Category: Croatia

In Croatia, acquiring a company’s own shares is often a useful tool for the implementation of management and employee reward plans, employee stock ownership plans (ESOP), and various bonus policies of joint stock companies. The company would normally acquire a desired number of its own shares and distribute them to selected employees according to a reward program. EU legislation describes these programs as “buy-back programs.”

Joint stock companies performing buy-back programs related to employee reward plans must follow the rules of Croatia’s Company Law in acquiring their own shares. While a company would generally need to obtain approval from its general meeting to subscribe to its own shares, a resolution is not required in cases where the company’s own shares are to be acquired by the employees of the company or its affiliates within a year. The volume of shares acquired in this method cannot exceed 10% of the company’s share capital. Several accounting prerequisites must also be followed. The company must provide prescribed provisions for its own shares and the subscription of a company’s own shares cannot result in breach of share capital maintenance principles.

A joint stock company that holds its own shares is not entitled to any benefits arising from the shareholding. These shares do not participate in the distribution of profits and they do not provide voting rights to the company as their holder. 

Companies listed on the stock market are mostly concerned about the capital market laws’ potential classification of a company’s acquisition of its own shares as insider dealing or market manipulation, which constitute market abuse. Should the Croatian Financial Services Supervisory Agency determine market abuse, it has a handful of supervisory measures at its disposal, from a mere warning to temporary blocking of financial instruments. Criminal liability is also not excluded where trading in a company’s own shares can be qualified as misuse of capital markets under the Croatian Penal Code.

In order to minimize the risks, companies issuing shares can adopt buy-back programs that are compliant with the conditions regulated in the EU legislation, notably Commission Regulation (EC) No 2273/2003 of December 22, 2003. Trading in a company’s own shares will not be considered market abuse if it is based on buy-back programs intended to meet obligations arising from employee share option programs or other allocations of shares to employees of the issuer or its affiliate, and if it is carried out in accordance with the conditions laid down in the Commission Regulation. 

For instance, prior to the start of trading, full details of the program must be adequately disclosed to the public, such as the objective of the program and the conditions for trading, including maximum consideration and volume of trading. At the end of trading, the issuer must publicly disclose details of all transactions which were carried out within the program.

Transparency in the form of public disclosure of information is very valued as prevention of market abuse. Once the issuer has resolved to acquire its own shares internally and has subscribed to its own shares, the company must publish the exact number of its shares to the public within four trading days. Besides the Croatian Financial Services Supervisory Agency and the Zagreb Stock Exchange, listed joint stock companies will usually publish the acquisition of their own shares on their websites or sometimes inform the national state-owned news agency, Hina. 

While the implementation of a buy-back program in accordance with the Commission Regulation rules is the most secure option, the fact that some issuers do not adopt them does not necessarily mean that the intended buy-back of own shares is in itself prohibited. The actual circumstances should be taken into account in assessing whether a company’s program of trading in its own shares represents market abuse as defined in the Croatian Capital Markets Act or not. 

Failure to comply with the prescribed procedures for trading in own shares can result in misdemeanor liability and high penalties for the issuer and its responsible persons. For example, failure of the issuer to disclose the number of a company’s own shares acquired to the public within four trading days after each subscription or the buy-back of a company’s own shares which led to serious jeopardizing of the financial market can result in a penalty equaling three to five per cent of total annual turnover of the issuer in the year in which the undisclosed transaction with a company’s own shares occurred. If the issuer failed to disclose, but this failure did not jeopardize the financial market, the issuer can count on a penalty of between USD 15,000 and USD 37,500.

By Danijela Simeunovic, Partner, Kovacevic Prpic Simeunovic

This Article was originally published in Issue 3.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The new Croatian government is on the top of Danijela Simeunovic’s list of encouraging signs for businesses and foreign investors in the country.

After over a year without a functioning government the country has finally put one together, and Simeunovic — one of the founding partners at Croatia’s Kovacevic Prpic Simeunovic law firm — reports that projects in the country have already begun picking up. She concedes that the exact nature of the increase is hard to gauge, especially as it coincides with the traditional end of year pick up in business anyway, but she’s confident that investors are responding positively to the predictability that comes with political stability. “It kind of doesn’t even matter if, politically, you agree with the new government or you don’t,” she says. “Just having the stability after a year of no government is going to be good.”

Simeunovic also refers to a hope that the new government will reactivate the list of special investment projects in Croatia which has fallen dormant in the past year or so, including the long-awaited LNG project at Krk and major Croatian motorways tender. “Projects in the infrastructure, tourism, and energy sectors have been at a standstill,” Simeunovic reports, “and maybe now they’ll pick up.”

