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Duties & Responsibilitiesof Directors


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With increased consolidation of business across Europe, executives ofmultinational groups can nd that they are required to become directors ofcompanies in a variety of jurisdictions, often at short notice.

The rules relating to directorships vary considerably from jurisdiction to

jurisdiction. This guide is intended to provide an overview of the duties andresponsibilities of directors across 21 jurisdictions in Europe, answering the mostfrequently asked questions for directors coming from another jurisdiction.

In many jurisdictions, there are various forms of company available, and thereare different rules for directors according to the type of company used. Thisguide focuses for each jurisdiction on the most common form of company, andon the rules which apply to executive/managing directors.

CMS is the organisation of independent European law and tax rms of choicefor organisations based in, or looking to move into, Europe. CMS provides a

deep local understanding of legal, tax and business issues and delivers client-focused services through a joint strategy executed locally across 27 jurisdictionswith 54 ofces in Western and Central Europe and beyond. CMS was establishedin 1999 and today comprises nine CMS rms, employing over 2,800 lawyers andis headquartered in Frankfurt, Germany. This guide is intended only to providea general overview of the matters covered. It is based upon the law in each ofthe countries as at 1 July 2010. However, the information contained in this guideis not comprehensive and does not purport to be professional advice.

For further information on rules for directors of private companies in Europe,contact any of the people listed in the Contacts section from page 140, or yourusual contact at CMS.


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5 _ Austria 10 _ Belgium 16 _ Bosnia and Herzegovina 22 _ Bulgaria 28 _ Croatia 33 _ Czech Republic 39 _ France

47 _ Germany 52 _ Hungary 58 _ Italy 66 _ The Netherlands 72 _ Poland 79 _ Romania 86 _ Russia 92 _ Serbia 98 _ Slovakia 104 _ Slovenia 111 _ Spain 118 _ Switzerland 125 _ Ukraine 130 _ United Kingdom

140 _ Contacts

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For each of the jurisdictions we cover the following key question areas:eligibility requirements, method of appointment, method of removal,authority and representation, working rules of the board, contractualrelationship with the company, conicts of interest, duties of a director,liability, limitation of liability, immigration issues, taxation and socialsecurity.

4 | Duties & Responsibilities of Directors


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Austria

Peter Huber, [email protected] Trenkwalder, [email protected]

This guide focuses on the rules relating to private limitedcompanies (Gesellschaft mit beschrnkter Haftung,GmbH). It does not address the rules for other formsof entities, such as the public limited company(Aktiengesellschaft, or AG). However, rules for privateand public limited companies are similar in many cases.

Austrian private limited companies generally have amanagement board (Geschftsfhrung). All directors ofthe management board are managing directors. Anadditional supervisory board (Aufsichtsrat) is mandatory if:

the stated share capital exceeds EUR 70,000 and thenumber of shareholders exceeds 50;the number of employees of the company exceeds 300;the company centrally manages or, by means of a directinterest exceeding 50%, controls private or publiclimited companies, and the total combined number ofemployees of the controlling and of the controlledcompanies exceeds 300;the company is a general partner (Komplementr)of a private limited liability partnership(Kommanditgesellschaft) and the total combinednumber of employees of the company and the private

limited liability partnership exceeds 300; oremployee representatives have the statutory right tonominate members of the supervisory board pursuantto Part VIII of the Austrian Labor Relations Act(Arbeitsverfassungsgesetz) as a result of a cross-border merger.

The articles of association may provide for an optionalsupervisory board. The supervisory board has a controllingfunction, and thus its directors are non-executive.

Eligibility requirements

There are few restrictions on who can become a director.In particular, a director is not required to be resident in

Austria, and there is no nationality requirement. Only aphysical person with full legal capacity can be appointedas a director. A legal entity or a partnership may not beappointed. Special provisions apply to directors who areshareholders. A company may have one or more managingdirectors. Usually the articles of association determines thenumber of managing directors.

The company must effectively be managed from withinAustria. Otherwise it might be regarded as liquidated andtaxed on built-in gains. A supervisory board must consistof at least three directors. Additional members may be

appointed unless the number of members is restricted bythe articles. Usually the number of directors of thesupervisory board is determined by the articles.

Members of the supervisory board may not simultaneouslybe managing directors, permanent substitutes formanaging directors, or employees of the company. Also, anindividual must not be a member of the supervisory boardof more than 10 (in certain cases 20; the role as chairmanof a supervisory board accounts for two supervisory boardpositions) private or public limited companies and he mustnot be a managing director of a subsidiary of the company.

If the employees have established a works council (whichrequires a minimum number of ve employees), the workscouncil may nominate one additional member to thesupervisory board for every two members of thesupervisory board elected by the shareholders.

Method of appointment

Managing directors are appointed by shareholderresolution. Managing directors may also be appointed bya provision in the articles of association, if, and as long as,they are shareholders. The period of appointment is notlimited unless the articles provide otherwise.

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Notication of the appointment, signed by the managingdirector(s), together with certied evidence of theappointment, as well as a certied sample signature ofthe managing director, must be led with the CommercialRegister. A small fee is payable.

The directors of the supervisory board are appointed byshareholder resolution. The period of appointment mustnot exceed ve years. Notication of the appointment,signed by the managing director(s), must be led withthe Commercial Register. Again, a small fee is payable.

