Share Transfers in Serbian Companies: What to Know Before an Ownership Change

One ​​member wants to leave the company. The other wants to increase his share. Or a new investor enters the company. When the parties agree on the price and percentage of ownership, it may seem that all that remains is to sign the contract and register the change with the Serbian Business Registers Agency (APR).

However, the transfer of an ownership interest in the company may open up a number of issues that should be resolved before signing the contract.

It is necessary to check the articles of incorporation, the rights of other members, existing contractual relationships and possible transfer restrictions. When a new owner enters a company, it is important to determine what kind of company he is actually taking over – with its assets, liabilities, disputes, contracts and other business risks.

That is why a well-prepared change in the ownership structure does not begin with registration in the APR, but with an analysis of the legal and business position of the company.

What Does a Transfer of an Ownership Interest Actually Mean?

A share represents the membership of a specific person in a limited liability company and the rights and obligations arising from that membership.

When a member transfers his share to another person, the member of the company changes. This, however, does not automatically mean that the director, the method of representation or all the elements of the articles of association change.

Therefore, several terms should be distinguished.

The change of a company member refers to the ownership structure.

The change of director refers to the management and representation of the company.

The change of the articles of association represents a separate corporate change which can accompany the transfer of an ownership interest, but does not have to in every case.

Change of control is a broader business concept and can arise, for example, when someone, by acquiring a sufficient share, gets the opportunity to decisively influence decision-making in the company.

In LLCs, it is particularly important that the registration of a change of member has a constitutive effect. In other words, the status of a member is acquired, that is, it ends on the day of registration of the change in accordance with the registration rules.

That is why signing the contract on the transfer of an ownership interest and acquiring the status of a member of the company are not the same legal act.

First check the articles of association and existing contracts

The Law on Business Companies starts from the rule that the transfer of an ownership interest is free, unless the law or the articles of association provides otherwise.

This is precisely why the review of the articles of association should be one of the first steps before serious negotiations on the sale of shares in the company.

It is necessary to check whether there are:

• the right of pre-emption of other members;
• the obligation to obtain the company’s prior consent;
• other restrictions on the transfer of an ownership interest;

special rules between members that may affect the transaction.

The law allows the articles of association to regulate the transfer procedure differently in certain matters, as well as to provide for additional restrictions. Therefore, it cannot automatically be assumed that a member can transfer a share to a third party just because he is registered as its owner.

It should also be checked whether there are special agreements between company members.

In companies with several investors, the relations of the owners are sometimes additionally regulated by the members’ agreement, i.e. the shareholders’ agreement. Such agreements may contain rules on exit from the investment, sale of shares, protection of minority owners or mechanisms such as tag-along and drag-along rights.

That is why it is necessary to look at the complete corporate documentation, not just the extract from the APR.

The right of pre-emption can change the whole transaction

When an LLC member wants to transfer a share to a person who is not a member of the company, the other members have a legal right of pre-emption, unless this right is excluded by the founding deed or the law.

This means that a member who has found an external buyer cannot automatically conclude a transaction with him.

Before transferring the share to a third party, the share must be offered to other members in accordance with the law and the rules of the founding deed. The offer must contain the essential elements of the planned contract, while the articles of association can regulate the procedure for exercising the right of pre-emption in a different way within the limits allowed by law.

Let’s imagine a company with three members. One of them is negotiating with an outside investor to sell his share for 200,000 euros.

If existing members have the right of first refusal, the relationship is no longer just a matter of seller and investor. Before concluding the transaction, it is necessary to check and properly enforce the rights of the other members.

Violation of the right of pre-emption can have serious consequences, including the possibility of a court challenge to the transfer.

That is why this issue is resolved before the conclusion of the deal, and not afterwards when the contract has already been signed.

What Does the Buyer of an Ownership Interest Actually Acquire?

When buying shares in one of the most important things for a company is to understand the difference between the purchase of a share and the purchase of an individual asset of the company.

If an investor buys business premises, a machine or a certain intellectual property right from a company, the object of the transaction is a concrete asset.

When buying a share, the situation is different.

The company remains the same legal entity. His property, contracts, employees, claims, debts and any disputes remain with the company. Its member changes.

The buyer therefore acquires an ownership position in an already existing company and its business history.

This is precisely why legal due diligence can be one of the most important steps before transferring the share.

Ownership of the Interest

It is necessary to check whether the seller has the right to dispose of the share and whether there are restrictions or burdens that may affect its transfer.

Corporate documentation

The articles of association, relevant decisions of the company, previous changes in the ownership structure and contracts between members can show what rights the buyer actually acquires.

It is not enough to know that buys, for example, a 30% stake. It is necessary to understand what that 30% means for voting, management, profit and future business decisions.

Debts and disputes

The company may have debts, lawsuits or potential liabilities that are not visible from the basic extract from the register.

Such risks can directly affect the economic value of the share being purchased.

