Corporate Governance 2019

Last Updated June 26, 2019

Montenegro

Law and Practice

Authors



Radonjic Associates is a leading full-service Montenegrin law firm, providing integrated legal advice on complex transactions covering a broad spectrum of transactional and regulatory matters. The firm benefits from an international reputation, and is the preferred local partner to many international law firms, international financial institutions and embassies. Clients include a diverse range of large international corporations, leading energy and construction companies in Europe, and wealthy individuals investing in Montenegro. The firm has a particularly strong focus on the corporate and commercial, energy, banking and finance, foreign direct investment, real estate and construction sectors.

The principal forms of business organisations in Montenegro are:

  • the joint stock company (akcionarsko društvo – "AD") – an AD has a minimum corporate capital of EUR25,000, and its corporate capital is divided into shares; and
  • the limited liability company (društvo sa ograničenom odgovornošću – "DOO") – a DOO is mostly used for small and medium-sized businesses and start-ups, and its capital is divided into stakes representing a portion of the corporate capital. A DOO has a minimum corporate capital of EUR1.

This report focuses mostly on these two forms of business organisation.

The Law on Business Organisations (Official Gazette of Montenegro, No. 17/2007, 80/2008, 40/2010, 36/2011 and 40/2011) (hereinafter the “LBO”) is the principal corporate governance source for any type of Montenegrin company. Pursuant to the LBO, simultaneously with incorporation, any company must adopt by-laws setting out key rules concerning the management bodies and its composition, role and functioning.

Several other laws and regulations establish specific corporate governance requirements, such as the Law on Capital Markets (Official Gazette of Montenegro no. 1/2018).

In addition to mandatory corporate requirements laid down in the LBO, AD companies may opt for self-regulating corporate governance code – namely, an AD may voluntarily adopt and implement the Code of Corporate Governance of the Montenegrin Stock Exchange (Montenegroberza AD), which is based upon the “comply or explain” principle. If an AD decides to adopt the Code, it may still opt out of the provisions it finds unsuitable by providing an explanation (or even without providing an explanation in certain cases).

The jurisdiction of Montenegro does not provides other specific key corporate rules and requirements beside the ones noted above.

The key forthcoming development vis-à-vis corporate governance issues is the adoption of the new corporate governance code of the Montenegrin Stock Exchange, which is expected by the end of 2019. No additional information regarding the new corporate governance code is available at the moment.

The principal governance and management bodies of AD companies are the General Meeting of Shareholders, the Board of Directors (appointed by the General Meeting) and a Chief Executive Officer ("CEO"). Beside these three governance and management bodies, the appointment of a company secretary is mandatory under the LBO. AD companies are also required to appoint an independent, authorised auditor of the company.

The corporate governance statutory regime for DOO companies is simplified, allowing substantial autonomy for shareholders of the company to determine the corporate governance structure. The key governance and management bodies are the General Meeting and the executive director, respectively. The roles of the General Meeting roles may be exercised by shareholders directly without following strict rules of its functioning, as is the case for ADs.

In accordance with the LBO, the General Meeting of an AD company exclusively decides on the adoption of and amendments to the company’s by-laws, the appointment and dismissal of the Board of Directors and auditor, and the appointment of the liquidator of the company. The General Meeting of an AD also decides on the following, among other matters:

  • the adoption of financial statements and reports;
  • the remuneration of members of the Board of Directors;
  • the acquisition and disposal of high-value assets (if a company acquires or disposes of assets whose purchase value and/or selling value and/or market value at the time of the passing of a relevant decision accounts for 20% or more of the book value of that company’s total assets, it shall be deemed that such company is acquiring or disposing of major assets, although by-laws of the company may regulate lower thresholds);
  • the distribution of profits and any increase or reduction in share capital; and
  • the restructuring of the company and the initiation of bankruptcy proceedings.

As a general rule under the LBO, the exclusive competence of the Board of Directors is to manage the company and issue directives in accordance with the company's business policy, and to decide on the company's organisation and the structure of the company’s management. The exclusive competence of the Board of Directors is also to appoint and remove the company’s executive director and secretary.

The CEO carries a duty to implement decisions of the Board of Directors, especially those concerning the company's business activity, protection of the company’s interests, management of the company’s assets, entering into agreements, and employment issues.

Decision Making by General Meeting

The General Meeting operates through sessions.

An ordinary session of the General Meeting must be convened at least once a year, within three months of the end of each financial year, with the exception of the first year after the establishment of the company.