Method of removal

A director may be removed at any time by a resolutionof the shareholders. A director may resign at any time bygiving notice to the company. However, such a resignationmay constitute a breach of duty or a breach of contract.The resignation has immediate effect in cases where thereare substantial grounds for it to do so, otherwise it iseffective after 14 days following notication of thegeneral assembly or of each shareholder. Even if onlyone managing director was appointed, resignation is still

possible. A director has certain obligations to clarify to thecompany any business activities carried out by him in thecourse of his term and during the ve years following hisremoval or his resignation. If directors are appointed fora xed term, or are subject to rotation, their appointmentwill terminate if they are not re-appointed.

Notication of the removal or resignation of a director,signed by the new or remaining managing director(s), mustbe led with the Commercial Register. A small fee ispayable.

Authority and representation

The managing directors can only represent the companytogether. The articles of association may provide for adifferent form of representation and usually provide thatone or two managing directors or, if there is more than onemanaging director, one managing director together witha Prokurist (agent with limited power to represent) mayrepresent the company.

The actions of managing directors properly representingthe company i.e. exercising such powers as are conferred

by law or by the articles are valid and binding regardlessof whether prior approval by the shareholders or by thesupervisory board is required or not.

A managing director has full authority to manage thecompany. However, such authority may (only internally)be restricted by the articles or by shareholder resolution.In many cases the articles will provide that certain keymanaging acts will be subject to prior approval by theshareholders or by the supervisory board. With fewexceptions, a breach of such restrictions of his/her authorityto represent the company by a managing director does not

invalidate the directors actions vis--vis third parties.

Working rules of the board

All directors have the same rights and duties and are jointlyobliged to manage the company. However, and notwithstanding each directors overall responsibility, certainmanagement roles may be allocated to specic persons bythe articles, by shareholder resolution, by resolution of thesupervisory board, by internal guidelines for directors and/ or by the management board itself.

The shareholders may give binding instructions to thedirectors on any managing acts unless otherwise providedby the articles or unless there is a supervisory board.



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Contractual relationship with the company

Appointment by a shareholder resolution as a director doesnot of itself constitute a contract with the company, orentitle a director to remuneration. A companys articles willgenerally only entitle members of the supervisory board toreimbursement of expenses. Supervisory board directorsfees commensurate with their duties may be payable to theextent specied in the articles of association or approvedby a resolution of shareholders.

A managing director may also have a contractual

relationship with the company, for example as an employeeunder a service agreement or as an independent contractorproviding services under a consultancy agreement.Termination of any such contract will not automaticallyterminate the directorship. Termination of the directorshipwill not automatically terminate, but may constitute abreach of, the related contract.

Conicts of interest

In the case of a conict of interest, a director must

refrain from any action that might be detrimental for thecompany.

A managing director cannot represent the company indealings with himself or herself, or with a third partyrepresented by himself or herself unless the companyconsents by shareholder or supervisory board resolutionor unless the companys interests are not negativelyaffected. A managing director being the sole shareholderof the company may represent the company in dealingswith himself (in some cases, such self-dealing will requirethe drawing up a document certied by a notary public).

Directors must not accept any loans from the companywithout prior approval by the shareholders or by thesupervisory board.

The managing directors must neither transact businesswithin the companys line of business for their own accountor for the account of others, nor may they be generalpartner of a partnership or a member of the managementor supervisory board of another company in the same lineof business, without prior approval by the shareholders orby the supervisory board.

Duties of a director

The duties of a director are owed to the company.

A directors duties are not owed to any one shareholderor to the companys creditors.

A managing director must manage the company andact on behalf of the company in line with the businesspurpose, in the best interests of the company and inaccordance with instructions by shareholders, with thediligence of an orderly businessman (without regard tohis own, individual level of skill and experience).

Directors are subject to a wide range of specic statutoryduties. Such specic duties include, but are not limited to:

setting up nancial statements and disclosing nancialstatements to shareholders and to the public;setting up an accounting and a controlling system;submitting quarterly reports, an annual budget, andreports on extraordinary circumstances to thesupervisory board;convening shareholder meetings (annually and in caseof loss of half of the stated share capital);initiating court proceedings in case of insolvency; andin the case of directors of the supervisory board:supervising management.

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Liability

A director is fully liable to the company, but not toshareholders, for wilful or negligent breach of duty. In thecase of wilful or negligent breach of duty by two or moredirectors, they are jointly and severally liable.

In cases of insolvency of the company or failure to le forinsolvency proceedings in a timely manner due to wilfulmisconduct or negligence, a director may also be directlyliable to creditors. Moreover, wilful or negligent injury tocreditors interests or failure to le for insolvency

proceedings on time may constitute a criminal offence.

In cases of wilful or negligent default on payment of taxesor social security contributions, a managing director maybe personally liable to the tax authorities for amountsoutstanding, or may even commit a criminal offence. Amanaging director may also be criminally liable in cases ofwilfully incorrect statements, including nancial statements,statements to shareholders or the supervisory board orlings with the Commercial Register.

Limitation of liability

A directors liability to the company cannot be limitedby agreement. However, it is common practice to passa resolution on the approval of the directors acts(Entlastung) after the close of each business year, thuswaiving any recognisable claims of the company.

A directors liability to the company is excluded, if theshareholders give their consent by a shareholder resolution.A private limited company may purchase directors liabilityinsurance in favour of its directors.

Immigration issues

Foreign directors generally require:

a residence permit for Austria; anda labour permit.

EU and European Economic Area nationals are exempt fromthese requirements with a temporary counter-exceptionregarding a labour permit for nationals of new EUmember states.

A residence permit is required in all other cases.A permanent residence permit will only be issued if itis covered by the immigration quota for key employees.A director must apply to conrm that a permit is availableunder such quota.

