The essential Corporate Law in Serbia

These are the highlights if you want to know more about the essential Corporate Law in Serbia. This entry was drafted by Karanovic & Partners. Link to E-Iure Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Karanovic & Partners is an excellent option in Serbia.

Corporate Law in Serbia is generally regulated by the Company Law published on the 27th of May 2011, in the “Official Gazette of the Republic of Serbia” no. 36/2011 which came into force on the 4th of June 2011, and by the Law on Registration Procedure with the Business Registers Agency published on the 27th of December 2011, in the “Official Gazette of the Republic of Serbia” no. 99/2011 which came into force on the 4th of January 2012. The Company Law was amended on the 27th of December 2011, the 5th of August 2014, and the 20th of January 2015 (“Official Gazette of the Republic of Serbia” nos. 99/2011, 83/2014 and 5/2015) and the Law on Registration Procedure with the Business Registers Agency was amended on the 5th of August, 2011 (“Official Gazette of the Republic of Serbia” no. 83/2014).

The Company Law regulates the legal status of companies and entrepreneurs, their incorporation, governance, affiliation, changes of legal forms, status changes and the liquidation of companies. The Law on Registration Procedure with the Business Registers Agency regulates the conditions, subject, and procedure of registration with the Business Registers Agency and the operating procedure of this Agency.

1.             Types Of Companies

Business in Serbia may be conducted by incorporation of the company in one of the following legal forms:

• general partnership;
• limited partnership;
• limited liability company; and,
• joint stock company.

Alternatively, business may be conducted by either the incorporation of a branch office (in Serbian: ogranak) or a representative office (in Serbian: predstavništvo) of the foreign company. Branch or representative offices are not considered separate legal entities, so the foreign company remains liable for all obligations assumed by a branch office or representative office.

General and limited partnerships are not that common in Serbia due to the unlimited liability of shareholders for the debts of the company. The minimum share capital of joint stock companies is rather high and it is in the amount of approx. EUR 25,000, which makes this legal form seldom used in practice as well.

The limited liability company (in Serbian: društvo sa ograničenom odgovornošću – d.o.o.) is by far the most commonly used legal form in practice. This is due to the rather straightforward incorporation procedure, minimum requirements in relation to the share capital of the company (approximately EUR 1), and the fact that the shareholders are not liable for the debts of the company (except in specific circumstances, e.g., if there are grounds for the piercing of the corporate veil). A shareholder may have only one share in the company, which is expressed as a percentage.

The capital contributions by shareholders can be made in money – Serbian dinars or “in kind”, such as equipment, goods, know-how, etc. which do not have to be paid/contributed before registration, but within five years after the execution of the founding act. The value of contributions in kind can be assessed by the shareholders themselves.

The limited liability company can engage in all legally permitted activities, but its predominant business activity (taken from an exhaustive list of business activities provided by Serbian laws) must be defined in the Memorandum of Association and registered with the Business Registers Agency. There are certain activities (e.g. financial services and insurance services), that may only be performed by an entity incorporated in a certain legal form (e.g. joint stock company), and certain activities (e.g. trade in poisonous goods, medicines or weapons) that may be subject to licensing requirements.

Joint stock companies (in Serbian: akcionarsko društvo – a.d.) can be founded by one or more natural and/or legal persons, and the company’s share capital is divided into shares. Shareholders are not liable for the debts of the company (except in specific circumstances, e.g., if there are grounds for the piercing of the corporate veil). There are two types of joint stock companies, closed and open (public), depending on whether the shares are listed on the stock exchange market or not. Currently, most of the joint stock companies in Serbia are banks and insurance companies, as this is the statutory requirement of the specialised laws. As mentioned, the minimum amount of the initial share capital of the joint stock companies is significantly higher than the one prescribed for limited liability companies, and it amounts to approx. EUR 25,000.

Joint stock companies can issue ordinary and preference shares. Ordinary shares have the same nominal value or have no nominal value at all, in which case their accounting value is used as grounds for determining the number of dividends or liquidation proceeds belonging to their holders. Preference shares include, in particular, priority rights in the payment of dividends, and priority in payments of the liquidation proceeds. However, holders of preference shares do not have voting rights except in a limited number of cases explicitly stated in the law. The company’s Articles of Association can prescribe that the company can approve shares that are not issued. These shares can be issued for the purposes of increasing the share capital of the company by making new contributions.

