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Overview of the Croatian Companies Act

April 2007 - Corporate & Commercial. Legal Developments by BABIC & PARTNERS Law Firm .

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The principal law governing business organizations in Croatia is the Commercial Companies Act (CAA). It was enacted in 1993, entered into force in 1995 and was amended in 1999, 2000 and 2003. The statute is modeled on German and Austrian laws.

1. Business Entities

The principal law governing business organizations in Croatia is the Commercial Companies Act (CAA). It was enacted in 1993, entered into force in 1995 and was amended in 1999, 2000 and 2003. The statute is modeled on German and Austrian laws.

The CCA introduces five types of commercial entities:

  • general commercial partnership;
  • limited partnership;
  • joint stock company;
  • limited liability company; and
  • economic interest grouping.

There are two principle types of business organizations - commercial partnerships and corporations. Both commercial partnerships and corporations are legal entities. Among commercial partnerships the law distinguishes between the general commercial partnership and the limited partnership. The two types of corporations are the joint stock company and the limited liability company.

Croatian company law also recognizes economic interest groupings. The rules on economic interest groupings implement European Community law (EC Directive on European Economic Interest Groupings). The CCA defines an 'economic interest grouping' as a legal person set up by two or more natural persons or entities for the purpose of (i) facilitating or promoting their business activities and (ii) promoting or increasing the effect of these activities. An economic interest grouping may not retain profits.

 

Investors can generally choose between these types of business entities. However, certain enterprises must take on a particular form. Banks, for example, can only be organized as joint stock companies.

The CCA also contains rules on silent partnerships, although these are not legal entities. A silent partnership is established by contract. One person (the silent partner) contributes value to the enterprise of another person (the entrepreneur) and on the basis of this contribution participates in the division of profits or losses. Relations between the silent partner and the entrepreneur are regulated by the contract. The contract does not affect third parties and the entrepreneur has the sole power to conduct business and to act towards them.

Croatian law also recognizes civil partnerships. The civil partnership does not fall under the general discipline of company law. It is a contractual relationship between persons who pursue a common goal. It has no legal personality of its own. There are no formal requirements for the formation of a civil partnership so the agreement between the partners can be deemed to be formed by implication. Given that the civil partnership has limited importance in the Croatian practice of business law, this overview will only discuss commercial partnerships.

2. Foreign Investments

Croatian law on business organizations affords national treatment to foreign investors. Foreign investors may establish partnerships, companies or branch offices under the conditions applicable to domestic persons.

This treatment is based on assumed reciprocity, unless there is proof to the contrary. The reciprocity requirement is met for (i) founders of branch offices with the registered seat in a WTO member state or (ii) members of partnerships or shareholders of companies whose registered seat, residence or nationality is with a WTO member state.

Foreign investors are guaranteed free transfer and repatriation of profits and repatriation of the capital invested under the Croatian Constitution. The Constitution stipulates that rights acquired through investment may not be diminished by law or any other legal act.

3. Liability

Partnerships
In a general commercial partnership, partners are jointly and severally liable to creditors of the partnership. In a limited partnership, at least one partner is jointly and severally liable for the obligations of the partnership (the general partner) and at least one partner is not liable for the debts of the partnership if he/she has paid in a contribution (the limited partner). The limited partner may be held liable for the partnership's debts incurred before registration.

Corporations
In both the limited liability company and the joint stock company shareholders are not liable for the company's debts. There are exceptions to this general rule:

  • a shareholder may be held liable for the company's debts in cases of abuse;
  • the company's promoters are liable for debts incurred before the company's registration; and
  • the statutory rules may lead to shareholder liability for the company's debts (in the context of groups of companies).

4. Formation

Partnerships
General commercial partnerships and limited partnerships are established on the basis of a partnership agreement. A partnership is not established until it is registered in the register of the relevant local commercial court. Registration is made upon filing the application containing particulars required by law together with the partnership agreement.

There are no minimum capital requirements for the formation of a general commercial partnership. If not otherwise stated by the partnership agreement, partners are obliged to make equal contributions. Contributions may be made in cash, kind, labour or services. Registration is not conditional upon partners having made their contributions. Failure to make the contribution can lead to liability for partnership debts.