The application for both types of immigration permit mustbe led from outside of Austria together with certaindocuments, for example a birth certicate and a policeclearance. The rst permit is granted for a maximum periodof one year, subsequent permits are granted for amaximum period of two years. After ve years a permit

may be granted for an unlimited period of time.

Having obtained permission to immigrate, a director hasto apply for a labour permit. This permit can be restrictedto certain geographic areas or to a certain position, and itis issued for a maximum period of one year. The executivemay apply for an extension.

Directors holding 25% or more of the shares of thecompany, while exempt from the requirement of a labourpermit, nonetheless require a quota-bound residencepermit allowing entrepreneurial activity, which will begranted only if qualied positive effects for the Austrianlabour market are certied by the Austrian labour service.



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Directors holding less than 25% are only exempt from theregular labour permit requirement if the authority conrmsthe exercise of essential inuence on the management ofthe company.

Taxation

If an individual is resident in Austria, his or her worldwideincome is subject to Austrian income tax. If an individualis not resident in Austria, only certain sources of income,including income from employment in Austria or

consultancy services provided in Austria, are subject toAustrian income tax. Numerous double taxation treatieslimit Austrias or the foreign countrys right to tax, inparticular, if the director performs his services partly ortotally outside of Austria, his income may be exempt fromincome tax in Austria.

Income is generally taxed at a progressive rate, withbrackets reaching from 0% to 50% for income exceedingEUR 60,000 per year. The average tax rate is approx. 44%.Tax treatment of service fees depends on whether thedirector is qualied as an employee or as an independent

contractor (this will generally be the case if his or her shareexceeds 25% or he or she is not bound to shareholdersinstructions by the articles). The tax rate is generally thesame, except that in case the director qualies as employee

one sixth of employees fees is taxed at a at rateof 6%; andthe income tax is levied by way of withholding, i.e.the employer has to retain the income tax on theremuneration and forward on behalf of the employeeto the competent tax authority.

Social security

If a director qualies as an employee, pensioncontributions, health insurance, casualty insurance andunemployment insurance are mandatory. Social securitycontributions amount to 37.85% of gross salary (20.78%employer contribution and 17.07% employee contribution).The basis is currently capped at EUR 4,110 per month.

If a director qualies as an independent contractor (this willgenerally be the case if his or her share exceeds 25% orhe or she is not bound to shareholders instructions by the

articles), pension contributions, health insurance, provisionfor self-employed persons and casualty insurance aremandatory. Social security contributions amount to 25.18%of gross fees (7.65% health insurance, 1.53% provision forself-employed persons and 16% pension contribution) andmonthly payments of EUR 8.03 casualty insurance [plus aat amount of approx. EUR 85]. The basis again is currentlycapped at EUR 4,795 per month.

Individuals contributing to the above schemes are entitledto payments in cash or in kind in cases of retirement,sickness, disability, casualty, in case of an employed

individual unemployment and so on, subject to specicpre-conditions under each scheme (for example minimumcontribution periods).

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This guide focuses on the rules relating to companieslimited by shares (naamloze vennootschap / socitanonyme) only.


There are few legal restrictions on who can be a directorof a company limited by shares (examples include minorsand individuals who are personally bankrupt). The articlesof association may contain certain conditions, such as aspecic diploma or profession. However, these conditions

may not limit the choice of shareholders to appointdirectors at a general meeting.

An individual director is not required to be resident inBelgium, nor is there a nationality requirement. Directorsresiding abroad are deemed to elect domicile for the entireduration of their appointment at the registered ofce ofthe company, where all notications may validly be madeto them.

A company can be appointed as a director, but mustappoint an individual to act as its permanent

representative. This permanent representative must be ashareholder, director or employee of the company director.


The directors are appointed by a general meeting ofshareholders. On formation of a company, the directorsmay be appointed in the deed of incorporation by thegeneral meeting. If there is a vacancy on the board ofdirectors, the remaining directors have a right to ll sucha vacancy temporarily by co-opting a director, unless thearticles of association provide otherwise. The next generalmeeting then conrms the directors appointment.

Co-optation is only mandatory if there are less than threedirectors remaining. A general meeting of shareholdersmust always have a free choice of appointment. Thearticles of association prescribe the duration of thedirectors term of ofce, which may not exceed six years.Unless the articles of association provide otherwise, thedirectors are eligible for reappointment. In the event of anearly vacancy, a newly appointed director serves for theperiod of the person he or she replaces.

Method of removal

A general meeting of shareholders may remove anydirector at any time. A director may resign at any time.However, his or her resignation must not cause damageto the company and should therefore be done carefully. Adirector may be required to settle any current business. Theremoval or resignation of a director must be published inthe Belgian Ofcial Journal and led with the ofce of theCommercial Court in the district in which the company hasits registered ofce within fteen days.

The removal or resignation of a director does not shield

him from liability. He or she can still be liable for faultscommitted during his or her ofce, even if the damageoccurs after his or her removal or resignation.


The board of directors has all of the powers that arenecessary or useful to implement the corporate object ofthe company, save for those powers expressly reserved forthe general meeting of shareholders by law or by thearticles of association. The board of directors representsthe company towards third parties.

The articles of association may grant one or more directorsthe power, solely or jointly, to represent the company in all

Belgium

Cedric Guyot, [email protected] Gofn, [email protected]



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acts, deeds and before the courts and public authorities.Such authority must be published in the Belgian OfcialJournal.


A company limited by shares must have at least threedirectors. However, if the company has only twoshareholders, the board may consist of only two directors.There is no maximum number of directors, unless thearticles of association provide otherwise.

