Official Position on the Application of Article 13(3)(2) of the Companies Takeover Act

The Croatian Financial Services Supervisory Agency (hereinafter: Hanfa) has determined the existence of a public interest in issuing this Official Position, following open questions that may arise in practice regarding the application of statutory provisions of the Companies Takeover Act (Official Gazette nos. 109/07, 36/09, 108/12, 90/13 – Constitutional Court Decision, 99/13 – Constitutional Court Decision; hereinafter: CTA).

Specifically, the question arises as to how Article 13(3)(2) of the CTA applies when Hanfa has, by decision, established the arising of an obligation to publish a takeover offer, but where the same decision does not include an order for the execution of that obligation. The relevant questions are:

• From when does such a case apply the prohibition on exercising voting rights from shares of the target company held by the offeror and persons acting in concert with it?
• Until when does such a prohibition apply?

With the aim of promoting, organizing and supervising measures for the effective functioning of the financial market in terms of harmonizing procedures when applying the provisions of the CTA, the following procedure is applied.

Based on Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette nos. 140/05 and 12/12), Hanfa, at the meeting of its Administrative Board held on 11 October 2022, adopted

OFFICIAL POSITION on the application of Article 13(3)(2) of the Companies Takeover Act

I. On 15 December 2013, the Act on Amendments and Supplements to the Companies Takeover Act (Official Gazette no. 148/13) entered into force, which amended and supplemented, among others, the provisions of Article 13 and Article 50 of the CTA.

Thus, Article 13(3) of the CTA prescribes cases in which the offeror and persons acting in concert with it cannot exercise voting rights from all shares of the target company they hold, and point 2 of paragraph 3 regulates the situation in which an obligation to publish a takeover offer has arisen for the offeror and persons acting in concert with it, which they have not fulfilled, but Hanfa has established the arising of that obligation by decision.

The relevant provision reads: "(3) The offeror and persons acting in concert with it may not exercise voting rights from all shares of the target company they hold in the following cases: … 2. when the offeror and persons acting in concert with it, after the arising of the obligation to publish a takeover offer, do not publish the notice referred to in Article 11 of this Act and Hanfa establishes by decision the arising of that obligation and orders taking actions to publish a takeover offer, from the day the Hanfa decision becomes final until the day of payment and transfer of shares deposited in the takeover offer."

In practice, situations may arise where Hanfa has established by decision the arising of an obligation to publish a takeover offer, without including in the same decision an order for the execution of that obligation. In such a case, uncertainties may arise regarding the correct application of the cited statutory provision. To avoid potentially incorrect procedures in practice concerning the application of Article 13(3)(2) of the CTA, which could result in abuse or circumvention of the purpose of the cited statutory provision, Hanfa's official position on its application is provided below.

II. The reasoning of the Act on Amendments and Supplements to the Companies Takeover Act (Official Gazette no. 148/13) clarifies that the amended paragraph 3 of Article 13 of the CTA is conditioned, primarily, by Decisions of the Constitutional Court of the Republic of Croatia U-I/4469/2008 of 8 July 2013 and U-I/2470/2010 of 9 July 2013, which annulled the provisions of Article 13(3) and Article 61(2) and (3) of the Companies Takeover Act (Official Gazette nos. 109/07, 36/09 and 108/12). In the amended paragraph 3, essentially, a different treatment is regulated regarding the moment from which the offeror and persons acting in concert with it cannot exercise voting rights from shares of the target company they hold, depending on whether the basic legal question has been resolved – whether an obligation to publish a takeover offer has arisen or not. In cases where Hanfa has established by decision the arising of that obligation (i.e., when the offeror and persons acting in concert with it have not, according to CTA provisions, published that the threshold was crossed and the obligation to publish a takeover offer arose), the offeror and persons acting in concert with it lose voting rights from shares of the target company from the moment that Hanfa decision becomes final. Thus, the prohibition on exercising voting rights arises:

• after the expiry of the time limit for filing an administrative lawsuit, or
• if an administrative lawsuit is filed, upon the delivery of a final court judgment confirming Hanfa's decision.

A different treatment is provided when the offeror and persons acting in concert with it independently publish that an obligation has arisen. Namely, in such a case the basic legal question is resolved - the offeror has published notice that an obligation to publish a takeover offer has arisen and its arising is not disputed and confirmed by the offeror. Then, the offeror and persons acting in concert with it lose voting rights from shares of the target company at the moment they fail to execute the offer in the manner and within the time limits prescribed by the CTA.

In situations where Hanfa establishes by decision the arising of an obligation to publish a takeover offer, without including in the same decision an order for the execution of that obligation, the question arises whether the prohibition on exercising voting rights for the offeror and persons acting in concert with it arises from the finality of Hanfa's decision establishing such an obligation, or whether such prohibition arises at another moment.

