Category: Croatia

Ante Sucur has been the Head of Legal Affairs and Company Secretary at Mercury Processing Services International Ltd (formerly Intesa Sanpaolo Card Ltd) since 2009. Before joining Mercury, he worked for five and a half years at Privredna Banka Zagreb d.d. (which is also part of the Intesa Sanpaolo Group).

CEELM:  As Head of Legal you obviously have a lot of plates spinning in the air at any point. What’s at the top of the priorities’ list in terms of your legal team??

ANTE: Internally speaking, to set the background, with the change in ownership of my company (we were purchased by a company ultimately owned by Advent and Bain Capital funds), we have become affiliated with the Nets Group, a much bigger European family in terms of payment processing. This also means that we no longer work purely as an inter-group processor but are now serving the open market as well. 

What we are seeing now – and this takes into account the fact that processing was always a heavily regulated industry – is that in the past few years we’ve experienced a flood of new regulations, mostly coming from the EU level. The fact is that compliance with all of them is indeed expensive, but non-compliance is even more so. Furthermore, we’re seeing more and more consolidation globally in our sector and we can expect even more complexities in terms of our compliance.

In terms of what we need to make sure that we have at the very top of our agenda, I tend to agree with Michael O’Neill, Senior Vice President and General Counsel at Lenovo, who argued that at the moment the top legal priorities for technology companies are litigation and intellectual property, but who also emphasized that company supply chain relationships need to constant supervision. To those I would also add labor law issues, since these can escalate quickly. But the biggest and constantly moving part is of course our revenue-generating activities, and, in general, contractual relationships where breaches of law can happen rather easily.

CEELM: How then do you manage these contractual relationships?

ANTE: Standardization definitely helps a great deal. The most important thing is to ensure an adequate level of involvement of lawyers in these activities. Managers often raise issues that they perceive as purely commercial and are all too often unaware that they actually involve a great deal of legal aspects. Naturally, if something goes wrong later, down the line, questions over control are raised, but if everything runs smoothly that’s rarely recognized. 

But that is the duty of the lawyers and why they need to be involved – to ensure there are no legal surprises. And that’s where the value of legal control of those selected complex relationships lies: in detecting legal risks, mitigating them if possible, and raising the awareness of management if mitigation is not possible for some reason. 

CEELM: How specifically are lawyers involved in the process in your organization?

ANTE: The standard process of contract preparation ideally starts with involving lawyers in the commercial preparation of the deal, which they can provide valuable advice on how properly to structure. The activity then continues in contract preparation itself, by detecting issues and implementing mitigating solutions when needed. There are situations where you simply can’t do that, such as when the other party doesn’t want to accept those solutions. You then need to assess the risks, and allow managers to decide whether those risks are acceptable or whether, perhaps, they represent a deal-breaker. However, this is not the case only with legal risks. There are a number of regulatory aspects that come into play and various functions need to weigh in. For example, there are tax or security considerations that need to happen, and we have dedicated teams to focus on that. 

The whole contract process is organized such that all aspects are represented in the contract preparation. If issues come up, depending on severity, the relevant function raises the issue with the board, which then makes the ultimate decision. Obviously, I speak here only about complex contracts; there are many simple contracts where we don’t need such thorough input.

CEELM: And how long does it take for all of the different functions to weigh in?

ANTE: It depends on the complexity of the deal. It can get particularly lengthy in contracts where we are service providers, since those contracts can also be subject to review by the regulators. In such instances, it can take months. Of course, procurement contracts are prepared much faster. When it comes to labor contracts, we are applying templates which our HR team simply fills in, and they only reach out to us if they need to make changes to those templates. 

The amount of standardization we apply is also a reflection of our negotiation position. On employment contracts we rarely need to make any changes – they tend to be more of a take-it-or-leave-it kind of thing. However, with our clients or big suppliers we naturally need to be more flexible. 

CEELM: How do you believe the GCs themselves need to develop to face the increasing complexity you mentioned?

ANTE: I believe that GCs, just like navigators that support the captains of ships, should help navigate business through that increased regulatory complexity. I think there are two general ways in which a GC needs to develop. The first relates to things that we all know about and try to implement: expand new capabilities, participate in trainings, purchase new software, etc. The problem is that all of these ultimately represent so-called horizontal personal development aspects – they will help you improve your capacity and help you become a better expert in your field. But I don’t think this type of horizontal development is enough. I believe this explains the need for the second way – vertical development. I believe this increased complexity requires more change in terms of adopting a new approach. 