2.   Corporate Bodies In Limited Liability Companies And In Joint Stock Companies

• Limited liability companies

Corporate governance in a limited liability company can be organised as a one-tier or two-tier system.

In the one-tier system, besides the Shareholders Assembly, a company has one or more directors (not forming any separate corporate body, such as a Board of Directors), all of whom are presumed to act as executives, in charge of the day to day running of the business of the company.

In the two-tier system, besides the Shareholders Assembly, there is (i) a Supervisory Board which acts as a separate supervisory and controlling body; and (ii) one or more directors (executives). The Supervisory Board consists of at least three members, appointed by the Shareholders Assembly, none of whom can serve as (executive) directors. The Supervisory Board in turn appoints and controls the work of director(s) who are in charge of running the daily business of the company and are considered as executives.

The Shareholders Assembly operates through sessions which can be held in person or via a conference call. In case of a sole shareholder, the functions of the Shareholders Assembly are performed by the shareholder itself.

If not otherwise provided by the Company Law or the company’s Memorandum of Association, the Shareholders Assembly:

• adopts amendments to the Memorandum of Association;
• adopts the financial statements, and auditor’s statements if the financial statements were audited;
• appoints and dismisses the directors of the company, and adopts reports of the directors of the company;
• supervises the work of directors, determines the compensation of directors i.e. guidelines for the determination of such compensation;
• decides on increases and decreases to the company’s share capital and on any emission of securities;
• decides on the distribution of profit and the manner of covering losses, including the determination of the day of acquiring the right to participate in profit and the day of the payment of dividends to the shareholders of the company;
• appoints the auditor and determines the compensation for his engagement;
• decides on the initiation of the liquidation procedure, as well as on the submission of a proposal for the initiation of company bankruptcy proceedings;
• appoints the liquidation administrator and adopts the liquidation balance sheets and the reports of the liquidation administrator;
• decides on the acquisition of treasury shares;
• decides on additional payments to the shareholder of the company and on the return of such payments;
• decides on the shareholder’s request for the withdrawal from the company;
• decides on the exclusion of a company shareholder due to a non-payment, i.e. failure to pay-in the subscribed share;
• decides on the initiation of the proceedings for the exclusion of a company shareholder;
• decides on withdrawing and cancelling the shares;
• decides on status changes and changes of legal form;
• approves the legal transactions involving personal interest; and,
• approves acquiring, selling, leasing, pledging or otherwise disposing of the assets of significant value.

The annual Shareholders Assembly has to be held within six months from the end of the business year.

All the decisions of the Shareholders Assembly are enacted by a simple majority of votes, but only if shareholders that have majority of the total number of votes are present at the session on which these decisions are enacted. However, certain decisions of the Shareholders Assembly require a higher majority, unless the Memorandum of Association provides that these issues will be decided by another majority which may not be less than the majority of the total number of votes.

• Joint stock companies

The corporate governance of joint stock companies can also be organised as a one-tier system or a two-tier system.

In the one-tier system, besides the Shareholders Assembly, a company has one or more directors who form a Board of Directors in case there are three or more directors. They may be executive directors and non-executive directors. If there are less than three directors, all of them are considered executive directors, in charge of the day to day running of the company business. Non-executive directors oversee the work of executive directors, propose a company business strategy and oversee its implementation.

In the two-tier system, besides the Shareholders Assembly, there is (i) a Supervisory Board which acts as a separate supervisory and controlling body; and (ii) one or more executive directors who form an Executive Board in case there are three or more executive directors. The Supervisory Board may name one of the executive directors as the director general in case there is no Executive Board, while in cases where there is an Executive Board, the board has to name a director general. The role of a director general is to coordinate activities of the executive directors and to manage the business of the company.

The authorities of the Shareholders Assembly are very similar to the authorities of this body in limited liability companies. The regular session of the Shareholders Assembly has to be held once a year within six months from the end of the business year. Decisions of the Shareholders Assembly are enacted by a simple majority of votes, but only if shareholders that have a majority of the total number of votes in the Shareholders Assembly are present at the session at which these decisions are enacted.

3. Incorporation of limited liability companies and joint stock companies

• Limited liability companies

According to the Law on the Registration Procedure with the Business Registers Agency, the following documents are required in the incorporation procedure:

• a certificate of incorporation of the shareholders or, if the shareholder is a natural person, a copy of his/her identity card (for Serbian citizens) or passport (for foreign citizens);
• a decision on the appointment of company representatives, if it was not designated by the Memorandum of Association;
• the Memorandum of Association with the founders’ signatures notarised; and,
• proof of the contributed share capital, if the contribution was made before incorporation.

