According to Companies Act (“Off. Herald of RS”, Nos. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44/2018, 95/2018, 91/2019 and 109/2021 – further: Companies Act) concept of shares is negatively determined, i.e. by the provisions of the Article 150 of the Companies Act shall be prescribed that a company’s shares are not securities and that a company’s shares may not be acquired, nor may they be disposed by forwarding a public offer in terms of the law regulating the capital market.
According to provisions of the Article 157 paragraph 1 of the Companies Act, a share or part of a share a company acquires from its member is considered to be own share of the company in terms of the Companies Act.
A limited liability company cannot acquire own share at its establishment but subsequently from its member due to certain legal situations, which are a specific exception type.
The company can achieve own shares exclusively based on the decision of the company’s assembly, and the founding act cannot transfer the decision on the acquisition of own share to the competence of another body of the company (the director or the supervisory board in the bicameral management system).
The company may acquire own shares under a resolution of the general meeting only if the share it acquires is fully paid up in the following cases:
- Unencumbered legal transaction
- On the grounds of repurchase of a share or part of a share of a company member.
The company may acquire own shares under a resolution of the general meeting if the share has not been fully paid in the following cases:
- On the grounds of the expulsion of a company member
- On the grounds of compulsory repurchase of share of a deceased member, if such company right is provided in the memorandum of association
- On the grounds of status change, in line with the Companies Act.
When talking about a share that has not been fully paid, attention should therefore be paid to the fact that the legislator has in mind a share that has been partially paid; that is, a share that has been registered but not paid in full cannot be acquired.
Restrictions when Acquiring Own Share
Companies Act by the provisions of Article 157 prescribes the following restrictions on the acquisition of one’s own share:
- The impossibility for the company to acquire a share that has not been fully paid up, except in cases of acquisition of shares that have not been fully paid up, which are prescribed as an exception by the Companies Act
- Payment of compensation pursuant to acquisition of an own share in a case of repurchase of a share or part of a share of a company member may be carried out by the company only from the reserves that may be used for these purposes
- A company may not acquire an own share so that it remains without its members
- A single member company may not acquire own share
- Acquiring of company’s share by its controlled company shall be considered as acquiring of own share, in terms of the Companies Act.
A legal transaction by which the company acquired own share contrary to provisions of the Article 157 of the Companies Act is null and void.
Rights of the Company Pursuant to Own Share
A company does not have a voting right pursuant to own shares, nor do these shares count in the quorum at the general meeting.
An own share does not entitle to a share in the profit and may not be a subject of a pledge.
The provisions of Article 308 of the Companies Act, which usually refers to the increase of the company’s share capital in joint-stock companies, but should also be applied to limited liability companies (based on the provision of Article 149 of the Companies Act, which prescribes the corresponding application of the requirements on the increase of the share capital of joint stock companies to the increase of the share capital of a limited liability company) one exception is prescribed.
According to provisions of Article 308. paragraphs 1. and 3. of the Companies Act the right to stocks based on the increase of company’s share capital out of the company’s net assets is vested in the company’s stockholders on the day of rendering such a decision and the referred right also belongs to the company on grounds of the company’s own stocks. The provision of Article 308, paragraph 4, expressly stipulates the nullity of the assembly’s decision that is not following the above.
Therefore, the company will acquire new shares; that is, own share of the limited liability company will increase in proportion to its participation in the share capital; that is, that proportion will be maintained.
Disposing with Own Share
A company may do the following with an own share:
- Distribute it to the company members, in proportion to the participation of their shares in the share capital of the company, pursuant to a general meeting resolution; The decision on disposal of own share must contain a time limit for payment of unpaid, i.e. entry of not entered contribution.
- Transfer it to a company member or third party in exchange for a consideration, in which case each company member is entitled to a pre-emptive right to purchase, proportionate to the amount of his share in the company.
If the company does not dispose with its own share in the manner to distribute it to the company members, in proportion to the participation of their shares in the share capital of the company pursuant to a general meeting resolution, within three years from the day of acquisition, it is obliged to cancel its own share and conduct the procedure for reducing the share capital.
The general meeting adopts the resolution to dispose with own share with a simple majority of votes of all company members, unless the memorandum of association provides otherwise.
As an exception, own share may be distributed to company members disproportionately to the participation of their shares in the company’s share capital only pursuant to a unanimous decision of the general meeting, unless the memorandum of association provides otherwise.
