The principal forms of business organisations in Montenegro are:
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 – 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 if it finds it unsuitable by providing an explanation (or even without providing an explanation in certain cases).
The jurisdiction of Montenegro does not provide 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 was expected by the end of 2019. No additional information regarding the new corporate governance code is available at the moment.
In general, there are no obligations on such reporting except for companies dealing with environmental, industrial activities, etc. As a general rule, domestic and foreign legal entities and natural persons are obliged to ensure the rational use of natural resources, accounting for environmental costs within investment and production costs, application of regulations, and taking environmental protection measures in accordance with environmental laws and regulations.
There are no specific measures that relate specifically to governance. However, the Government of Montenegro, the Central Bank of Montenegro and other government authorities have taken certain decisions and interim measures to mitigate the impact of COVID-19 and improve the economy such as:
The principal governance and management bodies of AD companies in Montenegro are the following.
Thus far, Montenegrin Company Law envisaged only one type of company management system where the General Meeting, Board of Directors (appointed by the General Meeting) and the CEO were the only bodies of AD companies’ management structure.
With the EU perspective set within the Montenegrin political agenda, Montenegrin Assembly has encountered three general legislative approaches when determining the most convenient board model for its market and corporate reality: (i) optional two-tier board model (typical reference – French or Italian company law); (ii) in general, mandatory two-tier board model (typical reference – Austrian or German company law). By giving the option for commercial entities to choose freely between two models, Montenegrin government recognises the following:
Consequently, in the future, Montenegrin-based companies will be able to freely balance between the need for internal supervision of business and the financial conduct of the executive on the one side and company expenditures on the other side.
Another legislative novelty makes a shift from rule on mandatory AD secretary appointment to optional appointment. This is understandable given that the new LBO, in the absence of an appointed secretary, prescribes that typical administrative and General Meeting session-related authorities (which were thus far vested exclusively to the company secretary) should be now exercised by the company CEO (in a single-tier management system) or Supervisory Board chairperson (in two-tier management system). By virtue of this novelty, companies may decide with more autonomy which solution is more convenient for the purpose of their administrative needs, which is normally dependable on the total number of shareholders, executive body members and expected number of sessions of company bodies.
Additionally, new provisions regulate the capacity and legal characteristics of the company secretary in a more thorough manner. It is envisaged that the company secretary does not need to be engaged with the company based on an employment agreement. Those bodies competent for appointment of a secretary (CEO and Supervisory Board chairperson) also decide on a secretary’s remuneration for his or her engagement in the company’s activities.
As employment agreements are established under a presumption of contractual intentions of parties to create a stronger (permanent) mutual legal bond, by virtue of this novelty, companies may opt for different types of engagement (outside of employment), in accordance with the frequency of their sessions. This directly implies the lower or higher necessity for assistance in terms of preparation of materials for sessions, submissions, various summons and instructions for shareholders, minutes and other administrative activities related to functioning of the General Meeting.
AD companies are also required to appoint an independent, authorised auditor.
The Board of Directors and CEO (at companies with a single-tier management system) on the one side and Board of Directors and Supervisory Board (at companies with a two-tier management system) are explicitly regarded as management bodies of the company. This legislative approach introduces a significant legislative improvement in Montenegrin Company Law; in practice, this provision should also introduce appropriate differentiation of authorisations vested to particular company bodies throughout the LBO.
In a sole-member company, the function of the General Meeting shall be performed by the sole company member. A shareholder of such company may decide to exercise the authorities of a company CEO or to appoint another person as the company’s executive official.
The corporate governance statutory regime for DOO companies is simplified, allowing substantial autonomy for shareholders of the company to determine the corporate governance structure and their internal relations within the company, as well as their relations with the company itself. The key governance and management bodies are the General Meeting and the CEO. A DOO company may also opt to introduce a more complex management structure, prescribed by provisions that regulate AD companies. On the other hand, an AD management structure is mandatory for a DOO company if it is involved in activities of public interest.
The roles of the General Meeting may be exercised by shareholders directly, without following strict rules of its functioning, as in the case for an AD. A DOO owned/incorporated by a sole shareholder may as well operate with a single person/entity exercising both General Meeting and CEO authorities.
In general, LBO stipulates that those matters related to a DOO, which are not explicitly regulated by LBO provisions, shall be regulated by provisions related to AD companies (mutatis mutandis).