Key contracts

Special attention should be paid to contracts with the largest customers, suppliers, banks, lessors and other important business partners.

Some of them may contain so-called change of control clauses.

They may provide for the obligation to notify the other contracting party, obtain its consent or other consequences if control over the company changes.

This means that the sale of shares can sometimes affect contracts in which the company member is not a direct contracting party at all.

Loans and collateral

If the company has loans, mortgages, pledges, guarantees or other collateral, the buyer should determine their scope and conditions.

The value of a company cannot be realistically assessed only on the basis of its assets and income without considering existing obligations.

Employment relations

For companies whose value depends on key employees or management, the relevant employment contracts, the method of remuneration, prohibitions of competition and possible labor disputes should be checked.

Intellectual property

With technological, creative and other companies, a significant part of the value often consists of software, trademarks, copyrights or other intellectual property rights.

The buyer should check whether these rights really belong to the company and whether they are adequately legally protected.

Tax and regulatory risks

The tax position and regulatory obligations of the company can also be an important part of the legal analysis.

The transfer of an ownership interest itself may have tax consequences that depend on the status of the participants in the transaction, the method of transfer and other circumstances. Therefore, the tax treatment should be analyzed for each case separately.

Share Transfer Agreement: Price Is Only One Part of the Deal

A share in an LLC is transferred by a contract in written form with certified signatures of the transferor and the acquirer, except when the transfer is carried out in another way in accordance with the law.

However, filling out the legal form does not automatically mean that all transaction risks adequately regulated.

In the case of a simple transfer between existing members or related parties, the contract can be relatively short.

In the case of the purchase of a significant share, the entry of an investor or a transaction of greater value, a wider set of issues must be considered.

Method of payment

Is the price paid immediately or in installments?

Is part of the price depends on the future results of the company?

What happens if the buyer is late with payment?

Conditions for the realization of the transaction

Before the final implementation of the transfer, it is sometimes necessary to obtain certain consents, implement corporate decisions or fulfill other previously agreed conditions.

Declarations and guarantees of the seller

In more complex transactions, the seller may make certain representations and warranties regarding the ownership of shares, contracts, disputes, assets or other facts important to the buyer.

In international M&A terminology, the term representations and warranties is often used.

Its practical purpose is not to complicate the contract, but to more clearly determine who bears the risk if a certain important fact subsequently turns out to be was not correct.

Liability for previous risks

It is especially important to regulate what happens if after the transfer becomes known an obligation or a problem that arose before the transaction.

The company remains the same legal entity even after the change of owner. Therefore, the buyer should protect his economic position with the contract where it is justified.

Confidentiality and competition

During the negotiations, the buyer often gets access to financial, business and other confidential information.

Confidentiality should therefore be arranged during the preparation of the transaction.

For certain deals, a ban on competition may also be considered, but its admissibility and scope must be analyzed in the specific case.

Dispute resolution

The more complex the transaction, the more important it is to pre-arrange the method of resolving possible disputes between the seller and the buyer.

Does a Share Transfer Automatically Mean a Change of Director?

No.

The ownership of the company and the management of the company are not the same legal category.

The new majority owner may wish to appoint a new director after the transaction, but the change of representative is carried out through a separate corporate decision and the appropriate registration procedure.

Therefore, before the transaction is implemented, it should be agreed in advance what will happen with the management of the company.

Who stays director?

Is a new director being elected?

Who will have the power of representation?

Is the way of making the most important decisions changing?

These questions are especially important when buying a majority or controlling stake.

Registration of the change with APR

After the transfer, it is necessary to carry out the corresponding registration with the Agency for Economic Registers.

Registration of the change of member has a constitutive effect, which means that the ownership of the member is acquired or ends on the day of registration and changes.

For registration, it is necessary to submit an appropriate registration application and documentation proving the legal basis for the change. In the case of a contractual transfer of an ownership interest, the relevant document is the transfer agreement with certified signatures, along with other documentation required by the specific change.

The exact composition of the documentation depends on the type and structure of the transaction, so it should be checked according to the current instructions of the APR.

An appropriate fee is paid according to the valid price list of the Agency.

It is important, however, that the APR procedure is not identified with the entire transaction.

APR registers the change of member. It does not check the financial and business risks of the company on behalf of the buyer, does not negotiate contractual guarantees and does not resolve the relations between the seller, the buyer and other members.

That is why most of the legal work is often done before the registration application is submitted.

A Transfer Between Existing Members and the Entry of a New Investor Are Different Transactions

When one existing member buys another’s share, he usually already knows the company and its way of doing business. business.

However, this does not mean that the transaction does not have significant consequences.

Purchasing an additional share can change the ratio of votes and control over the company. A member who previously had 30%, and after the transaction has 60%, is in a significantly different position.

When a new investor enters, the questions are usually even broader.

The investor should know not only what he is buying, but also what position he will have after joining the company.

Who appoints the director?

For what decisions is a special majority required?

Does the minority member have special protection rights?

