04 Dec 2017

More Significant Role of Minority Shareholders

The Act on Amendments and Supplements to the Companies Act represents one of the largest, if not the largest legislative development expected in Serbian law in 2017.  As the public debate on the subject changes came to a close recently, it is expected these revisions will be subject to the parliamentary procedure very soon.

Among the proposed amendments and supplements—which have a two-fold aim, i.e. harmonization of domestic law with requirements from the Chapter 6 (Companies Law) for accession to the European Union and Serbia’s progress on the World Bank’s Doing Business List—are those concerning status of minority shareholders of limited liability and joint-stock companies.  Since the World Economic Forum’s Competitiveness Report for 2016-2017 identified a low degree of protection of minority shareholders as one of the main weaknesses of our legal system, and thus, pursuant to the subject criteria, ranked Serbia on 134th place, the subject amendments and supplements significantly deal with this issue as well.

The Draft of the Act on Amendments and Supplements to the Companies Act (“Draft”) revises the existing rights and introduces some new rights of minority shareholders. An overview of the most important changes is as follows.

Minority Shareholders Cannot Waive a Right to Vote

The current Companies Act contains the provision pursuant to which each shareholder of a limited liability company has the right to vote in proportion to participation of its share in company’s total share capital—unless otherwise stipulated by company’s Memorandum of Association. The aforementioned practically means that Memorandum of Association may stipulate that minority shareholders, regardless of whether they hold a share, have no single vote within the Shareholders Assembly. The Draft, however, stipulates that each shareholder has the right to vote within the Shareholders Assembly proportionally to its share in the company—whereby, the Memorandum of Association cannot prescribe that shareholder does not have the right to vote at all. As such, the Draft provides minority shareholders a certain level of protection as they are guaranteed the right to at least one vote.

Lower Thresholds for Convening a Limited Liability Company’s Session

Furthermore, pursuant to the current provisions, a session of the Shareholders Assembly of the limited liability company must be convened in case shareholders who hold or represent at least 20% of votes claim so in writing. The Draft, however, reduces the aforementioned percentage to 10%—unless the Memorandum of Association provides that the subject right belongs to shareholders who jointly hold or represent even lower percentage of votes.

Lower Thresholds for Proposing the Agenda of the Limited Liability Company’s Session

In accordance with the above-mentioned, the Draft also provides the possibility that one or more shareholders of the limited liability company who hold or represent at least 5% of the share in company’s share capital, instead of the currently stipulated 10%, may put additional items on the session’s agenda by sending a written notice—unless the Memorandum of Association gives the subject right to shareholders that hold or represent even lower percentage of share.

Higher Thresholds for a Compulsory Squeeze Out

The current Companies Act also contains the provision pursuant to which, upon a proposal of a joint-stock company’s shareholder who holds or represents at least 90% of the company’s share capital, and has at least 90% of votes of all shareholders holding the ordinary shares, the Shareholders Assembly shall issue a decision on the compulsory acquisition of all shares of the remaining shareholders holding the ordinary shares, along with payment of the price (determined by applying provisions governing disbursement of dissenting shareholders).  The Draft increases the above-mentioned percentage to 95% of the company’s share capital, and 95% of votes of all shareholders holding the ordinary shares.  In addition, the Draft specifies that the subject decision is made regardless of the encumbrances, prohibitions of disposal, limitations and third parties’ rights on shares, since the current Companies Act raised issues whether the pledged shares may be subject to compulsory acquisition.

Accordingly, while the current provisions stipulate that a controlling shareholder who acquires shares representing at least 90% of the company’s share capital is obliged to purchase the shares of each of the remaining shareholders at their written request, the Draft increases the aforementioned percentage to 95%.

Greater Business Transparency Benefits Minority Shareholders

In addition, proposed amendments and supplements introduce the liability of the company to obtain a report on the assessment of market value of assets or rights that are subject to a legal transaction or a legal operation where there is a personal interest involved, in case the value of the subject transaction or operation exceeds 10% of the book value of company’s total assets pursuant to the latest annual balance sheet.  The aforementioned report forms an integral part of decision on approval of such legal transaction or operation.  Also, the Draft stipulates that the company must publish, either on its website or on the website of Business Registers Agency, a notice on the undertaken legal transaction or operation where there is a personal interest involved, along with their detailed description and all relevant facts about the nature and scope of the subject personal interest—all within 15 days from the date of entering into the subject transaction or operation.

Precise Deadlines for Payment of Dividends

One of the Draft’s novelties, which is of a particular importance for all shareholders, including minority shareholders, is the provision concerning the payment of dividends.  Namely, the Draft specifies that the payment of dividends has to be made within a period of maximum six months from the day of making the decision on payment.  Bearing in mind that the execution of such payment often took several years, the aim of new provision is to prevent such practice in the future.

Finally, transitional and final provisions of the Draft provide that the Act on Amendments and Supplements to the Companies Act will apply from March 1, 2018, except for certain provisions that will apply from the date of accession of the Republic of Serbia to the European Union.

Since the Draft has undergone the public debate, it is expected that the current wording will be subject to relevant changes in accordance with given suggestions prior to commencing the adoption procedure before the National Assembly.  In any case, in addition to the strategic significance, it is anticipated that these alterations and amendments will be of practical importance for creating a more favorable business environment, as well as for development of Serbia’s economy.

Authors: Ognjen Colić i Lara Maksimović, Gecić Law