Company Law and Corporate
Governance in the Enlarged
Europe
Prof. dr. sc. Hana Horak
I. Legal history, foreign inspirations and recent
development in Croatian company law

Croatian legislation took over German company law in
its entirety
There are only a few contents that were changed:

not accepting limited partnership as a stock company

permitting one founder, that is, member of a joint stock
company

the establishment of each type of company requires different
minimum capital

optional participation of union representatives in the
management
Legislative framework

The Croatian Companies Act entered into force in 1995,
and was amended on several occasions

The most recent amendments were introduced in 2010 &
2011
The most important accompanying legislation
in the field of company law are the following:

The Court Register Act (1995, amendments in 1996, 1999, 2003,
2005, 2007, 2010, 2011)
Bankruptcy Act (1996, amendments in 1999, 2000, 2003, 2004,
2006, 2010, 2012)
Capital Market Act (2008, 2009)
The Act on the Takeover of Joint-Stock Companies (2007, 2009)
Insurance Act (2005, 2008, 2009)

Investment Funds Act (2005)




The most important accompanying legislation
in the field of company law are the following:

Crafts Act (1993, amended in 1995, 1996, 2001, 2003, 2007)

Associations Act (2001, amended in 2002)

Cooperatives Act (1995, amended in 2001, 2002, 2011)

Institutions Act (1993, amended in 1997, 1999, 2008)

The Competition Protection Act (2003, amended in 2009)

Banking Act (2002, amended in 2006)

Audit Act (2005, amended in 2008)
Alignment of the national law with the ECDirectives

The screening of the company law with EU legislation started in
2006

It presupposes the analysis of EU directives relating to company
law
EU common law secondary
sources
The First Directive on company law includes:

safeguards prescribing the conditions for
obligatory disclosure of information,

limiting the reasons for the nullity of obligations
entered into by companies and limiting the
reasons for nullity of joint stock companies and
limited liability companies

The Second Directive concerning company
law specifies rights about the formation of
public limited liability companies and
maintenance and alteration of their capital

The Third and Sixth Directives concerning
company law harmonise national rules for the
protection of stockholders and trustees in the
context of domestic mergers and divisions of
public limited liability companies

The acquis communautaire provides for certain
European legal formations regulation, in
particular the European Economic Interest
Grouping (EEIG) and the European Company
(Societas Europaea or SE) but Member States
may regulate in their national legislation some
aspects of their internal organisation and
business operations

Regulatory framework includes rules for the
evaluation and appearance of balance sheets and
profit and loss accounts for annual (Fourth
Directive concerning company law) and
consolidated (Seventh Directive concerning
company law) financial statements of joint stock
and limited liability companies

Croatia stated in its report that it is prepared to
take over the acquis communautaire relating to
company law and that no difficulties are
expected in the implementation of the acquis
communautaire until the accession to the
European Union
The system of Croatian company law
I. Structure of company law and its legal
environment
Who is a merchant?
1. A merchant is a legal or natural person.
2. A merchant must perform an economic activity independently, in his name
and for his account.
3. A merchant must perform an activity continuously.
4. A merchant must be engaged in an economic activity.
5. This activity must be carried out with the aim of making profit.
6. The economic activity and the making of profit may result from production,
trade in goods or provision of services on the market
General partnership

a company into which two or more persons are joined with the
aim of continuous performance of activities under a common
firm name

each member of the company has unlimited and joint
liability to creditors of the company with all his assets

any natural or legal person may be a member of the company
The main characteristics of the general partnership
are the following:






it must have at least two members
members of the company may be natural and legal persons
the company’s activity must be permanent
the activity must be carried out under the joint firm name
it is based on a contract
all members of the company share unlimited liability for the
company’s debits, jointly with all their assets

the application for entry into the court register is accompanied
by the contract on the establishment of the company – the
company agreement

members regulated their relations on the basis of their own
will and such application of the Companies Act confirms the
principle of OPTIONALITY
The Companies Act contents:
1. name, surname and personal identification number of a citizen
and residence, that is, firm name and seat of each member of
the company who was the founder of the company at the
moment of its establishment
2. firm name
3. company seat
4. subject of business activities
5. contribution that members of the company are obliged to make
in order to achieve the company’s goal