The session shall be convened by request of the Board of Directors or by shareholders who jointly hold at least 5% of the share capital in the company (unless the smaller share capital percentage is stipulated within the provisions of the company's by-laws). Before the session, the convocation will take place by sending a notice on the session to the shareholders, board members and other subjects entitled to take part in the session, along with the agenda of the General Meeting and the proposals for decisions that should be adopted at the General Meeting.

Minutes shall be made for every session of the General Meeting, and its mandatory elements are explicitly regulated by provisions of the LBO.

The General Meeting shall act by a simple majority of voting power present entitled to vote on an issue, unless a higher number of votes is provided by the LBO or by-laws of the company (eg, a decision on the restructuring and liquidation of the company shall be adopted by a two-thirds majority of shareholders present at the assembly).

The LBO envisages that the extraordinary session of the General Meeting shall be convened, inter alia:

  • by request of shareholders holding a minimum 5% of voting rights;
  • by request of the Board of Directors or shareholders (ie, in case of changing the business activity or share capital of the company);
  • when there is a need to assess significant losses of the company;
  • when there is a need for approval on a reorganisation, merger or voluntary liquidation, or on filing a petition for the initiation of bankruptcy;
  • when the number of members of the Board of Directors falls below the legal minimum, or there is not an odd number of members;
  • by request of the Board of Directors, when there is a need to assess other issues; and
  • by decision of the Commercial court, in the case of a breach of statutory provisions on convening the General Meeting.

Decision Making by Board of Directors

The Board of Directors also operates through sessions. A session is convened by request of a President of the Board of Directors or any other Board member, with a mandatory consent of a minimum half of its members. The decision can be made only when a minimum of half of the members attending the session votes for the decision. All members of the Board of Directors have equal voting power. However,if the decision-making process is blocked, the president of the Board of Directors has a golden vote. As a general rule, the CEO attends the sessions, unless the Board of Directors decides differently. Generally, the decision-making process of the Board of Directors shall be thoroughly regulated by the Rules of Procedure of the Board of Directors adopted by the Board of Directors.

The Board of Directors is a collective and mandatory management body of the AD company. Further analysis of the structure of Boards of Directors is provided below.

On the other hand, the Board of Directors is not a mandatory body in the DOO, so it is likely that the DOO company will have a very simple executive organisation.

All the members of the Board of Directors share their duties as a collective body. The president of the Board of Directors is one of the Board members, elected between the Board members. The distinction regarding the difference between the roles of Board members is a golden vote power assigned to the President of the Board.

The number of Board members shall be determined by the company's by-laws (Articles of Association) and according to the LBO it must be odd, with at least three members.

Members of the Board of Directors are appointed and removed by the General Meeting. The CEO and secretary of the company are appointed and removed by the Board of Directors.

The LBO does not stipulate any specific requirements concerning the independence of directors.

On the other hand, it does stipulate that a company cannot conclude loan agreements or fictive loan agreements in the form of direct transactions, agreements on credit transactions or agreements on loan or credit transaction collaterals with a member of the company's Board of Directors or a member of the Board of the parent company or any other company in which a member of the Board has a personal financial interest. This restriction also applies to the spouse and blood relative of first degree of kinship with a member of the Board of Directors. However, within its regular business activity, the company may conclude loan agreements and credit transactions and securities for loans and credit transactions with the persons referred to above.

The principal legal duties of a company’s Board of Directors, and of a CEO, are as follows:

  • to carry out their duties in that capacity in good faith, with due diligence;
  • to act with the company’s best equity interest in mind;
  • to act with a certain degree of knowledge, skill, experience and caution, in order to control the management and business activity of the company;
  • to avoid using the company's assets as their own property or for their own personal needs;
  • to avoid using confidential information of the company for their own profit;
  • to avoid abusing their function within the company;
  • to avoid using opportunities for entering into transactions that arise for the company;
  • to avoid any conflict of interest;
  • to give a note to the General Meeting on every profit or privilege they have in the company, besides the remuneration for their function; and
  • to keep the trade secrets of the company.

Members of the Board of Directors owe their duties to the shareholders and to the company.

If a member of the Board of Directors or the CEO breaches his or her duties within the company, shareholders are entitled to contest such acts before the court. The lawsuit may be filed only if the company had not previously filed a lawsuit against the responsible individual, or had not previously filed such lawsuit in accordance with the prior request of the shareholders.

If the rights of shareholders are exercised in court proceedings, the members of the Board of Directors will jointly compensate the costs of the proceedings and the damage suffered by shareholders for non-compliance with their rights. The member of the Board of Directors shall be released from such responsibility if he/she did not agree with the adoption of the decision due to which the shareholders suffered the damage, and such disagreement was expressed in the minutes. This also applies to a member of the Board of Directors who did not attend the meeting of the Board of Directors but expressed his or her disagreement with the disputable decision in writing to the Board of Directors immediately after learning that such decision was made.

