According to provisions of the Companies Act a contract on control and management shall be concluded in the case of forming an contractual group of companies. A contractual group of companies consists of a controlling company and one or more controlled companies that have entered into a contract on control and management.
A contract on control and management is regulated by the provisions of Articles from 554 to 566 of the Companies Act.
Concept, Conclusion, Amendments and Termination
A contract on control and management is a contract whereby a company grants the management and conduct of operations to another company.
If the companies making up a group based on equality in terms of Article 551 paragraph 2 item 3) of the Companies Act enter into a contract introducing uniform manner of management, such a contract is not be deemed to be a contract on control and management in terms of the Companies Act.
Concluding the Contract
A contract on control and management is concluded in writing and must be approved by the general meeting of each company that concluded it, by a three- fourths majority of votes of the attending stockholders, unless a higher majority is laid down by the articles of association.
In the case of a general partnership or a limited partnership, the contract on control and management is approved by all partners, i.e. general partners, unless otherwise stipulated by the memorandum of association.
The board of directors, i.e. supervisory board, if the company has a two-tier management system, compile a report for the general meeting at the occasion of submission of the contract on control and management to the general meeting for approval, wherein they shall also state the financial data and the data on the operation of the companies with whom the contract should be concluded. In the report the legal and economic reasons for concluding the contract and its content are elaborated, also including the amount of remuneration for management, i.e. the method of its determination and may be prepared as a joint report for all companies concluding the contract.
The contract on control and management is registered in accordance with the registration act, and may not enter into force before the day of registration.
An advertisement on the conclusion of the contract on control and management is published on the internet page of the business entities register on the day of registration of such contract, in the duration of at least 90 days as of the day of publication.
Amendments and Termination of the Contract
A contract on control and management is amended in accordance with the procedure under which it was concluded.
Unless otherwise agreed, and if the contract on control and management was concluded for an indefinite period of time, each of the contractual parties is entitled to terminate the contract only at the day of ending of a business year or other agreed accounting period, by giving a termination notice in writing to all other contractual parties at least 30 days prior to the end of the business year, i.e. other agreed accounting period.
The termination of the contract on control and management on any ground is registered in accordance with the registration act, and an advertisement on the termination of the contract on control and management is published on the internet page of the business entities register on the day of registration of such termination of the contract, in the duration of at least 90 days as of the day of publication. The advertisement shall also include a notification for the creditors on their right to seek relevant protection from the controlling company with respect to the collection of their claims towards the controlled company.
Rights, Obligations and Responsibilities Stipulated in the Contract on Control and Management
In case of existence of a contract on control and management, a controlling company is entitled to issue binding instructions to a subsidiary on the manner of conducting operations, guided by the interests of the group.
If the implementation of a particular instruction requires a decision or approval by the board of directors of a controlled company, i.e. its supervisory board if the subsidiary has a two-tier management system, and such a decision or approval has not been granted within a reasonable time, the director, i.e. executive board of the controlled company shall, without delay, notify the controlling company thereof, unless otherwise stipulated by the contract on management and control. In the case, the instruction may be re-issued only with the consent of the board of directors of the controlling company, i.e. its supervisory board if the controlling company has a two-tier management system.
Responsibility of Directors of the Controlling Company
Directors of the controlling company shall issue the binding instructions to the controlled company with due diligence, while at the same time the provisions of Art. 63 through 80 of the Companies Act on the special duties of directors apply mutatis mutandis to the directors of the controlling company and in relation to the controlled company.
Exclusion of Liability of Directors of the Controlled Company
Directors, i.e. members of the supervisory board are not liable for damages incurred as a consequence of breach of special duties towards the company referred to in Art. 63 through 80 of the Companies Act if they acted in accordance with the binding instructions.
Liability of the Controlling Company
The controlling company is liable for damages sustained by the controlled company due to acting in accordance with the binding instructions.
Protection of Stockholders and Creditors of the Controlled Company
Payment of Consideration
A consideration based on a contract on control and management may not be paid if the controlled company has operated with losses. The consideration for the period during which the controlled company operated with losses may be paid in the year when the controlled company generated profit.
An interest is not calculated in case of a claim for the consideration.
Appropriate Consideration to External Stockholders
An external stockholder in terms of the Companies Act is each stockholder of a controlled company who is neither a controlling company, nor a stockholder of the controlling company.
A contract on control and management shall define an appropriate consideration per stock which the controlling company shall pay to the external stockholders on an annual basis. The consideration is determined according to a projection of the average expected dividend per stock for the following three business years which a company would pay in case a contract on control and management would not be concluded, at least in the amount of an average dividend per stock for the previous three business years.
If the controlling company is the sole stockholder of a subsidiary, the contract on control and management does not provide for the consideration per stock which the controlling company shall pay to the external stockholders on an annual basis.
For amendments to, or termination of the contract on control and management, which change the consideration given to those stockholders, consent of those stockholders is necessary which they grant as a special class of stocks.
Court Evaluation of the Appropriateness of the Consideration
An external stockholder of a subsidiary may, within a term of three months from the day of registration of the contract on control and management, i.e. amendments thereto, in accordance with the registration act, seek from the competent court to determine the appropriate consideration in non-contentious proceeding if he deems the consideration determined by the contract inappropriate.
If, acting pursuant to the motion in non-contentious proceeding, the court determines a consideration in a higher amount than agreed in the contract, the controlling company is entitled to terminate the contract on control and management within a term of three months as of the day of finality of the court’s ruling, without a notice period for termination.
Right to Sell Stocks
A contract on control and management shall provide for a right of the external stockholders to sell their stocks to the controlling company at a price which corresponds to the market value of stocks determined in accordance with Article 57 of the Companies Act. Otherwise, the contract is null and void.
Instead of paying the price, the contract on control and management may stipulate a right to exchange stocks for the stocks of the controlling company, at the ratio provided for in the contract. The ratio shall correspond to the ratio at which the stocks of a controlled company would be exchanged for the stocks of the controlling company in case of acquisition of the controlled company by the controlling company. An additional payment in cash to external stockholders may also be stipulated, which shall be subject to the provisions of the Companies Act governing additional payment in cash in the event of status changes.
Court Evaluation of the Price Appropriateness
An external stockholder that deems the price of stocks which sell to the controlling company or the ratio inappropriate may, within three months from the day of registration of the contract on control and management, i.e. its amendments, in accordance with the registration act, seek from the competent court to determine the appropriate price, i.e. ratio in a non-contentious proceeding.
If, at the request of an external stockholder, the court determines a higher price or a more favorable ratio for external stockholders, the company shall publish on its internet page the court decision immediately upon finality, and submit it to the register of business entities for the purpose of publication on the internet page of that register.
The court decision on a higher price or a more favorable ratio for external stockholders binds the company in relation to all external stockholders.
Protection of Creditors
If a contract on control and management terminates, a controlling company shall provide the creditor of a controlled company, at his written request filed within a term of six months after the termination of that contract, with the appropriate protection for collection of his claims incurred before the registration of the termination of that contract in accordance with the registration act.
Creditors whose claims are secured, or who, in the event of bankruptcy of the controlled company, would be in the first or second rank of payment priority in terms of the bankruptcy act, are not entitled to the protection described in the paragraph above.