Legal guide for company directors and CEOs in Slovenia

BREAKING: Coronavirus (COVID-19) considerations for directors

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

HR management

One of the initial priorities was protection of the company’s workforce. Despite the fact that many employers issued working from home orders, or even instructed employees to stay at home for business reasons, certain companies could not just close their production facilities and were faced with difficult decisions. In some cases it was necessary to introduce precautions (e.g. adequate distance between work spaces, or even COVID-19 related body temperature tests), while complying with the relevant laws (e.g. data protection) and considering financial compensation for the active workforce. With the upcoming lifting of lockdown measures, management will need to have in place various mechanisms to further protect employees or, if necessary, adapt its company’s processes in case of another outbreak.

Liquidity

The current priority is to address the short- and long-term financial sustainability of the company. Based on the individual activities of the company, its market and cash flow, management will have to ensure it is well informed on the current standings and projections in order to monitor and steer the company’s assets. Considering the global impact of COVID-19, companies have to prepare for difficult scenarios which may last for several months. Therefore management must: (i) secure funding on a daily basis; (ii) identify key assets which can be used; (iii) contact banks and secure extended credit lines; and (iv) monitor debtors, suppliers and clients in their activities in order not to risk any negative impact on cash flow.

Strategy

One of the biggest upcoming priorities will be to adapt the individual company’s strategy. Slovenia was faced with a slow recovery from the 2009 recession due to the fact that its economy is predominantly export-oriented. In order to regain strength, many companies will have to consider if their strategy will be able to succeed or if changes (either production- or market-oriented) are necessary. 

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

Slovenia’s government adopted several measures within a so-called Anti-Corona Package in order to support companies. Among them are:

  • reimbursement of salary compensation for temporarily laid-off employees and employees absent from work due to force majeure
  • exemption from contribution payments for temporarily laid-off employees and employees absent from work due to force majeure
  • partial exemption from contribution for pension and disability insurance for employees working in the private  sector during the COVID-19 epidemic
  • moratorium on loan payments for the duration of 12 months (this applies to all loans for legal persons or individuals)
  • adjournment of statutory deadlines in non-urgent court and administrative matters; and
  • extension of existing loan and guarantee schemes of the Slovenian export and development bank (SID Banka), the Slovenian enterprise fund and the Slovenian Tourist organisation.

Furthermore, Slovenia adopted a second package focusing on the liquidity of companies, and announced that a third package focusing on the reboot of the economy will follow. 

The objectives of the second package are to facilitate bank borrowing by companies for liquidity purposes and thus contribute to the country’s economic stability, prevent major economic damage, preserve jobs in companies, ensure sufficient medium-term liquidity in the banking system and optimise the use of the already tight fiscal space in the budget. The second stimulus package provides liquidity for businesses through a EUR 2 billion guarantee scheme for loans from commercial banks.

Loans to micro-sized companies and small- and medium-sized enterprises (SMEs) will be guaranteed for up to 80% of the principal, and loans to large companies up to 70% of the principal. Banks will get guarantees for loans with maturity of 5 years issued between 12 March and 31 December 2020 and intended exclusively for financing a company’s principal activity.

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

While most obligations of the management remain, i.e. to preserve the company’s solvency and financial structure, duties in regard to insolvency have changed. The Intervention Measures to Mitigate the Effects of the Coronavirus (COVID-19) Infectious Disease Epidemic on Citizens and the Economy Act (the “COVID-19 Act”) stipulates that the obligation to file for insolvency is suspended if a company became insolvent due to the Coronavirus epidemic. The government therefore realises the extreme effect the pandemic has on the companies and wishes to support them through the various measures listed above and to protect companies from premature insolvency proceedings. Furthermore the COVID-19 Act introduced a new insolvency reason: a debtor will be deemed to be illiquid and insolvent if it is more than 1 month overdue with payment of salaries to employees and social contributions from the time it received compensation from the state based on the COVID-19 Act.

Directors duties and responsibilities

1. What form does the board of directors take?

Slovenian company law provides for a board system in joint stock companies (JSCs) but not in limited liability companies (LLCs). Although there may be more than one director, they do not constitute a board of directors.

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

As stated above, private limited companies do not have boards in Slovenia. In a JSC, the board may comprise both executive directors and non-executive directors as Slovenian law permits both one-tier and two-tier systems. This guide concentrates on the rules applicable to directors whose role is the same as executive directors; that is, directors who have an executive role within the company. However, in general, the law does not distinguish between executive and non-executive directors.

