Zagreb-based, full-service law firm that advises public and private companies, ranging from multinational corporations to start-ups, private equity and boards of directors. The firm's lawyers are experienced in acquisitions and dispositions in a wide range of industries, including those that are highly regulated. Its team is recognised for dedication and innovation; traditionally, all its lawyers, before advising on transaction work, undergo dispute resolution practice, which gives them not only experience but also a broader perspective. Ostermann is praised by clients and peers for its particular expertise in debt markets and restructuring, which are often combined in its M&A work.

Compare law and practice by selecting locations and topic(s)


Select Topic(s)

loading ...

Please select at least one chapter and one topic to use the compare functionality.