In accordance with the LBO, the General Meeting of an AD company has an exclusive competence to decide on the following matters:
Unless otherwise stipulated by the DOO foundation act or Articles of Association, substantially similar authorisations are vested to the General Meeting of DOO companies. However, this shall not apply for DOO companies pursuing activities of public interest, as their internal structure must reflect the one prescribed for AD companies.
In companies with single-tier type of management, the Board of Directors has the following authorisations:
In companies with single-tier type of management, the CEO has the following authorisations:
In companies with two-tier type of management, the Board of Directors has the following authorisations:
Authorisations of the Board of Directors in two-tier management systems cannot be transferred to the Supervisory Board.
In companies with two-tier type of management, the Supervisory Board has the following authorisations:
Unless otherwise envisaged by provision of the company’s Articles of Association, authorisations of the Supervisory Board cannot be transferred.
The General Meeting operates through ordinary or extraordinary sessions. An AD company is obliged to hold an ordinary session once a year. The first annual session of the General Meeting of the company must be held within 18 months of the founding session of the company. Afterwards, sessions are convened on a yearly basis.
The right to convene the session is vested to the Board of Directors, Supervisory Board and shareholders representing at least 5% of the company share capital, unless the provisions of Article of Association envisage a smaller share capital representation for this purpose.
Additionally, shareholders representing at least 5% of the share capital are entitled to convene the session within 30 days from the date of publication of a final decision on annulling of the decision of the General Meeting on merger or division of company in the Official Gazette of Montenegro. Within that period, the existing bodies of the company are obliged to perform their functions within their authorisations, except from disposal of the property.
The regular annual session of the General Meeting must be held within six months from the end of each business year, with the exception of the first year since the establishment of the company.
Minutes shall be made for every session of the General Meeting, and its mandatory elements are regulated by provisions of the LBO.
The quorum of the General Meeting consists of shareholders owning at least half of the total number of voting shares that are present, represented by proxies or have voted through ballots. If the required quorum is not reached, the General Meeting may be reconvened with the same agenda, while the quorum for reconvened session consists of shareholders owning at least 33% of the total number of shares with voting power, who are present, represented by proxies or have voted through ballots. If a quorum is not reached at the reconvened session, the third session may be convened with respect to the general rules for session convening, although without quorum requirements, while the General Meeting may decide on all issues from the agenda regardless of the number of represented shares.
If a certain decision of General Meeting requires consent of shareholders owning the shares of a certain class, such decision can be made by these shareholders only if the shareholders owning more than half of the shares of that class attend the session.
Voting by ballots is mandatory when members of the Board of Directors and members of the Supervisory Board are elected, or in case when this is requested by shareholders holding at least 5% of the voting rights at the General Meeting.
The General Meeting makes decisions by a majority vote of the present or represented shareholders or by ballot, except in cases when different majority is required.
The General Meeting cannot decide on matter not contained in the agenda, unless all shareholders with voting rights attending the General Meeting unanimously agree with agenda amendments. Shareholders holding at least 5% of the share capital are entitled to demand from the management bodies extension of the agenda. In such case, the Board of Directors (ie, the Supervisory Board) is obliged to expand the agenda. If the session is not held, the reconvened session must keep the content of the agenda agreed for the previous session, which had not been held.
The new LBO also provides rules on mandatory ballot sheet content, voting through representatives (Power of Attorney issued by a shareholder), voting by electronic means and shareholder agreement on voting.
An Extraordinary General Meeting session is convened in case:
When the total net worth of company assets amounts to half or less of the value of the company share capital, the Board of Directors/Supervisory Board shall convene an extraordinary session.
The competent court shall make decision on session convening if:
The General Meeting sessions of a DOO can be held without convening, if they are attended by all shareholders, unless otherwise provided by the foundation act or Articles of Association. Moreover, the General Meeting of a DOO can make decisions without convening sessions, if decisions are signed by all shareholders with voting power.
Provisions envisaged by the LBO that prescribe rules on functioning of the Board of Directors in companies with single-tier management system shall apply mutatis mutandis on the Board of Directors in companies with a two-tier management system and Supervisory Board.
The Board of Directors passes the Rules of Procedure for its work at the first session.
A session of the Board of Directors can be scheduled by the chairperson of the Board of Directors and by other members of the Board of Directors, if the chairperson of the Board of Directors fails to schedule a session at the written request of any member of the Board of Directors within 30 days from the date of submission of such request.
