Corporate Governance 2020

Last Updated June 22, 2020

Montenegro

Law and Practice

Authors



Radonjic Associates is a leading Montenegrin full-service law firm, providing integrated legal advice on complex transactions to its clients. As a premier business law firm whose practice covers a broad spectrum of transactional and regulatory matters, Radonjic Associates enjoys an international reputation and is preferred local partner to many international law firms, international financial institutions and embassies. The firm’s client base is a diverse range of large international corporations, leading energy and construction companies in Europe and some of the wealthiest individuals investing in Montenegro. Radonjic Associates has a particularly strong focus in 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) with a minimum corporate capital of EUR25,000, divided into shares; and
  • the limited liability company (društvo sa ograničenom odgovornošću – DOO), mostly used for small and medium-sized businesses and start-ups, with its capital divided into stakes representing a portion of the corporate capital; 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 – 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:

  • possibility for companies and entrepreneurs to postpone up to 90 days payment of taxes and contributions (ie, all personal income of the employee for work and on the basis of work, including additional work, employment contracts, property income and property rights);
  • creation of a new credit line of the Investment Development Fund of Montenegro intended to improve the liquidity of entrepreneurs, micro, small, medium and large enterprises up to a maximum amount of EUR3 million per user, under a simplified procedure, without approval fee and with an interest rate of only 1.5%;
  • possibility for users of loans, leasing (legal entities, individuals, entrepreneurs and other loan users) approved by all banks, microcredit institutions of the Investment Development Fund to postpone up to 90 days repayment of all loan obligations (principal, interest, fees, etc).

The principal governance and management bodies of AD companies in Montenegro are the following.

  • In case of single-tier company management:
    1. General Meeting of Shareholders (General Meeting);
    2. Board of Directors;
    3. Chief Executive Officer (CEO).
  • In case of two-tier company management:
    1. The General Meeting;
    2. Supervisory Board;
    3. Board of Directors.

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:

  • the necessity to ensure easier adaptation to the new LBO for existing entities as the majority of such entities have a long history of functioning through simplified, one-tier management system;
  • the lack of high numbers of huge corporations in terms of company structure and business complexity, for which a two-tier management system would be a more appropriate solution;
  • appreciating that major number of existing entities which would not welcome or find financially viable the mandatory two-tier system, taking into account an unavoidable increase of expenditures related to engaging a new executive body;
  • the significance of consistent application of contractual freedom (here manifested as unlimited "affectio societatis" in terms of organising of company executive structures).

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:

  • passing of Articles of Association of a company;
  • performing of amendments and supplements to Articles of Association;
  • appointment and dismissal of members of Board of Directors and Supervisory Board;
  • appointment and dismissal of audits;
  • appointment and dismissal of company liquidator;
  • remuneration policy and determining of remuneration amounts for members of Board of Directors and Supervisory Board at each regular annual session;
  • adoption of annual financial statements and reports on the company's operations;
  • disposal of the company's assets (by purchase, sales, lease, exchange, acquisition or other disposal modalities) exceeding 20% of the book value of the company's assets ("high-value assets of the company’’), unless the company’s Articles of Association requires lower participation;
  • distribution of profit;
  • increase/decrease of company share capital;
  • replacement of shares of one class with shares of another class;
  • making a decision on voluntary liquidation of a company or company restructuring;
  • making a decision on filing of a motion for initiation of bankruptcy proceedings;
  • approving of appraisal of contributions in kind;
  • considering issues within the competence of the Board of Directors and Supervisory Board related to the company's operations;
  • approving of agreement on purchase of property of company founder of shareholder with major equity interest in the company, when the payment exceeds one-tenth of company share capital determined by Articles of Association and when the agreement is to be concluded within two years from the moment of company registration;
  • making a decision on issue of bonds, convertible bonds and other convertible securities;
  • limiting or banning the priority right of shareholder on subscription of shares or acquiring of convertible bonds, with consent of a two-third majority of shareholder votes to which such decision is pertaining;
  • making decisions on independent or joint foundation of another company or making a decision whereby management bodies of the company are authorised to decide on independent or joint foundation of one or more companies;
  • drafting/passing of its Rules of Procedure;
  • making other decisions in accordance with the company’s Articles of Association;