The second encouraging development Simeunovic refers to is the significant tax reform proposed by the Ministry of Finance. According to Simeunovic, the government is proposing to lower the profit tax, especially for small companies, lower the income tax, and to some extent reduce VAT. All taxes should be lowered across the board, Simeunovic reports, “and not one should be raised.” She believes this is good for business, will encourage consumer spending, and will attract foreign investment. 

Most of the anticipated tax measures should go into effect on January 1, 2018, and some are expected even sooner. 

According to Simeunovic, “it will be interesting to see what the consequences of these developments are.”

Turning to a sector analysis, Simeunovic starts with Transportation and Energy, which her firm specializes in, and although there’s much of significance happening in the transportation sector at the moment in Croatia, Simeunovic is seeing some significant new developments in the Energy sector, especially in Renewables. On January 1, 2016, Croatia enacted its first Renewable Energy law, changing from a “tariff” system to a “Market Premium” system, making producers of Renewable energy subject to the tendering system. “It’s a big change,” reports Simeunovic. “I’m not saying it will immediately boost FDI, but it’s a big change.” As a side effect of the change, both lawyers and clients are needing to come up to to speed on the new rules, and Simeunovic reports a number of seminars on the subject across Croatia in the past year. The country is awaiting secondary legislation, expected to provide further details and clarification.

There has been a standstill in Renewables in recent years, Simeunovic reports, in large part because of a quota on the amount of megawatts that could be produced. That quota has recently opened up on wind, biomass, and solar energy, apparently, and she reports that her firm has already begun getting inquiries from foreign investors, so she expects to see things happening in the sector soon.

“Another buzzword related to energy is ‘energy-efficiency,’” Simeunovic notes, pointing out that this topic is also getting a significant amount of attention at the EU level, which has passed regulations to increase energy efficiency of buildings, public transportation, street lighting, etc. Simeunovic says many companies in Croatia are now preparing or proposing work on “Energy Performance Contracting”, which she describes as “a complex type of service.” Simeunovic believes this is an “important change and development in the market,” and she says “it will be interesting to see what kind of legal work comes from it.”

In addition to Renewables and Energy Efficiency, the third sector Simeunovic points to is the Banking and Insurance. She notes that the NPL sales have been going on in Croatia as elsewhere in CEE for some time now, but although many Croatian NPL portfolios have been sold, “the process is not over yet, as banks are starting to sell NPLs connected to asset management in the tourism and commercial sectors. Simeunovic points to recent sales of NPLs related to specific tourist complexes, shopping centers, and commercial buildings in the country as evidence of this new phenomenon.

In addition, Simeunovic says, an increasing number of Croatian banks are merging with foreign banks, and transferring their competency centers abroad, leaving the Croatian operations as little more than branch offices. This trend both in banks and in the insurance sector is a subject of some concern in the market. On top of everything else, she concedes, “it means less work for lawyers.”

The legal market in Croatia remains stable at the moment, though Simeunovic notes she’s seeing an increased number of spin-offs and new firms popping up on the market. 

In “The Buzz” we interview experts on the legal industry living and working in Central and Eastern Europe to find out what’s happening in the region and what legislative/professional/cultural trends and developments they’re following closely.

Pre-employment screenings of potential job candidates, commonly known as background checks, are not always an easy task for employers.

A proper balance needs to be found between asking the right questions, allowing employers to find the best match for a certain job position, and not stepping too far into a candidate’s private sphere. Pre-employment screenings are not specifically regulated, but the permitted scope for questions is determined on the basis of the Croatian general legal framework, which mainly focuses on the permissible acquisition of data relating to job applicants and a non-discriminatory attitude.

Preparatory Phase: What is Relevant for a Particular Job Position? 

Before hiring a candidate for a job opening, employers need to fully understand the applicable legislative framework and prepare the entire process in detail. 

Only information that is directly relevant for that particular employment relationship may be requested during the pre-employment screening. In this respect, the specific conditions of employment (e.g., education, skills, language) should be set out by the law, CBA, or even internal documents. Therefore, even if certain specific issues that matter to the employer in the hiring process are not statutorily required (such as drug abuse testing or providing a record showing no pending criminal proceedings), the employer may still successfully set up these requirements under its internal documents, provided that applicable regulations are observed (e.g., employers are not permitted to request proof of previous convictions). A job applicant’s nationality may only be relevant if a working or similar permit is required. Also, job applicants are not required to inform a potential employer of an illness or any other condition unless it would prevent or hinder them in adequately performing their employment obligations or endanger the lives or health of others. If job applicants do claim to have such an illness or other condition, an employer is entitled to verify their health status in this regard by arranging and paying for a specific medical examination.

Understanding Legal Constraints During the Recruitment Process

During the recruitment process, everyone involved on behalf of the employer should be made familiar with applicable legal constraints. 

