The new Montenegrin Law on Business Organisations (in further text the “Law”) entered into force today. The reason for establishing the Law is directly related to the process of Montenegro’s accession to the European Union. The key criteria for the temporary closure of negotiations in Chapter 6 (Commercial law) is precisely the adoption of the Law. Additional goal is the full harmonization of the Law is with the so-called “Company Directives”.
Companies of Public Interest
This is not a new form of company nor new form of business, but a generic term used in European Union law to denote Joint Stock Companies (JSC) or Limited Liability Companies (LLC) whose securities are listed on the Organized securities market in Montenegro or abroad.
So far it has been used in practice, but from now on the Law recognizes the subsidiary (in Montenegrin: podružnica) as a special organizational unit of a company without the status of a legal entity, which performs activities outside the registered seat of the company.
Breaking the corporate veil and the creditor’s lawsuit for collection of claims
Abusing the circumstances that one or more limited partners, members of the LLC or JSC, are not responsible for the obligations of a limited partnership, LLC or JSC are existing in the following cases:
- using the company to achieve a goal that is prohibited to it;
- using the company or its property to the detriment of the company’s creditors;
- managing or disposing of the company’s property contrary to the Law;
- reducing the company’s assets, to gain benefits for himself or third parties, even though he knew or had to know that the company will not be able to perform its obligations.
As a novelty, this Law also brings the special right of creditors of the company, whose claim is due, to file a lawsuit for collection of claims against limited partners, members of the LLC or JSC, within six months from the day of learning about such abuse, and no later than three years from the day of the abuse. Filing such lawsuit does not affect the right of creditors to collect claims in another way.
Address for receiving e-mail
The company is obliged to have an e-mail address, registered within the Central Registry of Business Entities (CRBE).
This institute returns to the Law as a business power of attorney for performing a wide range of tasks in a domain of business capacity of the company. The key characteristics of this institute are the following: (i) procura cannot be given to a legal entity, (ii) procura is not transferable to other persons, (iii) procura is given on the basis of the decision of the relevant corporate body; (iv) procura is given in a form of notarial deed, with mandatory registration within the CRBE and (v) procurator is signing in the name and on behalf of the company and near his/her signature inserts the word “procurator”.
Special duties to company and lawsuits for breaching such duties
The significant novelty is that the Law precisely defines the following special duties towards the company and potential consequences of their non-compliance by the persons concerned: duty of care, duty to declare personal interest, duty to avoid conflicts of interest, duty to keep business secret, duty to comply with the prohibition of competition.
Company assets and capital
It is defined that non-monetary share can be only in things and rights, except when the Law explicitly prescribes otherwise. It has been explicitly established that shareholders of JSC, members of an LLC and limited partners must enter a share into the company before the shares are registered within the shareholders/owners. In this regard, the liability of these persons for damage due to non-submission of deposits or submission of deposits with delay is also defined. A prohibition on the return of deposits is also a novelty, as a basic type of protection, and a mechanism for maintaining the company’s capital.
Entrepreneur and manager (in Montenegrin: poslovođa)
Mandatory registration of entrepreneurs is being introduced in our legislation as a significant novelty, which at the same time a condition for a natural person to acquire that status. Also, the institute of manager was introduced, a natural person to whom the entrepreneur entrusted the management with a written authorization, who registers in the CRBE, on the day of registration acquires the status of a representative of the entrepreneur and has an employment relationship with the entrepreneur.
JSC – commitment to the company
The issue of representation and legal validity of obligations undertaken by the company is regulated in such a way that publishing the names of executive director/the president of the management board/persons explicitly authorized to represent the company, binds the company. Thus, company cannot invoke any irregularities in their appointment in relation to third parties. The exception to this refers to a situation where third parties were aware or could have known of such irregularities. Besides this, actions of representatives bind the company, except when such actions exceed the powers they have.
JSC – keeping business records and publicity of business
The Law regulates the issue of keeping business records and documentation by exhaustively listing the documents and records that the company is obliged to keep, as well as the manner of exercising the right to inspect records and documentation by shareholders. Among all, the novelty is mandatory listing of certain information in business correspondence and the company’s official website.
JSC – introduction of a bicameral management system
One of the most important novelties is that the new Law prescribes that the management of JSC can be unicameral or bicameral. The legislator opened a new possibility, but at the same time enabled existing companies that already applied the unicameral system to keep the familiar and well-established concept, as well as new ones to have a choice between the two management. The unicameral management system bodies are the assembly, board of directors and executive director, while bicameral management system consists of the assembly, the supervisory board and the management board.