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:

  • managing of the company and issuing of directives to the CEO regarding the management of the company’s business activities;
  • deciding on internal organisation and systematisation of the company;
  • depending on the need, appointing of the company secretary and CEO;
  • determining of the company’s business strategy in accordance with directives of the General Meeting;
  • supervision of the company’s business activities;
  • determining accounting policies and risk management policies of the company;
  • appointment of persons in charge of internal audit of the company, in accordance with recommendation of the audit commission (if formed within the company);
  • convening of sessions of the General Meeting and deciding on any session agenda proposal as well as on the General Meeting’s decisions proposal;
  • deciding on amount, modalities and procedures of dividend disbursements;
  • execution of decisions of the General Meeting;
  • proposing remuneration policy for members of the company’s executive bodies;
  • appointment and dismissal of a procurator;
  • deciding on the salary and other remunerations for the company CEO, in accordance with the company’s remuneration policy;

In companies with single-tier type of management, the CEO has the following authorisations:

  • representation and acting on behalf of the company;
  • entering into agreements on behalf of the company;
  • organising and managing company’s business activities;
  • managing property/assets of the company;
  • execution of decision of the Board of Directors;
  • deciding on disposal of financial assets of the company;
  • deciding on rights and obligations of employees related to employment;
  • submitting of quarterly reports on ongoing business activities of the company as well as other reports;
  • performing other activities in accordance with the LBO and the company’s Articles of Association.

In companies with two-tier type of management, the Board of Directors has the following authorisations:

  • conducting of business activities of the company;
  • determining internal organisation of the company, with consent of the Supervisory Board;
  • supervision on keeping of the company’s books of account and on drafting of the company’s financial reports;
  • proposing of agenda for sessions of the General Meeting to the Supervisory Board;
  • in accordance with decisions of the General Meeting, deciding on calculation (amount), day, procedure and modalities of dividend disbursement;
  • execution of decisions of the General Meeting and the Supervisory Board;
  • submitting quarterly reports on ongoing business activities of the company to the Supervisory Board;
  • performing other activities and making other decisions in accordance with the LBO, company’s Articles of Association and decisions of the General Meeting and the Supervisory Board.

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:

  • deciding on the company’s business strategy and supervision of its execution;
  • issuing of business directives to the Board of Directors as well as determining of company’s accounting policy and risk management policy;
  • appointment of members of the Board of Directors (including chairperson of the Board of Directors) and the company’s secretary;
  • adoption of reports of the Board of Directors on the company’s business activities, determining financial reports of the company and submission of such reports to the General Meeting;
  • appointment and revocation of a procurator;
  • appointment of an internal auditor of the company;
  • convening of General Meeting sessions and proposing session agenda;
  • deciding on the acquiring of the company’s own shares;
  • proposing remuneration policy for executive bodies members to the General Meeting;
  • appointment of the chairperson of the Supervisory Board;
  • submitting reports to the General Meeting and of other activities in accordance with the LBO and the company’s Articles of Association.

Unless otherwise envisaged by provision of the company’s Articles of Association, authorisations of the Supervisory Board cannot be transferred.

General Meeting

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:

  • shareholders holding at least 5% of the voting rights deliver to the registered office of the management board a written request to hold a session;
  • the Board of Directors/Supervisory Board/shareholders propose
    1. change of the company’s business activity,
    2. change of the company share capital,
    3. change of the auditor before the expiration of the agreed term of the auditor,
    4. replacement of a member of the Board of Directors/Supervisory Board before the expiration of their term;
  • it is necessary to consider serious losses of the company or to issue approval to the company for acquiring its own shares;
  • reorganisation, merger, voluntary liquidation or submission of proposal for initiating bankruptcy proceedings of the company needs to be approved;
  • this is required by the resigned auditor;
  • termination of membership of member of the Board of Directors/Supervisory Board;
  • the Board of Directors/Supervisory Board considers that a certain issue should be discussed at extraordinary session.

