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03 August 2020

Montenegro: Insight into the New Companies Act

The new Montenegrin Companies Act ("Official Gazette of Montenegro", no. 65/20) [Zakon o privrednim društvima] ("Companies Act"), which entered into force on 11 July 2020, is an innovative and thoroughgoing codification of Montenegrin Corporate Law. The legislator opted for a comprehensive legal instrument which, compared to the previous law, contains more detailed and exhaustive rules determining the establishment, management, restructuring, termination and functioning of business entities.

The explanatory note accompanying the draft proposal of the new Companies Act accentuated three essential aspects of its rationale: (i) the need to eliminate those obstacles posed by the previous legal framework, created primarily by the principle of deregulation, which could not be adequately applied in the Montenegrin legal system; (ii) the harmonisation of Montenegrin law with European acquis communautaire; and (iii) the attempt to create a more reliable business and investment environment.

State-of-the-art legal solutions

The Companies Act, which contains 333 Articles compared to only 98 in the previous law, introduces several cornerstone changes:

  • No more company stamps
    Business entities in Montenegro are no longer required to use ink stamps. Nevertheless, this provision is still expected to be scrutinised in the bylaws and legal practice.
  • Envisaged electronic registration
    While the registration procedure of business entities within the Central Register of Business Entities ("CRBE") remains mostly the same, the legislator created a space for further modernisation of the CRBE's functioning by stipulating the possibility of submitting the registration application or any other document electronically.

    Also, the deadline for the CRBE to decide on the registration application is shortened to just three days.
  • Piercing the corporate veil
    The institute of piercing the corporate veil is strengthened with the introduction of a special right of the company's creditors to seek the determination before the court of legal grounds for the application of this institute and the collection of their claims from shareholders who have committed unlawful acts. This legal action might be used if two criteria are simultaneously met: (i) the creditor's claims are mature, and (ii) the claims cannot be settled by the company itself.
  • Procuration
    The institute of procuration is reintroduced into Montenegrin Corporate Law as a form of power of attorney, granted by the competent body depending on the type of business entity, authorising one or more natural persons to conclude legal transactions and take other legal actions in the company's name and on its behalf.
  • Special duties towards the company
    The law explicitly enumerates the range of persons owing special duties to the company and stipulates that this range may be extended to other persons by virtue of the articles of association or statutes. The special duties towards the company are (i) the duty of care, (ii) the duty to report transactions/actions in which there is a personal interest, (iii) the duty to avoid conflicts of interests, (iv) the duty to keep business secrets confidential, and (v) the duty to abide by the prohibition of competition. Special lawsuits are introduced in case of the breach of each of the aforementioned duties.
  • Corporate share capital
    The Companies Act introduces a clear differentiation between the concepts of share capital and net share capital, which is defined as the difference between the value of the company's assets and liabilities. It is also clarified that nonmonetary stakes are composed of either objects or rights and, in comparison to the previous law, the new Companies Act indicates that work or services as forms of the nonmonetary share capital are possible only in those business entities incorporated as partnerships or limited partnership.
  • Two-tier management system
    The new Companies Act introduces the possibility for all Montenegrin joint-stock companies ("JSC") to adopt either a unicameral or bicameral (two-tier) corporate structure. JSCs which opt for a one-tier management system are required to establish a management structure composed of at least a shareholders' assembly, a board of directors and an executive director. Alternatively, JSCs which adopt a two-tier management system will have a corporate structure composed of a shareholders' assembly, a supervisory board and a management board.

    The board of directors (in one-tier companies) or supervisory board (in two-tier companies) must have at least three members, except for public JSCs where the relevant board must have at least five members. Furthermore, the Companies Act stipulates that one-third (or one-fifth in public JSCs) of members of the board of directors or supervisory board must be independent board members. There is no requirement for independent board members of the management board.
  • Public interest companies
    The new Companies Act also introduces the concept of a public interest company, which can be established either as a JSC or a limited liability company ("LLC"). Those companies are defined as business entities issuing securities and other financial instruments on the regulated market in Montenegro or abroad, at the request of the issuer.
  • Corporate bodies of LLCs
    Public LLCs and LLCs that fall into the category of large companies in terms of the accounting laws must have the corporate bodies of a JSC.

    Also, the new Companies Act stipulates that the shareholders' assembly and the executive director are the obligatory bodies of the LLC. The only exception to this rule is an LLC composed of a sole member, which is under the legal obligation to appoint only the executive director.
  • Miscellaneous
    The new Companies Act introduces many other peculiarities regulating Montenegrin business entities, such as:
    • all business entities are required to have a registered e-mail address;
    • the executive director must submit quarterly reports on the company's business activities to the board of directors;
    • the term of board members does not have to be renewed each year and can be set to four years per term automatically;
    • the shareholders' pre-emptive rights in the LLC may be excluded by the articles of incorporation or statutes;
    • electronic participation in shareholders' assemblies is specifically regulated;
    • withdrawal and exclusion of LLC's shareholders are strictly prescribed; etc.

What to expect?

As the new Companies Act has introduced many substantial changes to Montenegrin Corporate Law, all business entities are expected to undertake several steps to adjust their operations to the requirements of the newly established legal framework. Final and transitory provisions of the new Companies Act envisage that:

  1. JSCs and public LLCs and/or large LLCs (as per the applicable accounting laws and regulations) are required to harmonise their organisational structure and register such changes in the CRBE by 11 April 2021;
  2. JSCs that have ordinary shares with different nominal values are required to equalise the nominal values of all ordinary shares in such a manner that the proportional participation in the company's share capital will be preserved by 11 July 2021;
  3. all other business entities registered in the CRBE are obliged to harmonise their organisational structure and register such changes in the CRBE by 11 January 2022;
  4. sole traders and partnerships which are currently not registered in the CRBE are required to register by 11 April 2021; and
  5. sole traders which are currently registered in the CRBE are required to harmonise their business activities and submit a new registration application to the CRBE by 11 January 2021.

Business entities that do not comply with these requirements can face several sanctions, which in certain cases could also result in their deletion from the CRBE's record of business entities, following the procedure of a judicial liquidation.

Authors: Slaven Moravčević, Luka Veljović and Petar Vučinić