Legal guide for company directors and CEOs in Bosnia & Herzegovina

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

During the COVID-19 crisis, companies’ internal and external operations are being disrupted, and directors are being challenged to find a way to overcome difficulties and continue their companies’ operations in the best possible manner. As social distancing is required, directors are turning to online platforms and, where possible in accordance with the company’s internal acts, to virtual meetings. Directors will need to stay up to date with market fluctuations and options provided by the government in order to overcome challenges and avoid negative financial, HR and operational effects. 

Solvency

The main issue for directors during the COVID-19 crisis is the financial sustainability of the company. In order to maintain solvency, directors need to undertake any and all legally-available options to continue operations in both the short and long term. However, as the situation is changing rapidly, directors need to track market changes and adjust their decisions based on up-to-date information to achieve the best possible results for each company and its employees. Due to uncertainty over the length of the crisis and what effects will it have on companies, directors need to revise their own company’s activities and plan a variety of different scenarios to be implemented depending on the lockdown rules and on economic recovery. In the event that a company is threatened with insolvency, all the company’s governing bodies should be included in the decision-making and specialist advice should be sought in order to overcome such a situation.

Health

Another issue that directors may be facing relates to protective measures for the safety of all personnel. Implementation of such measures is often in conflict with the commercial objectives of the company meaning that, inter alia, working hours and planned financial achievements will needed to be amended; employees may need to be directed to take leave, paid or unpaid; and the productivity of employees and management may be affected by the switch to virtual communication as business trips and meetings in person are cancelled.

Directors of affected companies are also being challenged to find alternative ways of engaging with their consumers due to the lockdown rules in order to ensure the continuance of certain business processes and, ultimately, the company’s financial solvency.

In the long-term interests of the company, directors need to find a way to balance the competing considerations of the company’s commercial objectives and of providing a safe environment for employees.

2. What government relief measures have been made available to directors?

The legal structure of Bosnia and Herzegovina (“BiH”) is very complex, which directly impacts on legislation as well as policies regulating and supervising companies and their directors.

BiH consists of two separate and distinct administrative entities: Federation of Bosnia and Herzegovina (“FBiH”) and Republika Srpska (“RS”), plus the Brcko District (“BD”) as a separate administrative unit. The two entities and the Brcko District have their own governmental structures as well as legislation, regulations and policies, so company law may be subject to legislative provisions at entity level, i.e. at FBiH, RS or BD level. Directors of affected companies can use the available measures adopted by the competent government in order to relieve the negative impacts caused by the COVID-19 crisis, but as mentioned above, each government (i.e. FBIH or RS and BD) adopts its relief measures independently so the measures may differ between them. 

FBiH

During March, the government of FBiH issued recommendations for employers and employees, mostly referring to protecting the health of employees in the manner of, for example:

  • reducing working hours
  • reorganising the work process in shifts
  • instructing employees to work from home and to take leave, both paid and unpaid
  • issuing instructions on how to organise non-cancellable meetings
  • ensuring the implementation of hygiene measures in the company’s facilities, and
  • providing employees with protective equipment (e.g. masks and gloves).

All the above recommendations are applicable if the nature of the work process allows and they are in accordance with the company’s internal acts, employment rulebook, collective agreement and the law.

Furthermore, the government of FBiH adopted the Law on mitigation of negative economic effects, making available the following measures to companies under prescribed conditions:

  • subsidising contributions for compulsory insurances
  • suspension of the calculation and payment of default interest on public revenues
  • abolition of the obligation to pay an advance on income tax
  • abolition of the obligation to pay an advance on income tax from independent activity
  • interruption of the calculation of default interest on late payments in debtor-creditor relations
  • interruption of forced collection
  • maintaining the stability of certain payments
  • postponement of the application of certain regulations during the state of emergency, and
  • establishment of the Guarantee Fund.

Additionally, the government of FBiH adopted a Decision on deadlines and acting in court proceedings during the state of emergency in the territory of FBiH.