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 session was not held within six months from the end of the business year, while the shareholder has notified the competent court on this omission;
  • a person who has the right to request the convening session has addressed the competent court because the management rejected his request for session or did not schedule a session within the prescribed time limit;
  • the company's creditors request this from the court due to the failure to convene an extraordinary session.

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.

Management

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:

  • a member of the Board must not be a blood relative in a straight line, a blood relative in lateral line (up to the second degree of kinship), a spouse or de facto partner of other member of the Board or a shareholder (with significant holding in company share capital or with major equity interest in company share capital);
  • a member of the Board must not be a person who, within the period of two years prior to his or her appointment to the position of Board member, had a significant holding or major equity interest in company share capital;
  • a member of the Board must not be a person who, within the period of two years prior to his or her appointment to the position of Board member, had the capacity of Board member (except for the body in which this person is being elected), procurator, company employee or employee of the company linked to the company in which this person is being elected;
  • a member of the Board must not be a person who, within the period of two years prior to his or her appointment to the position of Board member, received or claimed from the subject company – or from a company linked with the subject company – a remuneration in the amount which exceeds 10% of yearly income of that person (calculation of these claims does not include remunerations received from the companies mentioned herewith, in which the subject person had the capacity of a Board member).

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:

  • entering into a transaction between a company and such person (or a related party of such person);
  • actions (in judicial and other proceedings, waiver of rights, etc) taken by a company in relation to such person (or a related party of such person);
  • entering into a transaction between a company and a third party or taking of an action by a company in relation to a third party, if such third party has a financial relationship with such person (or a related party of such person) and it can be reasonably expected that the existence of such relationship affects the person’s actions;
  • entering into a transaction or taking of an action by a company which would bring financial gain to a third party, if such third party has a financial relationship with such person (or a related party of such person) and it can be reasonably expected that the existence of such a relationship affects the person’s actions.

Duty to Avoid Conflict of Interest

The officers shall not, for their own benefit or for the benefit of their related parties:

  • use their company’s assets;
  • use any information they obtained in that capacity, insofar as such information is not otherwise publicly available;
  • use opportunities for entering into transactions that arise for the company;
  • in other ways abuse their position within the company.

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:

  • act in the capacity of the officer in another company with the same or similar scope of business activities (ie, the competing company);
  • be an entrepreneur with the same or similar scope of business activities;
  • be employed at the competing company;
  • be otherwise engaged at the competing company;
  • be a member of founder of another legal entity with the same or similar scope of business activities.

The officers owe their duties to shareholders and to the company. This responsibility is manifested through the following principles:

  • rights of shareholders to request any action towards the management bodies, including rights on bringing legal actions against responsible officers, as referred throughout the content of the sections herewith;
  • position of the Supervisory Board, with respect to the competence of this body to review and control pursuing of activities and authorisations of the Board of Directors (applicable in companies with a two-tier management system);
  • a right of the Board of Directors in companies with a single-tier management system to form company committees.

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:

  • a nomination committee;
  • a remuneration committee;
  • an audit committee; and
  • other committees, in accordance with company needs, if this is envisaged by the Articles of Association.

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.

Audit Committee

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:

  • prepares, proposes and verifies the implementation of accounting and risk management policies;
  • proposes to the Board of Directors the appointment and dismissal of persons responsible for performing the function of internal supervision in the company and supervises their work;
  • examines the compliance with accounting standards in the preparation of financial statements and evaluates the content of financial statements;
  • examines the fulfilment of conditions for the preparation of consolidated financial statements of the company;
  • conducts the procedure for election of the company's auditor and proposes a candidate for the company's auditor;
  • gives an opinion on the draft contract with the company's auditor and, if necessary, issues a reasoned proposal for termination of the contract with the company's auditor;
  • supervises the audit procedure, including the identification of key issues to be audited and verification of the independence and objectivity of the auditor;
  • performs other auditing tasks as entrusted by the Board of Directors.

