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Acquisition of a Company’s Own Shares via Buy-Back Programs

Acquisition of a Company’s Own Shares via Buy-Back Programs


In Croatia, acquiring a company’s own shares is often a useful tool for the implementation of management and employee reward plans, employee stock ownership plans (ESOP), and various bonus policies of joint stock companies. The company would normally acquire a desired number of its own shares and distribute them to selected employees according to a reward program. EU legislation describes these programs as “buy-back programs.”

Joint stock companies performing buy-back programs related to employee reward plans must follow the rules of Croatia’s Company Law in acquiring their own shares. While a company would generally need to obtain approval from its general meeting to subscribe to its own shares, a resolution is not required in cases where the company’s own shares are to be acquired by the employees of the company or its affiliates within a year. The volume of shares acquired in this method cannot exceed 10% of the company’s share capital. Several accounting prerequisites must also be followed. The company must provide prescribed provisions for its own shares and the subscription of a company’s own shares cannot result in breach of share capital maintenance principles.

A joint stock company that holds its own shares is not entitled to any benefits arising from the shareholding. These shares do not participate in the distribution of profits and they do not provide voting rights to the company as their holder. 

Companies listed on the stock market are mostly concerned about the capital market laws’ potential classification of a company’s acquisition of its own shares as insider dealing or market manipulation, which constitute market abuse. Should the Croatian Financial Services Supervisory Agency determine market abuse, it has a handful of supervisory measures at its disposal, from a mere warning to temporary blocking of financial instruments. Criminal liability is also not excluded where trading in a company’s own shares can be qualified as misuse of capital markets under the Croatian Penal Code.

In order to minimize the risks, companies issuing shares can adopt buy-back programs that are compliant with the conditions regulated in the EU legislation, notably Commission Regulation (EC) No 2273/2003 of December 22, 2003. Trading in a company’s own shares will not be considered market abuse if it is based on buy-back programs intended to meet obligations arising from employee share option programs or other allocations of shares to employees of the issuer or its affiliate, and if it is carried out in accordance with the conditions laid down in the Commission Regulation. 

For instance, prior to the start of trading, full details of the program must be adequately disclosed to the public, such as the objective of the program and the conditions for trading, including maximum consideration and volume of trading. At the end of trading, the issuer must publicly disclose details of all transactions which were carried out within the program.

Transparency in the form of public disclosure of information is very valued as prevention of market abuse. Once the issuer has resolved to acquire its own shares internally and has subscribed to its own shares, the company must publish the exact number of its shares to the public within four trading days. Besides the Croatian Financial Services Supervisory Agency and the Zagreb Stock Exchange, listed joint stock companies will usually publish the acquisition of their own shares on their websites or sometimes inform the national state-owned news agency, Hina. 

While the implementation of a buy-back program in accordance with the Commission Regulation rules is the most secure option, the fact that some issuers do not adopt them does not necessarily mean that the intended buy-back of own shares is in itself prohibited. The actual circumstances should be taken into account in assessing whether a company’s program of trading in its own shares represents market abuse as defined in the Croatian Capital Markets Act or not. 

Failure to comply with the prescribed procedures for trading in own shares can result in misdemeanor liability and high penalties for the issuer and its responsible persons. For example, failure of the issuer to disclose the number of a company’s own shares acquired to the public within four trading days after each subscription or the buy-back of a company’s own shares which led to serious jeopardizing of the financial market can result in a penalty equaling three to five per cent of total annual turnover of the issuer in the year in which the undisclosed transaction with a company’s own shares occurred. If the issuer failed to disclose, but this failure did not jeopardize the financial market, the issuer can count on a penalty of between USD 15,000 and USD 37,500.

By Danijela Simeunovic, Partner, Kovacevic Prpic Simeunovic
This Article was originally published in Issue 3.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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