JSC – novelties in the assembly
The issue of determining the nullity of the decisions of the assembly was regulated, which created the basis (that did not exist in the previous law) to make a precise distinction between cases of absolute and relative nullity of assembly decisions. Furthermore, the rules on the use of electronic technologies in the preparation and holding of the assembly were additionally harmonized. Additional novelty is the regulation of electronic power of attorney, as well as shareholder participation in the assembly via video link and other electronic means of communication.
JSC – board of directors and introduction of an independent director
The Law also introduces a novelty related to the number of board of directors. The Law prescribes that board of directors has at least three members, except for the board of directors of a public interest company, which has at least five members. In addition, significant novelty is that the Law explicitly prescribes that boards of directors must have at least one third of the independent members, while the board of directors of the public JSC must have at least two fifths of the independent members. It is stipulated that JSCs, that subsequently acquire the status of a public interest company, are obliged to harmonize the number and composition of its board of director or supervisory board members within three months from the day their securities or other financial instruments are included in trading within a regulated market.
JSC – appointment of a temporary representative
A novelty is introduced in the Law offers a solution for the case when the new executive director is not elected within 60 days from the day of registration of the termination of the old one. In particular, the shareholder or other interested person is given the right to request that the court, in a non-litigious procedure, appoints a temporary representative with all the rights and obligations of the executive director, in a procedure which is given the character of an emergency.
JSC – supervisory board
The composition, criteria for membership, competencies, manner of election, compensation for work, termination of membership and other issues of importance for the supervisory board, as a body specific to the bicameral system of corporate governance, are regulated. Here follows the appropriate application of the rules relating to the board of directors in a unicameral management system and its members.
JSC – management board
Again, legislator prescribes the appropriate application of the rules related to the board of directors in the unicameral management system, i.e. its members, with the necessary adjustments. On the other hand, the issues of appointment and mandate of the members of the management board, the issue of its competences and the issue of the status and authority of the president, are regulated somewhat differently. When it comes to the president of the management board, it is necessary to emphasize the fact that he/she, following the example of the executive director in the unicameral model of management, is explicitly appointed as the legal representative of the company.
JSC – the secretary
The appointment of a secretary is obligatory only for companies of public interest, while in other cases it is optional, provided that in the case where not appointed, the executive director of a unicameral company is responsible for performing tasks within secretary’s competence, i.e. the chairman of the board of a bicameral company.
JSC- preferential shares
Unlike the old legal provision, the new one explicitly envisages the limitation of total nominal value of issued preferential shares, which cannot exceed 50% of the company’s share capital.
The Law stipulates that holders of preferential shares have a right to participate in the work of the assembly, without the right to vote. However, an exception is provided by stipulating that shareholders with preferential shares have a right to one vote per share at any assembly of shareholders within their class of shares when voting on the following issues:
- increase or decrease of the total number of shares of that class;
- modification of any privileged right of shares of that class;
- division or merger of shares of that class or their exchange for shares of another class;
- issuing a new class of shares that give greater rights in relation to the rights that give shares of that class or change the rights from shares of another class so as to give equal or greater rights in relation to the rights that give shares of that class;
- restriction or exclusion of the right of pre-emption and the existing voting right from the shares of that class, if that right is determined by the articles of association.
Voluntary liquidation of JSC
Significant novelty relates to the protection of the principle of legal certainty, and in that manner, it has been established that it is impossible to suspend a voluntary liquidation procedure once initiated. Also, the part related to the protection of creditors in voluntary liquidation procedure is elaborated in detail, which is one of the key goals of the legislator when regulating the liquidation procedure of a solvent company.
Compulsory liquidation of JSC
The grounds and content of the court decision on the compulsory liquidation of the JSC have been introduced, leaving the company the opportunity to appoint a liquidator within a reasonable time, which would otherwise be done by the court that made the decision on liquidation. Therefore, the appropriate application of the provisions of this Law relating to the procedure of voluntary liquidation of a JSC is prescribed.
Share capital of LLC
As in the previous law, it is envisaged that the founders are required to determine the amount of the share capital, which may not be less than EUR 1. However, the Law introduced one exception to this situation, if a special law does not prescribe a larger amount of minimum share capital. Also, besides the reduction of the share capital, the Law also regulates the situation of reduction of share capital in case of loss. If the company’s net assets amount to half or less of the value of the share capital of the company, the company may convene an assembly of members of the company in accordance with the Law.
