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Commercial Code changes empower small fry

An amendment to the Commercial Code has removed major legal barriers that minority shareholders of Slovak firms face in acquiring information about decisions taken by majority shareholders. It has also strengthened minority shareholder rights, and given more power to creditors of troubled firms.
The changes, approved by parliament October 3, will require majority owners to increase the depth and amount of publicly available information about company results and management decisions. The new rules take effect as of January 2002.
Until now, foreign investment into Slovak firms has been brooked by the tendency of majority owners to basically ignore the demands of minority partners for a role in company decisions. Slovakia's moribund capital markets, too, have suffered from the insufficient protection and information available to minority investors who might otherwise have injected money into Slovak firms.

An amendment to the Commercial Code has removed major legal barriers that minority shareholders of Slovak firms face in acquiring information about decisions taken by majority shareholders. It has also strengthened minority shareholder rights, and given more power to creditors of troubled firms.

The changes, approved by parliament October 3, will require majority owners to increase the depth and amount of publicly available information about company results and management decisions. The new rules take effect as of January 2002.

Until now, foreign investment into Slovak firms has been brooked by the tendency of majority owners to basically ignore the demands of minority partners for a role in company decisions. Slovakia's moribund capital markets, too, have suffered from the insufficient protection and information available to minority investors who might otherwise have injected money into Slovak firms.

The amendment was welcomed by a major investor who has in the past been frustrated by treatment from majority owners.

Alexander Auboeck, the head of the European Bank for Reconstruction and Development (EBRD) office for Slovakia and the Czech Republic, said he hoped his bank's former troubles were a thing of the past.

"We are a minority shareholder, and have suffered from little access to information from majority shareholders, who have often simply ignored us," he said. "They listen to us, but it doesn't reflect in what they do. Sometimes we get a programme of shareholder meetings containing important proposals just before it starts, and we don't have a chance to react."

The EBRD during the 1990s criticised the handling of the Slovnaft refinery, in which it held a minority stake.

"I hope these problems will change," Aubeck said.

The amendment, which brings Slovak commercial legislation into line with that of EU member countries, will affect both joint stock companies and limited liability companies.

"Current legislation allows an information barrier to be erected by majority shareholders who often do what they want at joint stock companies," said Lucia Žitňanská, a member of the team which revised the Commercial Code.

Žitňanská said the management of joint stock companies would henceforth be required to provide public access to all documents related to the company's business license, such as company articles, annual financial statements, auditor's reports and other documents. These are all now publicly unavailable.

The amendment would also require management to give shareholders equal access to information about shareholders' meetings and the agendas of such meetings. "Today, many minority shareholders may receive an invitation for the meeting, and then learn that there will be a vote on a new board of directors, even though they don't know why such a vote is being held or who the candidates are," Žitňanská said.

The revision will also allow minority shareholders to sue company representatives for mismanagement, something that is not possible under the current legislation, which allows shareholders only to address complaints about management to the supervisory board. "In most cases this is useless because many supervisory boards tend to cooperate with management," Žitňanská said.

Since economic transformation accelerated in Slovakia after 1998 elections, institutions such as the World Bank and the EBRD have urged the Dzurinda government to give more protection to minority shareholders and implement stricter control of managers to avoid asset stripping.

"Although this amendment may not allow minority shareholder to stop suspicious behaviour by managers, it at least gives them some tools to draw attention to such practices," said Marek Jakoby, an analyst with the Mesa 10 think tank.

Jakoby said a typical example of such practices had been east-Slovak steel mill Vychodoslovenské železiarne (VSŽ), which last year was acquired by the American firm US Steel. After new managers were voted in by shareholders in late 1998, they discovered debts of more than Sk11 billion ($231 million), and found many parts of the sprawling VSŽ empire were a hard fit with a company geared towards steel manufacturing. The former management of father-son team Alexander and Július Rezeš, controlling a 30% stake in the monolith, was held to blame.

"Other smaller shareholders in the company weren't informed about crucial decisions by VSŽ managers because they didn't have any tools to get that information and influence the direction of the company," Jakoby said.

Similar examples of mismanagement, analysts say, have occurred at an estimated 30% of Slovak companies, which are indebted and were privatised during the first and second waves of privatisation under the government of Vladimír Mečiar in the mid 1990s.

But while the legal framework has changed, experts said that implementation of the new Code would be a far greater challenge than rewriting the rules. They stressed the need for efficient law enforcement.

"It's an improvement, but even the nicest law doesn't help if no environment exists to support its enforcement. The next step will be making sure this environment is there," Auboeck said.

"In Slovakia, the utility of each law depends on the human factor, and this is our greatest problem. If a minority shareholder has to wait for several months for a court verdict on his complaint, not even the best law will help to improve his protection," added Karol Balog of the Agency for Industrial Development and Revitalisation.

Main changes in the Commercial Code

- Documents such as company articles, annual financial statement, auditor's reports etc will be publicly available.
- Stricter conditions will be set for calling shareholders' meetings, providing all shareholders with specific information on agendas
- Minority shareholders with a minimum 5% stake (together or individually) will be able to sue individual members of the board for abuse of power, failing to perform duties, and will be allowed to call special shareholders' meetings to propose changes to management
- Citizens of member states of the EU or the Organisation for Economic Cooperation and Development (OECD), and who are members of a Slovak company's statutory bodies, will no longer need 'green cards' - official permission for long or permanent stay terms in Slovakia

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