A company member who does not pay his contribution in due
time or does not deliver the money received for the company to
the company in a timely manner, or unjustifiably takes money
belonging to the company or is in delay with making other
contributions, shall pay the statutory default interest to the
company

Every member of the company has the right and the obligation
to manage company business


Each company member is entitled to be informed about the
company business
The profit and loss account is prepared at the end of each
financial year
 One-third of profits made in the current year shall be divided
among company members in such a way that each member
receives the part corresponding to his share in the company
capital (CAPITAL PRINCIPLE )
 Two parts of profits is divided in equal parts among members
of the company regardless of their share in the company
(PERSONAL PRINCIPLE )
Reasons for the dissolution of the company:

expiry of the time for which it has been established

decision of company members

bankruptcy of the company

final court decision establishing that the entry of the
company in the commercial register was unlawful

death or dissolution of a company member, unless
otherwise provided for in the company agreement
Reasons for the dissolution of the company:

initiation of bankruptcy proceedings over one of the company
members

rescission of one of the company members, or of his creditor

final court decision
Liquidation

is initiated upon the occurrence of a reason to dissolve the
company unless the company members have agreed upon a
different manner of settling accounts and division or unless a
bankruptcy procedure is instituted

it shall be carried out by all members of the company as
liquidators
Limited partnership

a company in which two or more persons are joined
with the aim to permanently conduct activities under
the common firm name

it is formed by an COMPANY AGREEMENT
Characteristics of a limited partnership:

the company is a person, a legal person and a merchant

at least two persons are joined

members have different liability for the company’s
obligations

the objective of the company is to permanently perform
activities under the common firm name

the basis of association is the agreement

the company is a person

it has two kinds of members whose position differs in
proportion to their responsibility

GENERAL PARTNER (at least one)

LIMITED PARTNER
Limited partners responsability:



a limited partner is not authorised to manage the company but
has the right of supervision over the company business
a limited partner may not oppose decisions or actions of general
partners, except for decisions or actions which go beyond the
scope of the ordinary scope of business activities of the
company
a limited partnership is represented exclusively by general
partners (a limited partner is not authorised to represent the
company )
Limited partners responsability:

profit is paid out to a limited partner if he has paid his capital
contribution in full

limited partner shall participate in the compensation of loss
incurred by company’s business, but only up to the amount of
his share in the company’s capital
Economic interest grouping

a legal person established by two or more natural or legal
persons with the aim of facilitating and promoting the economic
activities which form the objects of their business activities, and
to improve or increase their effect, but in such a way that legal
person does not acquire profit for itself

the grouping is not established for the purpose of acquisition of
profit
Important characteristics of economic interest
groupings:
a) at least two persons are joined
b) its goal is strictly prescribed by the Act and is different from all
other companies
c) the basis is the agreement
d) it is a legal person and a company
e) members are liable for the groupings' obligations
The grouping shall have this bodies:

members acting jointly

management board of the grouping

other bodies that must be provided for in the contract on the
establishment of the grouping

the management board is the obligatory body of the grouping
consisting of one or more members

members of the management board do not have to be the
members of the grouping

management board shall perform the MANAGEMENT AND
REPRESENTATION tasks

In all cases of dissolution of the grouping, except in case of
bankruptcy, liquidation must be carried out
Joint Stock Company

Joint stock companies are regulated in Title IV of the
Companies Act which has 225 Articles out of which
almost all are very detailed and regulate separate issue
under their own headings.

