What does the amended Companies Act (ZGD-1K) bring?
The National Assembly of the Republic of Slovenia adopted the new ZGD-1K on 27 January 2021. That act amended the provisions of the Companies Act (ZGD-1),1 which regulate the remuneration of management and supervisory bodies in a joint stock company, improve possibilities for shareholders to participate at a company’s general meetings and regulate measures to manage conflicts of interest in the conclusion of transactions between corporations and related legal entities. The new act transposes into Slovenian law the provisions of the Shareholders Rights Directive II – Directive (EU) 2017/828.2 The amended ZGD-1K will enter into force 15 days after its publication in the Official Gazette of the Republic of Slovenia, while some provisions will be applied three to six months after the entry into force of the amended act.
The new ZGD-1K brings four amended and new content sections, as well as several substantive redacted amendments and corrections, which present an upgrade of the application of the ZGD-1 in practice. The following topics are new or amended in terms of content:
(1) shareholder identification, the provision of information and the facilitation of the exercising of shareholders’ rights at general meetings;
(2) the formation and disclosure of the remuneration policy for members of management and supervisory bodies in a joint stock company and related shareholders’ rights;
(3) the transparency and approval of related-party transactions (management of conflicts of interest); and
(4) the transparency of the operations of institutional investors, asset managers and proxy advisors.
Worthy of particular note among substantive redacted corrections is the harmonization of the definition of the term public interest entity, which in the Auditing Act (ZRev-2)3 included a broader definition (Article 3, item 44 of the Zrev-2) than in the ZGD-1. The definition has now been harmonized in such a way that the ZGD-1 refers to the ZRev-2. Also, Article 10a of the ZGD-1 has been amended and stipulates restrictions on establishing companies and entrepreneurs, and on the acquisition of partner status due to unfair business practices.
We have summarized some of the most important new features below.
Which policies will now affect public joint stock companies?
Companies subject to audit will have to include in their corporate governance statement additional disclosures regarding their diversity policy (Article 70(5), item 7 of the ZGD-1), in particular with an indication of when and how a company will formulate its policy. If the business report fails to contain all of the elements set out in Article 70 of the ZGD-1, i.e. including clarifications regarding the diversity policy, a company may be fined.
In addition to the diversity policy, public joint stock companies will have to formulate and publish a remuneration policy, while institutional investors and asset managers (new legal categories in the ZGD-1!) will have to publish a cooperation policy, in which they will have to describe, inter alia, how they include shareholders in their investment strategies, how they monitor their investments, how they exchange opinions with a company’s bodies and other stakeholders, etc.
What will the role of shareholders be in determining the content of management contracts?
A public joint stock company may only pay the members of its management and supervisory bodies and executive directors (in a one-tier board system) the remuneration that has been submitted to the general meeting for vote in the form of a remuneration policy! A company will have to consult with shareholders on all content of the remuneration policy; the resolution of the general meeting will, however, only be of consultative nature. If the general meeting does not approve the remuneration policy, a company (supervisory board) will have to submit the amended remuneration policy to the next general meeting. Any significant change in the remuneration policy will have to be submitted to the shareholders for vote. In any case, the remuneration policy will have to be renewed at a minimum every four years.
The remuneration policy will include significantly more information than according to the valid provisions of the ZGD-1. The remuneration policy will have to be clear, understandable, and comprehensive with a detailed description of all components of fixed and variable remuneration, including all allowances and benefits and a description of how an individual remuneration contributes to promoting the business strategy, long-term development and sustainability of a company. It will have to contain, inter alia, criteria for financial and non-financial performance and methods for determining compliance with those criteria, disclosure of legal transactions relating to remuneration and clarification of how the salary and employment conditions are taken into account in determining the remuneration policy.4 Severance pay may be paid under the ZGD-1K only in case of early contract termination, but not in the case of recall for reasons under indents 1, 2 and 3 of the second paragraph of Article 268 ZGD-1, or if a member of the management board / executive director terminates the contract at their own will.
A company will have to publish the remuneration policy and the voting results, as well as the annual remuneration report, the content of which is also specified in detail by the new ZGD-1K. Both documents will be available free of charge on company’s website for a period of at least 10 years.