III. The aforementioned provision of the CTA stipulates that the exclusion of voting rights would arise if the offeror does not promptly publish a notice regarding the publication of a takeover offer (and Hanfa consequently establishes the arising of that obligation by decision), from the day the Hanfa decision becomes final, whereby an obligation for the offeror is established and actions to publish a takeover offer are ordered. However, this is not considered cumulative conditions for the application of the provision. The same Hanfa decision does not necessarily have to establish both the arising of an obligation and order actions to publish a takeover offer, which is also provided for in Article 48 of the CTA (supervisory measures), since these two actions are prescribed in that article as two separate supervisory measures1.

It is important to emphasize that the obligation to publish a takeover offer arises ex lege, i.e., by fulfilling statutory conditions. Hanfa's decision does not cause the arising of that obligation, but merely establishes that it arose previously, based on all relevant circumstances of the specific case in relation to statutory conditions. In this respect, Hanfa's decision regarding the establishment of the arising of an obligation to publish a takeover offer is declaratory in nature. As previously stated, the only difference between the two regimes of prohibition on exercising voting rights from shares of the target company for the offeror and persons acting in concert with it arises from the question of the status of the arising of an obligation to publish a takeover offer.

By comparing these two regimes, the following conclusions are reached:

• if the arising of an obligation is undisputed and notice of its arising has been published, the offeror and persons acting in concert with it lose voting rights according to Article 13(3) first indent point 1. of the CTA from the moment the statutory time limit under Article 24(1) of the CTA (30 days from the arising of an obligation to publish a takeover offer) expires, in which they were obliged to submit a request for approval of the publication of a takeover offer (and do not submit it), and they lose voting rights from the day they fall into delay until the day of payment and transfer of shares deposited in the takeover offer;
• if Hanfa establishes the arising of an obligation by decision, and the addressees of the decision (offeror and persons acting in concert with it) do not initiate administrative proceedings, the offeror and persons acting in concert with it lose voting rights according to Article 13(3)(2) of the CTA from the moment the time limit for filing an administrative lawsuit expires, and the prohibition applies until the day of payment and transfer of shares deposited in the takeover offer;
• if Hanfa establishes the arising of an obligation by decision, and the addressees of the decision (offeror and persons acting in concert with it) initiate administrative proceedings because they dispute the arising of an obligation, the offeror and persons acting in concert with it lose voting rights according to Article 13(3)(2) of the CTA from the moment Hanfa's decision becomes final, whereby the court confirms the correctness of establishing the arising of an obligation.

Article 50(3) of the CTA stipulates that a timely filed lawsuit against Hanfa's decision, in part of the decision establishing the arising of an obligation to publish a takeover offer, postpones the legal effects of that part of the decision until its finality. In such a case (when the arising of an obligation is disputed), the part of the decision relating to taking actions to publish a takeover offer is also postponed until the finality of the part of the decision establishing the arising of an obligation. Since the obligation arises ex lege, and when the court has confirmed its arising (when Hanfa's decision became final), the offeror and persons acting in concert with it are undoubtedly already in delay with fulfilling their obligations according to the CTA. According to Article 24(1) of the CTA, the offeror is obliged within 30 days from the day of the arising of an obligation to publish a takeover offer to submit to Hanfa a request for approval of the publication of a takeover offer, a takeover offer and documents referred to in Article 22(3) of the CTA. An order for execution of that obligation to the offeror (once the arising of an obligation is undisputed) arises from the law itself. However, if the offeror does not act accordingly, Hanfa is authorized by Article 48 of the CTA to order taking actions to publish a takeover offer. In this respect, it is not per se necessary that Hanfa's decision contains an order for taking actions to publish a takeover offer for the prohibition on exercising voting rights under Article 13(3)(2) of the CTA to arise.

IV. For reasons of constitutionality and proportionality, the offeror and persons acting in concert with it are also enabled to dispose of shares as provided for in paragraph 3 of Article 40 of the CTA, also by amendments in 2013. This possibility is also provided for by the provisions of paragraphs 4 and 5 of Article 13 of the CTA, relating to the termination of the prohibition on exercising voting rights. Namely, Article 13(4) prescribes the possibility and conditions under which the offeror and persons acting in concert with it, exceptionally from Article 13(3) of the CTA, the exclusion of voting rights ceases before payment and transfer of shares deposited in the takeover offer. This possibility is conditioned, primarily, by dropping to or below the threshold of 25% of shares with voting rights of the target company.

CLASS: 008-02/21-03/01 REGISTRATION NO.: 326-01-70-72-22-10 Zagreb, 11 October 2022. CHAIRMAN OF THE ADMINISTRATIVE BOARD Dr. Sci. Ante Žigman

1 (3) When establishing irregularities and/or illegality, the Agency may: 1. establish the arising of an obligation to publish a takeover offer; 2. order taking actions to publish a takeover offer, amend, supplement or withdraw a takeover offer,