The board of directors is a collegiate body. Its decisionsare taken with a majority of votes, unless the articles ofassociation provide otherwise. The directors can takedecisions in writing (i.e. without a formal meeting) only ifsuch decisions are taken unanimously and are absolutelynecessary in the interests of the company. If such possibilityis provided for by the articles of association of thecompany, the board of directors may appoint an executivecommittee (comit de direction directiecomit) towhom the management of the company is entrusted.

The members of the executive committee are appointedby the board of directors and need not be directors. Theworking rules of the executive committee are indicated inthe articles of association or, if no such working rules arementioned, are decided on by the board of directors. If amember of the executive committee has a direct or indirectpersonal and conicting interest of a nancial nature withinthe authority of the executive committee, the sameprocedure applies as for a conict of interest within theboard of directors.


A director in a company limited by shares is an agent(lasthebber) of the company. A director may, but need

not, be remunerated. The general meeting of shareholdersdetermines the remuneration of the directors, unless thearticles of association grant this power to the board ofdirectors.

A director can also be an employee of the company,provided his or her tasks as an employee are separate fromhis or her duties as a director. A management company,being a company that contracts with the company toprovide the directors services, is allowed.

Conicts of interest

If a director has a direct or indirect personal and conictinginterest of a nancial nature in a decision or transactionwithin the authority of the board of directors, he or shemust disclose such interest to the other directors prior tosuch decision or transaction. If the company has one ormore statutory auditors, the director concerned should alsoinform the auditors of his or her conicting interest.

The statement of a director and the reasons justifying his orher conict of interest must be recorded in the minutes of

the board meeting. Directors who have a conictinginterest at a board meeting in a company which has madea public offer of securities, may not participate in thedeliberation of the board regarding the decision ortransaction concerned, nor vote on such matter.

The directors are personally and severally liable for any losssustained by the company or by a third party as a resultof decisions or transactions which have secured for them(or one of them) an unlawful nancial advantage to theprejudice of the company, even if such decisions ortransactions have taken place in accordance with theabove-mentioned disclosure rules. The company mayrequest the cancellation of decisions or transactions whichhave taken place in breach of the conict of interest rules.

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Duties of a director

Each director must act in the best interests of the companyas a whole and not only for its shareholders. The directorsmust make and implement their decisions in the corporateinterest of the company. The board of directors has a dutyto determine the strategy of the company and toimplement such strategy. The board of directors also hasthe obligation to inform the shareholders in certaincircumstances and for specic operations, mainly relating tothe equity of the company.

The board of directors is entitled to do whatever isnecessary or useful for the implementation of the corporateobject of the company, except for certain decisionsreserved by law or by the articles of association to thegeneral meeting of shareholders. In particular, thefollowing powers of the general meeting of shareholderscannot be delegated to the board of directors:

appointment and removal of directors or statutoryauditors;approval of annual accounts and distribution of prots;liability suits against directors; and

amendments to the articles of association.

The articles of association may limit the powers granted tothe board of directors. Such restrictions, however, may notlimit the fundamental powers of the board of directors (forexample the power to call a general meeting ofshareholders or the preparation of the annual accounts).

Restrictions to the powers of the board are not enforceableas against third parties, even if such restrictions have beenpublished in the Belgian Ofcial Journal. It is possible toallocate certain powers of the board of directors to certainindividual directors. Such allocation cannot, however, beinvoked against third parties, even if such restriction hasbeen published.

A director can be liable for shortcomings in theimplementation of his or her duties, as well as for a breachof the provisions of the Commercial Companies Code orthe articles of association of the company.

Liability

The directors are not personally liable for any obligations ofthe company. The company is bound by the acts of theboard of directors and the individual directors representingthe company as well as the managing directors. The

company is bound even if such acts are beyond itscorporate object, unless the company proves that the thirdparty was aware thereof.

A particular liability for directors is provided in articles 527and 528 of the Commercial Companies Code. Pursuant toarticle 527 of the Commercial Companies Code, eachdirector is individually liable to the company formanagement faults. In other words, if a director fails toexercise reasonable care in managing the company (dutyof care), the general meeting of shareholders may decideto sue such director for damage to the company.

Moreover, pursuant to article 528 of the CommercialCompanies Code, directors are jointly liable to thecompany, as well as to third parties, for breaches of theCommercial Companies Code or breaches of the articles ofassociation. As the directors liability for breaches of theCommercial Companies Code or of the articles ofassociation is a joint liability, it also applies to directors whoare not actively involved in the management of thecompany, unless these passive directors are able todemonstrate:

that they did not in any way participate in the breach;and



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that they reported the breach to the general meetingof shareholders in due time. Article 528 thus forcesevery member of the board to monitor themanagement of the company and to refer to thegeneral meeting of shareholders whenever a breach ofthe articles of association or of the CommercialCompanies Code has been committed.

Liability suits against directors on the basis of articles 527and / or 528 of the Commercial Companies Code can bebrought either by the general meeting of shareholders orby an individual shareholder acting on behalf of the

company (derivative suit). Shareholders not only have theright to see the company managed in a proper way (dutyof care), they also may expect the rules on conicts ofinterest to be strictly observed (duty of loyalty).

Article 523 of the Commercial Companies Code providesthat if a director has a personal interest in a decision ortransaction to be acted upon by the board of directors, heor she must declare such interest to the board and applyfor the board to report to the general meeting ofshareholders. Liability may result from omitting toimplement such procedure or from personally obtaining an

unlawful nancial advantage, which prejudices thecompany.

