Corporate governance, relations between members and corporate transformations

A member of a d.o.o. holds a business interest and exercises membership rights on that basis. The member does not directly own the company's real estate, money or other assets. Those assets belong to the company as a separate legal entity, even where it has only one member.

Members exercise their governance rights by deciding matters reserved for the general meeting. The management board conducts the company's day-to-day affairs, organises operations, implements members' decisions and is responsible for legal compliance.

The management board of a d.o.o. acts in accordance with the articles of association, members' resolutions and binding instructions of the general meeting and, where applicable, the supervisory board. An instruction does not release a director from personal responsibility, and an unlawful instruction may not be implemented.

External and internal authority

Representation is the authority to undertake legal actions on behalf of the company. The method of representation is entered in the court register and can be independent or collective.

An internal rule may require members' prior consent for borrowing, investment or disposal of real estate. Where the director has individual authority to represent the company according to the court register, the absence of internal consent generally does not affect the contract's effect on a third party. The director may nevertheless be liable to the company for the breach.

The articles of association, registered method of representation, banking authority and internal approval rules should therefore form a coherent system.

The general meeting decides on annual financial statements, distribution of profit and coverage of losses, appointment and removal of management and supervisory-board members, amendments to the articles of association, capital, commercial powers of attorney and other matters reserved by law or the articles of association.

Decisions on financial statements, profit, loss and discharge must be made in the first eight months of the business year. It is not necessary to always hold a physical meeting: decisions can also be made in writing, in addition to the prescribed requirements.

Convening, majority and conflict of interest

The notice and agenda must allow members to participate effectively. A general meeting should be convened whenever the company's interests require it, particularly where a loss equal to half of the share capital is identified. Members jointly holding at least one tenth of the capital may also request that a meeting be convened, unless the articles of association set a lower threshold.

As a rule, decisions are made by a majority of the votes cast, while at least a three-quarters majority is usually required to amend the articles of association. A member may not vote on a special benefit for that member, the release of an obligation or a legal transaction or dispute between the member and the company.

Resolutions should be recorded without delay in the book of resolutions. Certain resolutions require a notarial form and entry in the court register.

Reserved questions

The articles of association may reserve specified matters for an enhanced majority: the business plan, major investments, borrowing, guarantees, sale of key assets, related-party transactions or a change of activity. The list should protect investors without turning day-to-day operations into a permanent deadlock.

A management-board member is more than an authorised signatory. They must conduct the company’s affairs with the due care of a prudent businessperson, in the company’s interest and on the basis of adequate information. Liability does not arise merely because a reasonable business decision produced an unfavourable result, but may arise from a breach of duty.

Where there are several directors, their decision-making, allocation of responsibilities and mutual reporting should be regulated. An internal division of functions does not release a director from the duty to respond to a serious irregularity of which they knew or ought to have known.

An orderly decision-making process

• collect relevant financial, legal and business information
• consider realistic possibilities, risks and financial consequences
• determine and resolve conflicts of interest
• obtain an expert assessment for a complex or unusual job
• record the reasons, separate opinions and the decision made
• monitor the implementation of the decision and the change in circumstances

Legality and financial difficulties

Management must organise accounting, tax compliance, employment relations, data protection, permits, contractual deadlines, internal controls and liquidity monitoring. External experts may perform individual tasks, but management retains responsibility for organisation and oversight.

When a reason for bankruptcy arises, the person authorised for representation must submit a proposal for opening bankruptcy without delay, and no later than within 21 days. Delayed reaction can lead to personal liability for damages.

Supervisory Board

The supervisory board oversees the management board, reviews documents, requests reports and reports to the general meeting. It does not manage the company’s affairs. The articles of association may require its prior consent for specified transactions.

In a d.o.o., a supervisory board may be established voluntarily, but is mandatory in certain cases, including where statutory thresholds or special regulations apply or because of the company's position within a group. The requirements should be checked against the company's actual structure.

Commercial power of attorney (prokura)

Prokura is a broad commercial power of attorney with statutorily defined content. It is granted in writing and entered in the court register and may be individual or joint. A procurator represents the company but is not a management-board member and does not assume responsibility for managing its affairs merely by holding prokura.

Without special authorisation, a procurator cannot dispose of or encumber real estate or take certain actions connected with dissolution of the company. Prokura cannot be transferred. The company may revoke it at any time; termination should be entered in the court register promptly and related banking and digital access withdrawn.

