General overview

What legislation governs M&A activity in your jurisdiction?

M&A in Croatia is governed by various pieces of legislation. These include:

• the Company Act (Official Gazette 111/93, 34/99, 52/00, 118/03);
• the Securities Market Law (Official Gazette 84/02);
• the Law on Takeover of Joint Stock Companies (Official Gazette 84/02, 87/02, 120/02);
• the Labour Act (Official Gazette 38/95, 54/95, 64/95, 17/01, 82/01, 114/03, 30/04, 142/03, 137/04);
• the Competition Act (Official Gazette 122/03);
• the Civil Code (Official Gazette 35/05); and
• the Investment Promotion Law (Official Gazette 73/00).

What impact have recent legislative changes had on the nature and amount of M&A activity?

In Croatia, there have been no recent legislative changes that would have an impact on the M&A activities. Further harmonization of Croatian legislation governing M&A with EU legislation is expected.

What have been the most significant M&A transactions in your jurisdiction over the past year?

The most significant M&A transactions in Croatia over the past year have been carried out in the banking sector. These include the acquisition of Nova banka by OTP Bank, the leading bank in Hungary, and the still pending compulsory sale of a majority stake in HVB Splitska banka, which forms part of UniCredit HVB Group. UniCredit HVB Group was forced to sell HVB Splitska banka because the recent merger between UniCredit Group and HVB Group reached a prohibited level of concentration on the Croatian banking market pursuant to the Competition Act.

In construction sector, a hostile takeover of Industrogradnja was recently finalized.

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted?

Croatian law does not discriminate towards foreign investors, whether legal or natural persons, and, in principle, treats Croatian and foreign investors equally.

The principle of equal treatment of domestic and foreign investment is prescribed by the Constitution of the Republic of Croatia, which provides that "rights acquired by investment of capital shall not be restricted by law or any other legal act" and "foreign investors shall be guaranteed free transfer and repatriation of profit and the capital invested."

The Investment Promotion Law regulates the promotion of investments, equally of domestic and foreign legal entities or natural persons, and it is aimed at stimulating the economic growth, development and implementation of the economic policy of Croatia and its integration into international trade flows by increasing exports and enhancing Croatia's competitive ability. The Investment Promotion Law provides several groups of incentives, such as tax incentives or incentives for employing new employees.

However, foreign investments have to be reported to the Croatian National Bank for purposes of gathering data for preparing statistical overviews of foreign investments portfolios.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

The Securities Market Act provides for a general obligation of the issuer of securities listed on an exchange to promptly inform the public of all information pertaining to circumstances or decisions that constitute material facts. Material facts are defined as all information and facts that can influence the price of securities.

Further, the Securities Market Act prescribes a special disclosure obligation when a natural or legal person directly or indirectly acquires or releases shares of a public joint stock company, and as a consequence of that fact the proportion of votes in the assembly that that person or entity possesses exceeds or falls below the following thresholds: 10%, 25%, 50% or 75%. In such case, that person or entity must notify in writing the Croatian Agency for Supervision of Financial Services (the Agency) and the issuer of the acquired or released securities within 15 days.

The information that an acquirer of securities has to deliver to the Agency and the issuer includes:

• the name and surname, personal identification number and residence of the person who has acquired or alienated the shares, or the name, head office and the registration number of that legal person, and the name and surname, personal identification number and residence of the responsible person in the legal person who has acquired or alienated the shares;
• the document on the basis of which the shares were transferred;
• the number of acquired or alienated shares, the share in the initial capital of the issuer on the basis of acquired or alienated shares, and the number of voting rights that the total of acquired or alienated shares ensures in the general assembly of the issuer;
• the total number of shares, that is, the share in the initial capital of the issuer after the acquisition or release.

The issuer who receives the notice must publish it in the daily press accessible throughout the territory of the Republic of Croatia within seven days from the date of its delivery. Only upon the written proposal of the issuer, the Agency may render a decision to temporarily exempt the issuer from the publication obligation for no longer than three months if the issuer considers that the publication of the notice might cause it serious harm and that the public, even without the publication of the notice, would be able to assess the value of shares to which the notice relates.

To what extent do disclosure requirements achieve market transparency?

Considering the broadness of data that have to be published, market transparency is achieved, provided that the issuers and acquirers obey their notification and publication obligations.

