When establishing a limited liability company (LLC), business owners often focus on ownership structure, business investment, and operational management. However, one critical aspect that is sometimes overlooked but can have significant long-term implications are relationships between LLC shareholders, which play a crucial role in corporate governance. While LLCs provide significant flexibility in structuring ownership and governance, minority shareholders often face challenges in protecting their rights and interests.
Recognizing this importance, the Serbian legislator has repeatedly strengthened the position of minority shareholders. In both 2018 and 2021, legislative amendments focused on expanding their rights, ensuring greater protection against potential abuses by majority shareholders. Each time the Company Law was revised, additional safeguards were introduced to enhance minority protections, reflecting a clear trend toward balancing power within LLCs.
Maximising Minority Shareholder Rights from Day One
While statutory protection continues to improve, one of the most effective ways to regulate minority rights is through Articles of Association and Shareholders’ Agreement (SHA). By defining voting rights, access to information, dispute resolution mechanisms, and exit strategies, such an agreement ensures that minority shareholders are not left vulnerable. Addressing these issues at the very start of the business relationship minimizes future conflicts and creates a stable foundation for corporate governance.
In addition to the elements that are mandatorily prescribed by law, the founding act may include optional clauses that fall within the domain of contractual freedom. These optional provisions are particularly important for regulating relations among shareholders, or between shareholders and the company, in a manner that deviates from statutory defaults. Moreover, since the founding act is publicly available and registered with the Business Registers Agency, all third parties can easily access and familiarize themselves with its content. This transparency is fundamental to legal certainty and the prevention of information asymmetry in commercial transactions.
However, the public nature of the Articles of Association also constitutes one of its main drawbacks. In practice, shareholders are often reluctant to disclose the internal structuring of their relations, especially concerning sensitive matters such as voting arrangements at general meetings, proportionality of capital contributions and voting rights, or special decision-making thresholds. To address these concerns, Serbian law allows shareholders to conclude a SHA, which is not subject to registration and remains confidential between the contracting parties.
Who Are Minority Shareholders?
Minority shareholders are individuals or legal entities that hold a smaller percentage of ownership in an LLC, typically less than 20% and less of the total shares. Their influence on decision-making is limited due to their inability to control the majority vote at the general assembly.
Shareholder rights in an LLC primarily include the right to vote at the general assembly, the right to participate in profit distribution, and the right to share in the liquidation surplus. These rights are generally proportional to the shareholder’s interest in the company’s capital, unless otherwise stipulated in the Articles of Association.
Fiduciary Gray Zone: Can Minority Shareholders Be Held to the Same Standard?
Under Serbian company law, fiduciary duties in a LLC automatically apply only to shareholders who either control the company or hold a “significant participation,” defined as more than 25% of the voting rights. Those below that threshold are, as a rule, spared obligations such as non-competition, confidentiality, and proactive disclosure of conflicts of interest.
The position shifts, however, once the Articles of Association or Statute expressly designate additional shareholders as duty-bearers. When the founding documents so provide, even minority shareholders must respect the same loyalty standards –avoiding competition with the company, protecting trade secrets, and reporting any personal-interest transactions. In short, well-drafted corporate documents can level the fiduciary playing field, extending core protection to the company regardless of ownership size.
Access to Corporate Documents – A Right of All Shareholders, Regardless of Ownership Percentage
All shareholders, regardless of the percentage of their ownership in the company’s share capital, have a statutory right to access the company’s documents and records. This right may be exercised by submitting a written request to the company, which must include the shareholder’s identification details, a specification of the documents or data being requested, the purpose of the request, and, if applicable, information about any third parties to whom the shareholder intends to disclose the obtained information.
The company may refuse access to specific documents only in accordance with the limitations prescribed by law for the relevant corporate form. If the company fails to comply within eight days of receiving the request, the shareholder may petition the competent court to order disclosure, which is treated as urgent. As minority shareholders are removed from the company’s daily operations and not needed for every strategic decision, this mechanism keeps them fully appraising all corporate developments.