To better explain, I think it comes down to lawyers’ psychology. We are very meticulous, organized, and sometimes overly judgmental, and we’ve trained society and our peers to not expect anything more from us than being a good expert in our field. But I believe more should be expected of us if we are to take leadership positions within our organizations. 

I think we need to work on shifting our attitudes and learn to put ourselves out there. I look at some historical figures and find it funny to see that few people realize that people like Mahatma Gandhi or Nelson Mandela were actually lawyers – and that speaks, in part, to how people perceive us. And when I say we need to learn to put ourselves out there I mean that we need to function as an integrated part of the business, and we need to start looking more towards other functions of the organization. Due to their specific profession and their role within an organization, lawyers can easily see the bigger picture, and it is a shame to waste this potential.

And it won’t be easy. Across the industry, I see business managers reluctant to involve lawyers in daily matters. There’s a perception that what they do does not involve legal in any way. And that’s the uphill battle that modern GCs need to face. We need to raise awareness that legal aspects are involved in everything and we need to proactively get out there and be present across the business to be able to shape the way things are run before situations land on our desks as problems that were “escalated to legal.”

CEELM: But how do you go about ignoring years of being a “traditional” GC and change the way you are?

ANTE: You don’t change the way you are – you simply build on top of it. The legal logic of our job stays the same, the advice we give has the same thinking behind it. You simply improve the “relationship” aspect of your work, paying more attention to interactions with your colleagues. Start showing them the multitude of ways you can help them, many of which they had no idea about. Educate them if necessary, to foster compliance culture. Show you care about other functions and their priorities. However, expect the same from them, as this approach is a two-way street. The legal opinions you give are the same, at the end of the day, but learn to incorporate new perspectives by exposing yourself to areas of the business you likely were not exposed to in the past. Once you do this you’ll find that you are happier with your job and that fewer and fewer matters get to you as problems because you were involved in those decisions from their roots.   

This Article was originally published in Issue 6.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In December 2018, the Croatian Parliament adopted amendments to the Renewables Act and the Government adopted two implementing regulations, which jointly apply as of January 1, 2019 (the “2019 Amendments”). In this article we briefly outline the 2019 Amendments and then discuss how they affect the current Croatian incentives system for renewable energy sources (RES) and new investments in RES.

Under the Renewables Act, applicable as of January 1, 2016, there are two types of incentives for renewables and cogeneration: (i) a premium tariff support scheme allocated through tenders, based on which eligible producers of electricity from RES may receive a premium tariff from the Croatian Energy Market Operator (HROTE) in addition to the selling price on the electricity market; and (ii) a guaranteed purchase price allocated through tenders for facilities up to 500 kW (prior to the 2019 Amendments, 30 kW), based on which eligible producers of electricity from RES have the right to a guaranteed purchase price from HROTE.

The incentive system was never put into practice – so far, the Government has not published a single tender that has resulted in a contract with HROTE for a premium tariff / guaranteed purchase price. The 2019 Amendments envisage that the first tender for premium tariff / guaranteed purchase price will be published within the first half of 2019.

Quotas for RES are prescribed under the (now obsolete) tariff system, according to which eligible producers signed PPAs with HROTE, to which the tariff system still applies. As quotas for the most wanted technologies (wind and solar) were met years ago and new quotas have not been prescribed, future tenders can refer only to those technologies where the quotas have not yet been met (i.e., hydro, biomass, geothermal, biogas).

In relation to the existing generation facilities that have contracts with HROTE based on the tariff system and the (future) facilities up to 500 kW that are eligible for the guaranteed purchase price, as of January 1, 2019 electricity suppliers are obliged to purchase 70% of the electricity delivered from HROTE for a fixed price. HROTE sells the remaining 30% on the electricity market in a transparent manner (prior to the 2019 Amendments, suppliers were obligated to purchase all net delivered energy from HROTE). The incentives for RES are partly financed through the fixed price that suppliers are obligated to pay to HROTE. Suppliers are unhappy because this obligation has been causing them financial losses for years, with some even considering leaving the Croatian market as a result.

Incentives for RES are also financed through the incentive fee paid by electricity consumers. In September 2017 the Government increased the incentive fee from 0.035 to 0.105 HRK/kWh to finance incentives for new generating facilities within the existing quotas. Connecting new facilities and adopting new quotas for renewables will require larger resources for financing RES, most likely resulting in increase of the electricity price yet further.