3. Who can be appointed as a director? 

Any natural person with full legal capacity can be appointed as a director. A director may also be a shareholder of the company and is not required to be a resident or national of Slovenia. It is also not mandatory that the director is employed by the company.

Slovenian law stipulates that a director may not be a person:

  • who is already a member of a supervisory body of the same company
  • who has been convicted of a criminal offence against the economy, social security, a legal business, property, the environment, space or natural assets. Any appointment is restricted for 5 years after the final judgment or 2 years after imprisonment
  • against whom a security measure has been passed prohibiting the pursuit of a profession, for the duration of the prohibition, or
  • who, acting as a member of the management or supervisory body of a company against which bankruptcy proceedings were instituted, has been found liable for damages to the creditors in accordance with the law regulating the financial operations of companies for the period of 2 years after the court ruling became final. 

A director has to make a written statement about the non-existence of such circumstances that would prevent his/her appointment, and the director’s signed statement needs to be notarised.

4. How is a director appointed?

It is up to the shareholders to decide on the appointment procedure of a director. Shareholders may regulate the appointment procedure in the company’s articles of association. If there are no provisions in the articles of association, the shareholders must appoint a director by a shareholders’ resolution passed by a majority of all shareholders present and voting at the shareholders’ meeting.
If the company has a supervisory board, this body is responsible for appointing a director. (The articles of association may however provide otherwise.)

A director may also be appointed in the articles of association, although this is not very practical as with each change of director, the articles of association would need to be amended as well.

A director is usually appointed for an indefinite term. If the appointment is made for a defined term, it cannot be shorter than 2 years. The same person may be reappointed several times.

The appointment of the first director has to take place prior to the entry of a new company into the court register. Each director has to be entered into the court register (however, registration itself is not a prerequisite for the validity of his/her appointment or the right to represent the company – it is thus only declaratory). The application form has to be submitted to the court register together with documentation proving the eligibility requirements. A decision on the appointment of the director and his/her written consent to the appointment should also be enclosed with the application form. If a director is a foreign national, his/her Slovenian tax number has to be provided in the application form.

5. How is a director removed from office?

If a director is appointed for a fixed period of time, his/her mandate ends with the expiry of the appointment period. There is no automatic renewal of the mandate or transformation of the fixed term into an indefinite term. Reappointment as a director is however possible.

A director may be removed before the end of his/her term. Generally, the shareholders’ meeting can remove a director at any time without giving a reason for the removal. However, the articles of association can provide that a director can only be recalled for specific reasons. The articles can also provide the supervisory board or a shareholder with the right to recall a director. If a company has a supervisory board and the articles do not provide otherwise, the supervisory board has a right to recall a director.

Contracts regulating the relationship between a company and a director usually stipulate that in case of unjustified removal, the director is entitled to a severance payment. If no such provision exists and the removal is unjustified, a director can claim damages according to general legal principles.

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

A director is a legal representative of a company. His/her powers to represent the company derive directly from the legislation. A director may carry out all legal activities on behalf of the company at his/her own responsibility. Any limitation thereof has no legal effect against third parties.

A company may have one or more directors. Each of the directors represents the company independently, unless (in the case of two or more directors) the articles or a shareholders’ resolution provide for joint representation. The articles can stipulate that two or more directors, or one director together with a proxy holder (agent with limited power to represent), may represent the company. The articles may also provide that only certain directors represent the company jointly, or that the directors represent the company jointly only when dealing with certain legal transactions. Joint representation must be entered into the court register and is, if entered, enforceable towards third parties.

Apart from joint representation, no other restrictions of the director’s authority and representation are enforceable against third parties, even if such restrictions have been published in the court register. Thus, any other restrictions on the director’s authority imposed either by the articles or by a shareholders’ resolution do not have any effect against third parties. A director may be held liable by the company if he/she seeks to circumvent these restrictions. A director has full authority to manage the company. Such authority may be internally restricted by the articles or by a shareholders’ resolution. In many cases the articles will provide that certain actions are subject to prior shareholder approval or approval by the supervisory board. However, neither the supervisory board nor the shareholders’ meeting may interfere with the director’s authority to decide on the daily business of the company.