A Voice That Matters: Minority Shareholders’ Voting Rights and Protective Mechanisms
The default rule is that each shareholder’s voting power corresponds to the nominal value of their share. However, the Articles of Association may deviate from this principle, as long as it does not deprive a shareholder of their right to vote altogether. This ensures that even where contractual flexibility is exercised, the essential right of participation in company governance remains preserved.
Another important statutory mechanism is the ability of minority shareholders to convene general meetings and propose agenda items. Under Serbian law, shareholders holding at least 10% of the share capital may request that the director convene a general meeting. If the director fails to act within the prescribed timeframe, those shareholders may convene the meeting themselves.
Moreover, Articles of Association may grant the right to place additional items on the agenda of the general assembly not only to shareholders holding at least 5% of the capital, as provided by law, but also to those holding a smaller interest, thus strengthening minority rights beyond statutory minimums.
As for decision-making, the general assembly typically adopts resolutions by a simple majority of the votes of shareholders present and entitled to vote. For certain key corporate matters, such as changes in capital, status changes, bankruptcy, or liquidation, a two-thirds majority of the total voting rights are required. However, the Articles of Association may set a different threshold, provided there are not less than a simple majority of all voting rights. This allows for tailored internal governance arrangements in line with the company’s needs. So, the Company Law strengthens the position of minority shareholders through mandatory qualified majority voting requirements for certain decisions. Such provisions are crucial because they ensure that minority shareholders cannot be forced into fundamental changes to the corporate structure without their consent. On the other hand, if they do not agree, they have a special right to exit the company (see below).
Importantly, shareholders are restricted from voting in certain situations where conflicts of interest may arise. A shareholder may not vote on resolutions relating to their own release from obligations to the company, their exclusion, the initiation or withdrawal of proceedings against them, the approval of transactions with the company, or other cases provided by law or the founding act.
This legal framework ensures a balance between safeguarding minority rights and allowing flexibility through contractual arrangements, while maintaining the integrity of core decision-making processes within the company.
Judicial protection of the minority shareholders
Another key protective mechanism available to minority shareholders under Serbian corporate law is the derivative lawsuit. This legal remedy allows shareholders to initiate litigation in the name and interest of the company when the company itself fails to act against directors or third parties whose conduct has harmed the company.
Shareholders may file a derivative lawsuit if, at the time of filing, they hold at least 5% of the company’s share capital, regardless of whether the grounds for the lawsuit arose before or after acquiring the shares. As a prerequisite, shareholders must first submit a written request to the company to pursue the claim itself. If the company rejects the request or fails to act within 30 days, shareholders acquire standing to proceed with the claim independently.
Minority Shareholders’ Power: Understanding the Right to Liquidate a Company
The rights of minority shareholders, i.e., those holding non-controlling stakes in a company, can be particularly significant, especially in situations where the company is operating in a manner that does not satisfy their interests or when there are serious disagreements among shareholders. One of the key rights granted to minority shareholders under the law is the right to request the liquidation of the company.
This right, although not automatic or unconditional, can be exercised in certain circumstances. Shareholders holding at least 20% of the company’s share capital are entitled to bring an action before the competent court seeking dissolution of the company or other remedial measures. This is a highly exceptional remedy, and the law provides a narrow and clearly defined set of circumstances under which it may be granted. The court may only order the liquidation of the company (or impose alternative measures) if it finds that:
1. The board of directors or, in the case of a dual-board system, the executive and supervisory boards, are unable to manage the company due to internal conflict or other reasons, and the shareholders’ assembly is unable to overcome the deadlock, resulting in an inability to manage the company in the interest of the shareholders.
2. There is a deadlock in decision-making at the shareholders’ meeting, lasting at least two consecutive sessions, which prevents the company from operating in its best interest.
3. The directors or supervisory board members (in a two-tier system) have acted unlawfully, dishonestly, or fraudulently, and contrary to the interests of the shareholders bringing the action.
