Category: Croatia

Krehic & Partners in cooperation with Deloitte Legal has helped OMV-Indoil form a strategic partnership with AVK International through the sale of shares. Vukmir & Associates reportedly advised AVK International on the deal.

OMV-Indoil is a Zagreb-based producer of ball and butterfly valves used in the oil and gas, power generation, processing, marine, and water treatment industries. The company, which was founded in 1990 by Tomislav Matkovic , currently runs manufacturing facilities in Zagreb, in Croatia, and in Capljina, in Bosnia and Herzegovina.

AVK International is a producer of valves, hydrants, and accessories for water, wastewater, gas, and fire applications. The company was founded in 1941 in Denmark, and currently employs over 4,400 people globally.

According to Krehic & Partners, the new partnership “will strengthen OMV-Indoil’s brand and position and will enable the company to benefit from the AVK Group’s global setup, strengthen the value proposition, and ensure future growth.” According to the firm, Matkovic will continue to be involved in the business as a key stakeholder in the development of the company.

The Krehic & Partners | Deloitte Legal team included Managing Partner Tarja Krehic, Partner Matea Gospic Plazina and Associate Jelena Kraljevic.

Editor’s note: After this article was published, Vukmir & Associates informed CEE Legal Matters that it had advised AVK International on the deal. The firm’s team included Partners Sanja Tkalec Kovac and Tomislav Pedisic.

Marohnic, Tomek and Gjoic has advised both Day One Capital and Orqa Holding Limited on the former’s EUR 1.3 million investment in the latter.

Day One Capital is a Hungarian venture capital fund with a capitalization of EUR 34 million that invests in seed- and growth-stage ventures with established growth potential. Orqa is a start-up focused on developing optical and management solutions for drones and autonomous vehicles.

According to MTG, Orqa will use the investment to expand its engineering team, and as working capital in its manufacturing process, among other things.

MTG’s team consisted of Partners Josip Marohnic and Tonka Gjoic and Senior Associate Ivona Zagajski.

Under the Croatian law, a foundation is a non-profit legal entity without any members, which includes assets permanently intended to serve a generally useful or charitable purpose on its own or through income it generates.

Foundations are distinguished by the areas of activity. In Croatia, there are scholarship, research, social, scientific, developmental, cultural, religious, and political foundations. Croatia does not have a long-lasting tradition of founding corporate foundations, so the establishment of such foundations began only a little more than ten years ago, when certain funds and the power of corporations was accumulated.

Foundations are an important factor in profiling of the civil society since they contribute to the global level of development. Just like trusts, the details of which we cover below, foundations have existed in various societies and cultures since ancient times until today, and they are legally regulated in Croatia.

The purpose of foundations is to help individuals and groups with specific needs, and they represent a way in which wealthier individuals, organizations, companies etc., may contribute to society and its needs (for example, preserving traditions and culture), and often encourage innovations and progress. A part of activities, which were in the domain of the government before, is being taken over by foundations, identifying social problems/needs and connecting them with the available funding in such a way, that they can serve as a supplement to the government’s measures in joint improvement of the common good, but also a way in which prominent individuals or companies influence the social processes, offering solutions for social problems. That way, foundations create and change the market so they can react better on the market. Globally, it is common that founders of companies transfer ownership of that company to a foundation, with the goal of preserving the business, as well as protect the company from poor management, which could lead the company into difficulties, especially by the heirs who are not interested in business development. In that case, a part of the dividend that the company generates is used to pay the heirs, and a part is used for various charitable, cultural, educational, and similar purposes.