How significant an issue is prospectus liability in a typical M&A transaction?

The Securities Market Law prescribes in which cases an issuer of securities in the Republic of Croatia must publish (public offering) or deliver (private offering) a prospectus, the process of its approval by the Agency, and its obligatory content.

If the issuer violates the procedure and conditions prescribed by the Securities Market Law with respect to the prospectus, it could be fined from K60,000 ($10,000) to K1 million, and the responsible person of the issuer could be fined from K20,000 to K200,000.

In addition, the issuer and persons who were determined to have covered up or falsely presented important facts in the prospectus are liable for the fullness and truthfulness of the data contained in the prospectus. The persons who have signed the prospectus are liable for the truthfulness and fullness of the data contained in the prospectus within the limits of their knowledge or assumed knowledge.

How have recent M&A transactions and/or current legislation dealt with the issue of material adverse change clauses?

In general, the Law on Obligations recognizes a material adverse change, defining it as a change that has arisen after conclusion of a contract that could not have been anticipated at the moment of concluding the contract and due to which performance of obligations for one of the parties to the contract has become significantly more difficult or it could cause one party a significantly large loss. In this case, the suffering party may request that the contract be either amended or terminated. Because the material adverse change institute applies ex lege, it is not necessary to introduce a material adverse change clause in the contract.

When it comes to public bids, the Law on the Takeover of Joint Stock Companies prescribes that the bidder cannot impose any conditions whatsoever on the obligation to purchase the shares that are the subject of a takeover bid. Exceptionally, the bidder may state in a bid that it will not purchase encumbered shares or the shares that will be deposited for the acceptance of the takeover bid if the total number of votes accorded by the deposited shares, together with the total number of votes that the bidder already has, does not exceed 50% of voting rights accorded by all the issued shares carrying voting rights. In this case, if not enough shares are deposited, the bidder will not be obliged to purchase and take over the deposited shares.

Further, the Law on the Takeover of Joint Stock Companies prescribes cases in which the bidder may withdraw its published takeover bid. These are if the competing bid is higher or the issuer has become bankrupt. The bidder must announce the withdrawal of the takeover bid in the same manner as is prescribed for publication of the takeover bid.

What are the key unresolved issues in your jurisdiction?

The main issue that arises when it comes to enforcing legislative provisions is protection of minority shareholders' rights before a court in cases where the management and supervisory boards have violated minority shareholders' statutory rights, for example, with respect to right to request convocation of the general assembly or to request appointment of special auditors. Also, the issue of control over the management board's actions taken during hostile takeovers is unresolved.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

The Law on Takeover of Joint Stock Companies regulates takeover procedure where the target company is a public joint stock company.

The Competition Act will apply if the takeover raises competition issues. In this case, the Croatian Competition Agency (the CCA) has jurisdiction to issue clearance for the intended transaction or to refuse it.

For transactions in specific fields, specific regulatory bodies could have jurisdiction, for example, the Croatian National Bank for the banking sector, and the Croatian Energy Regulatory Agency for the energy sector.

What are the various methods by which a takeover can be achieved?

In the takeover of a public joint stock company, a public bid must be made pursuant to the provisions of the Law on Takeover of Joint Stock Companies. If the target company is not a public joint stock company, the acquirer can purchase target's shares either at the stock exchange or off-exchange, in private transactions with the shareholders.

How differently are hostile and voluntary takeover bids treated?

The Law on Takeover of Joint Stock Companies does not distinguish between hostile and voluntary takeover bids. The Law obliges the target's management board and supervisory board to act neutrally in relation to the takeover bid, regardless whether the bid is hostile or voluntary.

After the bidder has notified the issuer of the acquisition of shares due to which it is obliged to publish a takeover bid, or of the intention to publish a takeover bid, and until the finalization of the takeover bid, the issuer's management board:

• cannot exercise its statutory authorization to increase the issuer's initial capital by issuing new shares until the takeover bid validity period and the payment term expire, or until the expiration of the publication deadline for the takeover bid if the bid has not been published. If, by then, the bidder or any other shareholder, pursuant to the Company Act, requires that the general assembly be convened to recall the supervisory board members or to make amendments to the articles of association, the management board cannot increase the initial capital until the conclusion of the general assembly convened in such manner;
• must not make a decision on extraordinary business operations that could change the balance of the company's assets or liabilities;
• must not, without approval of the general assembly, make a decision on the company's acquisition or alienation of its own shares;
• must notify the issuer's employees of the takeover bid.