Acquiring Own Share on the grounds of the Exclusion of a Member of the Company (based on the Decision of the Assembly and based on the Decision of the Court)
Expulsion of a Member by Resolution of the General Meeting
If the company member omits to perform his obligation, even in the additional term, the company’s general meeting may pass a decision on expulsion of the company member by a two thirds majority of votes of the remaining member of the company, unless the company’s memorandum of association requires a different majority. The resolution of the general meeting constitutes grounds for striking off of the expelled member from the business entities’ register.
The decision on expulsion of the company member may be passed only with respect to all members of the company who have not fulfilled their obligation to pay, or enter a certain contribution to the company even within the subsequently provided deadline which may not be shorter than 30 days from the day of dispatch of invitation in writing.
By expulsion of the company member, the share of that company member becomes the company’s own share, and the expelled member is not entitled to compensation for his share.
The expelled member remains under an obligation to pay, i.e. enter the subscribed contribution, and to make additional payments to which he was obligated, if this is necessary for settlement of company’s creditors.
The company reserves the right to claim damages from the expelled member by filing an action to the competent court.
Expulsion of the Member by a Court Decision
A company may request expulsion of a company member by filing an action to the competent court, for the reasons prescribed by the memorandum of association or other justified reasons, and in particular if the member of the company:
- Deliberately or by gross negligence inflicts damage to the company
- Fails to execute special duties towards the company prescribed by the Companies Act or the memorandum of association
- By his actions or failures to act, contrary to the memorandum of association, law or good business practices, obstructs or significantly hinders the company’s business operations.
A resolution to file the action is passed by the general meeting in accordance with the provisions of the Companies Act. The action for expulsion of the company member may be filed within a term of six months from the day of finding out about the reason for expulsion, and at the latest within a term of five years from the occurrence of the reason for expulsion.
By expulsion of a member, such member’s share becomes the company’s own share.
The expelled member remains under obligation to pay, i.e. enter the subscribed contribution and make additional payments to which he was obliged, if this is necessary to settle the company’s creditors.
Compensation for Share in Case of Expulsion by Court Decision
Within a term of 180 days from the day of finality of the judgment on expulsion of the company member an expelled member may file an action against the company before the competent court requesting to be compensated for the value of his share.
Acquiring Own Share on the grounds of Compulsory Repurchase of Share of a Deceased Member
Share Transfer by Inheritance
In case of death of a company member, such member’s heirs acquire his share pursuant to the law regulating inheritance.
Upon request of the company or one of the heirs of the deceased company member, the court competent to conduct inheritance proceeding regarding the deceased company member may appoint a temporary representative in charge of the deceased person’s estate to exercise member’s rights in the company on behalf of and for the account of the heirs of the deceased company member.
Compulsory Purchase of Share from Heirs
The memorandum of association may envisage the right of the company or one or more company members to pass, within a term of six months from the death of a company member, but not later than three months from the day of registration of the deceased member’s heirs as company members in accordance with the registration act, a decision on compulsory purchase of share from his heirs.
If the right to compulsory purchase is established in favour of the company, the decision on compulsory purchase of share from deceased member’s heirs is adopted by the general meeting by a simple majority of votes of all company members, while at the same time the share of the deceased shareholder is not included in quorum count, unless larger majority is provided for in the memorandum of association.
If the right to compulsory purchase is established in favour of one or more members, such member or members shall inform the company on the exercise of such right in writing within the deadline of six months from the death of a company member, but not later than three months from the day of registration of the deceased member’s heirs as company members in accordance with the registration act.
The director shall promptly forward the decision on compulsory purchase of share from deceased member’s heirs i.e. the information in writing of one or more members to the business entities’ register so that an annotation of the exercise of right to compulsory purchase is entered in that register.
From the day of inscription of the annotation until the day of payment of the compensation for share, the deceased member’s heirs may not exercise voting rights in the general meeting.
Compensation for Compulsory Purchase of Share
If the memorandum of association provides for a compulsory purchase of share from deceased member’s heirs, this document shall also prescribe the method of determining the compensation for the purchase of share, as well as the deadline for its payment; otherwise, it shall be considered that this right does not exist.
If a company or a member, i.e. members of the company decide to exercise the right on compulsory purchase of share, the heirs of the deceased company member are entitled to a payment of compensation determined pursuant to the memorandum of association, within the deadline set forth in that document.
The company may not adopt the decision on compulsory purchase of share from deceased member’s heirs if the payment of compensation pursuant to that decision would be contrary to the provisions of the Companies Act on restrictions on payments.
Unless otherwise provided for in the memorandum of association or the decision on compulsory purchase of share from deceased member’s heirs, the deadline for payment of compensation for purchase of share of the deceased member of the company starts running from the day of delivery of a final decision in inheritance administration whereby the heirs of the deceased company member were pronounced in respect of their share.
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