Current Concerns for Shareholders in Croatia

Introduction

It took 23 years for the historical transition of the Republic of Croatia from a republic within ex-Yugoslavia to an EU member state. This fast transformation from the previous economic and political system into an entirely new one was made through many reforms that, among other novelties, gave birth to shareholders’ rights and activism.

Reforms, such as privatisation of vast parts of the existing economy, have fostered the creation of joint stock companies with large amounts of shareholders, as the previous and existing employees of the privatised companies had privileged terms for the subscription of shares.

As the capital markets were weak and undeveloped, a compulsory listing of companies of a certain size (in terms of number of shareholders and annual turnover, both were unrealistically low) made via an ill-devised reform, jump-started the capital markets scene in which these employee shareholders, without their will and knowledge of this sophisticated system, became stock market participants.

All of the above has been instrumental in creating the capital markets ecosystem in which shareholders’ rights were very modestly pursued and activism was an endangered species.

Pension system reform created the largest players on the market (pension funds management companies) that slowly became aware of their size and accepted the necessity to also take an activist–institutional investor role, when necessary, for protection and/or creating new value for their members.

All these developments resulted in judicial reviews being scarce. Furthermore, the moulding of corporate governance issues and shareholders’ rights through a judicial machine requires a fair amount of time – decades, actually – and a constant stream of cases, neither of which existed.

Such a status helped in that only very few private investors dared to play an activist role, as one of the main tools for such endeavours was, and still is, the peril of a lawsuit – negotiations in the absence of a palpable outcome of a potential litigation is more of a gamble than prudent thinking, as it is very difficult to assess the probability of such a litigation creating value for the plaintiff (shareholder/s). As third-party funding of litigation is not very common in this jurisdiction, shareholders are left to their own devices in potential high-stakes, high-rewards litigation that, almost inevitably, produces high costs.

Trends

In the last five years, as can be grasped from the publicly available notifications on the Zagreb Stock Exchange containing proposals and counterproposals of shareholders to the published agendas of general meetings of shareholders, the enforcement of shareholders’ rights was predominantly focused on dividend payments and elections of supervisory board members.

Other topics of shareholders’ concern were amendments of the Articles of Association, acquisitions of treasury shares, and management and supervisory boards’ compensations – in general not much of a dissent could be traced.

For example, not a single request for appointment of a special auditor has been made. Namely, shareholders holding 5% of the company’s share capital have the right, in case there is a reasonable doubt that there are some irregularities in the management of the company’s business, to request that the general meeting of shareholders appoints special auditors in order to review the company’s books and documentation and assess such allegations. In case such a request for appointment of auditors is rejected by the general meeting of shareholders, the dissenting shareholder is authorised to file the request for appointment of special auditors to the competent commercial court.

Furthermore, only one request to the general meeting of shareholders to decide whether a request for compensation of damages caused by (i) the management board members, (ii) the supervisory board members, or (iii) the shareholder/s that influenced management or supervisory board members, was made. Shareholders holding 10% of the company’s share capital have the right to seek such resolution to be approved by the general meeting of shareholders.

It is true that corporate governance standards, in recent years, were raised due to codification and publication of the corporate governance rules, being either generally applicable rules for all the listed companies, or just partially; eg, for participation and engagement of compulsory pension funds management companies in the target companies. This resulted in an overall boost for most of the regular shareholders’ rights being exercised with less effort.

The above described non-existence of “extraordinary” shareholders’ engagement, both on the stock exchange and in the media, represents a sign about the actual status of the shareholders’ activism and such a status is not caused by shareholders’ laziness.

In the same period (last five years), the most visible form of shareholder activism was related to the aftermath of the Lex Agrokor, legislation that was introduced to resolve financial difficulties of an ailing, systemic company that led to serious cross-border insolvency issues and had a great impact on shareholders’ rights. Minority shareholders that were, effectively, deprived from their ownership, formed an association of shareholders (Udruga dioničara) in an attempt to overthrow this legislation and regain share-holdings in the affected companies. The fight was long and, although not with much success for minority shareholders, it has made shareholders’ activism seen as a tool for reaching legitimate goals serving all the shareholders and not only as a toy for rich, maverick shareholders.

Another venue for shareholders’ activism to be displayed is the takeover arena that, in its core, is always more dramatic and vocal than “business as usual” at the general meeting of shareholders.

However, the ability of shareholders, let alone activists, to have a more decisive role in takeovers is largely affected by the local legal framework as the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (Takeover Directive) was, in the author’s opinion, poorly transposed into the domestic legal environment, crippling shareholders’ rights for the judicial review of the regulator’s decisions. Namely, the shareholders are neither given the right to challenge such a regulator’s decisions in administrative proceedings nor are they given the ability to initiate judicial proceedings, either in proceedings against a supervisory authority or in proceedings between parties to a bid.