Other powers of attorney

Commercial or special power of attorney is given for a narrow range of business. The scope, the maximum amount, the duration, the possibility of signing and the method of revocation should be clearly defined. A bank power of attorney is not the same as a corporate power of attorney.

The articles of association govern the corporate structure and bind the company and its members. A members' agreement is a separate, generally non-public contract in which its parties regulate their mutual relationship in greater detail.

A members' agreement does not by itself change the powers of the company's bodies or automatically invalidate a resolution of the general meeting. Provisions intended to operate at corporate level, bind future members or bind the company should, where permitted, also be included in the articles of association.

Matters worth regulating

• business roles, management appointment and regular reporting
• reserved issues and protection of the minority member
• additional financing and profit payout policy
• transfer of business interests, right of first refusal and entry of a new member
• tag-along and drag-along rights
• confidentiality, non-competition and intellectual property
• related party affairs and conflict of interest management
• decision-making deadlock, exit and business-interest valuation

An obligation to transfer a business interest in the future is subject to the prescribed notarial form. By acceding to the articles of association, a new member does not automatically become a party to the members' agreement, so accession to that agreement must be regulated separately.

Before each payment, it should be clearly determined whether the money is given as capital, additional payment, loan or compensation for a specific good, service or right. The choice affects ownership, recoverability, tax position and creditor rights.

Capital, profit and loans

Capital increase strengthens own resources and can change ownership ratios. Additional payments, if stipulated by the articles of association, do not increase the share capital. Retained earnings finance development without new debt or change of ownership.

A member's loan creates a claim against the company and must have clearly defined terms. If, in a crisis, it is granted in place of capital that a prudent businessperson would have provided, it may be treated as a capital-replacing loan and rank lower in bankruptcy.

Tax rates, recognition of interest, withholding tax and transfer prices should be checked on the date of the transaction. The guide does not start from the assumption that every formally concluded loan is tax neutral.

Related parties and market conditions

Loans, leases, transfers of assets, services, licences, guarantees and distribution of costs between related persons are permitted when they have a real business purpose, clear documentation and conditions comparable to market conditions.

The interested person should disclose the conflict and take no part in approving the transaction on behalf of the company. For a significant transaction, a decision by disinterested members or the supervisory board, an independent valuation and evidence of actual performance are useful safeguards.

A transfer of value to a member without adequate consideration may constitute an impermissible payment and give rise to an obligation to repay, management liability and tax consequences.

Transfer of business share

A business share can be sold or gifted, but the articles of association may require consent, a prior offer or respect for the right of first refusal. Member contracts, financial agreements, liens and regulatory restrictions should also be reviewed.

Both the transfer agreement and an agreement creating an obligation to transfer in the future must be executed as a notarial deed or a solemnised private document. Following the transfer, the register of business interests, list of members, court register, Register of Beneficial Owners and other relevant records must be updated.

A buyer of a business interest enters an existing company with all its contracts, assets, liabilities and historic risks. A legal, financial and tax due-diligence review should therefore precede the transaction.

Foreign investor

As a rule, a foreign person may acquire a business interest. Prior foreign-investment screening is not required for every transaction, but may apply to investments and entities covered by special legislation, particularly where a qualifying interest or control is acquired in a relevant sector. Merger control, regulated activities, sanctions and source of funds must be considered separately.

Inheritance and continuity

The business share is included in the estate. Several heirs exercise rights from the same share jointly, which can make it difficult to decide. The articles of association can regulate the obligation to transfer the inherited share, the method of determining the value and the payment deadline.

The death of a member who is also the sole director may leave the company without an authorised representative. Continuity should be addressed by coordinating management arrangements, powers of attorney, testamentary planning, members’ agreements and possible financing of a buy-out.

Pledge and enforcement

A business interest may be pledged. The pledge agreement requires a notarial deed or solemnised private document, and the pledge is recorded in the list of members and notified to the registry court. The pledge alone does not make the creditor a member of the company.

A member's creditor may seek enforcement on the business share. The transfer restriction in the articles of association does not provide absolute protection against forced sale, so members should arrange the obligation of timely notification of liens, foreclosures and other personal risks that can change ownership.