In recent years, many RES facilities have been connected to the grid and financing the associated incentives is becoming too great a burden for the state budget and for domestic users who have to pay the incentive fee. Additionally, connecting new facilities to the grid requires significant investment in the distribution and transmission elements of the grid, as well as ancillary and balancing services. While the rest of the world is turning towards a market-oriented model for financing RES, Croatia is facing the problem of financing RES incentives, for which there is currently no solution. On the other hand, the lack of new quotas for RES is hindering further development of the RES sector and putting Croatia’s ability to meet the targets set by Directive (EU) 2018/2001 into doubt.

The potential of Croatian renewables, especially wind and solar energy, is high, and as a result projections for the development of RES until 2030 and 2050 are ambitious. Nevertheless, Croatia has a major problem in financing the incentives for producing electric energy from RES, primarily in relation to eligible producers that have already obtained requirements for incentives, because new quotas have not been set for years. Given this situation, Croatia must adopt a strategy of further developing RES based on new quotas and assess whether the incentive system should remain the basis for future development of RES or whether Croatia is ready for electric energy production from RES without incentives. 

By Marija Musec, Partner, and Mia Kanceljak, Attorney-at-Law, CMS Croatia

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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

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.

By Marko Kapetanovic, Attorney at Law in cooperation with Schoenherr, Gina Grancaric, Associate Schoenherr

On the eve of a widely-expected global economic downturn, the Croatian economy finally emerged from “junk” investment status, and rating agencies now rank it as “investment” tier. Formal confirmation of this new status is expected to come in the course of spring 2019 – when the first signs of a slowdown in the local economy are already signalled. The country’s GDP is growing shyly but persistently and after five years of membership in the EU there is a visible uplift in the trade balance with export of goods and services (predominantly with other EU-member countries) as the main driver.

Not everything is bright, of course. On the dark side, the importance of tourism to the country’s economy, at approximately 20% of GDP, is simply too high, making the economy too dependent on just one sector – a sector that is extremely vulnerable to the smallest uncertainty and global or regional turmoil. Also, at six years, Croatia took longer to recover from the 2008 financial crisis than any other country, and, with the lingering effects of the war in the 1990s, it continues to lag behind the economies of its neighbors in the CEE region.

The political situation provides an additional layer of complexity. Two years ago, for the first time in its short life, the country experienced the fall of the government … twice, in less than one year. Since then, a fragile coalition of the right-wing party (with everyone who was ready to join the bandwagon) is running the country, but without the power necessary to make the most important cuts and changes. Instead, necessary reform only happens when the water is so high that there is no other way to circumvent the problem (as in the case of the recent reform to the national pension scheme). Now, the state also has to somehow resolve the situation with two of the country’s largest shipyards, where the state budget is exposed to almost EUR 600 million in direct losses (a result of state guarantees for ships under construction), and potentially much more should the restructuring fail completely.

In this constellation, private business is, surprisingly, resilient, particularly in respect to anything related to tourism (i.e., M&A, investments, and construction). Infrastructure development is also active, particularly on the completion of objects designed to facilitate this sector, such as the completion of the highway from the north to the south of the Croatian cost, modernization of airports and railways, and so on. The next challenge will involve the sale of Croatia Airlines, the national airline, which is once again for sale, and the state is currently in the process of selecting advisers to work with. 

But infrastructure development is growing outside the tourism sector as well. Rising tensions between the East and the West have revived plans for an LNG terminal on the northern Adriatic coast; although there are plenty of supply channels for gas and oil in the region, the LNG terminal would represent a strategic backup in case all northers and southern streams are cut. Unsurprisingly, interest in and competition for the project is expected to be between US and Western Europe oil and gas companies. 

This year should also see the long-awaited settlement between the Croatian state and the Hungarian oil company MOL, which have a long history of antipathy as two main shareholders of INA, Croatia’s multi-national oil company. The antagonism, which escalated over the years to multiple arbitrations and constant clashes on all levels, is supposed to end with the buy-back by the state of INA’s shares and their subsequent sale to a new strategic partner. The size of the deal promises an interesting transaction, which should attract the interest of the biggest international players. 

