The Latest Amendments to the Company Law
The National Assembly of the Republic of Serbia adopted the Law on Amendments to the Company Law on 8 June 2018 (hereinafter the “Amendments”), nevertheless, the majority of its provisions became applicable as from 1 October 2018. The Amendments introduce some new corporate governance rules, as well as few obligations for commercial subjects, those most relevant are explained in some details below. The reason for adoption of these Amendments was to help overcome challenges in the practical implementation of the Company Law, as well as to achieve harmonization with EU law. With regard to the latter, two new forms of commercial entities have been introduced – the European Economic Interest Grouping (EEIG) and the European company (Societas Europea – SE). However, the Amendments regarding the new forms, as well as those concerning cross-border mergers and acquisitions, will start to apply from 1 January 2022.
The Amendments introduce the possibility of verification of the Memorandum of Incorporation, as well as signing of such document, by a qualified electronic signature. Speaking of the Amendments related to electronic services, all companies and entrepreneurs, as well as branches and representative offices of foreign companies, are required to register their e-mail address with the Serbian Business Registers Agency (“SBRA”) by 1 October 2019.
The abolition of use of corporate seal
One of the changes that will facilitate performance of business activities is certainly the abolition of use of corporate seal. While, prior to the effective date of this Law, companies were not required to use their corporate seal unless otherwise provided under some particular regulations, the Law provides that a separate regulation can no longer impose the use of the seal requirement.
Business name that includes Serbia or SRB
Business name of newly established companies can include a reference to “Serbia”, the name of a territorial unit or autonomous province of Serbia, including all forms of words that resemble such, as well as acronym “SRB”, only upon obtaining a prior approval from the Ministry of Economy.
Conflict of interest
There are also novelties in the rules on transactions involving conflict of interest. Before these Amendments, a prior approval was required for any transaction to be performed by the company, in which controlling or significant shareholders, supervisory board members, directors or other representatives have personal interest. However, an exception is now made for transactions whose value does not exceed 10% of the total value of all corporate assets based on the latest balance sheet – in such a case, a prior approval is not required. The same is true in the case where the significant or controlling shareholder of the company is the Republic of Serbia, autonomous province or local self-government units. On the other hand, procedure in the case of the necessary approval and procedure after performance of the relevant transaction are now a bit more complex, for transparency purposes.
New rules on increase and reduction of share capital in LLC
Regarding the increase in the share capital, decision on increase can be rendered even before investment/payment of all contributions, but only if a new member is joining the company, in which case the latter has to invest its contribution simultaneously with accession. Except in this case, the provisions governing capital increase in a joint stock company (“JSC”) remain accordingly applicable to capital increase in a limited liability company (“LLC”).
However, the rules on reduction of the share capital in JSC are no longer accordingly applicable to LLC. The share capital of LLC can be decreased for the purposes of: (i) covering losses; (ii) creating or increasing the reserves for covering future losses or for increase of share capital from net assets; (iii) releasing a shareholder from his obligation to pay the contribution; (iv) withdrawal and cancelation of a shareholder’s share; (v) cancellation of own shares. Thus, this means that the basic capital of overcapitalized LLC cannot be decreased for the purposes of making payments to its member(s).
The procedure for protection of creditors in the case of share capital reduction remains the same. However, provisions governing protection of creditors shall not be applied in the following cases of share capital reduction: (i) for the purpose of covering losses; (ii) for the purpose of creating or increasing the reserves for covering future losses or for increase of share capital from net assets; (iii) cancelation of own shares; (iv) withdrawal and cancelation of a member’s share (if such member has paid the entire contribution).
Share transfer in the case of restrictions of such transfer, i.e. required consent of other members/company for the transfer of share
A member does not have to file in a lawsuit in the case the company withholds its consent for share transfer (where such consent is required by the Memorandum of Incorporation), and it does not simultaneously determine the third party as a buyer of such share, as required under the Amendments. The company is required to buy such share from the seller itself, within 30 days from the expiry of the deadline during which the company can withhold its consent. Otherwise, the seller is authorized to sell his share to any third party at his option (without a court proceeding to that effect).
The company does not have an option to return additional payments to the respective members, but has an obligation to return them in the following cases: (i) within the deadline set in the Memorandum of Incorporation, i.e. upon member’s request if the deadline is not set, provided such payments are not necessary to cover losses; (ii) when the member who has made such payments is no longer a member, upon his request, provided such payments are not necessary to cover losses, if such return is not contrary to the provisions of the Company Law; (iii) when a member transfers his share to another party, the company is required to return to such member any additional payments he has made (unless otherwise provided by the SPA).
Additional payments, as stated above, shall not be returned before the payment of contribution by the member who made the additional payments.
Withdrawal of a shareholder from LLC
Before effective date of these Amendments, a member could not withdraw from LLC (even without compensation for his share) if such withdrawal would cause damage to the company, or if it would allow him to circumvent duties owed to the company. The Amendments introduce a new rule – a member can withdraw from the company at any time, for no specific reason, provided there are no outstanding obligations that he owes to the company on the basis of uninvested contribution.