In Croatia today, there are just over 200 active foundations, and in the European Union, there are about 110,000 registered foundations (most of them in Hungary, Denmark, Germany, Spain, and Sweden). An interesting fact to point out is that Liechtenstein has almost the same number of foundations as it has people, given that foundations legislation in Liechtenstein in rather flexible and foundations may be similar in purpose as a trust (on which more details below). Restrictive legislation, uninspiring environment for the development of foundations, low level of social capital and low level of citizens’ trust in such a form of aid, may all be highlighted as reasons for the insufficient number of foundations in Croatia. If we focus on corporate foundations, the situation is even worse, since a small number of companies found their own foundations and thus separate their own funds for the support of a generally useful or charitable purpose. One of the brighter examples of corporate foundations is a large local company performing business activities in the areas of real estate, insurance etc. and promotes and encourages innovations and quality in science and arts, encourages talented students and young scientists, protects and promotes Croatian traditions and strengthens ecological consciousness and assists the individuals in need in the Croatian society. In addition to the above-mentioned reasons for the relatively small number of foundations in Croatia, tax regulations are certainly one of the important factors and they have the potential to encourage or discourage the founding of foundations. Although foundations in Croatia act as non-profit organizations and they do not pay corporate tax, if they use their means and activities to support a generally useful or charitable purpose, the question of taxation i.e., tax incentives for the increase of donations to foundations, still arises. Namely, in Croatia, just like in any other country, one of the key questions raised by advocates of foundations, is certainly taxation of individuals and companies with income tax, corporate tax, or similar types of taxes if the assets/income they generate are not retained for their own benefit and expenditure, but they finance the company as a whole. Croatia enables certain tax incentives in that regard (e.g. according to the provisions of the Income Tax Act, donations in kind or financial donations are considered as tax deductible expenses if done domestically for cultural, scientific, educational, healthcare, humanitarian, sports, religious, ecological and other generally useful purposes and if their total amount does not exceed 2% of the total income of the business entity in the last year), however, their diversity, convenience and quality, as well as the entire (not just tax) regulatory framework regarding foundations, are always debatable.

There are different names for foundations around the world, for example, foundation in the USA, stichting in the Netherlands, stiftung in Germany, fondazione in Italy and in Great Britain they are also called trusts. Just as there are different names for foundations, so are their purposes fundamentally different. We explain the mentioned differences, what a trust is and why trusts are coming sooner or later, below.

Trusts are not a new legal institute. On the contrary, trusts were first used back in the Roman times, and in common law systems trusts are well known, well established and commonly used legal instruments for managing assets. However, even civil law systems, a part of which is the Croatian legal system, are moving towards the regulation of trusts, since there is a need for more flexible regulation of family wealth management and preservation through generations, for which inheritance law does not provide an adequate framework. For example, as of October 2020, the Slovakian Ministry of Justice intends to draft a regulation on the establishment of trusts. Similar regulations were already passed in the Czech Republic some years ago, so we hope that the Croatian legislator would also recognize the benefits of such legal regime, in addition to foundations.

But know, we will briefly describe what trusts are. Trust assets are held by the trustee in his own name for the beneficiary of the trust. The assets put in the trust by a founder, who is traditionally not publicly known, are transferred directly to the beneficiary when certain conditions have been met. The trust acts as a protective holding instrument for asset transfer at a future date, often with the goal of preserving family assets. There are many other public and private functions for the trusts, such as for example, charitable giving, divorce settlements, funding of surviving spouse and, perhaps most importantly for these times and the post-pandemic world, for simple asset protection. Also, trusts are sometimes used as investment vehicles, whereby the assets in the trust generate income surpluses and as investment vehicles, whereby the assets in the trust generate income surpluses.

Of course, it is crucial to appoint a capable and professional trustee who will manage the assets effectively.

There are three important persons in trusts – the founder, the person who puts their assets to the trust, the trustee, which is the person who holds and manages the trust, and the beneficiary, in whose favor the assets are held and managed. There can of course be other such as the settlor, the protector etc.

Some important points to pay attention to when establishing trusts are:

1. A trust must have a contract founding the trust and regulating the functioning of the trust – the trust is usually established only upon the conclusion of this contract and that contract mostly regulates who can appoint the trustee and how this is done, as well as who determines the beneficiary or how to the determine the beneficiary, when the beneficiary receives the assets, and to which amount etc.
2. Registration (i.e., creation) of the trust – it’s key to know that the assets are not held by a natural or legal person, but by the trustee (or in his name) for the trust itself.