No discrimination is allowed. Job applicants may refuse to reply to questions which are not directly job related, which embarrass them, or which violate their right to privacy or personal dignity. Examples of such questions are ones concerning religion, political beliefs, marital status, sexual orientation, and family expansion plans.

All job applicants should be treated equally regardless of their gender, age, marital status, ethnicity, education, sexual orientation, beliefs, and/or other personal characteristics. 

Right to privacy and data protection. The job candidate’s rights to privacy and personal data protection require that all processing of personal data must comply with the principles related to data quality, such as fairness, proportionality, and relevance. Also, if recruiting is done from the company’s headquarters (HR departments) located outside Croatia, employers should be aware that any transfer of personal data outside Croatia requires prior approval from the Croatian Data Protection Agency. 

Some employers may want to collect information on job applicants by contacting third parties, such as the applicants’ universities or previous employers. However, this can only happen with the applicant’s consent. Asking for references is recommended in order to obtain information on the applicant’s background. 

Cautious use of social media. With the rise of social media use, employers are more often turning to screening applicants online. This could potentially lead to a number of legal risks, and therefore caution is recommended. Although there are no clear-cut regulations as to the right to privacy online within an employer-job applicant context, it is recommended that only publicly posted information be viewed. Even then, information that a potential employer is not entitled to have or to consider during the recruitment process may be revealed, such as pregnancy, political, or religious views. Such information cannot be used as a basis for hiring decisions and can potentially lead to discrimination claims. Also, information available online may not always be accurate, and it is recommended that applicants be allowed to respond to information obtained through these mechanisms before dismissing their applications.

Befriending someone or using someone else’s profile for the purpose of gathering private restricted information from an applicant’s social media site in order to use it in the hiring process is strictly off limits.

Consequences of Non-Compliance

Should potential employers conduct unauthorized pre-employment screenings, they could face discrimination claims and fines due to non-compliance of up to EUR 7,800 for the company and EUR 800 for the responsible person within the company.  

By Luka Tadic-Colic, Partner, Dora Gazi Kovacevic, Counsel, and Ana Grubesic, Senior Associate, Wolf Theiss

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Divjak, Topic, & Bahtijarevic supported the Dogus Group in negotiating, coordinating, and ultimately accepting a EUR 30 million loan from the EBRD and syndicated lenders for the refurbishment of the Dalmacija and Borik marinas, which the firm describes as having “a key role in boosting nautical tourism along the coast of Croatia.”

The EUR 30 million loan was put together evenly by the EBRD and syndicate lenders Privredna banka Zagreb and Erste & Steiermarkische Bank, all of which contributed EUR 10 million.

DTB supported Dogus in fully acquiring the two Croatian marinas in 2012. While Marina Dalmacija, located in the town of Sukosan, offers 1141 sea berths, Marina Borik is a small boutique marina located in the west end of the historic city of Zadar.

The DTB team supporting Dogus on the matter included Partners Damir Topic and Mate Lovric and Senior Associate Ozren Kobsa.

Divjak, Topic & Bahtijarevic (DTB) has advised the Dogus Group on its assumption of majority control of Tenos Ltd.

Tenos — which before the transaction was owned by Croatian businessman Zdenko Zrilicwhich — owns a former factory in Zadar, in the northern Dalmatian region of Croatia. The Dogus Group plans to develop a five-star hotel and exclusive residential area on the property. In the process the firm advised on the closing of a transaction which included sensitive loan restructuring and subscription issues and an anticipated debt to equity swap. Upon completion of all anticipated phases of the deal, Dogus Group will have invested more than EUR 40 million in this newest purchase. 

DTB expects Dogus’ investments in Croatia to exceed EUR 400 million by the end of 2014.

DTB Partner Mate Lovric led on the deal, with assistance by Senior Associate Ozren Kobsa. Lovric explained that: “This project is to make room for Dogus’ leading position in terms of Zadar’s tourist offer. The Dogus Group already has two marinas in Zadar (Marina Dalmacija and Marina Borik), they already have one luxury hotel in Dubrovnik, and one hotel is currently being developed in Sibenik. Most importantly, the former Maraska factory-made-five star plus hotel will completely change the Zadar city scenery.”

Divjak, Topic & Bahtijarevic has advised the Turkish Dogus Group on its purchase of a majority stake in the Villa Dubrovnik hotel from the Croatian Heruc Group.

The transaction closed on April 14, 2014, when the transfer of shares was registered and all other pertinent actions executed. The Dogus Group now holds 3 Croatian marinas and 2 Croatian hotels in its portfolio, and the estimated value of its investments in the country is over EUR 200 million. In addition, Dogus is in the final stages of a transaction involving the acquisition of another hotel on the Adriatic coast, with two more in the works.

DTB expects Dogus’ investments in Croatia to total over EUR 400 million.