7. How does the board operate in practice?

As stated above, Slovenian law does not provide for a board system. Although there may be more than one director, they do not constitute a board of directors. Each of them solely represents the company and validly concludes contracts in the name and to the account of the company unless joint representation is required as stated above.

All directors have the same rights and duties, and decisions are not made by a majority of votes.
The articles of association, shareholders’ resolution, resolution of the supervisory board or internal guidelines may allocate certain duties to one or more directors. However, such distribution of responsibilities does not affect the overall responsibility of each director for the company’s business as a whole.

The shareholders’ meeting may give binding instructions to the directors, unless otherwise provided in the articles. Non-compliance with such instructions may lead to the recall of the director and potentially also to a claim for damages.

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

Appointment to the position of director does not create a contractual relationship between the director and the company or entitle a director to remuneration.
The company and the director usually enter into a management contract or employment contract. A management contract is a type of service agreement specifying the director’s duties and remuneration, as well as other aspects of the relationship between the company and the director such as benefits, confidentiality, or non-compete and termination provisions.

A director may also regulate his/her relationship with the company in an employment contract. Many aspects of the relationship are then regulated by the rules of labour law. The Slovenian Employment Relationships Act specifically stipulates which elements of the relationship between the director and the company may be regulated differently from the statutory provisions (for example, rules regarding remuneration, working times, breaks and rests during a working day and week, conditions and limitations of a fixed-term contract, disciplinary responsibility and termination of the employment contract).

Removal of the director does not automatically terminate the contract but may constitute a breach of contract. Termination of the contract would also not necessarily terminate the directorship. However, the contract can provide that it terminates upon notice of the director’s recall from his/her position.

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

A director must carry out his/her duties in the best interest of the company and with the diligence of a good businessperson. He/she is bound by professional confidentiality and must avoid any conflict between his/her own interests and those of the company.

A director may not participate as a director in a limited liability company, a member in a partnership, a shareholder in a private limited or unlimited company, a member of a management or supervisory board of another company, a private entrepreneur, a procurator of another company or an employee of another company, if the activity of such company or the private entrepreneur could present competition to the first company where such director operates.

The articles may regulate when a director may participate in another company that engages in the same business activities as the company of which he/she is a director.

Additionally, the articles may provide that the ban on competition continues even after the director no longer holds his/her position. Such a prohibition may last up to 2 years, except when a director has been recalled by a shareholders’ meeting. In the latter case the prohibition may not last longer than 6 months.

If the director breaches the ban on competition, the company may bring a claim for damages. The company may also require the director to surrender to the company any business concluded for his/her own account, or require him/her to transfer any benefits from such business to the company.
A director is also restricted from entering into contracts with companies in which he/she or his/her close relatives (as defined in ZGD-1), alone or jointly, have a share of 10% or more (or are in any other way entitled to a corresponding part of the company’s profit). Such contracts require prior approval of the supervisory board or shareholders’ meeting. If such a contract is not pre-approved, it is deemed null and void. If the shareholding of the director and/or his/her close relatives is less than 10% of the company’s share capital, prior approval is not required. However, the director must notify the supervisory board about such a contract within 3 working days of signing. If there is no supervisory board, he/she is obliged to inform the shareholders about the contract at the next shareholders’ meeting. The company’s articles may also impose other restrictions in this regard.
However, if the director or any of his/her close relatives, alone or jointly, hold a share of at least three quarters of the subscribed share capital or managing rights of the company, none of the restrictions above apply.

10. What other general duties does a director have?

A director must manage the company and act on behalf of the company in line with its business purpose, best interests and in accordance with instructions given by the shareholders and the current legislation. A director must act with the diligence of a conscientious and fair manager. Under the rules on financial operations, insolvency proceedings and compulsory dissolution, a director has to act with a higher standard of diligence, as stated below.

A director is generally responsible for the operative management of the company. Many of the director’s duties are regulated by law, while some additional duties may be included in the management contract, employment contract or any other contract regulating the relationship between the company and the director. Breach, neglect or omission of his/her statutory or contractual duties will constitute a valid reason for the removal of the director.

Directors’ duties include, inter alia, the following activities:

  • to enter the establishment of the company into the court register and to enter changes to the entered data
  • to convene a shareholders’ meeting
  • to prepare and execute the decisions of the shareholders’ meeting
  • to set up financial statements and disclose financial statements to shareholders and to the public
  • to execute a decision of the shareholders to decrease the company’s share capital, and
  • to bring an action against a shareholder,who has not paid in his subscribed contribution(s).