Moreover, a special provision of the CommercialCompanies Code (article 530) provides that, in the event ofbankruptcy, the receiver in bankruptcy or an individualcredit holder may bring a liability suit against the formerdirectors of the company for gross negligence. If the courtnds the directors gross negligence to have contributed tothe bankruptcy, the directors can be forced to assume all orpart of the companys obligations and liabilities. With effectfrom 1 September 2006 directors may, in the event ofbankruptcy, also incur several and personal liability forunpaid social contributions. This liability is only triggeredwhen a serious mistake on their part was at the origin ofthe bankruptcy or if they were previously involved in at

least two bankruptcies (or similar situations) whereoutstanding debts were owed to the social securityinstitutions.

In addition, with effect from 28 July 2006, the liability ofthe directors can also be triggered for the failure of theircompany to pay wage withholding tax (prcompte professionnel/bedrijfsvoorhefng) and VAT. Any failure of adirector(s) in charge of the daily management to pay wagewithholding tax and / or VAT will trigger the several liabilityof the director(s) if it is demonstrated that he (they) has(have) committed a fault in running the company. This

liability can be extended to other directors whose faultshave contributed to such failure.

Finally, the permanent representative of a company directoris severally liable with the company director for theexecution of the ofce as director of the company.

However, it is worth noting that, pursuant to article 554 ofthe Commercial Companies Code, the annual generalmeeting of shareholders is required to expressly decidewhether or not relief from liability should be granted to themembers of the board. If the annual meeting decides to

grant such relief, the directors are, as a rule, shielded fromliability to the company for the period prior to the annualmeeting. They will not, however, be shielded from liabilityto individual shareholders or to third parties.

A guarantee arrangement can be entered into to limit theliability of the directors. Such arrangement guarantees thedirector against the nancial consequences of liabilityincurred. This does not affect the liability itself but only thenancial consequences thereof. Such arrangement may notguarantee the director against criminal nes or against anintentional fault or fraud. The guarantee arrangement canbe provided for by a shareholder, a parent company or athird party.

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Another possibility to limit the nancial consequences ofdirector liability is to take out insurance. The company orthe director can subscribe to such insurance. The insurancedoes not guarantee the director against criminal nes oragainst an intentional fault or fraud. Again, the insurancedoes not affect the liability of the director but only itsnancial consequences. All proceedings against directorsbecome statute-barred after ve years.

Immigration issues

As a rule, if the director does not become a resident ofBelgium and is not remunerated, there are no immigrationissues. In other cases, a distinction must be made betweenEU residents and non-EU residents. EU residents have theright, in accordance with European Community Law, towork in any Member State. There are no specialrequirements, except the obligation to register with thetown hall where the director has his or her residence.Non-EU residents must full two obligations if they cometo live in Belgium and are remunerated by the company.

Firstly, an authorisation to stay for more than three months

in Belgium must be requested from the Belgian embassy orthe Belgian consulate in the directors home country. If theauthorisation is granted, a stamp will be put on thedirectors passport. Secondly, the director must obtain aprofessional card. This professional card can be obtainedfrom the Belgian municipality where the director has his orher domicile or from the Belgian embassy or consulate inhis or her home country if the director does not yet residein Belgium. A professional card is valid for a maximum ofve years and should be renewed at least three monthsbefore expiry. Such professional card must also be obtainedby directors that are non-EU citizens and whose ofce isnot remunerated.

Taxation

A director who resides in Belgium will be taxed in Belgium.To calculate the tax, all forms of remuneration are takeninto account, such as directors fees and all benetsgranted to the director in the context of the exercise of hisor her function.

The tax rate is progressive. The costs related to the exerciseof the directors function are tax deductible. The directormay deduct a at amount, xed by the tax administration,or he or she can prove his or her real costs. The company

is required to withhold an advance tax payment. If thedirector is a member of the board of several companies,each company must withhold an advance tax paymentseparately. Because of the progressive tax rate, theseadvance tax payments will be less than if the wholeremuneration was paid by one company.

Social security

A director is deemed to be self-employed, even if he or shedoes not receive remuneration for his or her function as a

director. Immediately after the start of his or her activity, heor she must be registered with a social insurance company.

Based on new rules, the Social Security Administration mayrequire the payment of a contribution fee to foreigndirectors of a Belgian company, even though they are noteremunerated by the Belgian company.

Appointment of managing directors

The day-to-day management of the company, as well asthe representation of the company in relation tomanagement matters, may be entrusted to one or moremanaging directors. A managing director is appointed andremoved by the board of directors. As a rule, the articles of



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association regulate the appointment, the removal and thepowers of managing directors.

Managing directors act jointly or severally as provided inthe articles of association. The appointment and removalof one or more managing directors must be published inthe Belgian Ofcial Journal. Notice of the appointmentand removal must also be led with the ofce of theCommercial Court in the district in which the companyhas its registered ofce within 15 days.

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This guide focuses on the rules relating to the managementof private limited liability companies. It does not addressthe rules relating to other types of companies.

Introduction

The legal structure of Bosnia and Herzegovina (BiH) isvery complex, which directly impacts on legislation as wellas policies regulating and supervising companies and theirdirectors. BiH consists of two separate and distinctadministrative entities: Federation of Bosnia and

Herzegovina (FBiH) and Republika Srpska (RS), as wellas the Brko District which belongs to both of the aboveentities. The two entities and the Brko District, have theirown governmental structures as well as legislation,regulations and policies which means that this, as well asany other area, may be subject to legislatory provisions atentity level i.e. FBiH or RS or Brko District. Therefore, inpreparing this guide we took into account relevantlegislation at all levels in order to provide a comprehensiveoverview of the situation in BiH.

Company law is regulated at the entity level, through the

Company Act of Federation of Bosnia and Herzegovina(ZPD FBiH), the Company Act of Republika Srpska(ZPD RS), as well as the Company Act of the BrkoDistrict (ZOP BD).

