Legal guide for company directors and CEOs in Serbia

  1. ESG obligation for Directors and CEOs
  2. 1. Do existing directors’ duties contain obligations that apply to matters that could be categorised as an ESG consideration, e.g. the environment, employee welfare? 
    1. 2. Are there other obligations of directors that relate to ESG considerations, e.g. health and safety, gender pay inequality, etc.?
    2. 3. What recent changes have occurred or are expected with respect to directors’ responsibilities in relation to ESG considerations?
    3. 4. What obligations do directors have in relation to ESG disclosure and/or reporting?
  3. Directors duties and responsibilities
    1. 1. What form does the board of directors take?
    2. 2. What is the role of non-executive or supervisory directors?
    3. 3. Who can be appointed as a director?
    4. 4. How is a director appointed?
    5. 5. How is a director removed from office?
    6. 6. What authority does a director have to represent the company?
    7. 7. How does the board operate in practice?
    8. 8. What contractual relationship does a director have with the company?
    9. 9. What rules apply in respect of conflicts of interest?
    10. 10. What other general duties does a director have?
    11. 11. To whom does the director owe duties?
    12. 12. How does a director’s duties change if the company is in financial difficulties?
    13. 13. What potential liabilities can a director incur?
    14. 14. How can a director limit his/her liability?
  4. Coronavirus (COVID-19) considerations for directors
    1. 1. What are the key issues for directors during the COVID-19 crisis?
    2. 2. What government relief measures have been made available to directors?
    3. 3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

This guide focuses on the duties and responsibilities of directors of limited liability companies (LLCs) established in Serbia in accordance with the Companies Act (Official Herald of the Republic of Serbia, nos. 36/2011, 99/2011, 83/2014, 5/2015, 44/2018, 95/2018 and 91/2019) (the “CA”). It does not cover other legal forms of companies such as joint stock companies.

ESG obligation for Directors and CEOs

1. Do existing directors’ duties contain obligations that apply to matters that could be categorised as an ESG consideration, e.g. the environment, employee welfare? 

Although no specific obligations are addressed to directors per se, a lot of obligations which lie with the employer are, in practice, to be fulfilled by directors (as authorised representatives).

Such important obligations dealing with employee welfare, for instance, include the obligation to provide the employee with:

  • Notice on the prohibition of harassment at work and rights, obligations and responsibilities of the employee and the employer in connection with the prohibition of harassment at work
  • Notice on the rights of whistleblowers and the whistleblowing procedure, as well as other issues of importance for whistleblowing and the protection of whistleblowers.

2. Are there other obligations of directors that relate to ESG considerations, e.g. health and safety, gender pay inequality, etc.?

It is worth noting that directors sign several documents with regard to health and safety such as the:

  • Risk Assessment Act
  • Decision on the Appointment of person for safety and health at work
  • Collective agreement on safety and health at work etc.

With regard to pay (in)equality, the Labour Law sets forth that employees are guaranteed equal pay for the same work or work of the same value (deemed work for which the same level of education is required, i.e. knowledge and skills, in which the same work contribution was achieved with equal responsibility). An employer’s decision (or an agreement concluded with an employee in that regard) that is not in line with said rule is deemed null and void, while the employee is entitled to damages in case of violation of rights thereof.

A general act of the employer (such as a rulebook), signed by the director, ascertains the elements for calculation and payment of basic salary and salary based on work performance. Thus, the employer (and consequently the director) must bear in mind the said guarantee provided by the Labour Law.

Additionally, the recently enacted Law on Gender Equality provides general rules and measures that should be applied in order to improve gender equality or to prevent prohibited discrimination based on gender. Some of those rules and measures deal with the following:

  • Equal opportunities when it comes to hiring and work
  • Structure of an employer’s management and supervisory bodies
  • Prohibition of termination of employment based on gender-related discrimination, e.g. in case of pregnancy, maternity leave or leave from work for childcare and leave from work for special childcare, as well as due to initiated proceedings for protection against discrimination, harassment, sexual harassment and sexual blackmail
  • Prohibition of harassment, sexual harassment etc.
  • Prohibition of gender inequality during maternity leave, maternity leave, childcare leave and special childcare leave
  • Prohibition of unequal wages for the same work or work of equal value etc.

