Share “options” in LLCs
How to issue a “financial instrument” from an LLC’s reserved company share?
Starting on April 1, 2020 – limited liability companies, as the most common legal entity form in Serbian economy (hereinafter: “LLC or LLCs”), can offer to third parties (including their own employees) to issue a law regulated “option” i.e. right to acquire share in the LLC itself.
Following the amendments of the Law on companies from December 24 2019 , two new complementary institutes were introduced (“reserved own share” and “financial instrument – right to acquire share”) that essentially imitate “stock option” mechanism effects.
The process itself entails enacting a decision on forming so called “reserved own share” (hereinafter: “ROS”) as well as issuing financial instruments called “right to acquire share” (hereinafter: “RAS”) to third parties/employs (which may eventually lead to registering new members based on RAS activation).
The whole process requires involvement of the Serbian Business Registers Agency (hereinafter: “SBRA”) as well as Central securities depositary and clearing house (hereinafter: “CSDCH”). Simplified scheme of acquiring company share in this manner looks as presented below:
Company’s General Assembly enacts the decision on forming (one or more) ROS from payed-in capital. Percentage of all ROS issued in the company’s share capital may not exceed 40%.
Company’s General Assembly (or another corporate body, authorized under the company’s founding document) enacts the decision on issuing RAS. This decision contains following information:
• number of RAS formed;
• ROS from which RAS are issued;
• data on persons acquiring RAS;
• ROS share percentage which RAS holder may acquire;
• share price which RAS holder shall pay to the company and payment maturity info;
• RAS issuance and due date;
• conditions under which each RAS can be annulled prior to its due date.
ROS is registered with SBRA, while each RAS is inscribed and registered with CSDCH .
Share price maturity date may be set within 15 to 30 days as of the RAS due date. Every RAS issued within the same emission is due on the same date, and shall have identical share price and maturity terms.
Missing the payment deadline is a reason for annulling RAS. The share price may be set even as 1 RSD.
Converting rights from RAS to share ownership – closing formalities with SBRA and CSDCH.
Procedure is finished.
In terms of implementation - SBRA and CSDCH bylaws regulating “procedural” issues related to ROS and RAS are still pending. Having in mind the current COVID 19 situation and the state of emergency currently in force in the Republic of Serbia, it is unclear if these bylaws will be passed by April 1, 2020.
In terms of tax treatment, any transfer of LLC’s share to its employee made free of charge (or at preferential price) will be treated as an income for the employee. However, tax exemption rules apply :
• if the employee does not transfer the share within two years from the moment of acquisition of said share;
• if the employer or person affiliated does not buy-back said share from the employee; and
• if the employee does not terminate the employment within two years from the moment of acquisition of said share, with exception of the termination of employment independently from the will of the employee and that of the employer.