Defining a Management Agreement  

A management agreement may be defined as a contractual relationship between the company and an appointed manager. In simple terms, the company entrusts the conduct of business to a specific person for the provision of an agreed-upon fee. 

More often than not, this agreement encompasses all business operations, meaning that the appointed person is engaged due to specific skills and knowledge, especially in the field of business management. 

The biggest danger a company faces is picking the wrong CEO – Warren Buffet 

Choosing a person with the right skillset is an essential item for the success of the company. A notable example is Lou Gerstner, who became the CEO of IBM after many years managing American Express. It wasn’t until a few weeks after taking over the leadership that Gerstner diagnosed IBM’s main issues. As a result, stock prices doubled in less than three years, and the company’s overall performance continued to improve year after year. 

In practice, a managerial contract is most often synonymous with the contract on the rights and obligations of the director. Accordingly, we will explain the legislation in the Republic of Serbia regarding the engagement of directors. 

How can a director be engaged?

 

Although the duties and responsibilities of a director are prescribed by the Companies Act, the answer to this question can be found in Article 48 of the Labour Law. 

The first way to engage a director is to establish an employment relationship for a specified or indefinite period through an employment contract. In this case, the director has the status of an employee and enjoys all rights and obligations, just like any other employee. 

The second way is to engage a director without establishing an employment relationship, based on a contract of rights and obligations of the director. The Labour Law does not describe this type of contract in detail or specify multiple mandatory elements; it only states that the mutual rights and obligations of a director who has not entered into an employment relationship shall be regulated by contract. 

Therefore, in the second case, the director does not have employee status, but the contract clearly defines the rights and obligations, while ensuring that the contract complies with all relevant legal provisions. 

The competent body of the company, as determined by the law or the company’s general act, concludes a contract of rights and obligations of the director with the director. 

The law only specifies that the individual performing the director’s duties under this contract is entitled to compensation for work and other rights, obligations, and responsibilities stipulated in the contract. 

These rules apply regardless of whether the director is a domestic or foreign citizen. 

Clarifying the Confusion Regarding Director Engagements 

Given that the Labour Law states that a director is entitled to compensation for work, the question arises: how to determine the compensation for directors in general? The Ministry of Finance introduced the concept of ‘adequate compensation for director’s work’ in Opinion No. 011-00-1137/2018-04. 

Interpreting Article 48, paragraph 5 of the Labour Law leads us to conclude that compensation for work is a mandatory element in contracts engaging directors outside of an employment relationship. This is further confirmed in the opinion of the Ministry of Labour, Employment, Veterans and Social Affairs No. 011-00-00416/2021-07, which asserts that compensation for a director’s work is a mandatory element of such contracts. 

In practice, it has sometimes occurred that this provision is either omitted or that the compensation is merely symbolic. Directors may be engaged with varying scopes of responsibilities, making it challenging to evaluate compensation using uniform criteria. While symbolic compensation can function in practice, the contractual provision should provide a more detailed explanation for such compensation, considering the scope of duties, whether the director is involved in multiple affiliated companies, or is employed by a foreign parent company, and whether symbolic compensation is offset by profits in the event of strong business performance. 

Therefore, agreed-upon compensation, as a mandatory element of this contract, carries certain tax implications, necessitating consideration of the economic justification for this compensation. 

The fact that this type of contract falls outside of an employment relationship does not mean it lacks certain forms of protection. Here, we highlight the ruling of the EU Court in the case of Danossa C 232/09 from 2010. In this case, the European Court had to determine whether a member of a company’s management board is entitled to the protection enjoyed by workers under EU law, even though the management board member could be dismissed without restriction under national law. 

The Court concluded the following: to assess whether a management board member is a worker, one must consider whether they work under the company’s instructions and the supervision of the company’s competent body that can dismiss them against their will, and whether they are remunerated for their duties, regardless of the titles given in national legislation. 

In the Danossa case, it concerned a pregnant member of the management board of a business entity. The ruling implies that termination of a contract and revocation of appointment due to pregnancy is prohibited, though it does not explain the difference between the status-related position of a management board member and the contractual relationship between a management board member and a company, which is usually separately regulated. 

Distinguishing Between Management Agreements and Consulting Contracts

Unlike a consulting contract, a management agreement typically encompasses the entirety of a company’s operations. It’s a comprehensive pact that delves deep into the core of a business entity’s functioning.  

On the other hand, a consulting contract is a contractual relationship where a consultant provides advisory services. In this scenario, the competent authorities of the business entity possess the freedom to either embrace or decline the consultant as their trusted advisor. 

In essence, it’s a tale of two distinct realms within the realm of business contracts. The management agreement is the captain of the ship, steering the entire business voyage, while the consulting contract offers counsel from the shore, awaiting acceptance or rejection at the discretion of the company’s decision-makers. 

*This article is for informational purposes and does not constitute legal advice*