Legal guide for company directors and CEOs in Serbia

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.

BREAKING: 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.

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.

Picture of Marija Tesic
Marija Tešić
Partner
Belgrade