Pursuant to ZPD FBiH, the management of a companyis run by one or more members of the managementboard, but since the provisions relating to joint-stockcompanies are expressly applied mutatis mutandis, thismeans that one director or one director with one ormore executive directors run the company. There is anestablished hierarchy between a director and executivedirector(s), as the extent of an executive directorsauthority is determined by a written resolution of thecompanys director(s).

According to ZPD RS, a company may have a singledirector or a management board as a collectivemanagement body, which is determined by thecompanys memorandum of association.ZOP BD states that the management of a companymay have one or more members i.e. directors.

The existence of a supervisory board is discretionarypursuant to ZPD FBiH and ZOP BD, however under ZPDFBiH it is obligatory in the case of a company which haseither more than 10 shareholders or an initial capital ofmore than 1,000,000 KM and at least two shareholders.

The ZPD RS does not envisage a supervisory board;however, an internal revision, a board of revision or anindependent auditor may be established or appointedby the company.


Any natural person with full legal capacity may become adirector, an executive director or a member of managementboard (hereinafter referred to as member/s ofmanagement). In addition, the company laws of entities

expressly state certain restrictions on who can be amember of management of a company, namely relating topersons who were convicted of nancial crimes, fraud,violations of laws relating to labour relations, socialsecurity, management of natural resources, or who haveviolated the provisions of company law relating to unlawfulpayments. ZPD FBiH, through an analogy with a joint-stockcompany, provides that a member of management may notbe older than 65 years on the day of appointment.Restrictions of ZOP BD and ZPD FBiH also relate to personsbarred or suspended from their professions, while ZPD RSexpressly states the incompatibility between the functionsof any bodies vested with oversight duties (since ZDP RSdoes not envisage one supervisory board) and functionsof management. Additionally, unlike ZPD RS, restrictionsnamed in ZOP BD and ZPD FBiH are of temporary nature.

Bosnia and Herzegovina

Nedzida Salihovic-Whalen, [email protected]



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Appointment

Pursuant to ZPD FBiH the company determines the methodand duration of appointment of members of managementin the articles of association and memorandum ofassociation.

ZPD RS and ZOP BD provide that the shareholders assemblyappoints the member(s) of management, although ZPD RSstates that the rst director/members of managementboard may be named in the companys memorandum ofassociation. ZPD RS also leaves the determination of the

number of members of management board to thememorandum of association or the articles of association,but also stipulates that a management board will havea president elected by the members of that managementboard. ZOP BD delegates the appointment of themember(s) of management to the supervisory board(if such supervisory board is established), and further statesthat the articles of association may envisage that themembers(s) of management can be appointed for alimited period of time, but not for less than two years.

Removal

Pursuant to ZPD FBiH the rules for removal of themember(s) of management are set out in the companysarticles of association. However, an analogy with the

joint-stock companies would indicate that removal may beeffected by the shareholders assembly if: the managementor any of its members lose the condence of theshareholders of the company; if the shareholders assemblyrefuses to adopt the yearly repor t of the company; or, if theshareholders assembly determines the responsibility of themanagement or a member of the management isconicted with the interests of the company.

ZPD RS and ZOP BD appoint the shareholders assemblyas the body that can remove the management i.e. its

member(s) with or without giving the reasons for suchremoval. ZOP BD expressly provides indemnity rights tothe member(s) of management if it/they is/are removedwithout a justiable reason, while ZPD RS states that theremoval does not affect the rights of the member(s) ofmanagement after removal provided in the contract withthe company.


Unless provided otherwise in the memorandum of

association or the articles of association, the member(s) ofmanagement have full authority to manage the company.

In general, the directors or the management board, or thepresident of the management board under the ZPD RS,represent the company. Additional persons (e.g. authorisedrepresentatives - procurators) may be determined torepresent the company through the memorandumof association or articles of association. Members ofmanagement are either entitled to represent the company

jointly, or they can be granted sole power of representationif the memorandum of association or articles of association

provide for such sole representation. The method ofrepresentation is registered in the registry of companies.Persons thus registered are authorised to undertake all actsand conclude contracts that are usually performed or arisewith the tasks that have been entrusted to that person. Thecompany is liable for any obligations that have arisen by theacts of a member of management who has exceeded hisauthority, if the third person did not know or did not havea means to know that the member of management wasexceeding his authority.

Working rules

ZPD FBiH provides that if the management board has moremembers, their respective authorities and responsibilitiesare determined in the articles of association. ZOP BD states,

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in similar manner, that in the case that there is more thanone member of management, the articles of associationdetermine whether they manage the company jointly orseparately.

Under the ZPD RS the general rule when thereis a management board, is that all members of themanagement board are vested with the same rights andduties, and every member may act individually unlessotherwise provided by the memorandum of association.If it is provided that a decision can only be made jointlythen the approval of all members of management board

is required to carry out any act or undertaking, except ifthe delay would adversely affect the company. Thememorandum of association may also determine that amember of management board must follow theinstructions of another member of management board. Ifa member of management board deems such instructionto be inappropriate, he may inform the other members ofmanagement board so that they can take a joint decisionon such specic issue. Among other issues themanagement board may form one or more commissions,which may be composed of its members or other personsand also determine their conditions and methods of work.

Decisions of such commission would be subject to priorapproval by the management board, unless statedotherwise in the memorandum of association or articles ofassociation.


In accordance with the labour legislation of FBiH, membersof the management are considered to be employees of thecompany, thereby having to have an employment contractas well as an established and concluded employmentrelationship. On the other hand, under RS labourlegislation, members of management may either beemployees of the company or may have their relationshipregulated in a different manner i.e. through special orservice contracts.