LLC – the right of pre-emption during transfer of shares
The Law obliges the transferor of shares to offer his share to all other members and to the company in writing before transferring the share to a third party. The transferor’s offer must contain all prescribed mandatory parts. By the articles of association, a different deadline could be set (besides the one of 30 days that remained the same as in the old law), which cannot be shorter than 8 days nor longer than 180 days. In case of violation of the right of pre-emption, a member of the company and the company itself may file a lawsuit requesting the competent court to annul the agreement or other act on the transfer of shares. The deadline for filing such lawsuit is 30 days from learning of occurrence of such agreement, i.e. no later than the six months from the date of registration of shares in the CRBE.
LLC – pledging a share
An interesting novelty is about pledging a share, that is regulated in such a way that a member of the company can pledge his share or part of the share, if the founding act does not prohibit such action. In that situation, the pledgee has no right to vote or manage until he/she becomes a member.
LLC – termination of the status of a member of the company
The new Law stipulates that a member of the company may not waive the right to withdraw from the company in advance, nor may this right be limited by the company’s acts. In addition to resigning, the Law also regulates in detail the situation of expulsion of a member from the company. The decision on expulsion is made by the competent court, upon a lawsuit for the expulsion of another member, in case it determines the existence of a justified reason determined by the Law.
Bodies of an LLC and new obligations for companies
Serious novelties of this Law are reflected in the bodies of LLCs. Firstly, the Law stipulates that the assembly and the executive director are obligatory bodies of the company, but it also gives the possibility to establish additional bodies by the articles of association.
The Law stipulates that i) companies of public interest (in terms of the Law) and ii) LLCs that fall into the category of large companies in terms of accounting and auditing laws, must have a mandatory structure of JSCs. The first group of companies is obliged to harmonize the structure of the body management within three months from the day when their securities or other financial instruments are included in trading on a regulated market, and the second group of companies is obliged to adjust the structure of the governing bodies, i.e. the structure of the members of those bodies within six months from the end of the financial year in which the conditions for the change of status have been met.
LLC – keeping business records and publicity of business
As with the JSC, the issues of the obligation to keep documents, the right to access the company’s acts and documents, as well as the registration of changes, are regulated within LLCs as well.
Cross – border mergers of capital companies
A new and very specific area is being introduced as a subject of regulation of company law in Montenegro. The goal is to substantially increase the mobility of capital in the Internal Market of the European Union and its further integration. The provisions of this part of the Law shall apply from the day on which Montenegro acquires full membership in the European Union.
The Law emphasizes the application of regulations governing e-government, which creates the conditions for electronic registration of companies and other forms of economic activity to be performed through the e-government portal: www.euprava.me.
Organization harmonization and registration
- JSCs and LLCs registered in the CRBE before the Law entered into force are required to harmonize the organization (the statute, bodies of the company and other acts) with the Law and register changes within nine months from the date of entry into force of the Law;
- Other companies that are registered in the CRBE before the Law entered into force are required to harmonize the organization with the Law and register changes in the CRBE within 18 months from the date of entry into force of this Law;
- Partnerships and entrepreneurs who have not been registered in the CRBE before the Law entered into force are obliged to register in the CRBE in accordance with the Law, within nine months from the date of entry into force of the Law.
- Entrepreneurs who are registered in the CRBE before the Law entered into force are obliged to harmonize their business and submit a registration application in the CRBE in accordance with the Law, within six months from the date of entry into force of the Law;
- JSCs in which ordinary shares of different nominal value exist on the date of entry of the Law into force are obliged to homogenize shares in order to equalize the nominal value, within one year from the date of entry into force of this Law, in a way to maintain a proportional participation in the total number of shares.
The competent registration authority shall, within 30 days after the expiration of the deadlines referred to in items 1 and 2, before the competent court, initiate the court liquidation procedure of companies that have not fulfilled the registration obligation within the deadline and delete them after the court liquidation procedure.
Procedures for registration and restructuring of companies that began with the convening of the competent body of the company, before the entry into force of the new Law, will be completed according to the law that was in force at the time of initiating the procedure. When it comes to procedures for reduction or increase of capital and procedure of issuing of shares that started by convening the assembly of shareholders, and when it comes to procedures for issuing shares under the acts on founding issue of shares, are all recorded and approved in accordance with the provisions of the law that was valid at the time of convening the assembly.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.