Changes in the Croatian Companies Act and Court Register Act

13 May 2019 | newsletters

Croatia introduced significant changes to the Companies Act and the Court Register Act on 20 April 2019 with the main goal of easing the incorporation of (simple) limited liability companies ("ltd companies").

Ltd companies are the predominant structure for trade companies, with 98.5 % of registered and 98.7 % of active companies.

With a simple electronic procedure replacing the protracted and expensive process of starting a business, the intention of the Croatian legislator is clear: to improve the efficiency of the system leading to an increase of competitiveness.

Additionally, the changes to the Companies Act implement Directive (EU) 2017/828 (amendment of the EU Shareholder Rights Directive) (the "Directive").

Main changes:

  • Establishment of ltd companies completely online;
  • Removal of business activities from articles of association;
  • No need to deposit signatures of authorised persons with the court register;
  • Shortened period for registration of new companies;
  • No need to reserve a company name prior to establishment;
  • Cessation of ltd companies in a shortened procedure;
  • Registration of bankruptcy estate with the court register;
  • Implementation of the Directive (identification of shareholders, remuneration policy for joint stock companies, related-party transactions, transmission of information and facilitation of exercise of shareholder rights, transparency for institutional investors, asset managers and proxy advisors).

Establishment of ltd companies completely online

In a way, electronic establishment of ltd companies already existed in Croatia, but only to a limited extent, as the presence of founders was needed either at a notary public or at the office of hitro.hr service.

With the introduced changes, founders will be able to establish a ltd company completely online, without the need for a physical presence or to send documents in physical form.

Online establishment should be possible from 1 September 2019 through the e-osnivanje app, which will be connected to the START system of the Croatian Ministry of Economy, Entrepreneurship and Crafts. The court register system will be accessible electronically using a credential of the National Identification and Authentication System.

When establishing ltd companies online, founders will be limited to the form of articles of association prescribed by the Companies Act, meaning they will not be able to regulate their relationship in more detail. For that purpose, founders may still establish a ltd company physically at a notary public.

Changes will make establishing ltd companies easier

To simplify the process of starting a business, it is now enough to pay HRK 5,000 out of the HRK 20,000 share capital required to establish a limited liability company upfront. The rest of the share capital must be paid within one year from the entry of the company into the court register.

Articles of associationno longer need to list the business activity (except of joint stock companies). This has led to the practice of founders registering as many business activities as possible to avoid potential future costs. Now business activity will be determined by a special decision (either by listing activities the company intends to perform or by general provision without listing each activity) submitted to the court register. This will also make it easier to change business activities later, as instead of changing the articles of association it will only be necessary to deliver the change decision to the court register. Such a decision may be rendered with a majority needed to change the articles of association. Business activities will not be registered in the main book of the court register, except those registered and performed based on the approval of a competent authority, which may be registered only based on such approval.

Companies will no longer need to submit the signatures of authorised persons (e.g. management board members) to the court register. However, all subjects registered with a court register will need to provide it with their e-mail address at the latest within three months of registration and to notify it about any changes.

Instead of three founders, it will now be possible to establish a simple limited liability company with five founders.

There is no longer a need to reserve a company name prior to establishment, but the company name must differ from that of another company registered in Croatia. Thus far, the company name restriction was tied to the same register court.

Finally, the deadline by which a register court must issue a decision on company registration is shortened from 15 to five business days from the date when the complete application with schedules was submitted.

Cessation of a ltd companies in a shortened procedure

In response to the outcry by company owners about high liquidation costs and the consequential widespread practice of not liquidating companies but instead leaving them to the register court for ex officio deletion (due to non-delivery of financial reports), the legislator introduced cessation of ltd companies without a liquidation.

All members must agree with a decision on cessation of a company. Besides the explicit confirmation on cessation of a company, all company members must state that (i) the company has no liabilities towards current and past employees, (ii) the company has no liabilities towards other creditors, and (iii) each member will be jointly and severally liable for any subsequently discovered liability.

This decision must be in the form of a notarial deed or a private document notarised by a public notary and must be immediately submitted to a register court. The register court can request additional/supporting evidence for a statement that the company has no existing liabilities and can also request additional insurance instruments from its members.

The register court will render the resolution on cessation of a company if all prerequisites are fulfilled. However, the register court will revoke the resolution if a justified complaint of a member, creditor or a state body is filed within 30 days from the date of publication of the resolution.

If no complaint has been filed against the resolution on cessation of the company without liquidation or the court dismisses or refuses the filed complaint, the register court will issue a decision to delete the company from the court register and publish it on the court register website.

Members remain jointly and severally liable with all their assets for any possible liability. Creditors may bring their claims against members of the company within two years from the date of publication of the resolution on removal of the company from the court register.

Additionally, one of the significant changes to the Court Register Act resolves an issue regarding companies deleted from the court register when assets are subsequently found. Previously there were formal issues with enforcing claims over such companies, i.e. subsequently found assets. Now, if new assets are found after the completion of the insolvency procedure, the bankruptcy estate will be registered with a court register, under the previously defined identification number (MBS), personal identification number (OIB) and name.