While many of these measures are already envisaged by other regulations, such as the Labour Law or the Law on the Prohibition of Harassment at Work, all these measures aiming to improve gender equality should be included in all company policies, where applicable, and should ideally be embedded in all companies’ actions and standards.

3. What recent changes have occurred or are expected with respect to directors’ responsibilities in relation to ESG considerations?

The most important recent changes include enaction of the Law on Gender Equality which came into force in June 2021. According to Article 16, the proposed measures for promotion and realisation of gender equality should be laid out in the company’s annual business plan as a separate section or appendix. It is prescribed that this separate section on gender equality must especially include the following:

  • Short analysis of the current situation in relation to the position and status of women and men within the employer’s organisation
  • Overview of the age structure
  • List of planned measures for promotion and realisation of gender equality
  • Reasons for choosing such measures and the goals they are expected to achieve
  • When the measures shall start to be implemented
  • How the implementation shall be monitored and controlled
  • When the measures shall no longer be applied.

Under the Law on Gender Equality, each employer having more than 50 employees must undertake the following:

  • Adopt the above-mentioned annual plan of gender equality measures as part of the company’s annual business plan
  • Adopt a report on realisation of planned gender equality measures as part of the company management’s regular report on realisation of the annual business plan
  • Keep records of anonymised data on gender structure of the workforce (based on a form which the Ministry has not yet published)
  • Adopt a separate annual report on gender equality which is to include the records mentioned under the point above as well as an analysis of the status of gender equality and an explanation of reasons why the prescribed gender equality levels (40-50%) have not been reached.

Additionally, amendments of the Law on Safety and Health at Work are expected soon.

4. What obligations do directors have in relation to ESG disclosure and/or reporting?

Employers whose annual business plans or annual reports are not publicly available are obligated to inform the Ministry about the adoption thereof, and to provide a copy of the respective parts of the annual plan and the annual report that deal with gender equality, as follows:

  • Within 15 days from the date of adoption of the annual plan
  • Within 30 days from the date of adoption of the annual report.

The separate annual report on gender equality for the preceding year should be filed with the Ministry by 15 January.


Directors duties and responsibilities

1. What form does the board of directors take?

Pursuant to the CA, limited liability companies may have one or more managing directors, and not a collective management body (i.e. board). The exact number of directors is determined by the memorandum of association or a resolution of the general meeting/sole shareholder.

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

In limited liability companies there are no separate categories of executive and non-executive directors. 
When a limited liability company opts in its memorandum of association to be governed by a two-tier (dual) corporate governance system (which in LLCs is very rare in practice), beside directors who represent and manage the business operations of the company, it will also have a supervisory board. Among other duties, the supervisory board determines the business strategy of the company, appoints and recalls directors, determines directors’ compensation, oversees the activities of the directors and adopts their reports, determines accounting and risk policies, supervises the legality of the company’s operations etc.

3. Who can be appointed as a director?

A natural person with full legal capacity, or a legal entity registered in the Republic of Serbia, may become a director of a company in Serbia. However, a company must have at least one director who is a natural person. There are no residence or nationality requirements. Also, a shareholder of a company may be appointed as managing director provided that the memorandum of association does not stipulate otherwise.

4. How is a director appointed?

Managing directors of an LLC are appointed by a resolution of the general meeting/sole shareholder (in a one-tier system) or by a supervisory board (in a two-tier system).

The managing director(s) at the time of incorporation of a company may also be appointed within the company’s memorandum of association. However, this is not the preferred option as every change of directors would require amendments to the memorandum of association. 

5. How is a director removed from office?

A managing director(s) may be removed at any time by a resolution passed by a general meeting/sole shareholder (in a one-tier system) or by the supervisory board (in a two-tier system). The reasons for the removal need not be given unless the memorandum of association provides otherwise.