Finally, 2019 should also reveal the destiny of what was once the largest private Croatian company: Agrokor. By virtue of the special law enacted for the purpose of Agorkor’s salvation, this regional retailing heavyweight is expected to be mutually controlled by two Russian banks and a US fund. The question is whether or not this “brotherhood” of the East and the West can work in the matter at hand; in other words, what comes first, politics or business? Nevertheless, Agrokor’s demise spurred some positive trends, including the rise of shareholder activism, increased sophistication in corporate governance, and a wide-spread awareness that private companies cannot, on the long run, be treated as simple cash-cows for their owners.

So, 2019 will, again, be an interesting year, and one in which a cold breeze of global recession might start blowing over the fragile recovery of the Croatian economy.

By Marija Musec, Partner, CMS Zagreb

This Article was originally published in Issue 6.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

After almost two years, the extraordinary administration proceedings over Agrokor and 77 of its Croatian group companies is entering its final stage.

On 1 March 2019, the Commercial Court in Zagreb followed the motion of extraordinary commissioner Fabris Perusko to announce 1 April 2019 as the so-called Implementation Commencement Date (the “ICD”). On the ICD, the settlement plan which became binding on 18 October 2018 will be implemented. During the implementation, Agrokor will no longer operate its business, which instead will be transferred to a recently incorporated Croatian joint stock company, currently named AISLE HoldCo d.d.

While most of the well-known consumer brands will survive, the new holding company will no longer be named Agrokor but will be renamed Fortenova Grupa d.d. (“Fortenova”). Fortenova will be structured as a joint stock company, with nine directors and three executive directors, with the CEO being a member of both bodies. For the time being, Mr Perusko will be CEO and Irena Weber, currently the deputy extraordinary commissioner, will stay on as COO. There has been no word on who will act as CFO.

Fortenova is owned by Aisle Dutch HoldCo (“HoldCo”), which is in turn owned by Aisle Dutch TopCo (“TopCo”), both incorporated as Dutch BVs. TopCo will be ultimately owned by Aisle STAK (“STAK”), a Dutch stichting. The beneficial owners of STAK and therefore of Fortenova will be the former creditors of the Agrokor group. The purpose of this structure is to separate legal and beneficial ownership in the Fortenova group.

Already last year Fortenova started to incorporate Croatian limited liability companies that will serve as the new operational companies. These operational companies will be named after the existing subsidiaries of Agrokor, but with an added “plus”, e.g. “Konzum plus”. The aim is to mirror the existing structure as far as possible.

Conversion of creditors’ claims 

On the ICD, the claims of Agrokor’s pre-petition creditors and its non-viable subsidiaries will be assigned automatically under the settlement to TopCo. As consideration for the assignment of pre-petition claims, creditors will receive a combination of two instruments issued by the Dutch holding companies consisting of new equity and structurally subordinated convertible bonds. Each creditor will be awarded depositary receipts from STAK, which holds all the shares in TopCo. The depositary receipts and convertible bonds are stapled together, thereby preventing the transfer of convertible bonds and depositary receipts independently.

Transfer of assets

TopCo will transfer the claims against the Agrokor group to Fortenova or the relevant subsidiary of Fortenova, e.g. claims against the Konzum d.d. will be transferred to the new Konzum entity, Konzum plus. Due to this transfer, TopCo has a claim against the relevant subsidiary, e.g. Konzum plus, which can later be used to upstream cash efficiently.

Fortenova and its subsidiaries will acquire all viable assets of the Agrokor group, using the claims against the Agrokor group as consideration.

The shares in the 32 existing viable Croatian subsidiaries of Agrokor will be transferred to Fortenova. The shares in the 82 foreign subsidiaries, such as Mercator and Idea, will be transferred by way of share or asset transfers under the relevant local law.

Non-viable Croatian subsidiaries will not be transferred, but these 45 companies, including Konzum d.o.o., Ledo d.o.o. and Jamnica d.o.o., will transfer their assets to the relevant newly incorporated mirror subsidiary of Fortenova.

The list of assets to be transferred, which is over 4,500 pages, is part of the settlement, but it is expected that further actions will be required. For this reason, the settlement stipulates that any assets not specifically listed also transfer and that each Agrokor subsidiary is obligated to give any additional statements and consents or to perform additional actions for the transfer to be executed.

The transfer of shares and assets shall, where possible, take effect on 1 April 2019. Between now and 1 April 2019, Agrokor and Fortenova are preparing the transfer off all assets, and Fortenova is also working on setting up the operational infrastructure to operate Agrokor’s business. Given the sheer size of Agrokor’s operations (some 50,000 employees will be transferred to Fortenova) this will be a very challenging task.