Additionally, we note that Croatia is not a signatory state to the Hague Convention on the Law Applicable to Trusts and on their Recognition (e.g., the Netherlands and Italy are, and just like Croatia, they too are not common law systems). The common problem in the procedure of recognizing trusts, which appears in civil law systems, is therefore the conflict between the principle of legal certainty and protection of third parties on the one hand, and simultaneous protection of the rights of the beneficiaries on the other hand, however, this issue may be resolved with adequate regulation, the adoption of which we support. Apart from adequate regulation, it would be crucial to contact an experienced attorney-at-law and an experienced tax advisor, who have good knowledge of the specific legal and tax regulations. Namely, thanks to their knowledge and experience, advisors play a significant role in deciding on trust establishment and on its location. For example, the key questions posed would be the way in which the assets put in the trust are taxed, tax treatment of the growth of value of the assets, the level of legal protection of the trust assets etc. Without the precise regulation of the legal basis, the rights and obligations between the founder and the trustee, legally meaningful drafts of documentation and clear tax provisions, there is no efficient protection of assets. Considering that many countries have a developed legal institute of trust with clear legal and tax provisions, trust founders often consider the advantages and disadvantages of every location and legal framework before making the decision on founding the trust. Croatia should certainly pay attention to this topic and it should, through development of clear provisions and regulatory framework, try to be one of the interesting locations for founding trusts in Europe and thus for attracting foreign and retaining local capital in the region.

By Matea Gospic Plazina, Partner, Krehic & Partners in cooperation with Deloitte Legal

How the Covid-19 Pandemic and Technological Innovations affect the insurance and M&A Market. As we are all aware, the last year was challenging for almost all industries, including the insurance companies, which were inevitably affected by both COVID-19 pandemic and technological innovations, and now must face the forthcoming risks and challenges.

THE IMPACT ON THE INSURANCE MARKET

Digitalization and Cyber Security. The trend on the insurance market, triggered by the COVID-19 pandemic and technological innovations, is definitely digitalization, which has proven to be a key strategic step, but also an increased need for security from cyber risks and/or termination/delay in doing business. Namely, the need for the acceleration of the digitalization and the larger use of virtual operations has reached insurance companies, which need to implement the transformation plans in the following year, on which implementation they would spend three to five years under the normal circumstances. Having that in mind, the need for innovations and digitalization was definitely necessary for the insurance companies, however great reliance on technology caused an increased exposure to cyber-attacks and interference in the ordinary course of business. Therefore, cyber security will certainly be on the list of priorities of the insurance companies in the following period and increased investments are to be expected in that segment. Additionally, the imposed digitalization, as a consequence of the COVID-19 pandemic, affected, on the one hand, the employees, for which undisturbed work from home environment needed to be ensured, and on the other hand corporate governance, which had to be organized through online meetings of the corporate bodies, using digital signatures etc. in order to continue with regular business activities. 

In technology investments, transitioning to the cloud, data security improvements and data processing analytics can be highlighted as priorities, all with the goal of growth and improvement in the further course of business. Namely, cyber security and data protection are in focus, not only due to increased regulatory pressure, but also due to the increased volume of data from various sources, which may be a useful source of information to the insurance companies, and which information could not be analyzed until now due to technological limitations or unprofitability. In that way, the processes may be accelerated and user experience improved.

The risk of long distant contracts and FOS. With regards to the clients of the insurance companies, they were enabled to conclude insurance contracts at a distance electronically, but here it is worth mentioning that the contracts concluded at distance may be unilaterally terminated more simply then regularly, i.e. the contract may be terminated by the policyholder without stating the reason for termination, mostly within 14 days from the conclusion (with certain exceptions). The consequence of unilateral termination is the need to return the received premium, which may aggravate planning and contribute to the insecurity of the insurance companies business. Aside from entering into contracts at distance, another risk for the business of the local insurers is the so-called Freedom of Services (FOS), i.e. direct provision of services by the insurers from other EU member states, which carry on business on the territory of the Republic of Croatia without organizational forms. Providing of such insurance services, opens additional questions regarding conditions, applicable law and the protection of the rights of policyholders and insured persons. Such questions inevitably arise, even though we strive towards harmonization and the insurance company intending to provide services in another EU member state on the basis of FOS, has the obligation to notify the competent supervisory authority of that member state of its intention, along with the description of the nature of the risk and obligations it offers to cover.