The EUR140 million takeover of a tourism company by a large shipping company has attracted special attention in recent months on many accounts – one was the minority shareholders status in the proceedings.

Media coverage drew the picture of a hostile takeover that some shareholders resisted, claiming foul-play due to concerted actions of other shareholders (who initially sold their shares to the offeror) and the offeror. It was claimed that such a collusion, ultimately, helped create a lower price for the takeover than the price said shareholders actually received from the offeror. Some newspapers even provided correspondence and documents exchanged between key players that, on face value, supported the statements that irregularities existed.

The supervisory body, however, approved the takeover and ruled that the price was right, and no violations had occurred.

This is not the first time that the takeover of a joint-stock company has been carried out despite the resistance of shareholders who, for various reasons, believe that their rights were threatened or violated. However, all previous attempts at seeking court protection by shareholders remained just attempts as they were rejected by court decisions stating that minority shareholders are not and cannot be parties in the takeover proceedings in front of the supervisory body. Consequently, minority shareholders are not authorised to question the legality and transparency of these proceedings.

The pending challenge will, hopefully, shed some more light as to the correctness of the above court practice and the transposition of the Takeover Directive into the Croatian legal system.

Namely, one of the proclaimed primary goals of the Takeover Directive is the protection of shareholders – such a goal was meant to be achieved by member states taking the necessary steps to protect security holders, especially those with minority shares, in the event of acquiring control over their companies.

The Republic of Croatia, as a member state, had the obligation to transpose the aforementioned Directive into its legislation, which was done by the Act on Takeover of Joint Stock Companies (“The Takeover Act”). However, the legislator failed (or forgot) to prescribe legal rules that would ensure minority shareholders, as parties to the takeover bid (offer), have the right to an independent judicial review of the supervisory body’s decision regarding the takeover, for which obligation is imposed on the member states by the letter and spirit of the Takeover Directive.

The Takeover Act only partially fulfilled such an obligation by enabling independent judicial assessment of the regulator’s decisions that could only be initiated by the offeror itself, whose interests in the takeover process are certainly not identical to the interests of the minority shareholders of the target company. In other words, the challenge that the price offered by the offeror in the takeover proceedings is too low and not in line with the applicable legislation, could only be initiated by the very same offeror.

Therefore, as a consequence of such an incomplete and improper transfer of the Takeover Directive into the Croatian legal system, an unjust judicial practice arose – the shareholders of the target companies could not participate in the administrative proceedings in front of the supervisory body and were denied the right to an independent judicial review of the regulator’s decisions by initiating an administrative dispute, all on the basis of the explanation that they are not parties to the proceedings and that their rights and interests are not decided in that proceeding.

Given the fact said challenge is still pending, it yet remains to be seen whether this case would reach the Court of Justice of the European Union and a preliminary ruling regarding the proper implementation of the Takeover Directive in the Republic of Croatia, stating that the Takeover Act, which prevents minority shareholders, the parties to the takeover bid, as specified by the Directive, from participating in the takeover process, and obtaining judicial review of said process is contrary to EU laws, would be issued.

One thing is certain (in addition to death and taxes) – whatever the result of this challenge, it will affect the further development of shareholder activism in similar matters.

Developments

Unfortunately, ESG-related subjects and challenges have not yet reached the shores of the local activist scene. However, it is expected, due to the obligations stemming from the adopted regulations affecting financial reporting of listed companies as of 1 January 2024, that ESG issues will, rather soon, find their way to the mainstream of corporate Croatia.

Until then, the major development that is observed in practice is the increased interest in performing a squeeze-out through a takeover process (“squeeze-out by takeover”), rather by the usual route via the resolution of the general meeting of shareholders (“squeeze-out by resolution”).

The share-holding requirements for both types of squeeze-out are the same – a shareholder that wishes to engage in any variant ought to dispose of 95% of the entire share capital.

The main difference is, however, that in the squeeze-out by takeover, the price for the shares of the remaining shareholders is equal to the initial price in the takeover that preceded. As indicated in the previous part of this article, the shareholders do not have a tool to contest the price in the takeover proceedings.

On the other hand, the price in the squeeze-out by resolution could be contested even by a shareholder with a single share, in a very specific proceeding, held in front of the competent commercial court. Such a court decision would have an effect towards all the shareholders, active or passive, and, if the fair price would be determined as higher than the one that was offered, the shareholder that initiated the squeeze-out by resolution would be obliged to top-up the price to all the shareholders.

Therefore, it could be expected that due to such a status of affairs, or, rather, consequences and certainty within the process, squeeze-out by takeover might gather more pace in the future.