A share of a withdrawing member shall become company’s own share automatically, i.e. without rendering a company’s decision on acquisition of own share.
If a member wants to withdraw from the company for a reasonable cause, he can still claim compensation for his share, but the novelty is that he will not be required to invest his subscribed but unpaid contribution (in such a case, the share capital shall be reduced for the amount of uninvested contribution). In any case, a withdrawing member (requesting or not requesting compensation) shall not be obliged to meet his previously determined obligation to make additional payments.
Speaking of own shares, a company can no longer choose to cancel own shares upon acquiring the same – cancelation of own shares is allowed only if the company does not dispose of such shares within 3 years after acquiring.
LLC company’s assembly and improved position of minority members
The authorities of the company assembly provided under the Company Law cannot be reduced or transferred to another corporate body.
As for minority members, percentages for undertaking some actions are now decreased: (i) request for shareholders’ assembly meeting can be submitted by shareholders having 10% (instead of 20%) of votes; (ii) members jointly holding 5% (instead of 10%) of share capital are entitled to include an additional item on the agenda for a shareholders’ assembly meeting.
Additional novelty is that a member holding 5% of share capital can submit a request to the company for filling a lawsuit seeking exclusion of another member. If the company denies such a request, such member is entitled to file the lawsuit himself.
Acquisition and disposal of high-value assets – high-value transactions
The Amendments specify the transactions that are considered to be high-value transactions, for which a prior approval of the company’s assembly is necessary. The previous version of the Company Law provided that, for the purposes of determining whether a transaction falls within the scope of acquisition/disposal of high-value assets, when more than one related transaction was consummated within a one-year period the aggregate of all transactions was deemed to make one transaction. The Amendments introduce an exception to this rule –simultaneous pledge, mortgage and/or other means of security interest granted by the company in order to secure its commitment under a credit facility agreement, loan or other legal transaction, are not deemed to be one high-value transaction; only the transaction of the highest value shall be considered when determining whether a high-value transaction has been consummated or not.
The Amendments also define the term “related transactions”; related transactions are several individual transactions: (i) undertaken to achieve the same purpose; (ii) transactions whose relation stems from the nature of the one major transaction for the performance of which those individual transactions have been undertaken.
Additionally, the company itself and its members are now entitled to file a lawsuit seeking damages from the board members/supervisory board members in the case of damage caused by acquisition/disposal of major assets made without decision of the company rendered in that respect.
Improved position of (minority) shareholders in JSC
The deadline for the payment of dividends to the shareholders has become a mandatory part of a decision on distribution of profit, and such deadline shall not be longer than 6 months as of the rendering of the decision.
The pre-emptive rights can be excluded only by a decision for which the majority of ¾ of members of the same class of shares have voted.
The position of minority shareholders is especially improved within the procedure for compulsory sale and compulsory purchase of shares (squeeze-out and sell-out). The deadlines for conducting such procedures are now shortened. However, the Articles of Association of the company cannot prohibit squeeze-out, neither it can impose higher percentage than the one determined in the Company Law as a condition for the squeeze-out. The decision of the company to this respect shall be rendered regardless of encumbrances, restraints on alienation, limitations or third parties’ rights relating to the shares being the subject matter of the squeeze-out. The buyer shall deposit the purchase price with the Central Register within 3 days from the day of delivery of the company’s decision to the Central Register. If any of the deadlines are not complied with, the decision on squeeze-out shall become null and void. Additionally, potential litigation before the competent court regarding the purchase price shall not suspend the payment of such price to the shareholders. If a shareholder wins such litigation, the court’s decision rendered to that respect shall effect all other shareholders whose shares are the subject matter of the squeeze-out (a class action).
As for the sell-out, a shareholder whose shares are the subject matter of the sell-out is entitled to initiate litigation before the competent court not only in the case he is not satisfied with the determined purchase price, but also if the company does not determine such price within the given time (60 days), as well as in the case the buyer does not deposit the purchase price within 30 days after receiving the notification of such price.
Corporate governance and other corporate matters in JSC
The decision on the increase of the basic capital can be rendered before the total payment of contributions for shares from earlier public offering, but only if the capital is being increased by in-kind contributions, which shall be invested immediately.
As for changes to the basic capital, the deadline for initiating litigation for establishing a security for creditor’s claims in the case of decrease in the basic capital is now shortened to 1 month. As for changes in the basic capital occurring during status changes, along with the decision approving the status change, the company’s assembly shall also render a decision on increase/decrease in the basic capital, as applicable.
From now on, the supervisory board shall approve the engagement of executive directors and give consent to the contracts to be concluded with the executive directors in that regard.
Decrease in the basic capital below the prescribed minimum and failure to appoint a new director within 60 days from the last director’s resignation are no more reasons for compulsory liquidation.
The procedure for compulsory liquidation is finally regulated. Such procedure shall be administered by the SBRA. Prior to the liquidation, the company will receive a notice of impending compulsory liquidation, published on the website of the SBRA, unless the company cures the deficiencies within 90 days therefrom. If the deficiencies leading to the compulsory liquidation are cured, the SBRA shall administer the liquidation ex officio.