RS

The government of RS adopted several decisions to mitigate the negative effects of the COVID-19 crisis including, inter alia, the following:

  • decision on the Solidarity Fund for reconstruction
  • decision on tax measures to mitigate the economic effects of COVID-19
  • decision on deadlines and acting in administrative proceedings and other proceedings regulated by special material regulations
  • decision on deadlines and acting in court proceedings during the state of emergency
  • decision on method of settlement of income tax and contributions, and
  • decision on temporary suspension of payment of tax obligations.

BD

On 31 March the government of BD adopted measures to assist BD’s economy and prescribed the criteria for companies and entrepreneurs that have the right to access such measures. These measures concern reimbursement of minimum gross salaries paid to companies and entrepreneurs whose work is prohibited, or legal entities whose work performance is prevented, due to the nature of their work or their affiliation with the companies whose work is prohibited. In addition, companies and entrepreneurs, except for those who are exempted by the subject decision, also have the right to access government measures related to subsidies for paid tax and contributions on salary.

Statewide measures

Both the Banking Agency of RS and the Banking Agency of FBiH have adopted several banking and finance measures to mitigate the effects of the COVID-19 crisis including, inter alia, a moratorium on loan repayment, which has been introduced with specific criteria.

Additionally, all governments in BiH have prescribed direct price control measures for certain goods and services during the COVID-19 crisis.

To mitigate the effects of the COVID-19 crisis, the Foreign Trade Chamber of Bosnia and Herzegovina is issuing Vis Maior (i.e. force majeure) confirmations which enable affected companies to demonstrate to their business partners that they are unable to fulfil their contractual obligations for objective and/or unforeseeable reasons.

Due to the limitations of lockdown prohibiting movement at specific times, directors are requested to issue their employees with confirmation that they are engaged in work between certain hours. This relates, for example, to employees in companies that have organised work into shifts. Additionally, directors are required to issue a confirmation/certificate of engagement for drivers engaged in the international transport of goods.

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

In Bosnia and Herzegovina neither of the governments has adopted any measures that would change directors’ duties, meaning that directors’ legal duties and obligations remain in place as they are prescribed by the company’s internal acts and by a director’s employment contract. 

Directors duties and responsibilities

Company law is regulated at entity level through the Company Act of Federation of Bosnia and Herzegovina (“ZPD FBiH”), the Company Act of Republika Srpska (“ZPD RS”), and the Company Act of the Brcko District (“ZOP BD”). In preparing this guide, we have taken into account relevant legislation at all levels in order to provide a comprehensive overview of the situation in BiH.

Having said that, this guide focuses on the rules relating to the management of private limited liability companies. It does not address the rules relating to other types of companies.

1. What form does the board of directors take?

Pursuant to ZPD FBiH, the management of a company is run by one or more members of the management board, but since the provisions relating to joint stock companies are expressly applied mutatis mutandis, this means that one director, or one director with one or more executive directors, runs the company.

According to ZPD RS, a company may have a single director or a management board as a collective management body, as determined by the company’s memorandum of association.

ZOP BD states that the management of a company may have one or more members, i.e. directors.

2. What is the role of non-executive or supervisory directors?

Pursuant to ZPD FBiH, there is an established hierarchy between a director and executive director(s), as the extent of an executive director’s authority is determined by a written resolution of the company’s director(s).

In accordance with the ZPD RS and ZOP BD, the role of the executive management board shall be prescribed by the company’s articles of association and/or memorandum of association.

3. Who can be appointed as a director?

Any natural person with full legal capacity may become a director, an executive director or a member of the management board (hereinafter referred to as “management member/s”). In addition, company laws specify certain restrictions on who can be a management member, namely persons who have been convicted of financial crimes; fraud; violations of laws relating to labour relations, social security or management of natural resources; or who have violated the provisions of company law relating to unlawful payments.

Restrictions of ZOP BD and ZPD FBiH also relate to persons barred or suspended from their professions; while ZPD RS expressly states the incompatibility between the functions of any bodies vested with oversight duties (since ZDP RS does not envisage one supervisory board) and management functions. Additionally, unlike ZPD RS, the restrictions set out in ZOP BD and ZPD FBiH are of a temporary nature.

