Investment model for companies in Serbia
The right to acquire shares
The latest amendments to the Law on Companies (“Official Gazette of RS”, No. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44/2018, 95/2018 and 91/2019 “Law“), two new legal institutes were introduced with the aim of forming a legal framework for investing in micro, small and even medium-sized companies that mostly perform their activities registered in the legal form of a limited liability company (“LLC“).
Namely, the Law prescribes for the first time the right for a LLC to acquire a reserved own share, and all for the purpose of issuing, also a newly-prescribed financial instrument – the Right to acquire a share.
What is a reserved own share?
Reserved own share is a share that the LLC freely acquires from a member or members of the company, for the purpose of allocating a financial instrument – the Right to acquire a share. The law, therefore, specifies that the reserved own share is acquired exclusively for the purpose of issuing a financial instrument – the Right to acquire shares, because the reserved own share cannot be disposed of by the LLC in any other way than by issuing the Right to acquire shares. The Company does not have the right to vote on the basis of reserved own shares, nor are those shares counted in the quorum of the Companies Assembly, and they also do not give the right to participate in the profit.
The percentage of participation of all reserved own shares in the share capital of the LLC cannot exceed 40%. The decision to acquire a reserved own share is made by the LLC assembly by a two-thirds majority vote, provided that the LLC can acquire the reserved own shares only from members who voted for such acquisition, with the restriction that the LLC can acquire the reserved own share only from the shares fully paid, or entered. As in the case of all other changes related to the shares in the share capital of the LLC, this change is subject to registration with the Business Registers Agency.
Financial instrument – the right to acquire shares
The right to acquire shares (“Financial Instrument“) is a financial instrument prescribed by the Law which is non-transferable and issued by the LLC, which gives the holder of the instrument the right to acquire a certain percentage of shares in the LLC on a certain day (due date) at a certain price. The Right to acquire a share cannot be the subject of a pledge, nor the subject of inheritance.
The decision on the issue of the Financial Instrument is, as a rule, made by the Assembly of the LLC, unless the founding act prescribes that the decision be made by the director.
The decision contains in particular:
1) number of Financial instruments;
2) reserved own share from which the Financial instrument is issued;
3) data on persons or legal entities acquiring a financial instrument;
4) percentage of the share that the holder of the Financial instrument has the right to acquire in relation to the reserved own share;
5) the price that the holder of the Financial instrument pays to the company for acquiring the share and the deadline for payment of the price which cannot be shorter than 15 days or longer than 30 days from the due date;
6) date of issue of the Financial instrument;
7) maturity date of the Financial instrument;
8) conditions under which the Financial instrument may be revoked before the due date.
In order for the Financial Instrument to become valid, it is necessary to register it with the Central Securities Depository, and all rights to the LLC on the basis of this Financial Instrument are acquired in full in the day of registration.
By prescribing the new Financial Instrument, based on the previously allocated reserved own share from the share capital of the LLC, a framework was created for attracting specific investors for certain projects in the LLC, which is especially important for companies that are just starting to operate. This type of investment can be especially attractive for people who are already employed by the LLC.
In such a situation, having in mind that the right to acquire a share envisages that at a precisely determined price, a share in the LLC will be acquired on a certain day, the person designated as the right holder by the LLC decision will have a special motive for additional engagement and dedicated work, given the possibility that in case of business success, the value of the share acquired is multiplied in relation to the price determined by the decision on the issue, and which cannot be changed.
On the other hand, in addition to material resources, the LLC also gets a highly motivated worker oriented towards mutual business success.
Apart from such a model, the right to acquire a stake can be tempting for other persons who are not directly related to the LLC if a well-developed business plan for a specific project could provide a potential investor with good enough prospects for business success.
Acquisition of shares
The share in the LLC is acquired by registration in the Business Registers Agency, after the conditions prescribed in the decision on the issue of the Financial Instrument have been met, primarily if the payment of the determined amount is made within the deadline, due date has set and if the conditions for cancellation have not been met. In that case, the LLC is obliged to register the acquisition of the share and the new shareholder within 60 days from the day of expiration of the deadline for payment of the determined price. By entering in the register, a new member of the LLC becomes a full member of the LLC (shareholder) with all the rights guaranteed by the Law on the basis of the percentage of share in the LLC share capital.
Exceptionally, the share on the basis of the Financial Instrument is acquired even before the determined due date, in the case of:
1) liquidations – on the day following the day of publishing the announcement on the commencement of liquidation;
2) status changes – on the day following the day of publishing the draft agreement on status change or division plan;
3) change of legal form – the next day from the day of publishing the proposal of the decision on change of legal form.
In the cases from the listed points, the deadline for payment of the price paid by the holder of the Financial instrument to the company for acquiring the share is 40 days from the day of the occurrence of the early due date.
On the next working day from the day of publication, the LLC is obliged to send a written notice to the holders of the Financial Instrument on the occurrence of early maturity, with an invitation to pay the price within 40 days.
The LLC cannot make a decision on termination of liquidation, decision on status change and decision on change of legal form until it has registered the acquisition of shares on the basis of the Financial instrument or registration of share capital reduction due to cancellation of unused reserved own share.
In the event that the LLC has not registered the acquisition of shares on the basis of the Financial instrument within 60 days from the date of expiration of the deadline for payment of the price, the holder of the Financial instrument who made the payment may, within six months starting the first day from the expiration of the registration deadline, file a lawsuit with the competent court to determine the status of the member and the percentage of shares that the holder of the Financial Instrument or a lawsuit to determine the fee that the company is obliged to pay to the holder of the Financial instrument.
The court will determine the said fee according to the market value of the share that the holder of the Financial Instrument would be entitled to acquire on the maturity date of the Financial Instrument.
In case of death of the holder of the Financial Instrument after payment of the price within the specified period, and after the due date of the Financial Instrument, the heirs have the right to demand payment of compensation in the amount of market value of the share that the holder of the Financial Instrument would have the right to acquire on the due date.
In the event that the Financial Instrument is unjustifiably canceled before the due date, the holder of the Financial Instrument is entitled to payment of compensation in the amount of the market value of the share that the holder of the Financial Instrument would be entitled to acquire on the maturity date, reduced by the amount of the determined price.
The financial instrument ceases to exist on the day of deletion of the company from the register due to the termination of the compulsory liquidation procedure and is written off from the Central Register ex officio, and the holder of this financial instrument becomes the creditor of the company and has the right to compensation which the holder had the right to acquire the instrument on the due date of the Financial Instrument if the price was paid, or on the day of deletion of the company from the register due to the termination of the compulsory liquidation procedure, reduced by the amount of the determined price, if the price is not paid.