Conict of interest

ZPD FBiH and ZOP BD state in a similar manner thatmember(s) of the management may not be engaged in anactivity which is or may be in conict with the business ofthe company, whether as an employee of a differentcompany, or as an independent entrepreneur. The articlesof association may determine that this prohibition willsurvive the termination of appointment as a member ofmanagement for up to two years. ZOP BD further providesthat a member of management may not enter into acontract on behalf of and on account of the company,

among other things, if the execution of such undertakingwould amount to an unlawful gain for him or certain thirdpersons.

The conclusion of contracts between a company andanother company in which a member of managementof the rst company has an indirect interest needs to beapproved either by the supervisory board, the shareholdersassembly or by another organ of the shareholders. Indirectinterest is determined by the fact that the other contractualparty is a member of the family or a legal person in whicha member of the family of some member of management

has a material or nancial interest, or is a responsibleperson in such an entity.

ZPD RS regulates this matter in more detail througha specic loyalty clause indicating that a member ofmanagement may not use the assets of the company orprivileged (insider) information for his personal interest,or commit any abuse of his position in the company forhis personal enrichment. ZPD RS further elaborates themeaning of personal interest as in existence when amember of management, or his family members: (i) ndshimself as a contractual partner of the company; or(ii) appears to be in a nancial relationship with a personwhich concludes a contract or other act with the company,and it can be reasonably expected that such a relationwould adversely affect his conduct with respect to the



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interests of the company; or (iii) when a person enteringinto a contractual relationship with the company has acontrolling inuence over the member of management in away that it can reasonably be expected to adversely affecthis conduct vis--vis the company. ZPD RS broadlyinterprets the notion of family member, in a way that it alsoincludes any person living in the same household with themember of management. A member of management mayalso not be directly or (through his family members)indirectly involved in a competing company unless hereceives permission in accordance with ZPD RS. Thisprohibition may survive termination of the appointment as

a member of management for a period of up to two years.

Duties

The management i.e. its members must manage thecompany in line with its business purpose, in the bestinterests of the company, with a diligence of an orderlybusinessman and in a reasonable belief that they areacting in the companys best interests. In general, themanagement is subject to a wide range of differentstatutory duties, inter alia:

to represent the company and manage the companysbusiness; to ensure that all statutory llings are made; to maintain accounts; to manage the book of shares; to convene the assembly meetings and determine theproposed agenda for such meetings;to set a date for:

determining a list of company shareholders entitledto receive notice;determining dividend amount;determining dividend payments;voting and other questions ;

to conclude loan agreements;to deal with other matters stipulated by the articles ofassociation or by the contract.

Liability

In general, the management, i.e. its members, must actin accordance with the due diligence standard and with abelief that they are acting in the companys best interests.It cannot be reasonably concluded that the managementacts in such a manner if it relies on information that itknows or should have known is incorrect.

Any party suffering damage caused by member(s) of themanagement acting intentionally or as a result ofmisconduct or negligence has the right to an indemnity

given directly by the management. In general, althoughthe company is liable to third parties for damage caused byits employees, it may receive compensation from individualmembers of the board who caused damage, if they actedintentionally or negligently, or if the damage was causedas a result of their misconduct. However, the differentCompany Acts provide for slightly different modalities ofthis. ZOP BD provides that the company may reimburse theexpenses that the responsible persons had to take as aresult of litigation because of their position in the company,if they acted with due diligence or had reasonably believedthat they have acted in the best interest of the company

and not contrary to law. The company will have tocompensate the member of management for all foundedexpenses if he was successful in such litigation, and themember of management can bring a claim against thecompany if it does not comply with this obligation.


It is not possible to limit the liability of the managementin respect of misconduct or negligence by an agreement.Also, it is not expressly regulated whether a company maywaive its claims against a director ex-post. It is furtherprovided that a director may rely on different acts ofother responsible bodies or employees of the company,unless he knows or should have known such acts are false.

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D&O insurances are not common in practice, although itshould be noted that most insurance companies offergeneral insurances to companies covering damage claimsby third parties.

Immigration issues

A foreign person who is appointed as a member ofmanagement of a company has to obtain, prior toappointment as a member of management and conclusionof the employment relationship, the following:

an entry visa;a working permit (which is issued for a period of oneyear but can be extended);a residency permit (on the basis and for the duration ofthe working permit).

Foreign individuals appointed as members of managementhave to register with the closest police ofce within 24hours of entering the country and acquire a white cartonconrming their residence address as well as their contactdetails. This document is very important in the future

procedure of acquiring work and residence permits.

The procedure for acquiring work and residence permits ishighly bureaucratic and complex in nature. The competentauthorities have great discretionary powers to approve ordeny work or residence permits to foreign professionals.

Taxation

Members of management are considered employees forthe purpose of personal income tax. In FBiH, personalincome tax amounts to 10% of the net wage (net wagerepresents the amount an employee receives as actualsalary i.e. the amount remaining after obligations towardsthe state, such as social security payments and other taxes,are deducted from the gross wage.).

In RS, personal income tax amounts to 8% of thenet wage.

Personal income tax in Brko District is 10% of net wage.

Social Security

Social security payments (in BiH, called contributions)have to be made by members of management in the sameway as any other employees.

In FBiH, part of the contribution is paid by the employeeand part is paid by the employer. The amount payable byeach party depends on the below explained percentagesestablished by the relevant laws as well as the amount ofthe gross wage payable to the employee. The same isapplicable in RS and Brko District.