According to the LBO, a member of the Board of Directors is not liable to the company for misjudgements committed while acting within the scope of the company’s regular operations, as long as he/she acted with due diligence and in accordance with the regulations of certain expertise.

Limitations of a company’s body or officer’s authorities arising from the Articles of Association or other by-laws of a company cannot be used against third parties, regardless of whether or not such limitations were disclosed.

The general principles on the remuneration of Board members are determined by a decision of the General Meeting. Thus, shareholders are entitled to restrict and introduce limitations on remuneration values.

The CEO must be employed in the company thatpays the earnings to the CEO. The Board of Directors shall conclude a special contract with the CEO defining his or her rights, obligations and responsibilities, as well as conditions for the termination of the CEO's employment before the expiration of his or her term.

If a Board member enters into an agreement on remuneration for his engagement with the company, or is employed by the company, all essential elements of the aforementioned contracts shall be made public in the annual financial statement. Pursuant to this obligation, shareholders will indirectly approve remuneration, by voting for or against the annual financial statement at the General Meeting.

The shareholders of an AD and/or members of a DOO will have only a limited liability for the company’s obligations, to the amount of their contribution registered with the company.

The LBO provides a specific liaison between the General Meeting and Board of Directors, whereby following a request from the Board of Directors, the General Meeting may review issues from the competence of Board of Directors, in connection with pursuing the business activity of the company.

Shareholders may indirectly involve themselves in management matters, through seeking the protection of their rights before the Commercial Court of Montenegro.

Shareholders with a minimum of 5% share capital are entitled to appoint a representative to review and control the business activity or the company's book keeping, on behalf of the shareholders.

An ordinary session of the General Meeting is mandatory and must be convened at least once in a year – ie, within three months of the end of each financial year, with the exception of the first year after the establishment of the company. For further analysis please see 3.3 Decision-Making Processes.

When an irregularity is determined in the management or operation of a company, the company has the right to file a lawsuit before the Commercial Court of Montenegro against the person responsible within the company. In the event the company has not sued a responsible person, such right belongs to the shareholder/s, meaning that the shareholders can initiate a "derivative lawsuit" against the person responsible on behalf of the company. The derivative lawsuit can be filed under the condition that the shareholder/s previously requested the company to file such lawsuit but the company refused or did not submit the lawsuit within 30 days of receiving the request from the shareholder/s. The compensation of damages under a derivative lawsuit shall belong to the company, while the shareholder who filed the derivative lawsuit has the right to reimburse the expenses.

A shareholder (as an individual) or his successor is entitled to file a lawsuit against the company before the Commercial Court of Montenegro. In initiated litigation proceedings, shareholders are entitled to the rebuttal of illegal decisions of the company or of decisions outside the company's business activity scope. In addition, such proceedings could be used for the rebuttal of fraudulent acts of directors, directed towards minority shareholders.

A shareholder (as an individual) or his successor is also entitled to initiate litigation proceedings before the Commercial Court, if there is evidence showing that the company's business is conducted in a way that threatens the rights of such shareholder or other shareholders, without respecting his/their interests as shareholder/s, even if such actions have been committed in good faith. In such proceedings, the shareholder/s who initiated the process shall act on behalf of all shareholders, protecting the joint interest of all shareholders who sustained a breach of their rights.

The obligation of shareholders within the company, arising from the LBO, is a contribution in money, for the purpose of registration of their shares, in accordance with the initial value/price of the shares.

The Law on Capital Markets (Official Gazette of Montenegro, No. 01/2018) provides an obligation for shareholders to inform the issuer of securities on reaching, exceeding or dropping below 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of total shareholder voting power, as a result of acquiring or disposing of the issuer’s shares.

The General Meeting of an AD has an obligation to adopt annual financial statements and statements on the company's business activity.A mandatory audit of the company's financial statement is performed upon the expiration of the accounting year, before the General Meeting session is convened. Copies of the financial reports, including the auditor's reports, must be available for the shareholders' inspection at the company's registered office during regular business hours, at least 30 days prior to holding the General Meeting of shareholders, and also at the General Meeting of shareholders.

An AD has an obligation to submit financial reports to the Central Registry of Commercial Entities in Montenegro (the "Registry"). Such reports are subsequently disclosed in the Official Gazette of Montenegro.

