When we described the take-over legislation in Slovenia, we speculated that it may be a factor slowing down the development of the capital market. The market capitalisation of the 27 companies quoted on the Ljubljana stock exchange at the end of 2020 was 16% of Slovenian GDP while in contrast the market capitalisation of the 104 companies quoted on the Zagreb stock exchange was 40% of Croatian GDP. Is the number of quoted companies and their market capitalisation the result of better legislation?
When Croatia was aspiring to join the EU in 2007 it passed a new take-over law in line with EU directives.
Some of the main provisions of the law were:
So far so good. The law did not have any of the shortcomings of the legislation in Slovenia. However, in 2013 Croatia joined the EU and during the same year changed the take-over law again. The “tiny” change was that after a take-over offer is made the investor does not have to publish another take-over offer (the 10% additional shares bought triggering a new take-over offer obligation was deleted). The explanation for this was that one possibility for an exit for the shareholders was enough.
Although this change appeared minor, it can have serious consequences for shareholder protection as can be seen in the take-over of Kraš d.d.
Kraš d.d. produces, distributes and sells confectionary products, predominantly chocolate, chocolate powder, candies, biscuits, and wafers. The company was founded in 1911 and is headquartered in Zagreb, Croatia.
The main financials of the company are presented in the table below.
The stock price in Croatian Kuna is shown in the following chart.
Kraš was taken over in 2019 by a meat production company from Croatia called Braća Pivac. Braća Pivac had been purchasing shares in Kraš for several years until it had built a 24.99% stake in the company by the end of November 2018.
The second biggest shareholder at that point was the Kraš ESOP (note that Kraš ESOP was de-facto controlled by the previous management of Kraš) with 19.76% of the company and Kraš also had 5.65% of treasury shares (note that by not counting the treasury shares the two entities together had 47.4%).
In November 2018 Kraš decided to issue new shares even though it did not have any major capital expenditure plans and was not particularly indebted (indebtedness of less than 3x EBITDA at the end of 2017). The company that bought the newly issued shares was of course Braća Pivac which raised their stake to 30.37% and the ownership stake of Kraš ESOP fell to 18.45% (note that by excluding treasury shares the combined effective ownership stake in Kraš of Braća Pivac and Kraš ESOP rose to above 50%). Due to the exception in the take-over law that when an ownership stake above 25% is obtained through a capital increase Braća Pivac was not required to launch a mandatory take-over offer.
Despite no legal requirement for a take-over offer on 9th September 2019 Braća Pivac informed Kraš that it intended to make a joint take-over offer together with Kraš ESOP.
At that point the stock price of Kraš was around 400 Croatian Kuna. Following the announcement a competing bidder called Kappa Star Group from Cyprus, that owns two confectionary and biscuit companies in Serbia entered the stage and started to aggressively purchase the remaining shares up to around 30% of the company because of which the stock price rose to more than 1.000 Croatian Kuna per share.
Based on this development Kraš ESOP publicly announced that it will not take part in the consortium take-over offer but Braća Pivac went ahead with a voluntary offer which did not have a minimal threshold to be deemed successful.
The take-over offer was 430 Croatian Kuna which was less than 40% of the stock price at the time when the offer was made. The legislation specifies that the average market price that needs to be reflected in the offer price is set by reference to a defined period before the obligation to make a take-over offer arose, but in the case of a voluntary offer the obligation arises when the take-over offer is published.
Due to the difference between the market price and the offered price the management of Kraš advised against accepting the take-over offer and only around 1% of the shareholders accepted the offer. Despite of that the offer was declared to be successful as it was voluntary.
Almost immediately after the take-over offer Braća Pivac bought the shares owned by Kraš ESOP for 861.20 Croatian Kuna per share and the 1% of shareholders who had accepted the take-over offer received the difference in price.
The take-over was completed and Braća Pivac did not have an obligation to launch a mandatory take-over offer. The remaining shareholder, of which Kappa Star Group is the largest, can therefore be bought out at different prices.
This example showcases all the deficiencies of the take-over law in Croatia and how the change implemented in 2013 drastically decreased the protection of shareholders.
In our opinion, the reason for the higher market capitalisation in Croatia is not superior take-over legislation but is more to do with the fact that the government of Croatia privatised more companies through a listing on the stock exchange than the Slovene government. In addition, before Croatia joined the EU the local pension funds had an obligation to invest a certain percentage of their assets in domestic stocks and they continue to favour this type of investment.