Transposition of Directive 2017/828

The Directive aims to create a more attractive environment for shareholders and to improve corporate governance for companies whose shares are admitted to trading within an EU Member State.

At the outset it should be clarified that the implementation of the Directive will only affect joint stock companies under the Croatian Companies Act.

Identification of shareholders

From 1 January 2021, shareholders will need to provide the company its e-mail. If shares are registered with an investment fund, and holders of its shares are not exclusively institutional investors, the investment fund will be deemed a shareholder.

The company's statutes may determine conditions under which someone can register someone else's shares in their own name. The registered person will lose the voting rights associated with these shares if it violates the obligation to reveal to whom the shares belong as determined by the statute.

If a company so requests, each person registered with the Central Depository & Clearing Company (Središnje klirinško depozitarno društvo) must immediately notify the company whether these are its shares.

The Croatian legislator has not prescribed any threshold - minimal percentage of shares - below which a company may not seek identification of shareholder, so a company may basically demand the identity of a shareholder holding even just one share.

Remuneration policy

The supervisory board or board of directors of a joint stock company whose shares are listed on a regulated market decides on the remuneration policy of management board members or executive directors. However, the shareholders' meeting needs to approve the remuneration policy at least once every four years, but always if it is changed significantly. From 1 May 2020, companies will need to decide on the remuneration policy of supervisory board members as well.

In exceptional circumstances, the supervisory board or board of directors can temporarily derogate the applicable remuneration policy, provided (i) it is necessary for the long-term interests and sustainability of the company, (ii) the policy includes the procedural conditions under which the derogation can be applied, and (iii) the policy specifies the elements of the policy from which a derogation is possible.

From 1 May 2020, the management and supervisory board, executive directors and board of directors respectively will need to annually publish a report about all remunerations that the company or another company within the same concern paid or undertook to pay during the last business year to any incumbent or past member of the management or supervisory board, executive director and member of the board of directors respectively. The report will be subject to auditing by an annual financial reports auditor.

The remuneration report must be published and freely accessible on the company's website for 10 years. However, certain information that a prudent businessperson could deem significantly harmful for a company do not have to be included in the report.

At least one supervisory board member must be an expert in accounting or auditing of financial reports in companies whose shares are traded on a regulated market.

Related-party transactions

The supervisory board of a company whose shares are traded on a regulated market must previously approve a related-party transaction if the value of that transaction (or jointly with other transactions undertaken within the last 12 months) exceeds 2.5 % of the long-term and short-term assets as determined by the last available financial report. If the supervisory board withholds approval, the management board may request approval from the shareholders' meeting. 

Companies must immediately publish related-party transactions on their websites or any other way which will inform the public, unless the transaction is already published in accordance with the Market Abuse Regulation. The notice must contain all information necessary to assess whether the transaction is fair and reasonable from the perspective of the company and the shareholders who are not a related party.

Generally, transactions entered into in the ordinary course of business and concluded on normal market terms are not related-party transactions. Companies may exclude this rule in the company's statutes, in which case approval and publishing obligations will apply.

Related-party transactions are not:

  1. transactions between a company and its wholly owned subsidiaries or subsidiaries in which no other related party of the company has an interest;
  2. transactions for which the consent or approval of the shareholders' meeting is required;
  3. all transactions and actions undertaken based on the consent or approval of the shareholders' meeting (e.g. share capital increase, entrepreneurship contract, mergers, acquisitions, etc.);
  4. transactions regarding the remuneration of directors or supervisory board members;
  5. transactions entered into by credit institutions on the basis of measures aimed at safeguarding their stability adopted by the competent authority in charge of prudential supervision within the meaning of Union law;
  6. transactions offered to all shareholders on the same terms.

Additionally, the supervisory board may appoint a commission to prepare decisions and/or supervise their execution. Commissions may not decide on supervisory board matters.

Transmission of information and facilitation of exercise of shareholder rights

From 1 January 2021, information on the convocation of a shareholders' meeting, the right to exchange exchangeable bonds, pre-emption right, right to payment in case of share capital decrease, right to registration of new shares in case of share capital increase and dividend payments will need to be transmitted either directly to the shareholders by the company or electronically to intermediaries.

Companies whose shares are listed on a regulated market will be able to request information from intermediaries on shareholders whose shares they safekeep. Companies whose shares are not listed on a regulated market may prescribe this right in their statues.

Transparency for institutional investors, asset managers and proxy advisors

Institutional investors and asset managers must report annually about their engagement policy (e.g. how they vote, how they voted on more important decisions, whether they used proxy advisors). They must disclose how they voted at shareholders' meetings, unless their votes were not important or they have a negligible shareholding.

Institutional investors must also disclose how they contribute to the mid-term and long-term value of their portfolios.

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Further reading:
Public mergers and acquisitions in Austria 2019

Marko Kapetanović

Marko Kapetanović

Attorney at Law in cooperation with Schoenherr

T: +385 1 4852 582
m.kapetanovic@schoenherr.eu

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Gina Grancarić

Gina Grancarić

Associate

T: +385 1 485 25 81
g.grancaric@schoenherr.eu

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