In Serbian legislation, a limited liability company ("LLC") is the most often used legal form when incorporating a company, since it requires the least amount of founding capital upon incorporation and, since the liability of its founders and stakeholders is limited to the amount they have invested in the company. If you are interested in a legal forms for companies in Serbia or the options for a company formation in Serbia remotely , these topics are covered in separate blogs. However, for a long time, companies incorporated as LLCs have had a disadvantage because they lacked the instruments which would permit the employees of the company to acquire a stake in the company in case they fulfill professional checkpoints. There was always an option to enter into an Agreement on the transfer of stake, between one of the stakeholders and the employee. However, this would not set to achieve the main goal of the company, which was to keep an employee who brings great value to the company. These instruments are very well-known in foreign legislation and widely spread in their practices. These instruments are known by several names, like Employee Stock Ownership Plan (ESOP) and Vesting.
ESOP or Vesting have different meanings in various countries, but more or less, these instruments allow the Employer to give its employees a stake in the company under certain conditions. Usually, these conditions state that an employee must stay in the company for at least two years. Also, is common for an established company or a startup company to give ownership stakes to people or companies with whom it is in cooperation, most often consultants or consulting firms.
In 2019, amendments and additions to the Company Act introduced a new legal institute that looks a lot like ESOP or Vesting, and it is called the right to acquire a stake. Until the introduction of the right to acquire a stake, the problem was that the stakes in LLCs were not like stocks in Public or Private Limited Companies, they were not being traded on the Stock exchange, and the world's largest companies could not dispose of them in these kinds of ways. Since LLC is the most common legal form in Serbia, it was necessary to enable Employers who are incorporated as LLCs to be able to reward Employees and other Associates.
The right to acquire a stake is a financial instrument that gives its rightful owner (e.g. an employee) the right to acquire a stake in an LLC (e.g. an employer) on a certain day (e.g. in two years) at a certain price and under certain conditions (e.g. the price can be symbolic in the amount of 1 euro, and the condition may be that the Employee remains employed at the company for the duration of those two years). However, in order to issue this instrument, the first thing that needs to be done is for a company to form a Reserved Own stake.
1. Formation of a Reserved Own Stake
Reserved Own Stake is the stake that a company acquires from its members without consideration. When a company acquires stakes from its members (owners of the company, Eng. Stakeholder), it is a phenomenon that is referred to in practice as "acquiring an own stake". In order for the company to transfer a stake to its Employee, it must first acquire it from its member, i.e. owner of an LLC. In the case of Vesting in Serbia or ESOP, a Company acquires it's Own Stake free of charge, which means that the Company will not have to compensate the member for acquiring his stake.
Therefore, the first step is to acquire an Own Stake without consideration from a Companies member. This is done by making a decision by the Companies' Assembly. It is necessary that 2/3 of the members vote in favor of this decision. In order to avoid any kind of embezzlement, the percentage of participation of all Reserved Own stakes in the capital of the company cannot exceed 40% of the founding capital.
After making a decision on the formation of a reserved own stake, the decision is registered in the Commercial Companies Register Agency ("CCRA"). Upon the formation of the Reserved Own Stake, it is the next step, which is the issuance of Vesting, i.e. ESOP, i.e. the issuance of a financial instrument - right to acquire a stake by the Employer, i.e. of the Company which transfers its stakes.
2. Formation of an ESOP or Vesting (Right to acquire a Stake)
The formation of a Reserved Own Stake can be seen as the formation of a fund for the transfer of a stake in the Company. Its sole purpose is to ensure that future acquirers of stakes, e.g. Employees, as future members of a Company, see what percentage of participation in the Company they can acquire by paying the price we will talk about now.
After the Reserved Own Stake is formed, the Company needs to make a decision on the issuance of ESOP, Vesting, or a financial instrument – the right to acquire a stake. After the decision is made, it needs to be submitted to the Central Registry of Depository and Securities Clearing ("Central Registry"), to register the decision and the rightful owners of these financial instruments (future acquirers of stakes), within 5 business days from the date of the decision. Since this procedure involves first registration in the CCRA, and then in the Central Registry, Employees as future acquirers of stakes have legal certainty that they will receive the stakes under the conditions defined in the Emission decision of the financial instrument – The right to acquire a Stake.