The provisions about joint stock companies make up
one third of the total Act
Establishment of a company:

SIMULTANEOUS ESTABLISHMENT

SUCCESSIVE ESTABLISHMENT
Share capital


the smallest initial amount of company’s capital defined in the
Articles of Association
a sum of nominal amounts of shares
The share capital is divided into shares and it must be made out to
nominal amounts expressed in HRK.
-The lowest amount of share capital of a joint stock
company is HRK 200.000,00
The meaning of the concept of a share is threefold:

PART OF THE SHARE CAPITAL OF THE COMPANY

COLLECTION OF MEMBERSHIP RIGHTS AND
OBLIGATIONS BELONGNIG TO A SHARE’S OWNER

SECURITIES
Bearer shares or registered shares

bearer shares do not specify the name of their owner and they
are transferred on the basis of transfer of ownership (tradition).

registered shares specify the name of the shareholder. They are
transferred by endorsement or in the manner prescribed by the
law regulating non-materialised securities (cession).
Three classes of shares:

ordinary

preferred*

non-voting shares
Each share gives the right to vote at the general meeting of the
company.
*only preferred shares may be issued without the right to vote
Limited liability company

a company into which one or several legal or natural
persons have invested their capital contributions,
participating in the share capital which was agreed upon
earlier so that the members are not liable for the
company's obligations
A limited liability company






a company
a legal person
a company of capital
a commercial company
members are not held liable for company's
obligations
has share capital

A limited liability company may be established
only simultaneously.

members of the company are not called shareholders but
members of the company

the lowest prescribed share capital of the limited liability
company is HRK 20.000,00

the minimum amount of a capital contribution is HRK 200.00


the share capital is divided into contributions
that may be expressed in securities
the company agreement is the basic founding
document of the company, and not the articles
of association as is the case in the joint stock
company
The obligatory bodies:

the management board (at least one member )

the general meeting

the Supervisory Board is an optional body of a limited liability
company
Commercial register

a public book containing data and information
about entry subjects that must be entered into
the register pursuant to the law (Article 2 of the
Court Register Act)
Subjects in the court register:









unlimited partnership
limited partnership
economic interest grouping
joint stock company
limited liability company
sole trader
institution
association of istitutions
other persons as prescribed by the law (Article 6 of the Court
Register Act)
Enforcement law

a branch of law regulating enforcement
proceedings and securing proceedings
Bankrupcy law

is regulated by the provisions of the Bankruptcy
Act (OG Nos. 44/96., 29/99., 129/00., 123/03.
and 82/06., 116/10., 25/12.)

Bankrupcy Act regulates:
-the conditions for the initiation of bankruptcy proceedings
-bankruptcy proceedings
-legal consequences of its initiation and implementation
-the bankruptcy plan
Reasons for bankruptcy :


insolvency
overdebtedness
Securities Market Act
The Securities Market Act regulates:







the procedure for the issuance of securities
transactions with securities and persons authorised to
conduct business with securities
conditions for organised public trading in securities
protection of investors and holders of rights from
securities
non-materialised securities
the organisation and powers of the Central Depository
Agency
the stock exchange and regulated public markets

transactions with securities may be performed in
Croatia only by authorised companies:

a brokerage firm

a bank licensed by the Agency and entered into
the court register
Role of the courts

In the Republic of Croatia the government is
divided into three branches of power:

legislative

executive

judicial (independent and autonomous )
Judicial power in the Republic of Croatia is exercised by:

misdemeanour courts

municipal courts

county courts

commercial courts

High Misdemeanour Court of the Republic of Croatia

High Commercial Court of the Republic of Croatia

Administrative Court of the Republic of Croatia

the Supreme Court of the Republic of Croatia
III. Company formation and creditor
protection
Joint stock company
Acquisition of shares

the decision on the issuance of shares is made by
the General Meeting or the founders of the
company in accordance with the statute

The company’s own shares are shares held by the
company and the rights of which are not in effect

The company may acquire its own shares only in the
following cases:

if such acquisition is necessary to avoid immediate and serious
damage threatening the company;

- if shares are to be offered in order to provide them to company
employees or to employees of companies affiliated with the
company;

- if shares are acquired with the aim of compensating the severance
shareholders in accordance with the provisions of this Act;

- if the acquisition is made without consideration or if by the
acquisition the financial institution purchases the shares on
commission;

- on the grounds of universal legal succession;

- pursuant to the decision of the general meeting to redeem the shares, in
accordance with the rules on the reduction of the share capital of the
company.