• Joint stock companies

According to the Law on the Registration Procedure with the Business Registers Agency, the following documents are required in the incorporation procedure:

• the Memorandum of Association, with the founders’ signatures notarised;
• the Articles of Association;
• a certificate from a credit institution that the shares have been paid-in in cash, or an appraisal by a state licensed appraiser of the value of the in kind contributions, or a certificate issued by the competent authority of the appraisal of the value of the in kind contribution;
• a decision on the appointment of the director, and/or members and chairmen of the Board of Directors, if it was not designated by the Articles of Association;
• a decision on the appointment of the members of the Supervisory Board in case of a company with a two-tier management system, if it was not designated by the Articles of Association;
• a decision on the appointment of the members of the Executive Board, in case of a company with a two-tier corporate governance system;
• a decision on the appointment of the company’s authorised representatives, if it was not designated by the Articles of Association.

4. Competition/Antitrust Issues

The Competition/Antitrust matters in Serbia are regulated by the Competition Law (Law on the Protection of Competition, “Official Gazette of the RS”, no. 51/09 and 95/13) which has been in effect since the 1st of November, 2009. In short, the Competition Law regulates the merger control regime and lays down the EU-like antitrust rules. The previous law, from 2005, established the Competition Commission assigned with the main competencies needed for the implementation of the law.

• Restrictive Agreements

The Competition Law prohibits agreements between undertakings which effect the significant prevention, restriction or distortion of competition within the territory of the Republic of Serbia. Restrictive agreements can take the form of written contracts, explicit or implicit agreements, concerted practices, decisions by associations of undertakings, and the law in particular provides examples of such agreements as follows:

• agreements to, directly or indirectly, fix purchase or selling prices or any other trading conditions;
• agreements to limit or control production, market, technical development or investments;
• applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
• agreements to share markets or supply sources; and,
• making the agreement subject to acceptance of additional obligations, which by their nature or according to commercial usage, have no connection with the subject of such contracts.

Restrictive agreements are null and void unless exempt through the application of either individual or block exemption in line with the Competition Law.

• Abuse of a dominant market position

The Competition Law prescribes that an undertaking can be presumed to be in a dominant position when, due to its market power, can act in the relevant market to a considerable extent independently of its actual or potential competitors, consumers, buyers or suppliers. Dominance is determined in relation to the relevant economic and other indicators, that include, but are not limited to: the structure of the market, actual or potential competitors, a market share above 40%, barriers to entry, a degree of vertical integration, financial and economic power etc. Similar to restrictive agreements, examples of abuse of a dominant position provided under the Competition Law include the following: direct or indirect imposing of unjust purchase or sale prices, or of other unfair business conditions, limiting the production, market or technical development, applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage and conditioning the contract with the other party accepting additional obligations.

• Merger Control

The Law prescribes mandatory notifications that are based on turnover thresholds – a notification is required for any concentration of undertakings (mergers, acquisitions, full functional joint ventures) where the combined turnovers of the parties exceed the prescribed thresholds. Any merger, acquisition, consolidation, fully functional joint venture or acquisition is regarded as a concentration of undertakings which has to be notified if it meets the thresholds. However, concentrations that are implemented through public takeover of joint stock companies must be notified even though the filing thresholds have not been met.

The merger notification has to be filed prior to the implementation of concentration, but not later than 15 calendar days after:

• the conclusion of the agreement or contract;
• an announcement of a public bid; or,
• the acquisition of control.

Alternatively, a merger can and should be notified at an earlier stage of the deal – upon the signing of a non-binding agreement (which does not trigger the filing deadline) – a letter of intent, a memorandum of understanding, an executive corporate decision which expresses a serious intent and is signed by both parties, etc.

The Competition Law prescribes an obligation to fully suspend the implementation of the concentration prior to the obtaining of the clearance issued by the Competition Commission or prior to the expiration of the statutory waiting period.

• Sanctions

Parties to anti-competitive agreements, dominant companies engaging in anti-competitive practices and parties which carry out a merger without obtaining an approval, can be fined up to 10% of their annual revenues realised in the previous fiscal year in the Republic of Serbia. If the parties do not file in a timely manner, a fine (a, so called, procedural penalty) ranging between EUR 500 and EUR 5,000 for each day that the filing is delayed, may be imposed by the authority.