The mandatory elements of the Emission decision made by the Issuer (e.g. employer) are as follows:
1. number of financial instruments – the right to acquire stakes that are issued
(number of vesting, ie ESOP instruments);
2. reserved own stake from which the financial instrument - the right to acquire stakes is issued, i.e. what percentage of stakes in the firm are reserved for future members;
3. information on individuals or companies who acquire a financial instrument - the right to acquire stakes, as well as information on the address of their residence, that is, persons or companies who will be future members of the company;
4. the percentage of the stake that the holder of the financial instrument - the right to acquire stakes has the right to acquire in relation to the reserved own stake, in other words, how much of the stake in the capital will the holders of these instruments acquire upon paying the prescribed price of the instrument;
5. the price that the owner of the financial instrument - the right to acquire stakes pays to the company for acquiring stakes 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. the date of issue of the financial instrument - the right to acquire stakes (the date of issue of Vesting, ie ESOP);
7. the due date of the financial instrument - the right to acquire stakes, in other words, the date on which the acquirers (employees) will acquire the right to register as members of the LLC in the CCRA and thus the percentage of ownership in the Company;
8. the conditions under which the financial instrument - the right to acquire stakes can be terminated before the due date. This refers to the situation when the condition is prescribed that the employee remains in the employment relationship with the employer for 2 years, so if the employment relationship ends for any reason, the right to acquire stakes can be terminated.
This instrument entitles future holders to acquire a certain percentage of stakes in the LLC, i.e. the company that issued these instruments, on a certain day, at a certain price.
This instrument is non-transferable, which means that the person designated as the legal owner cannot transfer it to another person, nor can the company itself transfer it to other persons. It also means that it cannot be pledged.
All financial instruments - the right to acquire stakes issued in the same series mature on the same day.
On the due date, the legal owner must pay the amount stipulated in the decision on issue within a period that cannot be shorter than 15, or longer than 30 days from the due date. When the deadline for payment has passed, the company submits a request to the Central Registry for the withdrawal of a financial instrument - the right to acquire a stake, for the purpose of acquiring a stake or terminating it. If the price is paid within the prescribed term, the rightful holder will acquire a stake in the company from the Reserved Own Stake, in a predetermined percentage amount, which is defined by the Emission decision of the financial instrument - the right to acquire stakes.
However, in the event that the rightful holder does not pay until the deadline, the financial instrument - the right to acquire stakes will be terminated. When the financial instrument - the right to acquire a stake gets terminated, that does not automatically entail the termination of the Reserved Own Stake. The law prescribes the fate of the unused Reserved Own Stake. The company, whose financial instrument - the right to acquire a stake has been terminated, can make a decision on new emissions of a financial instrument - the right to acquire a stake or make a decision to terminate its Reserved Own Stakes. The cancellation of own stake will, of course, entail the need to make a decision and register the reduction of the stake capital.
In both cases, the Central Registry makes a decision to issue a financial instrument - the right to acquire stakes. The Central Registry draws up a certificate and delivers it to the company which acts as proof that such a decision exists.
Upon delivery of the confirmation, the paid price from the emission decision, the company registers the acquisition of stakes in favor of its rightful holder (eg an employee). It is important to emphasize that all stakes from one emission are to be acquired on the same day, which means that the decision of the CCBA is such that it only states that a person or company has acquired a stake in the company on a certain day.
It is important to note that both the company and the acquirer enjoy complete legal certainty throughout the duration of Vesting. When registering the right to acquire stakes in the Central Registry, the company (employer) and the acquirer (employee) will receive documentation from the Central Registry that acts as a public document and guarantees the rights of both parties. A parallel can be made with the extract from the real estate deed that confirms the right of ownership to the real estate, as well as the documentation and records of the Central Registry confirming the rights of the company and the acquirer in relation to the future acquiring of stakes. The company cannot change its mind and unilaterally terminate the decision it has made, beyond the conditions prescribed in the same decision.
Acquired stake in a company is a taxable event since stake is an asset. However, government prescribed many tax exemptions in order to stimulate application of vesting in Serbia. Brief overview of taxes for companies in Serbia is already covered in our blog, although it does not specifically tackle this issue.
ATTORNEY FOR VESTING IN SERBIA
Law office Pekić has a wide range of domestic and foreign clients and business experience in representing companies before all competent bodies of the Republic of Serbia in the field of corporate law. By amending the law, Serbia modernized its regulations and enabled technical and other types of companies to attract talent and create innovations in Serbia. The process of acquiring one Own Stakes without compensation for the purpose of emitting financial instrument - the right to acquire stakes, i.e. ESOP or vesting in Serbia is a great novelty with great advantages for companies, so in order to implement this novelty, it is necessary to contact a lawyer with experience in representing companies, in order to complete the entire procedure in the simplest possible way.
If you are interested in conducting a vesting procedure in your LLC in Serbia, in order to attract quality employees and attract educated, and experienced, or your employer offers you a stake in the company and you need legal assistance, contact us by email at [email protected].