GROUP INTEREST
IN
SERBIA
Attila Dudás, Ph.D.
Assistant Professor
University of Novi Sad
Faculty of Law
LEGISLATIVE
BACKGROUND
2011 – Law on Business
Organisations (Law on Companies)
The Serbian company law
traditionally follows the German
model.
LEGAL FRAMEWORK
OF THE GROUP INTEREST
Under the effective Serbian Law on
Business Organisations, there are
some legal institutions that give legal
effect to certain aspects of the interest
of a group of companies.
These institutions are not numerous, but
there are are still some.
LEGAL FRAMEWORK
OF THE GROUP INTEREST
In order to determine the scope of legal
relevance of group interest two, somewhat
different, approaches should be taken
into account.
On the one hand, one should analyse the specific
norms relating various forms and means of
linking of companies, in order to determine
whether they contain any reference to the group
interest.
On the other hand, there are other legal
institutions by which the concept of
group interest gains legal relevance.
LINKING
OF COMPANIES
The Law on Business Organizations defines
three means of linking of companies:
Companies may be linked through:
1) Participation in share capital or
partnership interests
(“companies linked by capital”);
2) Contracts (“companies linked by
contract”);
3) Capital and contracts (“mixed
linked companies”).
LINKING
OF COMPANIES
Through linking in terms of capital share,
partnership interest or contract, a linked
company may have one of the following
forms:
1. a corporate group (concern),
2. a holding company, or
3. a mutually-owned company.
LINKING
OF COMPANIES
The Law defines only the notions of all
three types of linked companies.
From the definition of three types of
linked companies, the definition of
corporate groups has the greatest
relevance in determining the scope of
notion of group interest in Serbian law.
LINKING
OF COMPANIES
A holding company is a company that
controls one or more companies and the
management and funding of those
companies is its sole business activity.
Mutually-owned companies are
companies in which every company
holds an equity interest in the other
company.
LINKING
OF COMPANIES
According to the Law, corporate group exist if:
1) A controlling company manages one or more
controlled companies, without entering into a
control and management agreement (“de facto
group”), or
2) A controlling company and one or more
controlled companies that entered into a control
and management agreement (“contractual
group”), or
3) Companies that are not subordinate to
one another and are managed in a
uniform manner (“group of equal members”).
LINKING
OF COMPANIES
Serbia belongs the group of countries that follow
the German model, in the meaning that
contractual groups are the primary form of
linking companies, which are otherwise
separate legal entities, but guided by the same
group interest.
Contractual groups of companies are established by
concluding a control and management agreement,
and all provisions of the Law on linking of
companies pertain to contractual groups.
The parties to control and management
agreement are usually linked by capital,
but not necessarily.
THE NOTION
OF
GROUP INTEREST
In relation to contractual groups the notion of
group interest is explicitly recognised in
Serbian law.
The Law on Business Organisations states that
in contractual group the controlling company
shall have the right to issue binding
instructions to subsidiaries, taking into
account the group’s interest.
The Law, however, does not define what
the group’s interest is (whether it is the
interest of the controlling company, the
interest of the controlled company, or
some sort of common interest of both).
THE NOTION
OF
GROUP INTEREST
The prevailing opinion in the doctrine is that,
lacking statutory definiton of the interest of a
group, it is to be identified as the controlling
company’s interest.
There are some specific legal
institutions that provide ground for
such conclusion.
However, one must have in mind, that these
institutions are applied only to contractual
groups, which fact greatly reduces the scope
of their application.
THE NOTION
OF
GROUP INTEREST
First, the directors and managers, and
members of the supervisory board of
the controlled company, are exempt
from liability for any damage
resulting from a breach of special
duties that they owe towards the
controlled company (above all, the
duty of care and duty to avoid conflict
of interest), in they acted in
compliance with the binding
instructions issued by the controlling
company.