4. How is a director appointed?

Pursuant to ZPD FBiH, the company determines the method and duration of appointment of management members in its articles of association and memorandum of association.

ZPD RS and ZOP BD provide that the shareholders’ assembly appoints the management member(s), although ZPD RS states that the first director/management members’ board may be named in the company’s memorandum of association. ZPD RS leaves the determination of the number of members of the management board to the memorandum of association or the articles of association, but also stipulates that a management board will have a president elected by the members of that management board. ZOP BD delegates the appointment of the member(s) of management to the supervisory board (if such supervisory board is established), and further states that the articles of association may envisage that the members(s) of management can be appointed for a limited period of time, but not for less than 2 years.

5. How is a director removed from office?

Pursuant to ZPD FBiH, the rules for the removal of management member(s) are set out in the company’s articles of association. However, an analogy with joint stock companies would indicate that removal may be effected by the shareholders’ assembly if:

  • the management or any of its members lose the confidence of shareholders
  • the shareholders’ assembly refuses to adopt the company’s annual report, or
  • the shareholders’ assembly determines that actions of the management or a management member conflict with the interests of the company.

ZPD RS and ZOP BD appoint the shareholders’ assembly as the body that can remove management member(s) with or without giving the reasons for such removal. ZOP BD expressly provides indemnity rights to the management member(s) if he/she/they is/are removed without a justifiable reason, while ZPD RS states that the removal does not affect the rights of the management member(s) following their removal as provided for in the contract with the company.

6. What authority does a director have to represent the company?

Unless otherwise provided in the memorandum of association or the articles of association, the management member(s) has/have full authority to manage the company.

In general, the directors or the management board, or the president of the management board under the ZPD RS, represent the company. Additional persons (e.g. authorised representatives – “procurators”) may be authorised to represent the company through the memorandum of association or articles of association. Management members are either entitled to represent the company jointly, or they can be granted sole power of representation if the memorandum of association or articles of association so provide. The method of representation is registered in the registry of companies. Persons thus registered are authorised to undertake all acts and conclude contracts that are usually performed or arise from the tasks entrusted to that person. The company is liable for any obligations that have arisen from acts of a management member who has exceeded his/her authority, if a third party did not know or did not have a means to know that the management member had exceeded his/her authority.

7. How does the board operate in practice?

ZPD FBiH provides that if the management board has more members, their respective authorities and responsibilities are determined in the articles of association. ZOP BD states, in a similar manner, that when there is more than one management member, the articles of association determine whether they manage the company jointly or separately.

Under ZPD RS, the general rule when there is a management board is that all of its members are vested with the same rights and duties, and every member may act individually unless otherwise provided by the memorandum of association. If it is provided that a decision can only be made jointly, then the approval of all members of the management board is required, except if a delay would adversely affect the company. The memorandum of association may also determine that a member of the management board must follow the instructions of another member of the management board. If a member of the management board deems such instruction to be inappropriate, he/she may inform the other members so that they can take a joint decision on the specific issue. The management board may form one or more committees, which may be composed of its members or other persons, and determine their conditions and methods of work. Decisions of such committees will be subject to prior approval by the management board unless otherwise stated in the memorandum of association or articles of association.

8. What contractual relationship does the director have with the company?

In accordance with the labour legislation of BiH, members of management may either be employees of the company or have their relationship regulated in a different manner, i.e. through special or service contracts.

9. What rules apply in respect of conflicts of interest?

ZPD FBiH and ZOP BD both state, in a similar manner, that management member(s) may not be engaged in an activity which is or may be in conflict with the business of the company, whether as an employee of a different company or as an independent entrepreneur. The articles of association may determine that this prohibition will survive the end of their term of appointment for up to 2 years.