Once a company has transferred its assets, the remaining company will be merged into Agrokor d.d. After all companies have been merged, Agrokor d.d., once the second-biggest retailer in Southeast Europe, will be dissolved and deleted from the register 30 years after its incorporation. This will mark the end of one of the most complicated and contentious restructurings in the region.

By Miriam Simsa, Partner, Vice Mandaric, Attorney at Law Schoenherr

Croatian employers have until the end of this year to partially comply with the recently enacted Act on the Protection of Whistleblowers (Zakon o zaštiti prijavitelja nepravilnosti; “Whistleblower Protection Act”), with which they must come into full compliance by March 2020. The Whistleblower Protection Act defines who will be deemed a whistleblower and enjoy protection for whistleblowing. In contrast, the current whistleblower provisions are scattered throughout a number of laws, such as the Criminal Code, the Trade Act, the Employment Act and others. Consequently, research conducted in 2017 has shown that around 60 % of Croatian examinees do not know how to report corruption.

The Whistleblower Protection Act follows Recommendation CM/Rec(2014)7 of the Committee of Ministers.

Persons affected by the Whistleblower Protection Act 

Protection is provided to a wide circle of persons, not only employees, but any natural person who reports workplace irregularities. This may include volunteers, students, contract workers, undeclared workers, as well as job interviewees. On the other hand, public authority bodies as well as legal entities are recognised as employers.

Whistleblowers may not be placed in a disadvantageous position 

The Whistleblower Protection Act prohibits companies from preventing the reporting of irregularities, i.e. any illegal conduct against public interest. Reporting of irregularities (whistleblowing) is not considered a violation of business secrets.

Bylaws or acts of an employer which prohibit the reporting of irregularities or which deny or violate the rights of whistleblowers are without legal effect.

In addition, an employer must not place a whistleblower in a disadvantageous position because of reporting. This encompasses “regular” acts of retaliation, such as termination of employment, salary decrease, demotion and work overload, as well as more sophisticated acts of mobbing such as assigning meaningless tasks or tasks far below the employee’s qualifications, or not assigning any tasks at all.

Reporting may be (i) internal, (ii) external and (iii) public disclosure. 

Internal whistleblowing means reporting to an employer

An employer must:

• enable internal reporting of irregularities; 
• at the proposal of at least 20 % of its employees: (A) appoint a confidential person to whom irregularities are reported, alternatively such a person will be appointed by an employer, and/or (B) revoke an already appointed confidential person and appoint a new one within a month from revocation; 
• at the proposal of the confidential person, appoint their deputy;
• protect a whistleblower from harmful actions and take measures to stop such actions and eliminate their consequences;
• keep received information from unauthorised disclosure;
• eliminate identified irregularities.
• Employers with more than 50 employees must organise internal reporting procedures and appoint a confidential person by means of a bylaw. The rights of whistleblowers may not be decreased by such a bylaw. A bylaw that does not comply with the Whistleblower Protection Act does not have legal effect.

The confidential person must notify the Ombudsman about all reported irregularities within 30 days from the decision rendered in respect of the reported irregularity. If the irregularity has not been resolved with the employer, the reported irregularity must also be forwarded to the authority competent to investigate the irregularity (e.g. State Attorney, State Inspectorate).

External and public disclosure

• Irregularities may be reported to the Ombudsman as a competent authority, provided that at least one of the following conditions has been met:
• there is an imminent threat to life, health, safety, largescale harm or destruction of evidence; 
• there is no possibility of internal reporting; 
• the whistleblower has not been informed within 30 days of the results of the actions undertaken or no actions have been undertaken in response to the information provided in the process of internal reporting;
• there is a concern that internal reporting cannot ensure the right to protection, protection of the identity of a whistleblower or confidentiality of reported information;
• there is a founded concern that a whistleblower might be placed in a disadvantageous position due to reporting or if the protection measures undertaken were not effective;
• the whistleblower no longer works for the employer.

In exceptional cases, irregularities may be publicly disclosed, without prior reporting to an employer or Ombudsman, if there is an imminent threat to life, health, safety, largescale harm or destruction of evidence.

Whistleblowers have right to court protection, damages and confidentiality of their identity

Whistleblowers have the right to the confidentiality of their identity being maintained. They may also seek court protection for any damages suffered and request that the judgment be published in the media. The Whistleblower Protection Act provides elective jurisdiction, so that besides the defendant’s business seat, whistleblowers may also seek protection from the court of their residence or where the damage occurred. The burden of proof will shift to the employer if the whistleblower demonstrates that it is probable that they were placed in a disadvantageous position and that one of their rights has been violated.