How is the profit distributed?

What happens if one member wants to leave the company?

How will situations where the members cannot agree be resolved?

That is why the entry of investors is often not required not only the share transfer agreement, but also the detailed regulation of the future relations of the members and the corporate management system.

The most common mistakes when changing the ownership structure

1. Agreement without checking the articles of association

The seller and the buyer agree on the price, and only later discover the restrictions on the transfer or the rights of other members.

The consequence may be a delay or a change in the entire structure of the transaction.

2. Ignoring the rights of other members

The right of first refusal or other transfer restrictions should not be treated as a formality.

Failure to respect them may lead to disputes and jeopardize the planned transfer.

3. Buying shares without due diligence

The buyer relies on the company’s revenue and profits, but does not check its debts, disputes, key contracts or intellectual property rights.

Risks are then only discovered after the purchase.

4. Too simple a contract

A short contract may be sufficient for a simple transaction, but in a more significant purchase and sale it often does not regulate responsibility for previous or hidden risks.

5. Unregulated responsibility for previous obligations

A company does not cease to exist when its owner changes.

Therefore, the contract should, when necessary, define the distribution of economic risk between the seller and the buyer.

6. Identification of ownership and management

A change of member does not automatically mean a change of director.

If the management also changes, it must be arranged and implemented separately.

7. Focus only on registration

Successful registration of the change does not mean that the transaction is legally and commercially well structured.

Registration resolves the status of the member, but not all relationships and risks between business participants.

8. Misalignment of corporate documentation

The transfer of an ownership interest may require additional decisions or changes to certain corporate documents.

Therefore, after the transaction, it is necessary to check whether the complete documentation of the company is harmonized with the new ownership and management structure.

Example from business practice

Let’s imagine the company Alfa DOO with three members.

Marko has a 50% stake, Jelena 30%, and Nikola 20%.

Marko wants to sell his 50% to an investment company. The price has been agreed and the parties want to close the deal quickly.

During the legal analysis, it is determined that the existing members have the right of first refusal. Therefore, before the direct sale to the investor, an appropriate procedure should be carried out towards Jelena and Nikola.

At the same time, during the due diligence, it was determined that the contract with the largest client Alfa DOO contains a change of control clause that can activate certain obligations in the event of a change of control over the company.

The investor also wants a new director to be appointed after the acquisition of the share.

One seemingly simple purchase 50% of the company therefore requires the coordination of several issues: the rights of existing members, the key business agreement, the agreement on the transfer of an ownership interest, future management and registration of changes.

The example is purely illustrative.

He shows why a serious change in the ownership structure of a company often requires much more than signing a contract and filing with the APR.

When legal due diligence is especially important

Not every transaction is equally complex.

The transfer of a minor stake between two long-time members of a family firm does not necessarily require the same level of analysis as the purchase of a majority stake in a company by an outsider. investors.

More detailed legal due diligence makes sense especially when:

• the buyer was not previously a member of the company;
• a majority or controlling stake is acquired;
• the company has significant assets or debts;
• there are legal or other serious disputes;
• business depends on several key contracts;
• the company operates in a regulated area;
• intellectual property constitutes a significant part of the company’s value;

a professional or foreign investor enters the transaction.

The scope of the check should be adapted to the size and risk of the specific business.

The goal of due diligence is not to guarantee the buyer that no risk exists, but to enable him to know what he is buying before making a decision and to adequately include the identified risks in the price and contract.

Checklist before the transfer of an ownership interest

Before signing the contract, it is useful to answer the following questions:

Does the founding deed limit the transfer of an ownership interest?

Do other members have a right of pre-emption?

Does the transfer require a certain consent?

Are there encumbrances or other restrictions on the share?

Has the buyer checked the company’s key obligations and risks?

Do important contracts foresee the consequences of a change of control?

Does the contract regulate responsibility for previously incurred risks?

Does the director or management method change together with the ownership structure?

Are additional corporate decisions or documentation changes required?

Have the tax consequences of the specific transaction been checked?

If the answers to these questions are not known immediately before after signing the contract, the transaction is probably not yet sufficiently prepared.

A change in the ownership structure requires more than registration

The transfer of an ownership interest in a company is not only a change in the percentage of ownership and the registration of a new member with the APR.

A well-prepared transaction should regulate the relationship between the seller and the buyer, the rights of other members, existing legal and business risks and the future way of managing the company.

In the case of more complex transactions, the legal analysis that precedes the signing of the contract may be more important than the registration procedure itself.

Legal support when changing the ownership structure can include a review of the articles of association and other corporate documents, legal due diligence, structuring the transaction, drafting and negotiating the contract on the transfer of an ownership interest, as well as implementing the necessary corporate and registration changes.

This text presents general information on the legal framework of the transfer of an ownership interest in the Republic of Serbia and does not constitute legal advice for a specific transaction. The rights, obligations and necessary steps depend on the articles of association, contractual relations and the circumstances of each individual case.