Additionally, some of the director’s duties refer to the financial management of the company. Directors have to ensure that the company is operating in accordance with the financial operations, insolvency proceedings and compulsory dissolution laws and the rules of corporate finance. Directors have to act with the diligence of corporate finance professionals and endeavour to ensure that the company is always short- and long-term solvent.

Duties related to the financial management of the company require directors to, inter alia, submit a financial restructuring plan to the shareholders or supervisory board (if existent) when the company becomes insolvent, initiate court insolvency proceedings in due time, and to submit financial statements and reports (annual, quarterly) to the shareholders’ meeting and the supervisory board (if existent) and to competent national agencies/bodies.

Furthermore, the director must ensure that the company meets its obligations under public law – in particular with regard to, but not limited to, tax and social security laws.

11. To whom does the director owe duties?

Primarily the director’s duties are owed to the company itself and not to its shareholders.

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

Directors must always act with professional due diligence. Further, once a company’s insolvency is established internally, the Financial Operations, Insolvency Proceedings and Compulsory Winding-Up Act should be strictly followed to avoid or limit any damages towards the company’s creditors. 
Once directors have established financial difficulties in the company, they have to, inter alia (but not limited to), maintain the solvency of the company and manage the business risks, as well as adhere strictly to the equal treatment of all creditors. Further, non-essential payments should be suspended.
Directors shall also prepare a restructuring report for the shareholders with the description of the financial position of the company and the reasons for insolvency. The report shall also include an assessment for capital increase, an out-of-court settlement or court-sponsored measures.

As soon as directors are aware that a company is in financial difficulty, they should seek external advice.

13. What potential liabilities can a director incur?

A director is liable to the company for damage arising as a consequence of a breach of his/her duties, unless he/she demonstrates that he/she fulfilled his/her duties fairly and conscientiously and that he/she has acted with professional due diligence. In case of breach of duty by two or more directors, they are jointly and severally liable.

A compensation claim by the company against the directors may also be pursued by creditors of the company if the company is unable to repay them.

The directors and members of the supervisory board (if existent) are jointly and severally liable to the company for damage arising as a consequence of a violation of their tasks, according to the rules of the Financial Operations, Insolvency Proceedings and Compulsory Winding-Up Act, unless they demonstrate that they fulfilled their duties with the diligence of corporate finance professionals and the corporate governance rules. In practice, in the case of private limited companies, the main threat of legal action against directors for breach of duty is likely to emerge only in the event of the company’s insolvency.

Directors are liable for the fulfilment of the tax and social security obligations of the company, in the same manner as described in the previous paragraph.

Directors may also be held criminally liable in cases of wilfully incorrect statements, including financial statements, statements to shareholders or the supervisory board or filings with the court register, as well as being liable to fines and other penalties for breaches of various statutory duties and offences (for example, under various health and employee protection provisions).

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

Directors and/or members of a supervisory body do not have to reimburse the company for damage if the act that caused the damage to the company was based on a lawful resolution passed by the shareholders’ meeting.

The liability of directors cannot be excluded on the basis that an act was approved by the supervisory body (if existent).

The company may only refuse compensation claims, or offset them 3 years after the claims arose, provided that the agreement of the shareholders’ meeting is obtained and provided no written objection is made by a minority holding at least one tenth of the subscribed capital.

A single director is liable to the creditors for damage (if their claims were not repaid fully in the insolvency procedure) arising as a consequence of violation of his/her tasks under the rules on financial operations, insolvency proceedings and compulsory dissolution (particularly if certain duties, before or after the insolvency procedure started, were not fulfilled or not fulfilled in due time) only to the amount of twice his/her yearly income (remuneration) in the year of such violation, but not less than EUR 20,000 (small company), EUR 50,000 (medium-sized company) or EUR 150,000 (large company). The liability is unlimited in the case of gross negligence or a wilful breach.

Further, a director is not liable towards the company or its creditors if he/she can prove that damages occurred due to the actions of other people which the director could not have prevented, eliminated or avoided even if he/she had acted with professional due diligence.

A company is permitted to purchase directors’ and officers’ insurance cover on behalf of its directors, however for private limited companies it is not common for such insurance to be put in place.

Portrait ofRobert Kordić
Robert Kordić
Associate
Ljubljana