On 19 November 2021 the Parliament of the Republic of Serbia enacted yet another amendment to the Company Law. This is the seventh change of this piece of legislation in its 10 year long legal life.
We focus here on the two which may have far-reaching consequences to the landscape of limited liability companies (LLC) in Serbia.
Agreement between the Company and a New Shareholder
The amendments introduce a rather confusing provision requiring that for a third party to become a shareholder in a LLC, an agreement between that party and the company itself must be made (person nominated by the shareholders meeting signs on behalf of the company).
It seems that the purpose of this amendment is to provide a legal basis for the existing practice where in case of a capital increase by a third party, the Serbian registration authority – Business Registries Agency required an agreement on accession to be signed between existing and new shareholders.
On the other hand, according to the Business Registries Agency, this provision will apply only in special (in practice very rare) cases where the company’s memorandum of association provides that consent of the company itself is required for transfer of the share to a third party.
What our concern is that the wording of the provision is such that this provision apparently applies even if a third party becomes a shareholder by acquiring shares from the existing shareholder.
Requiring such an agreement does not only seem to lack purpose but is arguably detrimental to the status of minority shareholders in LLC’s. It appears that this provision will give the right to majority shareholders to block the minority shareholders to rightfully transfer their shares to third parties (by blocking execution of such an agreement at the level of shareholders’ meeting). We believe that this was not the intention of the lawmakers but is apparently an unfortunate inadvertent effect.
Since this change applies to all LLC’s, it appears that this change will also affect the relations between the majority and minority shareholders in the existing LLC’s in the manner explained above.
Nullity of Share Transfer Agreement
The law introduces a provision that in case a nullity of a share transfer agreement is established by a court ruling, the parties can request from the Business Registries Agency to change the registration of the title to the affected share.
It is not clear whether this newly introduced clause will override the principle of reliance in the registered data, providing that the parties cannot bear negative consequences if they relied on the registered data (which is of paramount importance for the certainty of legal transactions), and whether subsequent acquirers of the share (in case of sale chain) acting in good faith would bear consequences to their title to the share if the title of one of the previous sellers in the sale chain would be declared null. We hope these tensions will be resolved in court practice in favour of the reliance principle, but until then the huge legal certainty remains.
We will follow up with the news on other major amendments to the Company Law introduced this November.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.