THE NOTION
OF
GROUP INTEREST
However, the controlling company is
liable for any damage caused to
the controlled company, as a
result of its compliance with binding
instructions of the controlling
company.
THE NOTION
OF
GROUP INTEREST
Obviously, the section of the Law on the
exemption from liability of the managers of
the controlled company, applies to a
situation when observing the binding
instruction of the management of the
controlling company is detrimental to the
interests of controlled company.
This means that the management of the
controlled company follows the binding
instructions even if it is detrimental to
the company to which the management
owes special duties.
THE NOTION
OF
GROUP INTEREST
Therefore, in terms of binding instructions of the
controlling company given to the controlled
company, the group interest cannot be identified
as the interest of the controlled company.
It can be either the interest of the controlling
company or some sort of common interest.
However, it seems more reasonable to
assume that it is the interest of the
controlling company, especially in
cases when the controlled company is
a wholly-owned subsidiary od the
controlling company.
THE NOTION
OF
GROUP INTEREST
Is the management of the controlled company
obliged to follow the instructions of
controlling company?
Since the Law refers to the instructions of the
controlling company as “binding” instructions, it
implies that the controlled company is obliged to
follow the instructions of the controlling company.
In fact, the management of the controlled
company may deny to follow the
binding instructions. There are no
direct means to force the controlled
company to obey the instructions.
THE NOTION
OF
GROUP INTEREST
Is the management of the controlled company
obliged to follow the instructions of
controlling company?
However, there are indirect means to force
the controlled company to follow the binding
instructions.
For instance, the failure to follow the
instructions, may be qualified as an
infringement of the control and
management agreement, which can
activate penalty clauses from the agreement
(provided they are stipulated at all).
THE NOTION
OF
GROUP INTEREST
Is the management of the controlled company
obliged to follow the instructions of
controlling company?
On the other hand, the controlled companies
are regularly wholly-owned (or at least
majority owned) subsidiaries of the
controlling company, which exercises voting
rights in the controlled company. Therefore,
the failure to follow binding instructions by
the management of the controlled company
will most likely result in the appointment of a
new management.
THE NOTION
OF
GROUP INTEREST
Is there a difference between private and
public companies in terms of relevance of
group interest and duty to follow binding
instructions by the controlled company?
The rules on the right of the controlling
company to issue binding instructions
and the duty of the controlled company
to obey them, applies both to public
and private companies. The Serbian
law does not differentiate public and
private companies in this regard.
THE NOTION
OF
GROUP INTEREST
Is there a difference between wholly-owned
and not wholly-owned subsidiaries?
The duty to follow binding instructions of the
controlling company applies both to whollyowned and not wholly-owned subsidiaries.
However, it must be emphasized again, that
binding instruction could be issued only
towards controlled companies, with whom a
control and management agreement is
concluded, that greatly reduces the impact of
this question.
THE NOTION
OF
GROUP INTEREST
Are there statutory limits in issuing/following
binding instructions?
There are no limits explicitly stated in the Law, but
obviously mandatory norms and public policy
are limits of controlled company’s duty to follow the
instructions of controlling company.
The management of the controlled company
must not follow the binding instructions, if
they are obviously in violation of mandatory
norms or public policy. Otherwise they are not
exempt from liability for the breach of duties
they owe towards the controlling company.
RECOGNITION
OF
GROUP INTEREST
Is the recognition of the interest of a group
mandatory or may it be introduced by the
articles of association
Under the Serbian law, the recognition of group
interest is not mandatory, in the meaning that
it is not a mandatory element either of the
articles of associtation, or of the controll and
management agreement, but it can surely be
a subject matter of such acts, if the parties
consider that the interest of the group, and its
legal relevance, should be legally determined
in the articles or in the controll or
management agreement.
THANK
YOU FOR YOUR KIND
ATTENTION!
Attila Dudás, Ph.D.
Assistant Professor
University of Novi Sad
Faculty of Law