Sanctions and entry into force

Monetary fines range from HRK 10,000 to HRK 30,000 (approx. EUR 1,350 to EUR 4,050) for minor offences and HRK 30,000 to HRK 50,000 (approx. EUR 4,050 to EUR 6,750) for more serious offences.

The Whistleblower Protection Act will enter into force on 1 July 2019, but employers still have six months thereafter to establish a bylaw that will organise their internal reporting procedure and nine months for a bylaw that will organise the appointment of a confidential person.

By Marko Kapetanovic, Attorney at Law  Schoenherr

International taxation is rapidly changing and aligning with recommendations of the Project for the Prevention of Base Erosion and Profit Shifting (BEPS).

BEPS, which identified 15 actions aimed at preventing aggressive tax planning, tax fraud, and tax evasion, is the answer to tax evasion strategies that exploit gaps and mismatches in taxation rules in order to shift profits to jurisdictions with low or no tax burden. The BEPS Action Plan was originally developed by the OECD Committee and endorsed by the G20 countries. Croatia joined in later and became a member of the Inclusive Framework on BEPS in 2016.

Action 15 refers to the development of a multilateral instrument that would intervene in more than 1,200 tax treaties worldwide. So far, more than 80 countries have concluded negotiations and signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Instrument” or MLI).

MLI is a precedent in the field of international taxation, as it enables interested countries to update their tax treaties by applying one international agreement based on international standards.

The Croatian government brought a decision to initiate the procedure for concluding the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in June 2017.

The MLI’s Objective

The MLI’s objective is to simplify and speed up the implementation of BEPS measures in tax treaties. The MLI includes, inter alia, provisions on “pass-through” entities (i.e., “fiscally transparent entities”), dual resident entities, dividend transfer transactions, capital gains from the alienation of shares in real estate companies, artificial avoidance of permanent establishment status through commissionaire arrangements, and similar strategies or specific exempt activities, division of contracts, related persons, etc.

Croatia has signed, but has not yet ratified the MLI. At the signing on 7 June 2017, Croatia indicated all bilateral tax treaties and presented the status of list of reservations and notifications. Currently, Croatia will apply the MLI to 41 out of 62 tax treaties.

Entry into Effect 

For withholding taxes, Croatia will apply the MLI from the first day of the calendar year which follows the year in which the MLI enters into force in the country that ratifies the MLI later.

For other taxes, Croatia has chosen that the MLI will become effective for taxes levied with respect to taxable periods beginning on or after 1 January of the next year beginning on or after the expiration of a period of six calendar months from the date when MLI enters into force in the country that ratifies the MLI later.

How?

The OECD has published a tool and databases to facilitate the analysis of the MLI. It is expected that the tool will be expanded and refined over the next couple of years.

Although the MLI is imagined as a simple and fast intervention in tax treaties, its application will be complex, and taxpayers will have to perform several tests in order to assess whether and to what extent the MLI affects a specific tax treaty. First, it needs to be verified whether the MLI has entered into force in both countries that are parties to a particular tax treaty. It also needs to be verified if both countries have covered the specific tax treaty. If the answer to both is yes, then it needs to be determined which notifications and reservations apply to it and when the MLI will have an effect. Navigation through databases will be a must until the consolidated versions of treaties are prepared. Note that for most countries there is no legal requirement to prepare such consolidated versions, so using the OECD tool and databases alongside treaties may be permanent.

Let’s see how the MLI application affects Croatian tax treaties through an example. A French and an Austrian company are expanding their businesses to Croatia and have the same business plan. They both sign their own agent contract, according to which the agent finds buyers and negotiates the terms, but does not enter into contracts on behalf of the French or the Austrian company. All contracts are signed by representatives of the French and the Austrian companies, although these representatives do not materially change the buyer contracts.

France and Croatia agree that the MLI’s provisions will replace the existing provisions in the tax treaty, while Austria and Croatia agree not to change the existing provisions. Due to this difference, the agent of the French company will create a PE of the French company in Croatia, while the agent of the Austrian company will not create a PE of the Austrian company in Croatia. 

As a result, Croatia will have the right to tax only the profits made by the French company in Croatia.

By Tamara Jelic-Kazic, Partner, and Maja Marcelic, Consultant, CMS Zagreb

This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.