Slowdown, however with new opportunities.  The result of the breakout of the COVID-19 pandemic is the general economic slowdown, which certainly affected the insurance market. This is because the economic slowdown leads to higher levels of unemployment, lower income and thus the decrease of demand, which in turn may result in the decrease of premiums in life and non-life insurance segments. However, the change of habits and opinions of the clients simultaneously creates new opportunities for the insurance companies, since the clients are becoming more aware of the need to protect their health and be insured from risks, which may be a potential for growth of the related products of the insurance companies. This may particularly be a consequence in the life insurance sector, where growth is possible, and which is traditionally less represented in the countries of Central Europe, compared to the countries of Western Europe. Additionally,  as the stability of the services and customer satisfaction are crucial in these turbulent and unpredictable times, insurance companies adopted solutions to provide support to the users of their services by allowing flexible payments or prolongation of policies.

Higher non-pecuniary damages.  In the first half of the previous year, the insurance companies in Croatia also had to deal with the change of Orientation criteria and amounts for determining the amount of fair financial compensation for non-pecuniary damages by the Supreme Court of the Republic of Croatia. This change increased the accepted amounts for 50%, which does not benefit the insurance companies and creates the need for new reservations. Although the increase of the amount of compensation for non-pecuniary damages undoubtedly benefits the injured parties, the question who will ultimately bear the cost of payment of increased amounts of compensation remains open. This is due to the fact that the increase of the compensation will cause significant costs for the insurers, who are expected to increase premiums in the future, in order to annul the negative consequences of payment of increased amounts of compensation for non-pecuniary damages as much as possible.

THE IMPACT ON M&A

In relation to the M&A activities, which are still intense in the region, there is a relatively large number of the insurance companies which have not changed ownership in the recent years, although for some time now, future transactions are expected in order to stimulate the consolidation of the market and as such influence the fragmented insurance sector in the region. By the number of the transactions, the Vienna Insurance Group is the most active buyer in the region of Central Europe, followed by, in relation to the number of transactions, Canadian Fairfax Financial Holdings, Generali, Uniqa Insurance Group and Euroins Insurance Group.

How has the COVID-19 pandemic impacted M&A activity?  Mergers and acquisitions proceedings of the insurance companies have been very complex even before, especially due to the regulatory requirements, however, the COVID-19 pandemic certainly had an impact on:

• the scope of due diligence procedures, which needs to be adjusted so that it includes additional segments, considering the impact of the COVID-19 pandemic:

1. from state grants and subsidies,
2. to the impact of the COVID-19 pandemic on contractual relations and whether individual contracts contain adequate provisions on force majeure and/or rebus sic stantibus clause, i.e. changed circumstances clause,
3. the effect on the financial agreements and consequences and conditions of receiving a COVID-19 loan or other form of borrowing,
4. employees and their rights and obligations,
5. corporate governance and whether there is a framework for on-line functioning,
6. liquidity and the effect on the initiation of insolvency and/or pre-insolvency proceedings,
7. GDPR and the accumulation of more data on employees regarding their health and travels,
8. the effect on litigations and their prolongation,
9. insurance policies covering the risks caused by the COVID-19 pandemic etc.

• as well as on the transaction documentation, threw, for example:

1. the inclusion of additional representations and warranties, which would confirm the status of the risks discovered in the process of the due diligence, at the closing of the transaction,
2. the widening of the scope and more precise defining of the MAC clause and the conditions for its triggering, which essentially corresponds to the concept of changed circumstances in continental legal systems, to which the Croatian legal system belongs to,
3. the mechanisms for the change of the purchase price,
4. the conditions for termination of the sale and purchase agreement and its consequences,
5. taking the separate insurance policies for the entire transaction (R&W); and

• the virtual process of negotiations which has largely replaced the physical negotiations.