Within seven days after the publication of the takeover bid, the issuer's supervisory board must publish a substantiated opinion on the takeover bid in the same manner in which the bid has been published. Except for the publication of this opinion, the members of issuer's management and supervisory boards may not act in any way that influences the takeover bid.

After the bidder has published a takeover bid, and during the takeover bid validity period, third parties are not allowed to publish their intention to acquire or alienate the issuer's shares in the media or electronic media accessible to the public. Instead, they must publish the competing takeover bid pursuant to the provisions of the Law. A competing takeover bid may be submitted by any legal entity or natural person.

The public bid is in principle valid for 30 days after its publication. However, when competing takeover bids are published, the bidder may choose to extend its validity until the expiration of the competing bids' validity period.

What penalties are imposed for parties who violate takeover regulations (or equivalent)?

The Law on Takeover of Joint Stock Companies envisages a misdemeanour liability for violation of its provisions, for which it prescribes monetary fines for the bidder and its responsible person. Thus, the bidder (whether a natural person or a legal entity) will be fined an amount ranging from K20,000 to K1 million, depending on the type of violation, while the responsible person of the legal entity will be fined an amount ranging from K50,000 to K300,000.

The Securities Market Law also envisages misdemeanour liability for a legal entity and its responsible person who violate provisions of the Law. The fine for the legal entity ranges from K60,000 to K1 million, depending on the type of violation, while the responsible person of the legal entity will be fined an amount ranging from K20,000 to K200,000.

In addition to liability for misdemeanour, if the Agency establishes that a person who was obliged to publish a takeover bid failed to do so within the legal deadline, the Agency will pass a decision on the obligation of that person to publish the takeover bid, and deliver it to the issuer, to the shareholders through the issuer or through the depository, to the depository, and to the stock exchange or the regulated public market where the issuer's shares have been listed. In this case, each issuer's shareholder may, through a competent commercial court, require a mandatory conclusion of an agreement on sale of shares, subject to the conditions according to which the takeover bid had to be published.

What are the thresholds for disclosing bids and offers?

The Law on Takeover of Joint Stock Companies, defines the first threshold for public bid obligations as acquiring more than 25% of the total number of votes accorded by the issuer's shares carrying voting rights. The second threshold is defined twofold:

• if, based on a takeover bid, the bidder acquired less than 75% of shares carrying voting rights, the bidder would be obliged to publish a takeover bid in the case of further acquisition; or
• if, based on takeover bids, the bidder acquired 75% or more of shares carrying voting rights, the bidder would have to publish a takeover bid in the case of further acquisition of the issuer's shares carrying voting rights when: the bidder acquires an additional 5% of shares carrying voting rights; or there is a lapse of 18 months after the day of the acquisition of shares after a previous takeover bid.

If there is no legal obligation to make a public bid pursuant to the Law on Takeover of Joint Stock Companies, there are no rules imposing obligation to disclose bids and offers.

Competition/Antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

Since 2003, there have been no amendments to the Competition Act. The tendency is towards further harmonization of the competition legislation, including M&A transactions, with EU legislation.

How are the competition/antitrust regulations enforced in your jurisdiction?

The CCA has regulatory, supervisory and enforcement powers in the field of competition and antitrust. In some specific fields, the CCA may cooperate with other government bodies, such as the Croatian National Bank for the banking sector, and the Croatian Energy Regulatory Agency for the energy sector.

The CCA has power to issue interim measures, with a maximum duration of three months. In its decision on interim measures the CCA may suspend all actions, insist on particular conditions or impose other measures reasonably necessary to eliminate prevention, restriction or distortion of competition, where it deems that particular activities of restriction, prevention or distortion of competition represent a risk by creating a direct restraining influence on undertakings, or on particular sectors of the economy or consumers' interests.

At the request of parties to an anticompetitive agreement, the Agency may grant an individual exemption from the Competition Act regarding prohibition of such agreements, provided that the particular agreement fulfils prescribed conditions.

There is no right to appeal against the CCA' decisions, but the injured party may file an administrative claim before the Administrative Court of the Republic of Croatia.