A managing director(s) may resign from his/her position at any time. In certain circumstances such a resignation may constitute a breach of the director’s employment or management contract with the company. The CA allows for the de-registration of a particular director from the commercial registry to be made pursuant to his/her letter of resignation. Where a sole director resigns, he/she is obliged to continue to perform urgent directors’ duties until the appointment of a new director, but for no longer than 30 days from his/her de-registration from the commercial registry.

In practice, a director’s term of office is usually stated in his/her employment, or any other, contract regulating the rights, duties and responsibilities of a director (“management contract”).

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

An LLC is represented by its managing director(s). This authority may be subject to restrictions which will be set out in the memorandum of association. However, only restrictions requiring dual signature require registration and will bind third parties. Other forms of restrictions (e.g. an approval by the general meeting/sole shareholder) are of an internal nature only and are not binding for third parties.

Details of the individuals authorised to represent the company, including the extent of their authority, must be filed with the commercial registry of the Serbian Business Registers Agency (the “Agency”). 
Other persons (natural or legal) may also be authorised to represent the company such as representatives and “procurators”, and they are also registered with the Agency.

7. How does the board operate in practice?

If an LLC has two or more directors, they represent and manage the company jointly unless otherwise specified in the memorandum of association. Where the memorandum of association prescribes that each of the directors manages the company independently, none of them may act on behalf of the company if any of the other directors disagree. If they disagree, relevant instructions should be requested from the general meeting/sole shareholder (in a one-tier system) or from the supervisory board (in a two-tier system).

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

An employment or management contract sets out the relationship between a Serbian company and its directors. According to the Serbian Labour Act, a director may have a permanent or temporary employment relationship with the company under his/her employment contract. All rights and obligations arising from the Labour Act are mandatory terms of the employment contract. However, a management contract allows for more flexible arrangements between the director and the company.

A director is entitled to an adequate salary, which is determined in accordance with general Serbian legislation and his/her employment or management contract. For income tax purposes the director is treated equally under both an employment and management contract.

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

Directors are obliged to notify other directors or, in the case of a sole director, to notify the general meeting/sole shareholder (in a one-tier system) or the supervisory board about their personal interests when acting on behalf of the company. 

“Personal interests” are considered to be when a director (or a party related to him/her):

  1. is a party to a contract concluded with the company
  2. is a party to legal proceedings commenced by the company
  3. has financial relationships with a third party the company transacts with or commences legal actions against, if it can be expected that the existence of that relationship will affect his/her actions, or
  4. has financial relationships with a third party who has a commercial interest in a transaction or legal action with the company if it can be expected that the existence of that relationship will affect his/her actions.  

The restrictions above will not apply if the actions are approved by a majority of members in the general meeting (in a one-tier system) or the supervisory board (in a two-tier system). If not, a company/shareholder(s) with more than 5% of the share capital may apply to have the transaction annulled and file a claim for damages. Also, a court may declare a temporary measure, i.e. a ban on a person operating as a director/representative.

Also, any such transaction involving a personal interest will need to be announced by the company on the company’s website and the website of the Agency within 3 days of conclusion of the agreement/undertaking a legal act.
However, a transaction will not be annulled if in a litigation procedure it is proved that: (i) the transaction was in the interest of the company; or (ii) there was no personal interest involved (in scenarios c) and d) above).

In addition, directors must avoid conflicts of interest with the company, and in particular may not:

  • use the company’s assets for their own personal interests
  • misuse confidential information involving the company
  • abuse their position for personal gain, or
  • use business opportunities presented to him/her as officers of the company for personal benefit.

These provisions do not apply if the director’s actions are approved by a majority of members in the general meeting (in a one-tier system) or the supervisory board (in a two-tier system).

10. What other general duties does a director have?

Pursuant to the CA, and unless specified otherwise in the company’s memorandum of association, a director(s) of an LLC represents and manages the company. As a general rule, the director(s) carries out all activities that are not vested in the general meeting/sole shareholder (in a one-tier system) or the supervisory board (in a two-tier system).

A director(s) is also responsible for keeping business records, filing records of all resolutions passed by the general meeting, and the accuracy of financial statements. A director(s) is obliged to inform the general meeting and shareholders about all facts relevant to the operation of the company including extraordinary circumstances that may have a substantive effect on the business or standing of the company.