Challenges of virtual negotiations. The virtual environment for negotiations, but also organizing virtual data rooms in moments when large gatherings are prohibited, as well as conducting the due diligence process itself in the context of organization and work from home, may be challenging and it usually results in the prolongation of the M&A process in all segments. More time is also needed for the fulfillment of standard formal preconditions for the closing of the transaction, due to the limitations on the side of transaction participants and given circumstances.

Caution required regarding the M&A activities. When deciding on the entry into the future M&A’s, it is certainly worth considering the increased need for the control of expenses, which pushes the insurance companies to resort to deadline prolongation or postponing investments planned before the COVID-19 pandemic, all in order to preserve the funds for high priority projects of adjustments to the current situation. Additionally, we note that the regulatory changes that might affect the M&A’s in the insurance market and the decision making, are the introduction of IFRS17 accounting standards and Solvency II regime, which jointly contribute to the better understanding of the financial standing and advantages and disadvantages in the sector.

Taking into consideration the complexity of the M&A process, it is important to hire expert advisors, who will carefully determine and clarify, from a legal, tax and financial standpoint, all key aspects which might result from such transactions, either with regards to the position of the buyer or the seller, and help with this complex process and closing of the transaction.

By Matea Gospic Plazina, Partner, Krehic & Partners in cooperation with Deloitte Legal

The expression “never a dull moment” could have been tailor-made to describe the ethics and compliance function and how it has evolved over the past decade or so. The well-publicized scandals that started to take place on the market (concerning, e.g., anti-money laundering or privacy incompliances) led the policy makers to pass sweeping legislation that called for increased regulation, greater transparency, and more rigorous scrutiny of corporations.

Suddenly, the ethics and compliance function found itself front and center, its responsibilities greatly expanded, and its activities integral to the strategic core of organizations struggling to keep public trust.

What has become abundantly clear is that when it comes to creating ethics and compliance programs, organizations today cannot afford to settle. “Good enough” is simply not good enough. Rather, organizations should continuously strive for “great.”

What separates a “good” ethics and compliance program from a “great” one? How does an organization’s investment in compliance and reputation risk mitigation systems and processes measure up against leading practices? While there are a number of factors that separate the “good” from the “great,” in our experience, five factors are key differentiators in the highest-performing ethics and compliance programs.

Tone at the top—The starting point for any world-class ethics and compliance program is the board and senior management, and the sense of responsibility they share to protect the shareholders’ reputational and financial assets. The board and senior management should do more than pay “lip service” to ethics and compliance. They need to empower and properly resource the individuals who have day-to-day responsibilities to mitigate risks and build organizational trust.

Corporate culture—A culture of integrity is central to any effective ethics and compliance program. Initiatives that do not clearly contribute to a culture of ethical and compliant behavior may be viewed as perfunctory functions instilling controls that are impediments to driving the “value change” of the enterprise.

Risk assessments—Ethics and compliance risk assessments are not just about process—they are also about understanding the risks that an organization faces. The risk assessment focuses the board and senior management on those risks that are most significant within the organization, and provides the basis for determining the actions necessary to avoid, mitigate, or remediate those risks.

The Chief Compliance Officer (CCO)—The CCO has day-to-day responsibility for overseeing the management of compliance and reputational risks, and is the agent for the board’s fiduciary obligations in this regard. A skilled CCO can create a competitive edge for their organization.

Testing and monitoring—A robust testing and monitoring program can help ensure that the control environment is effective. The process begins with implementing appropriate controls, which should be tested and ultimately monitored and audited on a regular basis.

Each organization can determine how far it needs to evolve—whether it wishes, in effect, to have in place a reliable compliance vehicle or a top-fuel racing model. As an organization moves along the continuum, much more becomes possible.

In addition to the above-mentioned factors, innovative technology provides an opportunity for solving regulatory challenges. A modernized compliance program that combines new technologies and new approaches, keeping both in alignment with enterprise goals, helps deliver richer and faster insights, drives efficiencies in compliance processes through automation, reduces costs, and offers foresight into emerging risk issues.