Nomination Committee

A nomination committee:

  • proposes a candidate for CEO, stating its opinion and recommendation for appointment;
  • for the purposes of decision-making at the General Meeting, issues an opinion and recommendation for proposed candidates for members of the management body, when required;
  • proposes the conditions to be met by the candidate for members of the management body;
  • at least once a year, makes a report on the adequacy of the composition and number of members of the management body and makes recommendations in this regard;
  • considers the personnel policy of the company in selection of persons for managerial positions in the company and performs other tasks related to the personnel policy of the company, entrusted by the Board of Directors.

Remuneration Committee

A remuneration committee:

  • prepares a draft decision on the remuneration policy of the company's management body;
  • proposes the amount and structure of compensation for each member of the management body, as well as compensation for the company's auditor;
  • at least once a year, makes a report on the amount and structure of remunerations for each member of the management body;
  • recommends the amount and structure of remuneration to persons in managerial positions in the company and performs other tasks related to the company's remuneration policy entrusted by the Board of Directors.

In the event of breach of any of the duties referred to in 4.6 Legal Duties of Directors/Officers:

  • a company may bring legal action against the officer and seek indemnification, transfer of benefit gained as a result of breach or exclusion of company member, depending on type of violated legal duty;
  • a shareholder may bring legal action against the officer ("individual direct action");
  • depending on circumstances, a shareholder who brought legal action against the officer may act on behalf of all shareholders, whose interests are also violated by the breach ("collective direct action");
  • a shareholder may bring legal action against the officer on the company’s account, if a company had not previously brought legal actions against the officer, or had not previously acted in such manner in accordance with a prior request of a shareholder.       

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:

  • use the company to achieve an objective that is otherwise prohibited for that person;
  • use or dispose of the company’s assets as their own personal property;
  • use the company or its assets to cause damage to the company’s creditors;
  • reduce the company’s assets for their own personal gain or for the gain of third parties, although they knew or ought to have known the company would be unable to meet its obligations.

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.

  • Request from company bodies (here including management bodies) issuing of copies of session minutes, financial documentation and list of management members with appropriate details. Alternatively, if a company body fails to timely respond to this request, shareholders may bring legal action before the court in this regard).
  • Appoint a "minority shareholder expert’" (if shareholders own at least 5% of share capital). This person is basically a shareholder representative, engaged to review and control business activity and book-keeping of a company; expenses for engagement of this person shall be borne by shareholders unless significant irregularities are determined in such review – in that case, a company shall pay these expenses. Alternatively, if management fails to appropriately respond to these actions of shareholders, shareholders may bring legal action before the court in this regard.
  • Ask questions to management bodies with respect to session agenda and materials; if management fails to appropriately respond to these questions, shareholders may bring legal action before the court in this regard.
  • Nominate candidate for audit of financial reports (if shareholders own at least 5% of share capital).

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:

  • any amendments to the Articles of Association or the foundation agreement, and any extension of the duration of the company;
  • any changes in the company’s name and the registered office or address for receiving official notices;
  • 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;
  • appointment or dismissal of, and data on, the CEO, secretary and auditor;
  • decision of the General Meeting on the liquidation of the company;
  • decision on the appointment of a liquidator, and his or her identity, qualifications and powers other than those set out in the LBO or in the Articles; and
  • financial reports, including the auditor's report.

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:

  • 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.

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.

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

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Radonjic Associates is a leading Montenegrin full-service law firm, providing integrated legal advice on complex transactions to its clients. As a premier business law firm whose practice covers a broad spectrum of transactional and regulatory matters, Radonjic Associates enjoys an international reputation and is preferred local partner to many international law firms, international financial institutions and embassies. The firm’s client base is a diverse range of large international corporations, leading energy and construction companies in Europe and some of the wealthiest individuals investing in Montenegro. Radonjic Associates has a particularly strong focus in the corporate and commercial, energy, banking and finance, foreign direct investment, real estate and construction sectors.

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