Company mergers or selling a business
Mergeris laid down in the Companies Act (Official Gazette of the Republic of Croatia Nos 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08, 137/09, 125/11, 152/11, 111/12, 68/13, 110/15 and 40/19, hereinafter: CA) in such a way that, in a procedure involving the merger of several public limited liability companies into a new public limited liability company, reference is made to the application of the provisions on absorption (Art. 533 of the CA)
is an operation in which one or more companies, without going into liquidation, transfer all their assets (the company being acquired) to another company (the acquiring company) and cease to exist after the transfer is completed. In doing so, members / shareholders receive shares / units of the acquiring company for their shares / units. The members of the company being acquired shall become members of the acquiring company.
(there is no liquidation procedure as the company continues to exist within the acquiring company)
The CA allows for the following types of mergers:
- absorption of one or more public limited companies by another public limited company
- absorption of one or more public limited companies by a private limited liability company,
- absorption of one or more private limited liability companies by another private limited liability company
- absorption of one or more private limited liability companies by another public limited company
a) Prior actions before absorptions and negotiations:
- an assessment of the commercial rationality of the absorption each company performs for itself;
- Company management/executive directors shall negotiate mandatory and supplementary content of absorption contracts, time limits, etc. (Article 513(2) of the CA)
- assessment of the assets of the absorption companies to determine the share exchange ratio
b) The absorption contract shall be concluded by the management of the company and must be concluded in the form of a notarial deed (Article 513 of the CA)As soon as the absorption contract is concluded, it shall be entered in the commercial register. It shall be made available to shareholders.
c) Absorption reportIt shall be drawn up jointly by the management/executive directors of each company or board of directors, it legally and economically justifies the absorption contract (share exchange ratio and the level of cash supplements). (Art. 514 of the CA)
d) Revision of the absorption contract (Art. 515 of the CA)The auditors shall be appointed by the court and they shall produce an audit report to inform shareholders about the process and economic rationale of the absorption.
On the basis of these reports, the Supervisory Committee shall at the same time verify the absorption process and submit a report to the General Assembly.
e) Decision of the General AssemblyThe absorption contract shall be valid once it has been approved by the General Assembly of all the companies participating in the absorption. (Art. 516 of the CA)
f) Application for registration of an absorption and its effects (Art. 521 522 of the CA)Each company shall submit an application for registration of an absorption and the acquiring company shall be entitled to submit both applications.
By registering the absorption in the commercial register of the acquiring company,
- the company being acquired shall cease to exist and the acquiring company is the universal successor in law
- the assets and liabilities of the company being acquired pass to the acquiring company
All claims and liabilities vis-à-vis the company being acquired shall become the liabilities and claims of the acquiring company.
On the occurrence of the effects of the absorption, all the assets of the company being acquired are transferred to the acquiring company.
An exchange of shares/equities according to the estimated value of the absorption companies is performed and the shares/equities are exchanged in proportion to their values.
Mergeris laid down in the Companies Act in such a way that, in the process of merger of several public limited liability companies into a new public limited liability company, reference is made to the application of the provisions on mergers (Article 533 of the CA)
The main difference is that in a merger a new company is established, and the merging companies cease to exist; while an absorption is a procedure in which one company merges with another, already existing company. As a result, the company being acquired ceases to exist.
By definition, a merger is an operation in which, without going into liquidation, two or more companies (companies being acquired) set up another company (the acquiring company) and transfer all of their assets to it and cease to exist by way of a transfer. In doing so, members / shareholders receive shares / units of the acquiring company for their shares / units.
Under the CA, the following mergers may occur:
2 or more public limited liability companies in a new public limited liability company, i.e.
2 or more private limited liability companies in a new private limited liability company.
Legal consequences of the merger:
- The General Assembly of the company decides on the merger
- Shareholders/members of the merging company now become shareholders/members of the new company
- There is an exchange of shares/equities of companies, but, unlike absorptions, shares/equities are changed for shares/equities of a new rather than an existing company.
- All claims and liabilities of the merging company shall become the liabilities and claims of the new company at the time of the merger.
- All assets of the merging companies are transferred to a new company
- The new company should adopt a new articles of association/partnership agreement concluded by the management of the merging companies and appoint the first bodies
- The contract must be confirmed by the assemblies of the merging companies in order for it to be valid
- appoint members of the supervisory board/management board and auditors of the new company
- application for registration of a new company in the commercial register is submitted jointly by the management of the companies
The CA provides for the possibility of absorptions or mergers of companies from different EU Member States. Each of the companies being acquired or merging companies is governed by its national law as regards the conditions for carrying out the status change, the decisions to be taken and the legal consequences.
Rules on absorptions and mergers of companies from the same country have been harmonised between Member States.
Rules on cross-border absorptions and mergers:
- prescribe that there may be changes in status of companies from different countries;
- coordinate the actions of the relevant authorities of the Member States whose companies participate in the cross-border absorption or merger.
The concept of cross-border absorptions and mergers is governed by Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (Directive 2006/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (text valid for the European Economic Area) hereinafter Directive 2005/36/EC).
Provisions on cross-border absorptions and mergers are contained in provisions 549a-549k of the Companies Act.
A cross-border absorption is an absorption in which at least one of the absorption companies (the company being acquired or acquiring company) is legally constituted under Croatian law and the other company participating in the absorption is a company duly constituted under the law of another European Union country or a State party to the Agreement on the European Economic Area (Iceland, Liechtenstein and Norway). Limited liability companies can participate in cross-border absorptions: public limited liability companies (monistic and dualistic model) and private limited liability companies.
Relevant authority and regulations
Ministry of Justice and Administration
Ulica grada Vukovara 49
10 000 Zagreb
+385 1 371 45 80
Companies Act (Official Gazette 111/93, 34/99, 121/99 - authoritative interpretation, 52/00 – Decision of the Constitutional Court of the Republic of Croatia, 118/03, 107/07, 146/08, 137/09, 152/11 - consolidated version, 111/12, 68/13, 110/15 and 40/19)
Note: It should be noted that the Ministry of Justice and Public Administration is not the relevant authority for issues related to company transfers/disposals, this falls within the remit of the Ministry of Economy and Sustainable Development and we provide further explanation below with the remark —
SELLING A COMPANY is a term that is not defined by the CA. The closest terms that cover these matters relate to the transfer of shares laid down in Article 227 of the CA, and the disposal of equity as laid down in articles 412- 416 of the CA.
The Ministry of Economy states in the guide for business community:
‘Business transfer, as defined by the European Union, involves the transfer of ownership of a company to another person or to another company, thereby ensuring the continuity of the existence and business activity of the company. Most often, the start of the business transfer process is linked to the retirement of the founder of the company, but retirement is only one reason. Other reasons are most often personal (earlier disengagement, change of profession and interests), sudden situations (divorce, family illness, death), changes in the business environment that may require significant changes in the business that the current business owner is unwilling to undertake (new products on the market, new and aggressive competitors, etc.) or a desire to launch a new business venture (serial entrepreneurs).
The transfer of the business is explained in the mini guide for business community published by the Ministry of Entrepreneurship and Crafts (today’s Ministry of Economy and Sustainable Development).
A transfer of business in the form of a transfer of ownership of a company may take place through:
· transfer of ownership to family members (succession);
· sales of a company to non-family members in the company (management or employees) or to persons or businesses outside the company, including takeover
or mergers with other companies.’
Source: Mini guide for business community, Ministry of Entrepreneurship and Crafts, the current Ministry of Economy and Sustainable Development