The global financial crisis has not left Croatia untouched. The country is facing multiple problems in terms of public debt, illiquidity and insolvency of undertakings. At the end of 2012 the total debt of the undertakings registered in Croatia amounted to HRK118.8 billion (€15.75 billion – 35% of gross domestic product), while illiquidity rose to HRK44.5 billion (€5.9 billion). The situation has resulted in imminent bankruptcies, reduced economic activity and the consolidation of a number of sectors.
The Financial Operations and Pre-bankruptcy Settlement Act (Official Gazette 108/12, 144/12), which was implemented at the end of 2012, is one of the mechanisms designed to control these problems. The act was intended to regulate companies' obligations in terms of insolvency and the pre-bankruptcy settlement procedure. The legal purpose of the pre-bankruptcy proceeding is different from that of the bankruptcy proceeding, since its primary goal is the continuation of the business of the undertaking (the debtor) and the restructuring of its debts. Soon after the implementation of the act, it became evident that the pre-bankruptcy proceeding became the preferred way to deal with the problems of numerous undertakings, primarily because of adverse market conditions and increased difficulties with refinancing. Thus, it was no surprise to learn that at the beginning of 2013, more than 1,000 companies requested initiation of the proceeding.
With regard to the proceeding itself, one of the methods of debt consolidation (and, consequently, of dealing with illiquidity on the market) is the option that the debt-ridden undertaking, in accordance with Article 46 of the act, offers its creditors the conversion of receivables into share capital – more precisely, the creditors can opt to increase the share capital of the debtor by contribution in kind (eg, their receivables).
A question has arisen regarding the relationship between the potential acquisition of control over an undertaking and a pre-bankruptcy proceeding in accordance with the merger control rules. Namely, pursuant to Article 15(1) of the Competition Act (Official Gazette 79/09), a concentration is created by the change of control over an undertaking on a permanent basis, in particular by:
- the acquisition of the majority of shares or share capital;
- obtaining the majority of voting rights; or
- any other means in compliance with the Company Law and other rules.
Furthermore, the Competition Act prescribes exemptions from the aforementioned rule. Article 15(5) of the act stipulates that a concentration shall not be deemed to arise where control is acquired by a liquidator pursuant to the Bankruptcy Law. It should be borne in mind that the proceeding may end in a settlement by which an undertaking may acquire control over another undertaking. In this situation it would also be easy to imagine that control is acquired by a direct competitor in a dominant position on the market. Therefore, Article 15(5) implies that the exception described above is not applicable to the acquisition of control over an undertaking within the proceeding.
Thus, if the thresholds are met, the acquisition of control within the proceeding shall be notified to the Competition Agency, and a party can use, even purely for argument, the concentration-related rules concerning companies in financial difficulties.
Bearing in mind the general rule, it should be observed that it is forbidden to acquire control within the proceeding if it would lead to a concentration of undertakings that could significantly impede effective market competition – in particular, if such a concentration would create or strengthen the dominant position of an undertaking in a concentration.
However, undertakings may try to prove that in spite of the creation or strengthening of a dominant position, the benefits of concentration will outweigh the disadvantages of its implementation.
In this case, parties can use the 'failing firm' line of argument – taking into account that the undertaking might exit the market – which is acknowledged in EU court practice and explicitly mentioned by the agency's Guide to the Procedure for the Assessment of Concentrations, which serves as a soft source of law. Moreover, in the 2005 Belje/Agrokor concentration the agency confirmed that parties can use this argument.
However, it remains unclear whether this defence would be accepted by the agency if the acquisition of control took place within the proceeding.
Undertakings generally face a difficult task, given that they would have to indicate clearly the full set of assumptions required for the clearance of such concentrations – for example:
- that the undertaking is unlikely to meet its financial obligations, which will lead to its exit from the market;
- the absence of a less anti-competitive solution (eg, in the form of a more suitable buyer); and
- the exit of the undertaking's assets from the market, which would eventually be favourable for the acquirer, but detrimental to consumers.
Finally, in the case of acquiring control within the proceeding, the parties would need to prove not only these assumptions, but also that in the procedural sense, the proceeding presents a last resort for the undertaking, equal in outcome to a bankruptcy proceeding.
For further information on this topic please contact Gabriele Wahl Cesarec or Mislav Bradvica at Wahl Cesarec & Partners in cooperation with schoenherr by telephone (+385 1 4813 244), fax (+385 1 4813 073) or email (firstname.lastname@example.org or email@example.com).
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