The same applies to the general partners of limited partnerships. Limited partners are not obliged to pay in their contribution before the company is registered. The limited partner is not liable for the partnership's obligation if he/she fully paid the contribution undertaken in the partnership agreement. However, failure to pay the contribution in full gives rise to the limited partner's joint and several liability along with the general partners for the debts of the partnership, but only up to the outstanding amount of the contribution.

Corporations
A limited liability company is established on the basis of notarized articles of association. The company may be established by one shareholder on the basis of a notarized deed of incorporation. The company is established by registration in the court register upon application to the relevant local court.

The minimum share capital of a limited liability company is Kuna 20,000 (approximately Euro 2,700). Contributions to the share capital may be made in cash or in kind. Prior to registration, each promoter must pay in at least 25% of his/her cash contribution whereas contributions in kind must be made in full. The total amount of all contributions paid in before registration must be not less than Kuna 10,000 (approximately Euro 1,350).

A joint stock company is established on the basis of notarized articles of association which the promoters adopt. The company may be established by one shareholder on the basis of a deed of incorporation. A joint stock company may be established by way of simultaneous incorporation or successive incorporation. In the former, promoters undertake all shares, adopt and execute the articles of association and declare the establishment of the company. In the latter, promoters adopt the articles, undertake a part of the shares and issue a public prospectus for subscription of shares. In both simultaneous and successive incorporation the company is established by registration with the court upon application by the members of the management board and the supervisory board.

The minimum share capital of the joint stock company is Kuna 200,000 (approximately Euro 27,000). Rules for contributions are similar to those applicable to limited liability companies. But unlike in the formation of a limited liability company, promoters must submit to the court a report on the establishment of the company. In addition, the members of the management board and of the supervisory board must audit the formation of the company. In certain cases, the formation of the company must also be audited by independent auditors appointed by the court.

5. Corporate Governance

Partnerships
Partnerships do not have bodies entrusted with management or representative authorities. Each partner of a general commercial partnership is authorized and obliged to manage the partnership unless otherwise stated by the partnership agreement. The authority to manage the partnership extends to all actions normally taken in the course of conducting business. An action cannot be taken if a partner authorized to manage the partnership objects to the action. Actions outside the normal scope of business can only be taken with the consent of all partners.

The same rules apply to general partners in a limited partnership. Limited partners are excluded from management. They can only object to decisions made and actions taken by general partners outside the normal course of business.

Each partner of a general commercial partnership is authorized to represent the partnership, except where the partnership agreement states otherwise. Such restrictions have no effect on third parties. The same applies to general partners of limited partnerships. Limited partners are excluded from representation.

Corporations
The mandatory governing bodies of a limited liability company are the shareholders' meeting and the management board. The articles of association can include a supervisory board. However, a supervisory board is a mandatory body in a limited liability company if (i) the average number of employees in one year exceeds 300, (ii) specific statutes provide that a company carrying out certain activities must have a supervisory board, (iii) the share capital of the company is larger than Kuna 600,000 (approximately Euro 81,000) and the company has more than 50 shareholders, (iv) the company is a holding company of joint stock companies and/or limited liability companies with mandatory supervisory boards (or enjoys direct shareholding in such companies in excess of 50%) and the average overall number of employees exceeds 300 and (v) the company is a general partner in a limited partnership and the average combined number of employees exceeds 300.

The two-tier board structure is mandatory for a joint stock company (i.e., supervisory board which appoints and revokes members of the management board).

Management board

The management board of a limited liability or joint stock company consists of one or more directors. In a limited liability company the members of the management board are appointed by the shareholders' meeting, unless the articles of association state otherwise. They can be changed at any time. Management decisions are taken jointly by the directors, unless otherwise stated by the articles of association.

Only directors are authorized to represent the company. The articles of association may restrict the representative powers of the directors, but such restrictions are only internal and are ineffective towards third parties.

