Director’s Duties And Responsiblities To The Company

Pursuant to the Company Law (Official Gazette of RS, No. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44/2018 and 95/2018 hereinafter: the „Law“), in matters handled by the directors on behalf or for the account of the company, they are obliged to adhere to certain principles, otherwise they shall be liable for damages sustained by the company and, in addition to the company itself, members of the company shall also be entitled to file lawsuits against the directors in such cases.

The principles prescribed by the Law include: (i) due care; (ii) reporting any affairs and actions involving personal interest; (iii) avoiding conflict of interest; (iv) keeping business secrets; (v) adhering to the prohibition of competition;

In addition to prescribing these duties and defining their content, the said Law also defines the rules for filing lawsuits in case of violation of such duties, by envisaging individual claims to be filed by a single company member as well as derivative claims filed by one or more company members on their own behalf but for the company’s account.

Therefore, in case of violation of special duties, a lawsuit may be filed against a director within 6 months from the day the committed violation was identified and no later than five years after the date the violation was committed.

Provisions of Article 79 of the Law precisely define that derivative claims can be filed on behalf and for the account of the company by one or more members of the company if the company refused to file a lawsuit on these grounds or if it failed to act within 30 days of the request and provided that they hold at least 5% of the company’s fixed capital in the form of interest or shares regardless of the timing of acquisition of the capacity of a member when it comes to the grounds for the lawsuit.

The said requirements are imposed on a cumulative basis and the Law envisages the possibility of taking part in the proceedings of the member who acquired interest or shares from the person who filed a lawsuit until final resolution of the proceedings and, afterwards, under the extraordinary legal remedy pronounced.

In the event when the company itself acts by filing a lawsuit for violation of the director’s special duties, provisions of Article 80 of the Law envisage the right of the member, under whose claims the proceedings were initiated, to request from the court to take part in the proceedings as the intervening party.

As a remedy for director’s special duties, the Law envisages the filing of a lawsuit for violation of any of the duties specified by linking their name to a specific duty and with each lawsuit being based on damage compensation, dismissal from the company if the director is a member of the company and termination of employment if the director is an employee, while allowing for the possibility to include additional requirements or leave out some for each individual claim.

Director is designated as a person holding a position with special duties to the company in accordance with Article 61 of the Law and the provisions of Articles 63 to 76 of the Law define those duties in more detail, providing a clear outline of such duties as well as nuances in respect of their scope and content.

Due care; this duty is regulated by Article 63 of the Law which prescribes that in performing such duties, the director is required to act with the good care, to perform his/her assignments conscientiously and with a reasonable belief that he/she is acting in the company’s best interests. This refers to the degree of care which, as specified by the Law, would be exercised by a “reasonably prudent person”, who undoubtfully possesses adequate i.e. special knowledge, experience and skills for the relevant duties, all of which are considered when assessing the degree of due care exercised.
Director has the option to act on the basis of his/her capacities i.e. opinions and information obtained from experts, provided that he/she “reasonably believes that, in each particular instance, those experts are acting conscientiously”.

Reporting transactions and actions of personal interest; is the next duty entrusted to the director of the company pursuant to Article 65 of the Law.
The term “duty” in its name refers to two matters:
1. Reporting transactions concluded by the company (i.e. legal actions taken by the company) where the reporting, depending on the company’s legal form, is directed at General Assembly in cases where the company has one director i.e. at the supervisory body in case of two-tier management in the limited liability companies, at partners in business partnership, and at Board of Directors in case of multiple directors i.e. at supervisory body in case of two-tier management in joint stock companies and therefore, the consent to notification shall be provided by the competent body which is independent in respect of the relevant personal interest;
2. Personal interest (which, according to the Law, also includes “interest of the related person”) is reflected in the following: (i) conclusion of a legal transaction between the company and such a person (or person related to him/her), (ii) legal actions taken by the company toward such a person/ persons related to him/her, (iii) conclusion of transactions and taking legal actions toward third persons which involve financial relations or economic interests based on which, according to the Law, “… it may be expected that the very existence of such relationship could affect his/her actions”.

In such situation, the Law requires approval of a legal transaction or legal action which is approached differently depending on the form of a legal entity (specifying rules for partnerships, limited liability companies and joint stock companies), it being understood that the quorum for approval to be reached in all legal forms is “total number of votes of those members of the company who have no personal interest in such a matter”.