- on the basis of the authority of the General Assembly to acquire shares
which is worth 18 months at the most and determines the lowest and the
highest price that may be paid for those shares and the amount of share
capital referring tho those shares in such a manner that it may not exceed
the tenth portion of the mentioned capital
Relations between shareholders and the company

The rights of shareholders may be divided into:

economic rights

management rights

preferred rights
Distribution of profits

basic economic right of shareholders is the right to
participate in the distribution of profits

a dividend only in joint stock companies

paid from net profits

profits are shared in proportion to the par value of
shares

a different method of distribution of profits may be
prescribed by the Articles of association
Increase in share capital:

a company may acquire funds necessary for
investments and other purpose by taking an interest
loan and obligation to return it or on the basis of
systematic provisions of company law
– increase in capital
-by issuing new shares
The advantages of such an increase in capital are the
following:

new shares or increase in their nominal value belong to
shareholders on the basis of distribution in proportion to
their share in the company,

new shares are valid as paid in full

special financial statements are required for such an
increase

such increase in capital shall not affect the obligations of the
company towards third persons and additional obligations of
shareholders
Share capital reduction

The reasons for capital reduction transactions
are always of economic nature:

Capital surplus

Significant loss

Regular reduction of share capital - effective
reducation

Simplified reduction of base capital - a form of
nominal reducation

Withdrawal (depreciation) of shares - one of
the special legal techniques of regular, effective capital
reduction
Legal and technical reduction may be carried out in
the following manner:

by reducing the nominal share amount;

by consolidating the shares, which shall be allowed only
if the minimum par value may not be lowered any further;

by withdrawal (depreciation) of shares

The Act requires that the decision specifies the
purpose of such capital reductions, which
may be the following:

to compensate for a decline in value,

to offset losses

or transfer assets to capital gains
Dissolution of a company

The Act regulates the reasons and
procedures for the dissolution of a joint
stock company. Other reasons for the
dissolution of the company may be prescribed
by the Articles of Association

The company is dissolved after the completion
of liquidation proceedings regulated by the law
There are different cases of dissolution:

final decision of the court referred establishing that the entry of
the company in the commercial register was illegal

final court decision denying the initiation of bankruptcy
proceedings due to a lack of bankruptcy assets to cover the
costs of bankruptcy

dissolution of the company as an exceptional case possible
only when proposed by the Government of the Republic of
Croatia, and when the court adopts a decision on the dissolution

company without assets may be dissolved by deletion from
the commercial register
Limited liability company
Relations between members and the company

The rule is that funds corresponding to the amount
of share capital defined by the company agreement
must be contributed to the company

The Companies Act regulates legal relations between
the company and its members in two separate
subsections:
-
CAPITAL CONTRIBUTIONS
-
BUSINESS SHARES
Distribution of profits

The main economic right of members is to request the
payment of annual profit and of undistributed profit
(minus losses) from the previous years for as long as
the company exists

The basis for the distribution of profits, unless
otherwise provided for in the company agreement, is
the ratio between actual capital contributions of
members
Business shares

Unless otherwise determined by the company
agreement, the business share of a company
member shall be determined in accordance with
the amount of capital contribution that has been
taken over

The Companies Act differentiates between the
possibility of acquisition and pledge of
company's own business shares for which the
capital contribution has been fully paid and for
which it hasn't:
1.
The company shall not acquire or to
take in pledge its own business shares for which
the capital contribution amount has not been
fully paid
2.
The company may acquire its own business shares
for which the capital contribution amounts have been fully paid,
provided that the following conditions have been cumulatively
fulfilled:
- the capital contribution amounts have been fully paid
- the price of the capital contribution is paid by the assets
exceeding the share capital of the company
- provided the company is able to set up the reserves for
acquiring its business shares, pursuant to law, without reducing
the company’s share capital or reserves it is obliged to maintain
pursuant to the company agreement, and which may not be used
for payments to company members.
3.
A member of a limited liability
company may have a type of legal relation with
the company that is separate from its
membership.
Increase in share capital