Role of in-house and externalized lawyers

The primary, formidable risks handled by in-house departments today involve legal compliance and reputation and seldom originate in the legal function. General Counsels worry that most risks are from activities and behaviors across businesses without General Counsels’ control and without management visibility. They are concerned that even their upright employees may unconsciously breach a local regulation or set up some anti-competitive process that increases exposure to the business.

New skills, roles and responsibilities are required as legal and compliance departments move from reactive management of risk to risk-avoidance. People skilled in preventative and precautionary services are needed to fill these roles.

When it comes to outsourcing, purchasing patterns for legal services in area of compliance are changing. In-house teams are looking for tech perceptive, integrated service providers who offer more than traditional legal advice.

Conclusion

It is clear that compliance faces challenging time ahead with increasing internal and external scrutiny and an expectation that the function increasingly demonstrates the value they are providing. Compliance teams, which start to take action now around the key areas identified, will be better prepared to respond to these challenges and build on the capabilities and value their functions provides to the business in the future. However, Moving along the compliance evolution continuum and unlocking the potential to create material and strategic value is a process, and Rome was not built in a day.

By Tarja Krehic, Partner, and Ivan Zornada, Partner, Krehic & Partners in cooperation with Deloitte Legal

Former Zuric i Partneri lawyer Luka Vukelic has opened the Vukelic Law Office in Zagreb.

Vukelic spent a decade with Zuric i Partneri after joining the firm in 2011 as a trainee. He also gained experience with Stephenson Harwood in London as a secondee. He specializes in corporate and commercial, energy, labor, and real estate law as well as civil and commercial litigation.

He is a graduate of the Faculty of Law of the University of Split. 

Divjak, Topic, Bahtijarevic & Krka has advised Hungarian financial enterprise Bohemian Financing and Topaz Zagreb on the mandatory public offer of shares of Croatian tourist company Hoteli Jadran.

According to DTP, “Bohemian acted in concert with the direct shareholder of Hoteli Jadran, Croatian company Topaz Zagreb.” In addition, the firm reported, “the said public offer was unique in that it was the very first time that a fair price for the shares within the mandatory public offer procedure was valued at zero HRK (due to the fact that Hoteli Jadran operated with negative equity).”

Furthermore, DTB reported that the mandatory public offer was triggered by an indirect change in shareholding in Hoteli Jadran, caused by the change of shareholding in its owner, Topaz.

DTB’s team included Senior Partner Damir Topic, Lawyer Iva Crnogorac and Trainee Iva Vukoja.

D’Ornano Partners has advised the Groupama Group on its acquisition of the entire share capital of OTP Osiguranje, an insurance company owned by the OTP Bank in Croatia. Ivekovic Attorneys at Law reportedly acted as local advisors to Groupama. Schoenherr’s Hungarian office reportedly advised the seller on the deal. 

Financial details of the transaction were not disclosed. 

According to D’Ornano Partners, the transaction, which remains contingent on regulatory approval, is expected to close in the first half of 2021.

Earlier in 2020 D’Ornano Partners helped Groupama acquire Express Life Bulgaria (as reported by CEE Legal Matters on March 17, 2020). 

D’Ornano Partners’ team included Founding Partner Francois D’Ornano and Senior Associate Akos Szenczy.                          

The Ivekovic Attorneys at Law team consisted of Managing Partner Branimir Ivekovic and Associate Paula Kis.

Editor’s note: After this article was published, Schoenherr informed CEE Legal Matters that it had advised the OTP Bank on the deal. The firm’s team included Partner Gergely Szaloki and Attorneys-at-Law Ivan Einwalter, Vice Mandaric, and Ozren Kobsa.

Divjak Topic Bahtijarevic & Krka and Eisenberger & Herzog have advised the Austrian energy company Kelag on its acquisition of the Orjak wind farm in Croatia from BayWa. Tokic Ivic Sverak reportedly advised the seller on the deal.

Financial details of the transaction were not disclosed.

BayWa is a Munich-based company that operates in 14 countries in the agriculture, building materials, and energy sectors.

The 10.25 MW Orjak wind farm — now the second owned by Kelag in Croatia — is located 25 kilometers south of Split and has been operational since 2018. 

