Proposed amendments to the Serbian Company Act – participation of employees in the share capital

After the extensive amendments to the Company Act that came into force in June 2018 and partially this October (2019), the Ministry of Trade has proposed some new amendments. This time the amendments are narrow in scope and relate to a specific matter, namely the introduction of a new financial instrument - the right to acquire a shareholding (pravo na sticanje udela), which will hopefully enable limited liability companies (LLCs) to incentivize their employees/management/consultants by allowing them to participate in the LLC’s share capital. Until now, this has only been possible for joint stock companies. 

Considering the dominance of limited liability companies on the Serbian market (especially one-member LLCs), it was high time such an instrument was introduced.

Procedure 

The process should include:

1)    the acquisition of a reserved treasury share (free of charge, from the existing shareholder/s) pursuant to the relevant decision of the shareholders’ meeting and registration with the Serbian Business Registers Agency; 

2)    the issuance of financial instruments, i.e. rights to acquire a shareholding, pursuant to the relevant decision of the company director (defining the price and the due date for acquisition) and their registration with the Central Securities Depository and Clearing House; and

3)    the acquisition of a shareholding by the titleholders of the financial instruments, upon payment of the defined price on the defined due date and registration with the Central Securities Depository and Clearing House. 

Under the current wording, the procedure is supposed to be efficient and smooth, and companies should be in а position to directly register all changes with the Central Securities Depository and Clearing House. This marks a significant departure from the existing rule and practice in which companies communicate or transact with the Central Securities Depository and Clearing House strictly through their corporate agents (i.e. brokerage companies). 

Main characteristics of a reserved treasury share

-    registered with the Serbian Business Registers Agency,
-    no dividend or voting rights attached (nor taken into consideration for quorum calculation),
-    total volume of all reserved treasury shares may not exceed 40% of the company’s total share capital.

Main characteristics of a financial instrument - "right to acquire a shareholding"

-    registered with the Central Securities Depository and Clearing House,
-    non-transferable,
-    grants the right to acquire a shareholding, on a certain date and for a certain price,
-    cannot be subject to a pledge or inheritance.

The Company Act also regulates the status of these financial instruments in case of status changes, changes to the legal form and liquidation procedures to ensure that the rights to acquire a shareholding would be automatically considered due at the moment any of the above procedures are initiated. Also, a status change, change of a legal form or a liquidation procedure cannot be completed if there is an outstanding or expired right to acquire a shareholding.

The Company Act envisages explicit court protection for holders of the rights to acquire a shareholding, enabling them to request from the court to declare their status as shareholders or to request a compensation amounting to the market value of their potential shareholding, within a period of six months upon the payment for the shareholding. 

These regulations have been introduced predominantly to address the specific conditions in the IT sector, where as a rule the initial investment in the share capital is very low, but companies then subsequently tend to see rapid growth and development. Of course, there are no obstacles to prevent this mechanism being used by other types of companies, and it should be. Practice in the last decade has shown that major international companies with a presence in the Serbian market frequently expressed the desire to offer these kinds of incentives to their employees or management. Lacking any legal means, however, Serbian employees/management were granted shares in affiliated companies abroad, which was more complicated and more expensive for Serbian citizens as titleholders.

With the same aim, the proposed amendments to the Company Act also explicitly provide for employees to participate in their company’s profit distribution scheme.

Of course, it remains to be seen how the final text of the regulation will look once (and if) the National Assembly adopts it, and later, whether it will be actually welcomed by Serbian employers.