Simultaneously, the Law specifies exceptions when such an approval is not needed and when the personal interest of one company member or all company members is natural, including two situations which are related to subscription and purchase of shares in the company and buyout of company’s interests.

Avoidance of conflict of interest; this duty is regulated by Article 69 of the Law which prescribes that in pursuing his/her personal interest or the interest of persons related to him/or, the director may not:
(i) use the company’s assets, (ii) use information which is not in public domain but is available to him/her because of his/her capacity of the director, (iii) abuse his/her position and (iv) use the opportunity to conclude deals offered to the company. The obligation to avoid conflict of interest is in force regardless whether the company was in the position to use its assets, information or to conclude such deals.

Acting contrary to these prohibitions by the director may only be allowed in cases when prior or subsequent approval is obtained in accordance with the provisions of Article 66 of the Law.

What is interesting in respect of this duty is that the claim, in addition to damage compensation, may also include the demand for “transfer to the company of any and all benefits generated by this person (in this instance, director) or a person related to him/her as a result of violation of this duty.

It seems that in this way the legislator has ensured three-fold security of the company’s position, first by prohibiting the director to act in a certain manner and then by specifying requirements to be met for the validity of director’s duties and actions either by prior or subsequent approval and finally by envisaging that should the director act contrary to the foregoing, the benefits of such actions of his/hers shall be transferred to the company in the proceedings initiated by a lawsuit.

Keeping business secrets; this duty is regulated by provisions of Article 72 of the Law which prescribe that the director is primarily required to keep the company’s business secrets. More precisely, the duty of keeping a business secret can be regulated by the company’s founding acts and other policies. This duty remains in force for as much as two years after cessation of such duty, but the company may specify the duration of such obligation to be up to 5 years after the cessation of director’s term in its founding act, statute, decision or a contract concluded with the director.

The Law also defines the term “business secret”. Business secret is any data whose disclosure to a third party could cause harm to the company as well as any data that have or may have economic value by the very fact that they are unknown to the general public and are not easily accessible to third parties but the use or disclosure of which could create economic benefit and which are protected by the company by means of adequate measures put in place to safeguard their confidential nature. In this regard, data may refer to any production, technical, technological, financial or commercial information, studies, research results or documents, formulas, drawings, objects, methods, procedures, notifications or instructions of internal nature and similar.

Director shall be relieved of the duty to keep business secrets if the duty of disclosure is prescribed by law, when the interests and operations of the company require disclosure but also when the reporting of the offence punishable by law requires disclosure of business data to competent bodies or the general public.

Adherence to the prohibition of competition: this duty is regulated by Article 75 of the Law which prescribes that the director is not allowed, without approval of the company’s competent body, to (i) hold the position of a partner and a general partner, member of a limited liability company with significant share in company’s fixed capital or a member of a limited liability company who is the controlling member of the company, shareholder with significant share in company’s fixed capital or shareholder who is a controlling shareholder of the company, member of the supervisory body, legal representative, proxy in another company that carries out the same or similar business activity (hereinafter: “competing entity”); (ii) be an entrepreneur carrying out the same or similar business activity; (iii) be employed by the competing entity; (iv) be hired by the competing entity in any other way; (v) be a member or a founder in another legal entity which carries out the same or similar business activity.

Namely, the term “is not allowed to” is used in the wording of the Law to refer to performance of duties in another company which carries out the same or similar business activity but also prescribes that it would require an approval (prior and not subsequent) and also prohibits the holding of the same capacity after expiry of director’s term in accordance with the founding act but for no more than two years, it being understood that naturally such prohibition shall not apply to the sole member of the company.”

Generally speaking, the Company Law defines five special duties to be performed by the director of a company by outlining a clearer picture in Articles 61 to 80 about the content of each duty, without omitting to specify the intention that the legislative body has in sanctioning any violations of duties and the responses available to the company in case the director acts contrary to law.

Attorney at law Stefan Mojsic

The information contained herein has been provided only for the purpose of general information and cannot be considered as a legal opinion or legal advice. Accordingly, the Law Firm Petrović Mojsić & Partners disclaims all responsibility and accept no liability in respect to actions taken or not taken based on any or all the contents contained herein.