In the absence of the chairperson of the Board of Directors, each of the members of the Board of Directors may convene a session; by a majority vote of the members present, one of the present members shall be elected as chairperson at the beginning of the session.
A session of the Board of Directors may be held if more than half of the members are present, while decisions are made if at least half of the present members vote for adoption of such decisions.
Members of the Board of Directors have equal voting rights; however, the vote of the chairperson is decisive.
A member of the Board of Directors does not have the right to vote when the Board of Directors decides on his or her responsibilities and engagement with the company.
Sessions of the Board of Directors are held at least four times a year. Sessions by electronic means, telephone and audio/video links are possible as well and this can be regulated by Articles of Association and Rules of Procedure.
Members of the Board of Directors elect one of them as the body chairperson, with competence to convene and chair the sessions, to propose session agenda and with responsibility for session minutes. The Board of Directors may dismiss and elect a new chairperson at any time, without giving a reason.
The Board of Directors of a company with a single-tier management system must have at least three members (companies engaged in activities of public interest must have at least five members). The number of members is determined by the company's Articles of Association and it must be an odd number. Moreover, the Board of Directors must have at least one-third (two-fifths for companies engaged in activities of public interest) of the independent directors. Requirements for independent directors are thoroughly specified in 4.5 Rules/Requirements Concerning Independence of Directors.
The Board of Directors of a company with a two-tier management system and Supervisory Board must have at least three members. The number of members is determined by the company's Articles of Association and it must be an odd number. The Supervisory Board must have at least one-third (two-fifths for companies engaged in activities of public interest) of the independent directors. Requirements for independent directors are thoroughly specified in 4.5 Rules/Requirements Concerning Independence of Directors.
DOO companies must appoint a CEO (employment agreement is obligatory), who is in charge of representation of the company and manages the affairs of the company in accordance with the foundation act, Articles of Association and decisions of the General Meeting. The General Meeting may dismiss the CEO at any time, without obligation to state the reasons for dismissal, unless otherwise provided in the foundation act or a decision of the General Meeting.
All members of the Board of Directors and Supervisory Board share their duties as a collective body. The chairperson of these bodies is one of the body members, with the position and capacity within the body and the company as described in 3.3 Decision-Making Processes.
Please see 4.1 Board Structure.
Members of the Board of Directors and Supervisory Board are appointed and dismissed by the General Meeting. The CEO and secretary of the company are appointed and removed by the Board of Directors.
Provisions of the LBO set forth several rules, which are related to corporate governance requirements. The criteria for independency of members of the Board of Directors are envisaged by these provisions. The requirements are as follows:
In the event of the Board member failing to comply with any of requirements above, his or her term in office shall stop permanently.
Pursuant to provisions of the LBO, at least one-third (or, for AD companies with publicly traded shares, two-fifths) of the total number of Supervisory Board members in an AD company must be independent in accordance with the above-mentioned terms.
The principal legal duties of a company’s members of the Board of Directors/Supervisory Board and CEO (henceforth, "the officers") are as follows.
Duty of Care
The officers shall carry out their duties in good faith, with due diligence and in a reasonable belief that they act with the company’s best equity interest in mind. Due diligence is the level of care which a reasonably cautious person would use if he or she had the knowledge, skills and experience that could reasonably be expected of a person carrying out the same functions in a company. If such person has specific knowledge, skills or experience, that shall also be taken into account for the purpose of evaluation of due diligence.
Duty to Report Personal Interest
The officers shall notify company owners (shareholders), the Board of Directors, or the Supervisory Board, on the existence of a personal interest (or an interest of that person’s related party) in any transaction entered into or any action taken by a company. Personal interest shall be deemed to exist in case of:
Duty to Avoid Conflict of Interest
The officers shall not, for their own benefit or for the benefit of their related parties:
The duty to avoid conflict of interest shall pertain regardless whether a company had an opportunity to use the assets or information or to enter into the transactions referred to the previous paragraph.
Duty to Keep Trade Secrets
The officers shall be bound by the duty to keep trade secrets even after the termination of their status, for a period of two years after the date of termination of such status. The instrument of incorporation, the Articles of Association, a decision of the company or a contract entered into with such persons may provide only a longer period, but not be longer than five years.
