Croatia, Hungary: INA MOL under pressure from European Commission, SEE Energy News
On Thursday the European Commission asked Croatia to amend INA Privatization Act, on the grounds that it violates the free movement of capital and freedom of establishment, which is an obligation that Croatia took in 2010 during the accession negotiations in the Chapter Free Movement of Capital. Such situation is very bad for Croatia and will be in favor of MOL as a shareholder who owns the half of the company and whose interests are not identical to the interests of the state as the other shareholder.
The Commission has sent Croatia a reasoned opinion, which is the second step in the initiation of proceedings for breach of European regulations, and if Croatia fails to bring the INA law into line with EU law within two months, the Commission may decide to refer the case to the Court of Justice of the EU. After accession to the EU on July 1 Croatia cannot have rights in INA exceeding the value of its shares. It is still unknown how Croatia would react to the letter received from Brussels. Most likely it will respond that the state does not intend to amend the Law on Privatization of INA until the arbitration proceedings related to Shareholders Agreement from 2009 is completed and which is speculated to be resolved in favor of Croatia. In addition, the re-trial to former Prime Minister Sanader for the corruption regarding the modification of that agreement is expected and this is another argument in favor of the Croatian side and Croatia could prosecute the head of MOL Zsolt Hernadi for the same case.
The topic related to Amendments of INA Privatization Law exists since 2013 and was first reported by our portal HERE, and we published a draft of this legal proposal.
According to the Law on Privatization of INA, special powers were granted to the State, including veto powers over INA’s decisions relating to the sale of shares/assets with a value exceeding certain threshold. As a consequence, stakeholders are not able to influence important company decisions in proportion to the value of their shareholdings, which may discourage potential investors from making investments in INA company. Croatia holds 44.8% of INA shares, MOL holds 49% of shares, while the remaining 6% is held by institutional and other investors.
Although the objective of protecting the security of energy supply could justify restrictions to the freedoms listed in Treaty on the Functioning of the European Union (TFEU), the unconditional veto powers granted to the state by the INA law seem to go beyond what is necessary and proportionate to achieve this objective, the Commission announced. It should be noted that the European Commission launched a number of procedures before the Court of Justice against a number of Member States for the existence of special rights, and nearly all cases are adjudicated in favor of the European Commission.
The last time amendments to the Law on Privatization of INA were mentioned was during Milanovic’s Government in February 2015. It was speculated that the state wanted to use amendments to ban the sale of INA shares without the approval of the Government, and thus prevent MOL from selling its shareholder package in case of failed negotiations with the Government. This topic was on the agenda in 2014, and it was about amendments prepared a year before by Sinisa Petrovic, a lawyer and former Chairman of the INA Supervisory Board.
Even in 2013, when Croatia was not a member of the EU, the Government has prepared a draft amendments to the Law on Privatization of INA according to which the state, as a part of the European Union accession process, waives special rights over INA defined in Article 10, titled Protection of interests and safety of the Republic of Croatia, which was abolished by those amendments. These amendments should have become effective on the day of accession to the EU, but in the end it was withheld. Namely, the European legislation does not allow special rights in companies where one of the owners is the state, and that is exactly the case with INA. Veto powers are in direct opposition to the governing rights of other shareholders and the principle of free movement of capital within the Union. It was stipulated in Article 10 of the Law on Privatization of INA, whose abolition was then foreseen, that Croatia has certain rights reflected in a special right of control over changes in ownership, with a mandatory consent from the Government for acquiring share over a certain amount of capital, as well as the in veto powers over certain decisions of the Management Board, controlled by Zoltan Aldott.
In addition, these rights provide the right of first refusal to purchase all or part of the company’s assets at estimated market value in the event of INA liquidation, and it is believed that these rights are not in accordance with the acquis communautaire. It is about the rights of so-called “the golden share”, and besides INA Croatia this problem had to be solved in the Croatian Telecom. But what does it really mean? By abolishing this article Croatia waives the right as being the owner of 25% of INA shares or more, may give approval to MOL for making decisions or entering legal transactions of take legal actions relating to the sale or joint ventures with a value exceeding 25% of INA equity. One should know that according to the market value INA is still the most valuable Croatian company with a market capitalization worth EUR 4.3 million.
Furthermore, the current law states that as long as the Republic of Croatia is the owner of 10% of INA shares and more, none of the other shareholders or his related parties, can without a prior special consent of the Government of the Republic of Croatia, acquire gradually or at one time, INA shares whose aggregate nominal value exceeds 10% of the share capital or approved percentage of shares which have voting rights at the general assembly of INA. The Article also states that as long as the Republic of Croatia is the owner of one of INA voting shares or more, INA or its governing bodies may, subject to a prior consent of the Republic of Croatia, make decisions such as dissolution of the company, waiver of the operating permit or authorization or any concession of interest for the Republic of Croatia, change of company or transfer of INA registered office abroad. In the event of liquidation process over INA, with the proposed draft Amendments, the State waived the right of first refusal to purchase all or part of INA assets at estimated market value. In other words, the question may arise whether MOL will be able to independently make decision regarding the exclusion of INA Naftaplin or any other part of the INA from the Company and transfer the company activity to another company or even to another country. Does this mean that MOL will introduce other partner to INA if it wants to? In any case, if amendments from 2013 that are fully consistent with the EU requirements are adopted, Croatian interests in INA in the future will be exclusively protected by the Shareholders Agreement between INA and MOL, respectively amendments from 2009. This Agreement will be decided in arbitration proceedings that should be completed by the middle of next year. It is important to mention that there is a Belgium precedent that resolved the case in the EU Court to its benefit which implied a set of criteria and conditions for, inter alia, performing activities of general interest such as the supply of gas, oil etc. which was accepted as the legitimate public interest.