Silent existence of joint-stock companies in Serbia

When we talk about joint stock companies (“JSC”), the first association would be that it is a typical business corporation. However, let’s try to be more precise and define a joint-stock company as a company whose basic capital is divided into stocks, owned by one or more stockholders whose liability is limited, and which are not responsible for the company’s obligations.

This definition reflects the specificity of joint-stock companies, i.e. the fact that in its establishment, operating and termination, the corporate element is dominant rather than individual (it is separated from stockholders), i.e. for the existence of JSC, it is absolutely unimportant who are the stockholders. Therefore, if the stockholder dies (if it is a natural person) or it cease to exist (if it is a legal person), or the sale of stocks, i.e. the transfer of a share, the replacement of stockholder is only carried out. Also, when we talk about JSC, we point out that there are public (according to the previous act – open companies) joint-stock companies whose stocks are included in trading on the regulated market, i.e. MTP[1] in the sense of the law regulating the capital market, and joint-stock companies that, according to their ownership, are structures of a “private” character (according to the previous act – closed companies). In the following text, we will refer only to the provisions on public joint-stock companies, since they are the most common legal form of joint-stock companies in practice.

Q: Today in the Republic of Serbia, only about 1% of all active legal entities operate in the form of joint stock companies, so the actual situation seen in this way inevitably raises the question of why there are no more of them?

We can first find the answer to this question by analyzing currently active joint-stock companies, i.e. by looking at what kind of economic activity they are engaged in, which leads us to the conclusion that it is mostly a bank-centric and broker-dealer system, as well as insurance companies, and that the rest operate in the form of joint-stock companies only as a result of privatization and in small numbers as non-public (closed) joint-stock companies. When we take a look at all of this through the prism of imperative regulations in the field of capital markets, insurance and banking operations, which prescribe this form as mandatory, this means that in practice those companies that are required by the law to be established in this form mostly operate in the form of JSC. On the other hand, the privatization procedure forced the privatized companies to be in the form of open joint-stock companies. If it were not for regulations that oblige individual companies to be organized in the form of a joint-stock company, the number of open joint stock companies in the Republic of Serbia would be drastically lower, or there would be an extremely small number of closed joint-stock companies.

Q: Benefits and Drawbacks of JSC?

Characteristics of a public (open) joint stock-company are that they:

  • can have an unlimited number of stockholders;
  • may issue stocks on the securities market through a public offering or in any other public way;
  • may not introduce restrictions on the circulation of its shares through their founding act or bylaws;
  • can never change its founding act;
  • can never reduce its share capital below the legal minimum (except exceptionally and for a short-term period, provided that the company simultaneously increases its share capital, so that it does not fall below the legal minimum);
  • has the obligation to report to the public, the Securities Commission, as well as the Commercial Register on all important business and financial events;

Based on the above set foundation about the public joint-stock companies, we can point out their greatest advantages, which are:

  1. access to investors
  2. durability of business
  3. limited liability for stockholdersfree transferability of stocks
  4. free transferability of stocks
  5. centralized management
  6. the ability to increase capital through a public call
  7. risk limitation for shareholders

Perhaps the biggest advantage of public joint-stock companies is the obligation to publish information and transparency of their business, which aims to protect investors and to build and preserve business ethics and conscientious performance of economic activity.

This obligation means that the organization and practice of corporate governance must ensure accurate and timely provision of information on financial goals, business strategy, ownership structure, business risk assessment, information on employees and other relevant data.

In terms of business transparency, the key source of these obligations of JSC is primarily the Capital Market Act, but it should also be mentioned that our legislation adopts the best practice recommendations defined by the European Union directive, namely Directive 2004/109 and its amendments, the provisions of which regulate the publication information, which is also reflected in the articles of the Capital Market Act.

On the other hand, this same transparency is also one of the disadvantages of joint stock companies, because they have the obligation to submit data, documents and financial reports. In addition, the establishment of a joint-stock company requires strict administrative formalities, as well as great legal and other costs, and as far as tax treatment is concerned, these companies are subject to double-taxation. In addition, the business of a JSC requires a complex organizational structure, constant compliance with reporting regulations, professional management, etc., and they cannot reduce the share capital below the legal minimum.