Some competition issues, for example, validity of an anticompetitive agreement, could also arise in court proceedings before regular (commercial) courts. In this case, the court would decide whether the agreement is forbidden on the basis of the Competition Act and so void, or whether it falls within an exemption provided by the law and regulations and so is valid and enforceable.

How do legislation and regulations approach the issue of abuse of dominant position?

The Competition Act defines an undertaking's position as dominant when, due to its market power, it can act in the relevant market considerably independently of its real or potential competitors, consumers, buyers or suppliers.

Any abuse by one or more undertakings of a dominant position in the relevant market is prohibited. The abuse may, in particular, consist of:

• directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
• limiting production, markets or technical development to the prejudice of consumers;
• applying dissimilar conditions to equivalent transactions with other undertakings, thereby placing them at a competitive disadvantage;
• making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of the contracts.

The CCA has jurisdiction to:

• determine a dominant position and the practices of the undertaking abusing this position, that is, that prevents, restricts or distorts competition, and the duration of the abusive practices concerned;
• immediately order a cessation of such abusive practices;
• determine the terms and measures for the removal of adverse effects of such practices;
• determine other appropriate measures to ensure competition among undertakings in the relevant market and deadlines for their implementation.

Abuse of dominant position is considered to be a severe violation of the Competition Act. For such violation, the undertaking (legal or natural person) will be fined with a maximum fine of 10% of the value of its total annual turnover in the financial year preceding the year when the infringement was committed. The responsible legal person of the undertaking will also be fined between K50,000 and K200,000.

To what extent are parties to an M&A transaction subject to prior notification requirements?

If the parties to an M&A transaction estimate that their intended transaction raises obligation to notify the CCA, they will have to notify it and withhold from any further action either until they have obtained clearance from the CCA or the prescribed time period within which the CCA is obliged to render its decision has elapsed.

The Competition Act defines a concentration of undertakings as:

• merger association of undertakings;
• acquiring control or prevailing influence over another undertaking, that is, of more undertakings or a part of an undertaking by: acquisition of the majority of shares or share capital; or obtaining the majority of voting rights; or in any other way in compliance with the provisions of the Company Act and other regulations.

Pursuant to the Competition Act, the parties to a concentration must notify any proposed concentration of undertakings to the CCA, if prescribed conditions have been met. These conditions are:

• the total turnover of all parties to the concentration, realized by the sale of goods and/or services in the global market, amounts to at least K1 billion in the financial year preceding the concentration; and
• the total turnover of each of at least two parties to the concentration realized by the sale of goods and/or services in the domestic market amounts to at least K100 million in the financial year preceding the concentration.

The total turnover is calculated taking into account the turnover of all the parties to the concentration and their associated companies acquiring the control or prevailing influence and as a difference of the turnover that they realize by selling goods and/or services among themselves.

Notification of intent to create a concentration must be submitted to the CCA for assessment without delay, and at the latest within eight days after the publication of the public bid or conclusion of the contract through which the control or prevailing influence of an undertaking is acquired, whichever occurs first.

The notification of the proposed concentration prohibits the implementation of concentration for all the parties to the concentration, as long as the CCA has taken its final decision authorizing it, or until the expiry of the prescribed period within which the CCA has to render its decision (if the CCA fails to render its decision within the prescribed period, the concentration is not prohibited). The prescribed period for rendering the CCA's decision is 30 days after the receipt of the complete notification of concentration, or, where it is necessary to carry out additional expertise or analyses, the CCA may decide to extend this time limit for three to four months.

Author biographies

Tomislav Tus Zuric i Partneri Tomislav Tus is a partner in Zuric i Partneri law firm. After graduating from the University of Zagreb, Faculty of Law he was admitted to the Croatian Bar in 1993, at a time when Zuric i Partneri was engaged in the pioneer era of privatization in the Republic of Croatia. Tomislav Tus has advised major international investors in their entry into the Croatian market either through greenfield projects or M&A. Martina Prpic Zuric i Partneri Martina Prpic is an attorney in Zuric i Partneri law firm, one of the leading law firms in Croatia. She graduated from the University of Zagreb, Faculty of Law summa cum laude in 2000, graduated with distinction LLM in international business law from Central European University in 2001, and completed a course on US law, organized by the Law Faculties of Columbia University in New York, the Leiden University, and the University of Amsterdam, in 2002. She has been a member of the Croatian Bar since 2002. She specializes in business and arbitration law.