G ROUP INTEREST IN S ERBIA Attila Dudás, Ph.D. Assistant Professor University of Novi Sad Faculty of Law

L EGISLATIVE BACKGROUND 2011 – Law on Business Organisations (Law on Companies) The Serbian company law traditionally follows the German model.

L EGAL F RAMEWORK 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.

L EGAL F RAMEWORK 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.

L INKING 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”).

L INKING 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.

L INKING 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.

L INKING 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.

L INKING 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”).

L INKING 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.

T HE N OTION OF G ROUP I NTEREST 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).

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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. Is the management of the controlled company obliged to follow the instructions of 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.

T HE N OTION OF G ROUP I NTEREST Is the management of the controlled company obliged to follow the instructions of controlling company? 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). However, there are indirect means to force the controlled company to follow the binding instructions.

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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.

T HE N OTION OF G ROUP I NTEREST 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 wholly- owned 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.

T HE N OTION OF G ROUP I NTEREST 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. Are there statutory limits in issuing/following binding instructions? 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.

R ECOGNITION OF G ROUP I NTEREST 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. Is the recognition of the interest of a group mandatory or may it be introduced by the articles of association

T HANK YOU FOR YOUR KIND ATTENTION ! Attila Dudás, Ph.D. Assistant Professor University of Novi Sad Faculty of Law