One of the reasons why only 1% of business entities in the Republic of Serbia operate in the form of joint-stock companies is probably the fact that the establishment of a joint-stock company is more complicated than the establishment of a limited liability company (“LLC“). In this regard, we will look at the establishment procedure of JSC, in relation to the procedure for establishing of an LLC, in order to see the procedure for establishing these legal entities on practical and most common examples, which may further lead us to the cause of the current situation, i.e. to the answer to why legal entities more often opt for the legal form of a limited liability company, and whether it will ultimately lead to their imperceptible disappearance in the future.

Q: JSC vs. LLC?

What is common in the procedures for establishing a joint-stock company and LLC is that they can be established by both domestic and foreign legal and natural persons (founders).

However, the key differences between JSC and LLC relate to the minimum amount of founding capital, corporate bylaws, and the complexity of establishment and management.

Also, additional differences are:

  • stockholders have the right to participate in the profits of the company in the form of dividends when a decision is made to distribute dividends, in proportion to the value of the shares it owns, and in this respect the “dividend day” is scheduled;
  • stockholders’ day must be held in JSC;
  • JSC has executive and non-executive directors, i.e. an independent director;
  • stockholders have no other obligations towards the company, apart from the obligation to pay, as determined, the initial price of all the stocks they subscribed to;
  • JSC is subject to audit;
  • JSC is obliged to publish information on financial goals, business strategy, ownership structure, business risk assessment and other relevant data;
  • if JSC has three or more directors, a Board of Directors must be formed.

The Companies Act stipulates that a JSC must have a minimum share capital of RSD 3,000,000, and at least 25% of the share capital must be paid before the company’s registration.

On the other hand, for the establishment of a LLC, the basic share capital of the company is at least RSD 100, and it can be paid within 5 years from the date of company registration, unless the law stipulates a larger amount of basic capital for companies that perform certain activities.

When we look at these financial facts, we can definitely spot one of the most common reasons why there are more companies established in the form of a limited liability company, rather than in the form of joint-stock company.

Furthermore, unlike a joint-stock company, which must have a Corporate Charter, an LLC is exempt from that obligation.

When it comes to the complexity in establishment of companies, in the case of a limited liability company, the procedure in most cases ends at first step, i.e., before the Serbian Business Registers Agency, with some exceptions when it is possible to register a limited liability company, but the conduct of business activity is conditional and depends on previously obtained permit(s).

However, when it comes to a joint-stock company, before submitting the registration application for the establishment of the company to the Serbian Business Registers Agency, it is necessary to obtain a certificate from the credit institution about the paid in shares, i.e. an appraisal made by an authorized appraiser of the value of the in-kind contribution or a certificate from the competent authority on the appraisal of the value of the in-kind contribution in accordance with the law.

Summa summarum

Significant differences exist even after the establishment of one or another legal form of the company, which is reflected in both the financial and administrative sense, bearing in mind that JSCs are subject to extremely strict administrative procedures, that is, their establishment is neither cheap nor simple, which for LLCs is not the case.

As the effective cost of managing a LLC is much lower than managing a JSC, the current market situation undoubtedly only faithfully reflects the supply and demand relationship, i.e., it is far simpler for the founders to operate more often in the form of a limited liability company than in the form of a joint-stock company.

However, in the long run, joint-stock companies, precisely because of their transparency and complexity, and the business scrutiny to which they are subject to, bring much more of a reputational factor compared to LLC’s. This is especially reflected in a situation where the stocks are listed on the stock exchange, and moreover if there are subject to trading.

On the other hand, joint-stock companies are often established in countries with more developed economies and stock exchanges, where the movement of capital is more frequent and extensive. On the market of the Republic of Serbia, joint-stock companies, excluding banks and insurance companies, still represent a kind of the avant-garde, and the tendency of stagnation in terms of the number of these companies is something that is a reality.

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Kristina Zejak

Senior Associate