New Year, New Financial Instrument and Old Idea – Granting Equity as Incentive

New Year, New Financial Instrument and Old Idea – Granting Equity as Incentive

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As with each year, December was one of the busiest months and the Serbian Parliament was especially industrious. The aforementioned resulted in adoption of a very welcome set of amendments to the Serbia’s Company Act by the Serbian Parliament.

The amendments have formally been introduced by the Act on Amendments to the Company Act on 23 December 2019. They are aimed at finally creating a possibility for LLC companies (by far the most frequent company form in Serbia) to incentivize employees and other persons vested in the company business by giving them an option to acquire shares of the company.

Of course, the idea is all but brand new. The principle of granting equity as an incentive has been used for a number of decades now, and has especially flourished in late 1990s during the dot-com boom. And as back then in the US, today in Serbia seemingly the most benefit of granting equity as an incentive will be reaped by tech startups and information technologies companies.

Formally, the procedure of granting equity to employees enrolls one or more shareholders transferring a part of their respective shares of the company, to the company, free of charge. Those shares held by the company are known as the “reserved own share”. After the company has obtained the “reserved own share”, a decision on the issuance of the financial instrument is adopted to which the “reserved own share” relates. The newly formed financial instrument – “right to acquire a share” is defined as a nontransferable financial instrument issued by the LLC, providing the beneficiary the right to acquire the share under terms and conditions agreed upon with the company.

When you consider how beneficial accepting equity as an incentive for certain individuals was, it is easy to get excited. Just as an example, in 2013 during Twitter’s IPO the previous Twitter executive Ali Rowghani exercised 300,000 stock options at 84 cents each, and sold the shares for $33.76 per share, resulting in a $9.9 million profit.

However, if not structured correctly, equity may have downsides both for the company and for the individual who is being incentivized.

In the past, there were many allegations of abuse of these incentive schemes by various unethical companies, and moreover, there is obvious room for misuse of rights derived from a share in a company by a dissatisfied individual. Therefore, it is well advised to comprehensively structure any scheme that enlists granting equity in a company to individuals, well before such scheme has been implemented by a company.

With respect to the amendments to the Company Act discussed above, most of the implemented changes will take effect as of 1 April 2020, which should provide sufficient time for competent bodies to further work on the framework for complete implementation of the novelties introduced by the amendments.

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milos Velimirovic, Partner, and Milan Novakov, Senior Associate, Samardzic, Oreski & Grbovic