Capital increase

Capital is increased in order to finance development, entry of investors, strengthening the balance sheet or fulfilling a regulatory requirement. The decision changes the articles of association and, as a rule, requires at least a three-quarter majority of the votes cast, unless the contract stipulates more.

The increase can be carried out with money, things and rights, by converting the corresponding claim into capital or from reserves and profits. The conversion of a loan does not occur by simple posting, but requires appropriate corporate decisions and verification of the existence and value of the claim.

Existing members are protected from dilution by pre-emption rights, unless lawfully restricted or excluded. On admission of an investor, the company's value, investment amount, resulting ownership proportions and governance rights should be agreed separately.

Capital reduction

The capital can be reduced for the purpose of covering losses, adjustment to the financial situation, return of part of the capital or restructuring. In regular reduction, creditors are protected through publication, notification and the right to settle or secure the claim.

The simplified reduction serves to cover losses and internal financial arrangements, and not pay out to members. It is also possible to simultaneously reduce and increase the capital, for example for rehabilitation and new recapitalization.

The change takes effect by being entered in the court register. Legal, accounting, tax and financial consequences should be reconciled before making a binding decision.

Corporate transformations enable business reorganisation through legal succession, without the individual transfer of every right and obligation. The chosen model must correspond to the business objective, future ownership, assets and risks being transferred.

Basic models

• Merger by acquisition (pripajanje): one or more companies transfer all assets and liabilities to an existing company and cease to exist without liquidation.
• Merger by formation of a new company (spajanje): two or more companies transfer their assets and liabilities to a newly formed company and cease to exist without liquidation.
• Division by dissolution (razdvajanje): the company ceases to exist and its assets and liabilities are allocated to two or more companies.
• Division by separation or spin-off (odvajanje): the company continues to exist, but part of its assets and liabilities is transferred to one or more companies.
• Transformation: the same legal entity continues to exist in a different legal form.

What to check

The plan should cover the company's value and share exchange ratio, assets and liabilities, contracts, disputes, loans, guarantees, real estate, permits, concessions, public procurement, workers, taxes and regulatory approvals.

Legal succession does not displace change-of-control clauses, notification duties or specific conditions attached to a licence or concession. Following registration, land registers, other public registers, bank records, tax records, beneficial-ownership information and operational processes must be updated.

Tax neutrality is not automatic. The legal, tax, accounting and employment-law model must be aligned before decisions are made, particularly for cross-border transformations.

Ways out

The easiest way for a member to leave is by selling or transferring shares. The articles of association may provide for a contractual right to resign, and for a justified reason, a member may request resignation through the courts. The company can request the exclusion of a member if there are justified reasons.

In cases of judicial withdrawal or exclusion, the starting point is the market value of the business interest. Under the statutory model, membership ends upon payment of compensation, so valuation, payment terms and protection of the company's liquidity must be coordinated carefully.

Decision-making deadlock

A blockage occurs when the necessary decision cannot be made, and the company cannot operate properly as a result. It is especially common with two members with equal votes or widely set veto rights.

1. repeated decision after exchange of complete information
2. negotiations of members or their authorised representatives
3. involvement of experts or mediators
4. independent valuation of shares or company
5. agreed purchase, joint sale or business separation
6. judicial protection when rights are violated or damage that is difficult to repair is threatened

Corporate dispute

A dispute may concern challenges to resolutions, withholding of information, breach of a members' agreement, management liability, exclusion or withdrawal. Time limits for certain remedies may be short. Negotiations should proceed while minutes, resolutions, business records and procedural rights are preserved.

• Conflating membership, management and representation, or assuming that a member may dispose of company assets as if they were personal assets.
• Internal restrictions on directors that are not aligned with the registered method of representation and banking authority.
• Articles of association retained from the initial standard form even though ownership, financing and business risks have changed significantly.
• Members' agreement that is not aligned with the articles of association or is not drawn up in the required form for the obligation to transfer shares.
• Payment of money without a clear indication of whether it is capital, an additional payment, a loan or compensation for a specific action.
• Related party business without disclosure of interest, market comparison, proper approval and proof of execution.
• Acquiring a business interest without legal, financial and tax due diligence on the company.
• Absence of rules for exit, death, inheritance, execution on the share and decision-making block.
• Assuming that every right and permit continues automatically after a corporate transformation, without checking the contractual and regulatory conditions.
• Delayed response to insolvency or corporate litigation, with missed deadlines and loss of documentation.