A trade secret is any information which, when disclosed to a third party, could cause damage to a company, as well as any information which may have economic value because it is not generally known and is not readily available to third parties that could have economic gains from its use or disclosure and is protected by the company concerned with appropriate safeguards for the purpose of maintaining its secrecy. A trade secret shall also be any information identified as such by a law or other regulation or by a company by-law. The LBO provides exemptions to this duty as well.
Duty of Non-competition
The officers cannot, without obtaining appropriate authorisation:
The officers owe their duties to shareholders and to the company. This responsibility is manifested through the following principles:
Committees of the Board of Directors are bodies which may be formed with the purpose of assisting the Board of Directors in its work, especially for the purpose of preparing decisions, supervising the implementation of certain decisions or for the purpose of performing certain professional tasks for the needs of the Board of Directors. Members of committees may be members of a management body and other natural persons who have adequate knowledge and work experience relevant to the work of a certain committee.
Taking into consideration that forming of a committee falls under discretion of the Board of Directors, this type of internal corporate control may be rather deemed as internal assistance in typical management matters. Moreover, committees cannot decide on issues within the competence of the Board of Directors.
The committees are obliged to regularly report on their work to the Board of Directors, in accordance with the decision on their formation.
Exception to the general rule on formation of committees on voluntary basis is envisaged for companies engaged in activities of public interest. In these companies, the Board of Directors must form the Audit Committee.
On a voluntary basis, in general, the Board of Directors may form:
The committees must have at least three members. The total number of members must be an odd number, while one of the members and committee chairperson must be independent directors. The committees make decisions by a majority vote of the total number of members, except in case of equal division of votes in which case the vote of the chairperson of the committee is decisive.
In audit committee, at least one member must be a certified auditor or a person with appropriate knowledge and experience in the field of finance and accounting. Additionally, a person who is employed or otherwise engaged in a legal entity that audits the financial statements of a company may not be a member of the audit committee of such company. An audit committee:
A nomination committee:
A remuneration committee:
In the event of breach of any of the duties referred to in 4.6 Legal Duties of Directors/Officers:
Notwithstanding the aforementioned provisions on the liability of the officers, members of the Board of Directors and Supervisory Board are liable for any other damage caused to a company, unless it is proven that they had acted in accordance with a company decision, enacted with respect to provisions of the LBO.
The officers of a company involved in merger are liable to a company for damages arising from such process if they failed to act with due diligence during the merger.
When there was no indemnification of damages caused to shareholders as a result of transactions of a company with its parent/controlled company, the officers shall be liable for such indemnification as well.
The general principles on the remuneration of the officers are determined by a decision of the General Meeting. Thus, shareholders are entitled to restrict and introduce limitations on remuneration values. Remuneration for the CEO is determined by the Board of Directors, in accordance with the remuneration policy adopted by the General Meeting. Remuneration for other officers is determined by the General Meeting. It is possible to envisage that the officer has the right of participation in company profit.
A CEO must enter into an employment agreement with a chairperson of the Board of Directors; in a two-tier system, contracting parties of this agreement are chairpersons of the Board of Directors and Supervisory Board.
Remunerations of the officers must be disclosed in the annual financial reports of AD companies involved in activities of public interest.
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/value of their contribution/shares registered with the company (general rule of limited liability of shareholders). Exceptionally, shareholders are liable for the company’s obligations if they abuse the rule of limited liability. In particular, such abuse shall be deemed to have taken place if such persons:
A creditor of a company may take legal action against this person before a court competent for the place where the company's registered office is situated within six months of learning of such abuse, but, in any case, not later than within five years of the date of such abuse.
Shareholders may indirectly involve themselves in management matters, through seeking the protection of their rights before the court, as referred to in 4.8Consequences and Enforcement of Breach of Directors' Duties, as well as by exercising appropriate authorisations vested to the General Meeting.
Additionally, shareholders are also entitled to the following.
Please see 3.3 Decision-Making Processes.
Please see 4.8 Consequences and Enforcement of Breach of Directors' Duties.
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 31 December 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 31 March 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 30 September 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 documents and data to the Registry, which the Registry then submits to the Official Gazette of Montenegro for publication, such as obligation to register:
The secretary of an AD is liable for the submission of the 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 or 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:
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:
Provisions of the LBO which regulate Audit Committee shall apply only if they are not contrary to the regulations of the Audit Law, related to the Audit Committee.
Please refer to 4.9 Other Bases for Claims/Enforcement Against Directors/Officers.