In addition to the above, according to the Accounting Law of Montenegro (Official Gazette of Montenegro, No. 52/2016), all legal entities registered in Montenegro are obliged to prepare annual financial reports and consolidated reports on December 31st of the business year, and also on the day of the registration of status changes (merger, acquisition, division) and on the day of issuing a decision on the voluntary liquidation of a legal entity. Furthermore, all legal entities are obliged to submit financial reports and management reports in written and electronic form to the administrative body that is competent for tax identification and collection (the Tax Administration of Montenegro), no later than March 31st of the current year for the previous year, while the consolidated financial reports and consolidated management reports shall be submitted to the Tax Administration of Montenegro no later than September 30th of the current year for the previous year. The Tax Administration publishes these reports on its website.

Furthermore, a legal entity that issues securities and other financial instruments traded on a regulated market, as well as a parent legal entity that is required to compile consolidated financial reports, is required to make and submit to the Securities Commission in writing and electronic form an annual and quarterly financial report, which the Commission publishes on its website.

According to the LBO, the structural part of the report on the company's business activity is a report on the relationships with the controlling company and the companies in which the company in subject is in the position of controlling company or subsidiary. This report covers all legal relationships and transactions the company entered into with its controlling company or companies in which the company in subject is in the position of controlling company or subsidiary. A mandatory part of this report is a statement of the Board of Directors, whereby the directors declare whether the company sustained any damages in the aforementioned transactions and, if it did, whether the damages were reimbursed.

The LBO provides the obligation for an AD company to submit the following documents and data to the Registry, which the Registry then submits to the Official Gazette of Montenegro for publication:

  • any amendments to the Articles of Association or the foundation agreement, and any extension of the duration of the company;
  • any change in the company’s name and the registered office or address for receiving official notices;
  • the appointment or dismissal of, and data on, the subjects authorised to represent the company before third parties, as well as data regarding whether the subjects authorised to represent the company may do so jointly or individually;
  • the appointment or dismissal of, and data on, the CEO, secretary and auditor;
  • the decision of the General Meeting on the liquidation of the company;
  • the decision on the appointment of a liquidator, and his identity, qualifications and powers other than those set out in the LBO or in the Articles; and
  • the financial reports, including the auditor's report.

The secretary of an AD is liable for the submission of thee documents and data.

The documents and data are binding for the company towards third parties from the day of their publication in the Official Gazette of Montenegro, unless the company proves that the third parties had knowledge of them. The documents and data shall not be binding for a bona fide third party in relation to transactions executed within 16 days of the day of publication of the documents and data, under the condition that such party can prove that he/she did not know or could not have known about their publication.

The LBO provides similar provisions in relation to DOO companies.

According to the Audit Law (Official Gazette of Montenegro, No. 01/2017), the external audit is mandatory for, inter alia, the following entities:

  • entities of public interest;
  • medium-sized legal entities;
  • parent companies that, together with dependent legal entities, meet the conditions for classification in the group of medium-sized legal entities;
  • parent legal entities that, together with dependent legal entities, fulfil the conditions for classification in a group of large-sized legal entities;
  • investment companies;
  • investment funds;
  • voluntary pension funds, etc.

The legal entities referred to above are obliged to appoint an Audit Committee of at least three members. The Audit Committee is appointed by the General Meeting of an AD company, or by the competent body determined by the company's Articles of Association.

At least one member of the Audit Committee must have knowledge in the field of accounting and auditing, and cannot be a company employee, shareholder or member of a managing authority in the company.

The competence of the Audit Committee is to:

  • monitor the financial reporting process;
  • monitor the effectiveness of internal control of a legal entity and internal audit;
  • monitor the statutory audit of annual and consolidated financial statements;
  • monitor the independence of the engaged certified auditors or audit firms that perform the audit, as well as contracts for the use of additional services in accordance with Article 20 of the Audit Law;
  • make recommendations to the General Meeting of a joint stock company – ie, the founders – on the selection of the audit company or the certified auditor; and
  • consider the plans and annual reports of internal control, as well as other issues related to financial reporting and auditing.

Please see 4.9 Other Bases for Claims/Enforcement Against Directors/Officers.

Radonjic Associates

Bulevar Dzordza Vasingtona 108, a36
Capital Plaza
81000 Podgorica
Montenegro

+382 20 620 312

+382 20 620 313

info@radonjic-associates.com www.radonjic-associates.com
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Law and Practice

Authors



Radonjic Associates is a leading full-service Montenegrin law firm, providing integrated legal advice on complex transactions covering a broad spectrum of transactional and regulatory matters. The firm benefits from an international reputation, and is the preferred local partner to many international law firms, international financial institutions and embassies. Clients include a diverse range of large international corporations, leading energy and construction companies in Europe, and wealthy individuals investing in Montenegro. The firm has a particularly strong focus on the corporate and commercial, energy, banking and finance, foreign direct investment, real estate and construction sectors.

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