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Making of the New Montenegrin Law on Business Organizations – Expected Positive Effects

Making of the New Montenegrin Law on Business Organizations – Expected Positive Effects

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Long and costly court procedures resulting in enforceable verdicts remain the norm in Dispute Resolution in Montenegro.

Arbitration and Mediation have so far not shown significant practical relevance, despite the results expected from the adoption of the country’s 2015 Law on Arbitration and 2012 Law on Mediation. Court settlement, as yet another mechanism of Dispute Resolution, is rarely opted for in practice. This rigid tradition in Montenegrin Dispute Resolution practice has complex origins; nonetheless, the improvement of legal solutions offered by procedural and substantive laws should remain a priority. In that regard, our attention shall be focused on the Dispute Resolution practice established under the Law on Business Organizations (“LBO”), as well as the advancements reflected in the draft LBO adopted by the Montenegrin Government on July 6, 2017 (the “Draft LBO”).

The application of the LBO has revealed its numerous shortcomings, out of which we single out only a few. Provisions related to the court protection of minority shareholders’ rights applicable to the protection of members of a limited liability company (“LTD”), are sublimated in a single general and incoherent article of the LBO. This article simultaneously regulates both direct (individual and collective) and derivative shareholder lawsuits as an instrument of court protection, failing, however, to carefully define the specific grounds required for the submission of such lawsuits. The LBO guarantees shareholders’ elementary non-property rights, such as the right to be informed of the company’s business activities and to appoint an independent expert to review the company’s business activities on their behalf. At the same time, it fails to provide for an adequate urgent court procedure for the enforcement of those rights. Although the majority of start-ups are founded in the form of an LTD due to its efficient establishment procedure, low mandatory initial capital requirement (only EUR 1), and simpler managing body structure, the LBO has insufficiently treated specific features of this type of a company. Instead, for all LTD-related matters which have not been directly regulated, it calls for the application of provisions related to joint-stock companies. The LBO offers no clear solution for the decision-making deadlock issues occurring in LTDs where the distribution of owners’ shares enables such a scenario.

On the other hand, the Draft LBO eliminates these weaknesses. It provides clear provisions defining under which specific grounds and which type of lawsuit a shareholder and/or a company may file against company management and its managing bodies. Additionally, it provides a clearer definition of the obligations of persons owing special duties toward the company (such as management executives, shareholders with significant participation in capital, and so on). Breaches of such obligations and duties allow both the company and the shareholders to file lawsuits due to the violation of due diligence and/or rules of sound business decision making, infringement of the non-compete clause, duty to keep business secrets, and so on. For the first time, the Draft LBO elaborates the concept of a “Related Party.” In the future, some essential shareholder rights – such as the “right-to-be informed” and to review the company’s business activities – can be claimed by the shareholders/members in urgent extra-litigious proceedings and decided upon within eight days from the submission of the motion to the court. The Draft LBO also elaborates on the specific features of LTDs. It introduces the Assembly as a mandatory body, to an extent simplifies the decision-making procedure, and stipulates that an LTD’s Articles of Association must contain provisions regulating the manner of resolution of shareholder disputes. Furthermore, it provides for a special court procedure allowing members of an LTD to exclude a certain member from the company upon appropriate grounds. This model may serve to resolve prospective deadlock issues.

The Draft LBO announces that the new LBO should improve the degree of legal security in resolving disputes originating from the application of the LBO. A positive impact is also expected in the area of creating a safer business environment, while more precise rules and sanctions applicable to specific violations will have a positive effect on dispute prevention. Therefore, we look forward eagerly to the making of a new Montenegrin LBO.

By Dragan Prelevic, Managing Partner, and Gorjana Lekovic, Attorney at Law, Prelevic Law Firm

This Article was originally published in Issue 4.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.