There are two ways of increasing share capital:

EFFECTIVE AND

NOMINAL
Share capital reduction



when a company has too much capital and wishes to
reduce it
when it has suffered losses which it could not recover
within a reasonable period of time
when, instead of dealing with the nominal share capital
which has been objectively reduced, the company
decides to reduce the share capital to the actual value of
the company's assets
The reduction of share capital may be
effectuated by:
a) returning basic shares to company members;
b) through the reduction of par value of those shares;
c) through complete or partial exemption of
company members or their legal predecessors from
their commitment to full payment of their capital
contributions
Dissolution of the company
Reasons for dissolution of the company:






the expiry of the time limit defined by the company
agreement,
the decision of the company members
merger of the company into another company or
consolidation with another company
a final court decision
completion of bankruptcy proceedings
register court decision adopted in relation to shortened
IV. The system of corporate
governance
Organisational structure of the company

according to the new legislation in this area,
limited liability company is the only type of a
company with three lawful management bodies:
 the
General Meeting
 the
Management Board
 the
Supervisory Board
Management Board

the Management Board is the main body of the
limited liability company independent of the
General Meeting and the Supervisory
Committee

the Management Board consists of one or more persons

the number of members is determined in the Articles of
association, and if there is more than member of the
Management Board, a Chairman must be appointed

the members of the Management Board and its Chairman
are appointed by the Supervisory Board for a period of five
years
The members of the Management Board realise the right
to a remuneration for their work on the basis of a
contract concluded with the company. The remuneration
may be calculated in two ways:

in a fixed amount or

by participating in a certain extent of profits, that is, in a
share determined in a different manner (bonus)
The members of the Management Board may be
cleared of their liability if it is proved that:

they acted with the care of a prudent businessman,

on the basis of the General Meetings' decision
Supervisory Board

the main function of this body is to ensure
expert and objective supervision over the overall
effectiveness of the Management Board

the supervisory authority in the Croatian law are
confidential
members of the supervisory board shall be elected
by the general meeting of the company

Scope of work of the supervisory board and its
responsibilities
 Supervision
work
 Representation
function
The composition of the supervisory board must
reflect two of its basic functions:

a supervisor body for which majority shareholders are
primarily interested

an expert body capable of effective supervision and
influence on the successful business operations, growth
of the company and increase in profits
Without the consent of the supervisory board, a member of
the management board shall not:

either for his account or for the account of third persons,
carry out activities from the object of activity of the company

act as a member of the management or supervisory boards in
another company engaged in business similar to that of the
company

use company premises to perform activities for his own or
for another person's account

be a personally liable member of another company if the
company carries out activities from the object of activity of
the company in question
General Meeting

a company body in which shareholders realise
their rights and in which the will of all
shareholders is shaped and expressed
Decision-making and business operations:

conclusion and amendments of business contracts,

joining of a company,

merger of the company

transfer of assets

transformation of the company
General meeting: Shareholder democracy and
decision making

in principle, every shareholder may participate at the
general assembly and in the decision-making process,
unless he is the holder of shares that exclude this right

shareholders must be informed about the business
operations of the company as a precondition for voting
and decision-making before the general assembly
The right to information is protected:

by the law in cases when the provision of
information may be denied (taxes, information
harmful for the company, business secrets, etc)

by court protection of the right to information
There are two possible majorities for the
adoption of valid decisions:

simple majority

¾ of represented shareholders – a qualified majority

a greater majority than a ¾ majority
Best practices in public companies

basic rules concerning the management,
supervision and competence over companies are
contained in different regulations, for the most
part in the Companies Act and in other acts
and regulations regulating the capital market.

for the purpose of development of best practice
in corporate management in the republic of
Croatia, the Croatian Agency for the Supervision
of Financial Services and the Zagreb Stock
Exchange have prepared a Code of
Corporative Management
The basic principles of the Code are:

transparency of business operations

clearly defined procedures in the work of the Supervisory
Board, Management Board and other bodies and structures
responsible for taking important decisions

avoidance of the conflict of interest

efficient internal control

efficient division of responsibilities