Since 2019, a new legal instrument has been available in Serbia, introduced by the Law on Companies, which allows limited liability companies to reward employees and external collaborators with ownership shares under preferential conditions. This mechanism, known as the reserved own share and the financial instrument – right to acquire a share, represents a domestic equivalent to vesting, a concept widely used in American corporate practice.
In Serbia, this instrument is still considered relatively new, and there is currently limited practical application. It is expected to gain broader use over time across various industries, particularly in the IT sector.
What is Vesting?
Vesting originates from American corporate law and is used as part of the ESOP (Employee Stock Ownership Plan), a system that allows employees to acquire ownership in the company. In the United States, it is regulated by the ERISA Act of 1974, as well as by tax legislation. There are different vesting models, such as cliff vesting (e.g., acquiring rights after one year) and graded vesting (gradual acquisition of rights over several years).
Vesting became a standard practice in tech startups, especially in Silicon Valley during the 1990s and early 2000s. Due to limited financial resources, startups offered equity as a form of motivation and reward. The concept of reverse vesting was also introduced, providing investors with assurance that founders would not leave the company prematurely. Vesting clauses became a common part of investment agreements.
The Registration of a Reserved Own Share as the First Step
The first step is registering the reserved own share with the Serbian Business Registers Agency. The reserved own share is regulated by Article 159a of the Law on Companies and is defined as a share that the company acquires free of charge from a member of the company for the purpose of issuing the financial instrument – right to acquire a share.
It is important to note that the total percentage of all reserved own shares in the company’s capital cannot exceed 40%. Therefore, if you wish to reward multiple individuals at once, whether employees or external collaborators, you may do so as long as the total percentage does not exceed 40%. The law states that a single-member limited liability company may have a reserved own share, and that a company may have multiple reserved own shares, provided the total percentage remains within the 40% limit.
Keep in mind that the reserved own share does not confer any rights and is not counted toward the quorum of the general meeting.
Once the necessary documentation is prepared, the application is submitted to the Business Registers Agency along with payment of the applicable fees for registration.
Financial Instrument – Right to Acquire a Share
After successfully registering the reserved own share, the process continues before the Central Securities Depository and Clearing House.
The Law defines the financial instrument – right to acquire a share as a non-transferable financial instrument issued by a limited liability company, which grants the holder the right to acquire a share on a specified date (maturity date) at a specified price. This instrument is subject to provisions of the law governing the capital market that relate to the Central Registry and is not considered a public offering under that law.
The procedure and documentation required for registration and deregistration of this instrument are governed by the operating rules of the Central Registry.
The required documentation is prescribed by the Central Registry’s operating rules, and the mandatory elements of certain documents, such as the decision on the issuance of the financial instrument – right to acquire a share, are defined by the Law on Companies. It is important to observe deadlines, as this decision must be submitted to the Central Registry within five business days from the date of adoption.
Based on the registration request and submission of the required documentation, along with payment of the fee, the Central Registry assigns a unique identification for the financial instruments in accordance with its coding system, issues a certificate of assignment of the CFI code and ISIN number, opens an issuance account, records the issuance on the issuer’s account, and assigns a unique abbreviated name – FISN code. All financial instruments – right to acquire a share issued from the same issuance grant the same rights as stated in the issuance decision.
For further information, it is recommended to consult Corporate & Commercial Law section.
Deregistration of the Financial Instrument
The financial instrument – right to acquire a share, in accordance with Article 159d of the Law on Companies, may be realized through acquisition of the share or canceled. If the instrument is realized, it is deregistered from the Central Registry; the holder must pay the price within the deadline specified in the issuance decision, thereby confirming their intention to acquire the share. The company is obligated to submit a deregistration request to the Central Registry within 30 days from the expiration of the payment deadline, for all issuances from the same reserved own share, whether for acquisition or cancellation.
What Are Special Maturity Cases?
As previously mentioned, the documentation submitted to the Central Registry must specify the maturity date. Article 159e of the Law on Companies outlines special cases of maturity, i.e., situations in which the right to acquire a share matures before the designated date. These include liquidation of the company, status changes, and changes in legal form.
If any of these situations occur, the deadline for payment of the price by the holder of the financial instrument is 40 days from the date of the early maturity event. In the case of liquidation, the deadline begins the day after the announcement of the start of liquidation; for status changes, the day after publication of the draft agreement or division plan; and for changes in legal form, the day after publication of the proposed decision on the change.
It is important to note that a limited liability company cannot adopt a decision on ending liquidation, a status change, or a change in legal form until it registers the acquisition of the share based on the financial instrument or the reduction of capital due to cancellation of the unused reserved own share.
What if the Company Fails to Register the Acquisition of the Share?
If the company fails to register the acquisition of the share based on the financial instrument within 60 days from the expiration of the payment deadline, Article 159ž of the Law on Companies provides for judicial protection. The holder who has made the payment may, within six months, file a lawsuit with the competent court to determine their status as a member and the percentage of the share acquired, or to request compensation from the company. The court will determine the compensation based on the market value of the share that the holder would have been entitled to acquire on the maturity date.
Note: This text does not constitute legal advice and reflects the personal opinion of the author.
