Companies Act

Concern

According to the provisions of Article 549. of the 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) companies may be linked via:

  1. Interest in the share capital or partnership shares (companies linked by capital)
  2. Contract (companies linked by contract)
  3. Both capital and contract (mixed linked companies).

It is banned to link companies contrary to the regulations that govern the protection of competition.

By linking in terms of Article 549 of the 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), companies form:

  1. A group of companies (concern)
  2. A holding
  3. Companies with mutual interest in capital.

Group of Companies

A group of companies exists when a controlling company, apart from managing its subsidiaries, performs also other activities.

The principle of dependence presupposes the majority participation of one company in another or other companies, the first of which is the parent (ruling) company and the unique management of affairs by the parent (ruling) company – its management are essential features of the concern.

Types of concerns

According to provisions of the 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) a group of companies consists of:

  • A controlling company and one or more controlled companies managed by the controlling company (factual group) or
  • A controlling company and one or more controlled companies that have entered into a contract on control and management (contractual group) or
  • Companies which are not in a mutually dependent position and are managed in a uniform manner (group based on equality).

The factual and contractual groups represent a vertical concern (a concern with elements of dominance). In contrast, a group based on equality represents a horizontal concern (a concern with aspects of equality).

Vertical concern

This form of concern is characterized by the following:

  • a high degree of existence of common interest, which decisively affects the business policy of subordinate companies
  • functional subordination of the single administration over the administrations of subordinate companies
  • the affairs of the contracting company (subordinated, dependent company) are not conducted solely to satisfy the interests of the company itself and its shareholders/members but also third parties, the governing company and its members.

A vertical concern can be created in two ways: the first, factually, when based on the factual situation in which one company has a majority share in another company, a concern is created even though there is no agreement on this (the so-called de facto concern) and the second, by concluding a contract between parent and subsidiary companies, which are the basis of the so-called contractual (legal) concern.

So, in any case, it is assumed that there is a relationship between the dominant (controlling) and the dependent (subordinate) company when the dominant company has (directly or indirectly) a majority share in the dependent company.

A de facto concern can also be achieved by statutory clauses allowing one company to appoint the majority of management and supervisory board members of another company. Subsidiary companies in a de facto concern may be bound to the dominant company by contracts that are the basis for forming the contractual concern (contracts on control and management).

A contractual concern is created when the dominant company and the subsidiary company are connected by the Control and Management Agreement, which is the contract whereby a company grants the management and conduct of operations to another company. The contract on control and management is registered in accordance with the registration act, and may not enter into force before the day of registration. (Article 555, Paragraph 6 of the Companies Act). In this way, protection is provided to creditors and other conscientious comunication participants.

Based on the company management contract, the parent (dominant, ruling) company acquires the right to issue orders to the management of the dependent (subordinate) company in the domain of the entire management function, as defined by the law and the company statute. Therefore, for the existence of a concern relationship, there must be legally verified (as opposed to purely economic) control of the parent (ruling) company over the dependent (subordinate) company. The control must be manifested through the existence of a single administration, that is, through the continuous and decisive influence of the parent company’s administration on the subsidiary company’s administration.

Single management exists when all essential decisions of importance for the concern, as a form of affiliated companies, are made or initiated by the parent (ruling) company.

The unitary management, de lege, does not suspend the bodies of the companies within the group. Still, their managerial sovereignty is derogated to the extent that the contract accepts that decisions at the level of the unitary management have for them, that is, for the companies within the group, binding, instructing and similar character.

The parent (ruling) company can issue orders only to the management of the dependent (subordinate) company but not to its other bodies of the company or persons employed by the company. The management of the subsidiary company is obliged to carry out the orders of the dominant (ruling) company, even when it considers that they are not in the interest of the ruling company or concern. It can refuse to execute a given order only if it is evident that it is not in the interest of the governing company or concern.

Orders must comply with mandatory legal norms and good business practices. Orders whose execution causes damage to the dependent (subordinate) company are valid. This stems from the very purpose of the contract on managing the company’s affairs. Suppose the dependent (subordinate) company management refuses to execute the order.

In that case, the dominant (ruling) company cannot undertake the actions that are the subject of the given order because it cannot assume obligations in the name and on behalf of the subsidiary company.

Horizontal concern

A horizontal concern (a concern with elements of equality) means a grouping of companies in which the companies are not mutually dependent, so there is no relationship of dominance and dependence between them but a relationship of equality. The companies are connected by joint management of affairs in such a way that they are placed under unified management without becoming dependent on each other.

The collaborative management of affairs can be regulated by contract by choosing joint bodies that will be outside the individual companies to which they will entrust the management, or they will establish a new company to manage the concern, or it will be the management of a trading company or even civil society rights.

During the formation of a horizontal concern, care should be taken to ensure that the relationship based in this way does not contradict the provisions of the Law on the Protection of Competition (“Official Gazette of RS”, no. 51/2009 and 95/2013). It should be examined and assessed whether such a relationship could fall under the category of prohibited restrictive agreements or a concentration that requires the approval of the Commission for the Protection of Competition.

Moreover, the contracts drawn here are based on the general freedom of contract – the autonomy of the will provided for in Article 10 of the Law on Obligations (“Official Gazette of the SFRY”, no. 29/78, 39/85, 45/89 – decision USJ and 57/89, “Official Gazette of the SRJ”, No. 31/93, “Official Gazette of SCG”, No. 1/2003 – Constitutional Charter and “Official Gazette of the RS”, No. 18/2020), but care must also be taken to ensure that their content does not contradict the imperative norms of the legal system of the Republic of Serbia, i.e. other norms whose non-compliance can produce negative consequences for such a relationship.

Read more:
The Legal Framework for the Company Foundation »
Change of the company’s legal form and status changes »
Decision on the acquisition of company and its legal effect »

Leave a Reply

Your email address will not be published.