The provisions of the ZGD-1K regarding the new remuneration policy regime and the remuneration report will enter into force within six months from the entry into force of the amended act.
What is considered a conflict of interest under the amended act?
The definition of a conflict of interest from paragraph 3 of Article 38a of the ZGD-1 remains unchanged, while paragraphs 4 to 11 of the aforementioned article are replaced by new articles, which specifically regulate the management of conflicts of interest when the company enters into transactions with members of management and supervisory bodies or executive directors at a joint stock company, and when the company enters into transactions with directors and procurators at a limited liability company. Concluding transactions with so-called related parties has also been amended; related parties include a wide range of related companies and individuals as defined in the International Accounting Standard 24 (e.g. shareholders holding more than 20% of voting rights in the company, associated undertakings, joint ventures, persons in the management of the company).
Article 38a of the ZGD-1 is not applied if it refers to managers and members of management and supervisory bodies at companies in which the state or local community has a majority share or dominant influence (the Act Amending the Integrity and Prevention of Corruption Act),5 while the new provisions of the ZGD-1K apply.
Which legal transactions will now require the consent of the supervisory board?
The amended act requires the consent of the supervisory board or the general meeting for all transactions, regardless of their value, which a joint stock company enters into with the members of management and supervisory bodies or executive directors and procurators, and a limited liability company enters into with directors and procurators. The same condition applies to their family members and legal entities related to them. Both categories of related parties are defined by the amended ZGD-1K.
In public companies (joint stock companies or limited liability companies), the consent is also required for transactions with related parties, if the value of an individual transaction or group of transactions with an individual party in a period of 12 months reaches 2.5% of the value of assets shown in the balance sheet from the last approved annual report (or consolidated annual report).
The audit committee must be involved in the decision-making process when consent is not given.
As previously, the consent of the supervisory board will be required for the conclusion of a performance contract (employment contract or civil law contract) and advisory and loan contracts concluded between members of management and supervisory bodies or executive directors and parties related to them and the company, in which they hold corporate functions.
Does the amended ZGD-1K also affect the operations of a limited liability company?
The ZGD-1K sets out the obligatory formation of a supervisory board in limited liability companies considered to be public interest entities. In such companies, a supervisory board must set up an audit committee. The new act stipulates some exceptions to this obligation. Provisions on the election of a supervisory board and on the formation of an auditing committee shall apply three months after the ZGD-1K enters into force.
A special article regulates the conclusion of transactions between a company and directors or procurators, and the related parties thereof. The act sets out an obligation to obtain the consent of the supervisory board, as well as the public disclosure of transactions in certain cases.
Which new breaches are set out in the ZGD-1K?
The amended ZGD-1K sets out several new penal provisions. Any waiving of the obligation to publish and provide free access to the remuneration policy and remuneration report is considered a breach. Liability for the breach related to the publication of the remuneration report will also be assumed by each member of management and supervisory bodies and the executive director. Breaches by proxies in the exercising of the voting rights of shareholders, institutional investors, asset managers and proxy advisors will be set out as new legal categories in the amended act.
1. Slovenian Companies Act (Slo. Zakon o gospodarskih družbah, ZGD-1; Official Gazette of the Republic of Slovenia, No. 65/09, as amended)
2. Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement
3. Auditing Act (Slo. Zakon o revidiranju, ZRev-2; Official Gazette of the Republic of Slovenia, No. 65/08, as amended)
4. Regarding remuneration policy under the Shareholders Rights Directive II, see also A. Strojin Štampar, Politika prejemkov organov vodenja in nadzora – de lege lata in uskladitev z direktivo o sodelovanju delničarjev (Eng. Remuneration policy for management and supervisory bodies, de lege lata, and compliance with the shareholder participation directive), Dnevi slovenskih pravnikov 2018, Podjetje in delo, No. 6-7, 2018, pp.1075-1090.
5. Act Amending the Integrity and Prevention of Corruption Act (ZIntPK-C; Official Gazette of the Republic of Slovenia, No. 158/20)