COMPANY LAW AMENDMENTS - Jusufović & Partners

RESERVED OWN SHARE AND FINANCIAL INSTRUMENT – THE RIGHT TO ACQUIRE A SHARE

Amendments to the Company law (“Official Gazette of RS”, No. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44/2018, 95/2018 and 91/2019) are adopted on December 23, 2019 by the National Assembly of the Republic of Serbia.

The purpose of the Amendments to the Company Law is to find models for rewarding employees, managers and potential investors within the business of limited liability companies. The legislator sought to bring these new institutes closer to those institutes already established in developed market economies. Also, these amendments represent another form of support for the information technology sector, which is experiencing the highest annual growth in Serbia, in order to stimulate companies in the initial phase of operations when they have limited resources and are unable to pay quality employees in accordance with their contribution to the development of the Company.

In addition, the introduction of the Institute of reserved own share and related financial instrument – the right to acquire a share, is an option for employees to take part in the management of the company and distribute any eventual profit by acquiring a share in the company at a predetermined price.

Reserved own share

The introduction of this institute is the most important novelty. A reserved own share is a share that a company acquires without burden from a member of the company for the purpose of issuing a financial instrument – the right to acquire a share. Accordingly, the reserved own share cannot be pledged, nor can it be disposed of.

The subject of reserved own share may only be a share that has been fully paid or entered in the company and can only be acquired by a member of the company who voted in favor of the decision to acquire the reserved own share. The percentage of the share of all reserved own shares in the share capital of the company may amount to a maximum of 40%, and in addition, the company may have more reserved own shares.

The decision on acquiring a reserved own share is made by the General Meeting of Shareholders by majority vote, which is defined in Article 211 of the Company Law. This share does not entitle to share in the profit, and the company has no voting right on the basis of the reserved own shares.

Financial instrument – the right to acquire a share

The Amendments to the Company Law are introducing a new financial instrument into the legal life – the right to acquire shares issued by a limited liability company.

Financial instrument – the right to acquire a share is registered in the Central Registry, Depository and Clearing of Securities, and the rules of this Registry will prescribe the procedure necessary for conducting the subscription and deletion of this financial instrument. The decision on whether and how many such instruments will be issued in accordance with the Company Law will be made by the General Meeting of Shareholders.

In addition, a contract is concluded between the company and the employee/investor/consultant, on the basis of which the employee acquires a financial instrument – the right to acquire a share. In this way an employee can acquire a share in the company on the maturity date of the financial instrument, at a predetermined price. This right cannot be disposed of. If the employee makes a payment of the agreed price on the maturity date of the financial instrument and fulfills all other obligations stipulated by the decision of the company and the contract, it is then registered in the APR as a member of the company with the estimated percentage of share.

Article 159g of the Company Law also predicts the mandatory content of the Decision on the issue of this financial instrument, while Article 159d of the Company Law predicts that this financial instrument can be annuled in case that the rights holder fails to fulfill his obligation or in other cases predicted in the Decision on the issue of this financial instrument.

It is important to emphasize that if no financial instrument has been issued from the reserved own share, the company may either decide to divide that reserved share into several new reserved own shares or decide to annul that reserved share (in which case the company is obliged to carry out the procedure of reduction of share capital – maximum to the minimum predicted by the Company Law).

Judicial protection

Provisions of Article 159g of the Company Law predicts the procedure of judicial protection in case that the company has not completed the registration of the acquired share on the basis of a financial instrument – the right to acquire a share, within 60 days upon the expiry of the deadline for payment of the price. This Article of the Company Law also predicts the procedure of judical protection in case of the death of the holder of the right on the financial instrument, as well as in case of unjustified annulation of own share before the maturity date of the financial instrument.

Financial Instrument – the right to acquire a share ceases to exist on the day of the deletion of the company from the register due to the completion of the compulsory liquidation procedure, and then the holder of the instrument becomes the creditor of the company from the register.

In addition to the introduction of these new institutes, the Amendments to the Company Law increased the percentage of own shares that a joint stock company can distribute to members of the management and employees of the company from 3% to 5%.

The articles of the Company Law which regulate the reserved own share come into force on April 1, 2020, and whether the institutes introduced by these amendments will come to life and to what extent, as they have become part of the economic life of developed market economies, remains to be seen.