The Amendments to the Takeover Act

Lexology, January 13, 2014

1. Introduction

After several attempts of the Croatian Government to introduce changes into the existing Takeover Act, the Amendments to the Takeover Act finally entered into force on 15th December 2013 (“the Amendments”). By entering into force of the Amendments, the Takeover Act has been harmonised with the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids.

2. The Target Company

The Amendments reduce the number of cases triggering the obligation of undertakers to publish the public takeover bid for taking over the target companies. The Amendments reduce the takeover obligation in that, it applies only to the target companies, shares of which are listed on a regulated stock market, while the previous Takeover Act provided for a potential takeover obligation in respect to all joint stock companies with the share capital of HRK 30 million and 100 shareholders. The legislator argues the introduction of this Amendment by the need of harmonizing domestic laws with the acquis. Yet, it is to mention that the Croatian Takeover Act recognises a number of exemptions from the obligation of publishing takeover bid, which have not been recognised by the Directive 2004/25/EC (e.g. the exception in case of acquisition of shares of the target company in the course of pre-settlement procedure instigated against the target company). Besides, the Croatian Agency for Supervision of Financial Services (“HANFA”) which is subordinated to the Ministry of Finance may in certain cases (financial recovery of the target company) exempt undertakers from the takeover obligation by issuing a decision determining additional measures, conditions and/or terms which the undertaker has to comply with.

3. Acting in concert

Persons acting in concert are natural or legal persons, who pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain the voting rights, co-ordinately exercise voting rights or frustrate the successful outcome of an offer for a target company or who co-operate with the target company with the purpose of preventing a third party in taking-over the target company. Furthermore, two or more persons shall be deemed to be acting in concert if one of them directly or indirectly controls the other/others legal entities (directly or indirectly holds more than 25% of the share capital or voting rights, has the right to manage business and financial policies, or indirectly or directly exercises prevailing influence in respect to management or decision making).

Certain actions that would otherwise be considered as acting in concert are under certain conditions exempted from the Takeover law. Such exemptions apply in certain cases and under certain conditions where the company under control or affiliated company is a company for the management of private investment funds and/or pension funds and the fund under the management of that company holds or acquires shares with voting rights of the target company, provided the company for the management of private investment funds/pension funds exercises voting rights independent of the dominant/affiliated company.

The exemption also comprises the activities of a person under control/the affiliated person, which is an investment company, a company for management of investment funds or a credit institution which exercises voting rights from the shares of the target company, as a consequence of providing portfolio management services, provided that the investment company, company for management of investment funds or a credit institution:

  • has the authorization to provide portfolio management services by HANFA or the competent authority of an EU State;
  • can exercise voting rights only upon instruction of the client obtained in writing or by using electronic means of communication;
  • exercise the voting rights independently of the governing person or affiliated company.

4. Mandatory takeover bid

Another significant change refers to introduction of the single threshold triggering mandatory takeover bid obligation. A person is required to publish a takeover bid if, directly or indirectly, acting individually or in concert acquires shares with voting rights of the target company which together with previously acquired shares, exceed 25% of the shares with voting rights of the target company (control threshold).

Special regime applies to companies for management of investment funds and/or pension funds, which depending on the statutory investment limitations, in case of exceeding the threshold of 25%, may be required to publish take-over bid in their own name and for their own account instead for the account of the fund.

The Amendments abolish the obligation of the undertakers to publish a take-over bid in case of exceeding additional control thresholds which were set at 25% plus one share with voting rights, 35% plus one share with voting rights (subsequent acquisition of more than 10%) and 75% plus one share with voting rights.

The Amendments introduce modified method of determining the lowest price of the takeover bid. Inter alia, quarterly weighted average stock price within three months before the occurrence of the obligation to make a takeover bid shall be relevant only for the shares which are traded within the period of, at least, one-third of the trading days. For less liquid shares the price will be determined through an evaluation of their fair value.

5. The authority of regulator (HANFA)

HANFA which is subordinated to the Ministry of Finance conducts an indirect and/or direct supervision of the Takeover Act by:

  • monitoring, collecting and verifying published information and data including reports submitted by the capital market players to HANFA (indirect supervision);
  • collecting data and examination of documents at the premises of the supervised entity and/or with the supervised entity affiliated persons (direct supervision);
  • imposing statutory supervising measures.

If HANFA finds irregularities, it is authorised to order certain actions, purpose of which is remedying illegalities and declare the obligation of certain undertaker to publish the takeover bid.

If the undertaker fails to submit a regular request for approval of a takeover bid within the statutory period, or if the bid has been refused or rejected by HANFA, or if the undertaker fails to publish a takeover bid after the request for publication of the takeover bid was approved by HANFA, every shareholder of the target company may file a claim before the competent commercial court requesting conclusion of a contract on sale of shares, under the terms and conditions under which the takeover bid had to be announced.

Against the HANFA’s decision, a dissatisfied party may initiate an administrative dispute by filing the administrative claim before the competent administrative court within 30 days as of the receipt of the HANFA’s decision.

Having regard to the issues faced in practice at the occasion of which, the administrative courts abolished decisions of HANFA even after 3-4 years, during which period the minority shareholders already acquired legal titles in individual disputes instigated before commercial courts, the Amendments provide for postponement of legal effects of the HANFA’s decision declaring the take-over bid, until its final validity and imposes the obligation to the administrative courts to render decisions within six months, at latest.

6. Conclusion

More than 15 years old application of the Takeover Law in Croatia shows significant loopholes in practical implementation of the law. It is not just prevailing communist heritage, the lack of understanding the capital markets and its importance for the financial and economic development of the country, but also the lack of judges specialised to decide take over disputes, significant backlog of court cases, slow decision making process by the administrative courts, inexistence of the established court practice and high litigation costs, that make efficient protection of minority shareholders, at least questionable.

It is unclear whether the recent strategically performed subordination of the financial market regulator to the Ministry of Finance and lately introduced abolishment of additional thresholds may contribute to the more efficient protection of the minority shareholders and the effective achievement of ratio legis of the Takeover Act.

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