ZOP BD further provides that a management member may not enter into a contract on behalf of and on account of the company, among other things, if the implementation of this would give rise to an unlawful gain for him/her or certain third parties. The conclusion of contracts between a company and another company in which a management member of the first company has an indirect interest needs to be approved either by the supervisory board, the shareholders’ assembly or by another shareholder body. Indirect interest arises where the other contractual party is a family member of the management member, or a legal person in which a family member of a management member has a material or financial interest, or is a responsible person in such an entity.

ZPD RS regulates this matter in more detail through a specific loyalty clause indicating that a management member may not use the assets of the company or privileged (insider) information for his/her personal interest, or commit any abuse of his/her position in the company for his/her personal gain. ZPD RS defines personal interest when a management member or his/her family members:

  • is a contractual partner of the company, or
  • appears to be in a financial relationship with a person who has concluded a contract or other act with the company, and it can be reasonably expected that such a relation would adversely affect his/her conduct with respect to the interests of the company, or
  • a person entering into a contractual relationship with the company has a controlling influence over the management member which can reasonably be expected to adversely affect his/her conduct vis à vis the company.            

ZPD RS broadly defines family members to include any person living in the same household as the management member.

Also, a management member may not be directly or (through his/her family members) indirectly involved in a competing company unless he/she receives permission in accordance with ZPD RS. This prohibition may survive termination of the appointment as a management member for a period of up to 2 years.

10. What other general duties does a director have?

The management, i.e. its members, must manage the company in line with its business purpose, in the best interests of the company, with the diligence of an orderly businessperson and with a reasonable belief that they are acting in the company’s best interests. In general, management members are subject to a wide range of different statutory duties including:

  • representing the company and managing the company’s business
  • ensuring that all statutory fillings are made
  • maintaining accounts
  • managing the share register
  • convening shareholders’ meetings and determining the proposed agenda for such meetings
  • setting a date for:
  • determining a list of shareholders entitled to receive notice
  • determining dividend amounts
  • determining dividend payments
  • voting and other questions
  • concluding loan agreements, and
  • dealing with other matters stipulated by the articles of association or by the contract.

11. To whom does the director owe duties?

The director owes his/her duties to the company itself.

12. How do the director’s duties change if the company is in financial difficulties?

The director’s duties are regulated by the internal acts of each individual company (articles of association, rulebook, employment contract). In the event of financial difficulties, the director should perform his/her duties and adopt decisions in a manner that will protect the interests of the company.

Therefore, in order to overcome financial difficulties, the director should revise the financial plans, operational costs, planned investments and collection of due receivables, using government measures (if available), and undertake all other activities that are in the best interest of the company itself to maintain financial stability. As financial difficulties impact the whole company, all the company’s governing bodies should be involved in decision-making in order to overcome the financial difficulties. 

13. What potential liabilities can a director incur?

In general, management members must act in accordance with the due diligence standard and with the belief that they are acting in the company’s best interests. If management relies on information that it knows, or should have known, is incorrect, it will not have satisfied this test.

Any party suffering damage caused by management member(s) acting intentionally or as a result of misconduct or negligence has the right to an indemnity from management. In general, although the company is liable to third parties for damage caused by its employees, it may receive compensation from individual members of the board who caused damage if they acted intentionally or negligently, or if the damage was caused as a result of their misconduct. However, the different Company Acts provide for slightly different bases for this. ZOP BD provides that the company may reimburse the expenses that the responsible persons incurred as a result of litigation because of their position in the company, if they acted with due diligence or reasonably believed that they acted in the best interest of the company and not contrary to law. The company will have to compensate the management member for “all founded expenses” if he/she was successful in such litigation, and the member can bring a claim against the company if it does not comply with this obligation.

14. How can a director limit his/her liability?

It is not possible to limit the liability of the management in respect of misconduct or negligence by agreement. There are no express provisions allowing a company to release or waive its claims against a director.

D&O insurance is not common in practice, although it should be noted that most insurance companies offer general insurance policies to companies covering damage claims by third parties.

Picture of Nedzida Salihovic-Whalen
Nedžida Salihović-Whalen
Partner
Sarajevo
Picture of Zlatan Balta
Zlatan Balta
Senior Associate
Sarajevo