The managing director(s) is obliged to act on behalf of the company, with due care and diligence, in reasonable belief that he/she is acting in the best interests of the company. A director(s) is obliged to avoid conflicts of interest (as explained above) and keep trade secrets confidential, as well as to act in compliance with the mandatory legal regime on acquisition/disposal of high-value assets.

A director is also prohibited from engaging directly or indirectly in another company carrying out similar business activities, unless he/she is permitted to do so by the company. Depending on the provisions of the memorandum of association, this restriction may be extended for a period following the termination of the director’s term of office up to a maximum of 2 years. This restriction may also be included in the director’s employment contract if he/she is likely to have gained important know-how, business contacts or trade secrets during his/her term of office. However, such a non-compete clause would entitle the director to appropriate compensation following termination of his/her employment contract.

11. To whom does the director owe duties?

Generally speaking, directors are responsible to the company itself for any breach of their duties or misuse/excess of their authorisations. However, a court claim for a breach of directors’ duties may be filed by a company or by a shareholder(s) (in their name but on behalf of the company) holding minimum 5% of the share capital. Also, any shareholder may file a claim for damage it suffered as a result of breach of directors’ duties.

On the other hand, in practice directors report to and are appointed/recalled by the general meeting/sole shareholder (in a one-tier system) or the supervisory board (in a two-tier system).

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

General liabilities and competencies of directors remain unchanged in case of financial difficulties. However, there are restrictions in payments toward the shareholders (e.g. dividends, loan repayments, etc.) in the case that a company has negative equity, while a director himself/herself is directly liable for compliance with this rule. 

In Serbia, there is no obligation for directors to file for bankruptcy when applicable. But under Serbian Bankruptcy Law, directors may be criminally liable for causing a company’s bankruptcy (e.g. by irrational expenditure, undertaking disproportionate obligations, etc.), or for causing a false bankruptcy with the aim of evading tax or damaging creditors.

13. What potential liabilities can a director incur?

A director(s) is liable for the damage caused to the company or the company’s shareholders by a breach of his/her duties, including damage caused from acting outside his/her authority (except if ratified by a relevant corporate body), non-compliance with his/her obligation to inform shareholders, or making unauthorised payments to the company’s shareholders.
A director can be held liable and may be penalised (as a responsible person within a company) jointly with the company for minor or commercial offences committed by the company.

The CA even provides for criminal liability of directors in the following cases: giving false statements, entering intentionally into a legal transaction or taking legal action involving personal interests, breach of duty to avoid conflicts of interest and breach of limitations in his/her authority. However, directors are also liable for other criminal offences as provided for by the Criminal Code.

As a rule, a company is responsible for the damage caused to third parties by its governance bodies. However, a company is entitled to be compensated by directors who have caused the damage through their wilful misconduct or gross negligence.

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

As a general rule, it is not possible to limit the liability of a director (or any other person) in respect of wilful misconduct or gross negligence. A cap on the amount of potential pecuniary compensation may be agreed, but only if it is not disproportionate to the actual damage suffered. If such damage is caused by wilful misconduct or gross negligence, the compensation limitation will not apply.

In practice, within a court dispute, a director may try to prove that a certain act/activity was not in his/her competence, that he/she relied on an expert’s opinion, or that he/she acted strictly upon the decision/approval of a relevant corporate body.


Coronavirus (COVID-19) considerations for directors

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

There are no specific issues for directors during the COVID-19 crisis other than those referring to the organisation of work. The Serbian Government has passed decrees and recommendations on how to manage work safely during the state of emergency, namely working in shifts, working from home, provision of safety equipment etc. 

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

There are no government relief measures specifically designed for directors. However, if a director is an employee of the company he/she manages, the general government relief measures will apply to him/her: salary tax and social security contributions for the 3 months of the state of emergency will be due only from 4 January 2021, and the employer (company) will obtain direct payment for the director in the amount of a net minimal wage for 3 months.

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

No changes have been made to directors’ duties as a consequence of the COVID-19 crisis.

Portrait of Marija Tešić
Marija Tešić
Partner
Belgrade