In a joint stock company the members of the management board and the chairman of the board are appointed by a supervisory board for a term of office not exceeding five years. Appointments may be renewed. Members of the management board can only be changed by the supervisory board for material cause including:

  • a gross breach of duty;
  • the inability to conduct company business; or
  • a vote of no-confidence at the shareholders' meeting, unless such vote was made for manifestly arbitrary reasons.

Members of the management board can only take management decisions jointly, unless the articles of association state otherwise. A decision based on a minority vote is not valid. Any restrictions to the representative powers provided in the articles of association are of internal nature and are ineffective towards third parties.

Only the management board is authorized to represent the joint stock company. The management board represents the company jointly, unless the articles of association state otherwise.

There are no restrictions on the nationality of the directors of a limited liability or a joint stock company.

Supervisory board

In a joint stock company, members of the supervisory board are elected by the shareholders' meeting. However, the articles of association may provide that certain shareholders appoint members of the supervisory board. This right can only be granted to specific shareholders or holders of specific shares if they are shares whose transfer requires the consent of the company. Only one-third of the supervisory board may be appointed in this manner. The members of the supervisory board are elected or appointed for a term of office not exceeding four years and all may repeatedly be elected or appointed.

The shareholders' meeting may remove an elected member of the supervisory board before the expiration of his/her term of office. This resolution requires a majority vote of not less than 75% of the votes cast unless the articles of association provide for a larger majority or for additional requirements. If a shareholder made the appointment, he/she can revoke the appointed member of the supervisory board.

The supervisory board supervises the management of the company. It may inspect the business books and records of the company, treasury, securities and other matters. The board submits a written supervisory report to the shareholders' meeting. In addition, the board can convene a shareholders' meeting, and must do so whenever it is in the interest of the company.

The rules governing the supervisory board of a joint stock company apply analogously to the supervisory board of a limited liability company.

Shareholders' meeting

In a limited liability company shareholders adopt resolutions at the shareholders' meeting. This is unless all shareholders agree to vote in writing on the resolution or resolve in writing on a resolution.

The shareholders' meeting in particular decides on:

  • the financial reports of the company, use of realized profits and covering of losses;
  • the ratification of the acts of the members of the management board and supervisory board, if such exists;
  • the calls for payments of original contributions;
  • the appointment and removal of members of the management board;
  • the election and removal of members of the supervisory board if such exists;
  • the division and redemption of shares;
  • any measures to check and supervise business affairs; and
  • any amendments to the articles of association.

The responsibilities of the shareholders' meeting may be extended or reduced and set out in the articles of association. But the adoption of resolutions relating to the company's financial reports, the use of realized profits and covering of losses, as well as resolutions on election and removal of members of the supervisory board must remain the responsibility of the shareholders' meeting.

In a joint stock company the shareholders exercise their rights at the shareholders' meeting in particular on the following issues:

  • the election and removal of members of the supervisory board, unless they are appointed by particular shareholders directly;
  • the allocation of profits;
  • the ratification of the acts of the members of the management board and supervisory board;
  • the appointment of the company's auditor;
  • the adoption of amendments to the articles of association;
  • a decision on increase or reduction of the company's share capital;
  • an appointment of the auditors for the examination of matters in connection with the formation of the company or the business conduct of the company;
  • a decision on dissolution of the company.

6. Affiliated Companies

The CCA contains extensive rules on affiliated enterprises. These rules are modeled on the German Joint Stock Companies Act. The aim of these provisions is the protection of creditors, minority shareholders and the interests of the company.

7. Branch and Representative Offices

The branch office is the minimal form of presence that allows the establishing entity to conduct business in Croatia. Branch offices may conduct activities that form part of the registered objects of the parent entity. A branch office is established by entry in the court register of the relevant local court. The parent entity must adopt a resolution on establishment of the branch office that must be notarized. Details of these resolutions are listed in the CCA.

A branch office is not a legal entity. By its operations, rights and obligations are acquired by and for the parent entity.

Foreign businesses can establish representative offices in Croatia for the purposes of market research, marketing, information and representation activities. A representative office cannot conduct business in Croatia. The establishment of a representative office must be registered with the Ministry of Economy.

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BABIĆ & PARTNERS

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Tel: +385 1 3821 124

Email: boris.babic@babic-partners.hr