4. The company’s assets are being dissipated or diminished.
Even in such cases, the court is not obliged to order the company’s liquidation. The court has discretion to impose alternative measures that could remedy the dysfunction without resorting to full dissolution. These might include the appointment of a temporary manager, changes in governance rules, or, in some cases, compelling the company or majority shareholders to buy out the minority stake under fair conditions.
In addition to the right of minority shareholders to request liquidation of the company, it is important to note that the court is not obligated to automatically approve such a request. The court has discretion and may choose to reject the request for liquidation. Instead of granting liquidation, the court may impose other measures to address the issues raised by the minority shareholders.
Therefore, while minority shareholders have the right to request liquidation, the court has several options at its disposal to address the situation in a way that may better serve the overall interests of the company and its stakeholders. The decision to liquidate is not automatic and may be influenced by a variety of factors, including the potential impact on the company’s operations and the viability of alternative solutions.
For that reason, having a well-drafted Shareholders’ Agreement is indispensable whenever more than one shareholder holds equity. First, it allows the parties to prescribe exit and buy-out options, such as drag-along, tag-along, or call/put arrangements, that offer viable alternatives to the costly and protracted route of liquidation. Second, by predetermining dispute-resolution procedures and decision-making thresholds, the agreement provides a fast-track mechanism for ironing out conflicts before they escalate, thereby safeguarding both the company’s continuity and shareholder value.
Protection of Dissenting Shareholders in an LLC: The Right to Request Buyout
Although primarily regulated for joint-stock companies, the Serbian Company Law allows for the mutatis mutandis application of dissenters’ rights to LLCs, unless otherwise specified in the Articles of Association. This gives shareholders of an LLC a valuable protective mechanism when key decisions are made without their support.
A shareholder who votes against or abstains from voting on certain significant decisions, such as changes to the company’s legal form, status changes, amendments to the founding act that affect shareholder rights, approval of major transactions, or other actions explicitly covered in the Articles of Association, may request the company to repurchase their share. If the company does not fulfill this obligation, the dissenting shareholder may seek judicial protection. The court may award the full or remaining value of the share, and any such judgment benefits all dissenting shareholders of the same class, even those who did not file a claim.
This right ensures that shareholders who disagree with transformative changes are not forced to stay in a company whose direction they fundamentally oppose. It is an essential safeguard for minority shareholders, offering a structured and fair exit route in moments of corporate divergence. Once again, the Shareholders’ Agreement presents a golden opportunity to lock in alternative terms and contingency options from the outset.
Protect Your Interests: Why a Well-Drafted Shareholders Agreement is Essential for Your Business
Another area of significance is the shareholders’ agreement, which may be used to define or expand minority rights beyond the statutory minimum. Serbian law permits shareholders to enter into agreements that regulate mutual rights and obligations, provided such agreements do not contravene the law or the founding act. Through a shareholders’ agreement, minority shareholders, and indeed all other members, can secure added protections such as enhanced veto rights, reserved matters, special approval procedures, or tag-along rights upon a majority share transfer, creating a balanced framework that prevents decision-making deadlocks rather than serving only the minority. However, while shareholders’ agreements are binding between the parties, they are not opposed to the company unless incorporated into the founding act. Therefore, it is prudent to align the shareholders’ agreement with the company’s internal governance documents whenever possible.
It is important to note, however, that there are limits to what shareholders’ agreements can achieve. They cannot override the mandatory provisions of the Law on Companies. For example, the right to access information cannot be restricted. Also, minority shareholders cannot be deprived of their statutory right to convene a shareholders’ meeting. Furthermore, exit rights in the context of structural changes cannot be waived. These safeguards ensure that even in the absence of a shareholders’ agreement, the legal framework provides a baseline level of protection for minority shareholders.
Although the statutory framework in Serbia is relatively robust, practical challenges remain. Minority shareholders must be vigilant in asserting their rights and, where possible, negotiating additional contractual protections. In closely held companies, the risk of exclusion, oppression, or dilution is significantly higher, and minority shareholders should insist on comprehensive shareholders’ agreements that reflect their expectations and mitigate those risks.