DTB’s team included Senior Partner Mario Krka and Partner Marina Kovac Krka, among others.

Eisenberger & Herzog’s team in Vienna consisted of Partner Marco Steiner, Attorney-at-Law Christoph Lejsek, and Associate Niklas Kerschbaumer-Gugu.

Editor’s note: After this article was published, Topic Ivic Sverak confirmed that it had advised the sellers — ECOwind and BayWa — on the deal. The firm’s team included Partners Iva Tokic Culjak and Ivana Sverak.

Now the necessary supervisory and legislative prerequisites have been fulfilled, the European Central Bank Governing Council has adopted a decision to establish close cooperation with the Croatian National Bank. As a result, Croatia has joined the Single Supervisory Mechanism and the Single Resolution Mechanism, whose members include all the Euro-area states that already enjoy close cooperation with the European Central Bank. This means, among other things, that from 1 October 2020, the European Central Bank will directly supervise many important Republic of Croatia institutions.

Prior to commencing this direct supervision, the European Central Bank assessed all the significant credit institutions in Croatia and, based on prescribed criteria, decided to supervise the following directly: (i) Zagrebačka banka d.d., (ii) Privredna banka Zagreb d.d., (iii) Erste & Steiermarkische Bank d.d., (iv) PBZ stambena stedionica d.d., (v) Raiffeisenbank Austria d.d., (vi) Raiffeisen stambena stedionica d.d., (vii) Sberbank d.d., and (viii) Addiko Bank d.d. Less significant institutions will continue to be supervised by the Croatian National Bank; however, the European Central Bank may decide to supervise any further institution directly to ensure high supervisory standards are consistently applied.

Powers vested in the European Central Bank

What does direct supervision entail and precisely which tasks are conferred on the European Central Bank? The European Central Bank is authorized to review directly supervised institutions’ own funds requirements, securitisation, large exposure limits, liquidity, and leverage, as well as to report and disclose information to the public on those matters. The European Central Bank is also authorized to ensure that directly supervised entities comply with EU law and carry out supervisory reviews and stress tests, and publish the findings when necessary. On the basis of the supervisory reviews, the European Central Bank is authorized to impose on credit institutions specific additional own funds requirements, specific publication requirements, specific liquidity requirements and other measures. To summarize, this means that from 1 October 2020, and for the exclusive purpose of carrying out the tasks, the European Central Bank will be the competent authority for the directly supervised credit institutions in Croatia, and have all the powers and obligations set out in the Council Regulation (EU) No 1024/2013 of 15 October 2013, including all the powers and obligations the Croatian National Bank has under the relevant EU law.

Common Procedures

It is important to emphasise that, apart from the above mentioned powers and obligations, the European Central Bank is now also in charge of the procedures for granting and withdrawing authorisation for a business to act as a credit institution in Croatia and deciding on the acquisition and disposal of qualifying holdings in Croatian credit institutions.

For a licensing procedure, applications must still be submitted to the Croatian National Bank; however, if the application complies with the statutory requirements, the Croatian National Bank will forward it to the European Central Bank with a proposed decision on which the European Central Bank has the final say. If, however, the application does not comply with the statutory requirements, the Croatian National Bank must dismiss it. In addition to granting authorisation, under certain conditions stipulated by EU law, the European Central Bank is authorized to withdraw existing authorizations, based either on the Croatian National Bank’s proposal or its own initiative.

A similar procedure is envisaged for acquiring and disposing of qualifying holdings in credit institutions; however, the Croatian National Bank is not authorised to dismiss the application in this procedure, even if it finds it unsatisfactory. That is, the Croatian National Bank is always required to forward the application to the European Central Bank along with its proposed decision so that the European Central Bank can take the final decision.

In addition to the concurrent inclusion of the Croatian Kuna in the Exchange Rate Mechanism II, joining the Single Supervisory Mechanism and Single Resolution Mechanism has brought Croatia one step closer to entering the Eurozone.

By Jelena Nushol Fijacko, Partner and Relja Rajkovic, Attorney at Law, Bardek, Lisac, Musec, Skoko in cooperation with CMS