Therefore, employees pay:

FBiH: 17% pension insurance, 12..5% health insurance,1.5% unemployment insurance (total of 31% of thegross wage).

RS: 17% pension insurance, 11.5% health insurance, 0.7% unemployment insurance, 1.4% child protection(total of 30.6% of the gross wage).Brko District: 17% for pension insurance, 12% forhealth insurance (total of 29% of the gross wage).

On the other hand, employers pay:

FBiH: 6% pension insurance, 4% health insurance,0.5% for unemployment insurance (total of 10.5% ofthe gross wage).RS no contributions paid by employer.Brko District: 6% pension insurance (in total: 6% ofthe gross wage for employers who apply FBiH Law).



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This guide focuses on the rules relating to limited liabilitycompanies ( LLC) and joint stock companies ( JSC) only.

The Bulgarian Commercial Act (the Commerce Act )published in the State Gazette No. 48, dated 18 June 1991(as amended) denes ve types of companies: a generalpartnership, a limited partnership, a limited liabilitycompany, a joint-stock company, and a partnership limitedby shares. Only the companies set forth in the CommerceAct may be established in Bulgaria. General and limitedpartnerships are personal, whilst a joint stock company anda limited liability company are equity companies.

The duties and responsibilities of the directors varydepending on the type of company.

The management bodies of a JSC are: (i) a general meetingof shareholders, and (ii) either a board of directors (one-tiersystem), or a supervisory board and a management board(two-tier system).

A JSC is managed by the executive members of the boardof directors, in the one-tier system, or by the members ofthe management board, in the two-tier system. The

supervisory members of the board of directors in aone-tier system, or the members of the supervisory boardin a two-tier system, supervise the management of thecompany.

In an LLC the management bodies are: (i) a generalmeeting of the quotaholders, and (ii) a manager. Oftenthe quotaholders are closely involved in the managementof the LLC.

Where the shares/quota of a company are held byone person, the functions of the general meetingof shareholders/quotaholders are performed by thesole owner.


Joint Stock CompanyA board member can be an individual or a legal entity,where the articles of association of the company soprovide. Where the board member is a legal entity it mustdesignate a representative for the performance of its dutieson the board of the JSC. The liability of the legal entityarising from the actions of its representative on the boardis unlimited and is joint and several with the other boardmembers. However, Bulgarian law stipulates that a personmay not be a director if s/he:

has been a board member of a company which hasbeen dissolved on the grounds of insolvency within thetwo years preceding the date of his appointment andthe claims of its creditors were not fully satised; ordoes not meet other requirements provided for in thearticles of association of the company.

Board members must be registered in the CommercialRegister of the Bulgarian Registry Agency (theCommercial Register ) by presenting a notarisedconsent and a statement certifying that there are no

obstacles to them becoming board members.

Limited Liability CompanyThe manager of an LLC does not necessarily have to be aquotaholder but must be an individual, rather than a legalentity. An LLC may have more than one manager, who canrepresent the company jointly or severally, depending onthe provisions of the companys articles of association.The managers of an LLC must be registered in theCommercial Register and they must le at the CommercialRegister a notarized consent to manage the company anda specimen signature.

Bulgaria

David Butts, [email protected]



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Appointment

Joint Stock CompanyThe members of the board of directors (one-tier system)or of the supervisory board (two-tier system) are electedand released by a general meeting of shareholders. Ageneral meeting also determines the remuneration of thesupervisory board members, including their right to receivepart of the companys prots or to acquire shares anddebentures of the company.

The board members are elected for a term of ofce not

exceeding ve years. However, the term of ofce for themembers of the rst board upon incorporation of thecompany cannot be longer than three years. Boardmembers may be re-elected without limitation. The generalmeeting of shareholders can release the board membersfrom ofce at any time.

Two-Tier SystemThe company is managed by a management boardwhich is controlled by the supervisory board. Membersof the management board are appointed by thesupervisory board, which also determines their

remuneration and may release them from ofce at anytime. One person cannot serve simultaneously on boththe management board and the supervisory board.The number of members of the management boardranges between three and nine people and isdetermined by the articles of association. The rules ofprocedure for the management board are approved bythe supervisory board.The supervisory board may not take part in themanagement of the company. The supervisory boardrepresents the company only in its relationship with themanagement board. Members of the supervisory boardare appointed by a general meeting of shareholders.There may be between three and seven members.

The supervisory board adopts its own rules ofprocedure and appoints a chairperson and vice-chairperson from among its members. The supervisoryboard meets regularly and at least quarterly. Thechairperson calls meetings of the supervisory board onhis own initiative, as well as upon requests of membersof the supervisory board or members of themanagement board.

One-Tier SystemThe company is managed and represented by a boardof directors, consisting of a minimum of three and a

maximum of nine directors. The board of directorsadopts its own rules of procedure and elects achairperson and vice-chairperson from among itsmembers. The board of directors meets at least on aquarterly basis per year to discuss the companys stateof affairs and prospects for development. The boardof directors assigns the management of the companyto executive members, elected from among itsnumbers, and determines their remuneration. Thenumber of executive members must be lower than thenumber of the remaining (supervisory) board members.Each board member must immediately inform the

chairperson of the board of directors of anycircumstances which are material to the company. Eachboard member may request the chairperson to call ameeting to discuss particular matters.A person nominated as a board member must, priorto his/her election, give notice to the general meetingof shareholders (or the supervisory board, if a memberof the management board) of: (i) his/her participationin any companies as an unlimited partner, (ii) his/herholding of over 25 per cent of the equity in any othercompany, and (iii) his/her participation in themanagement of other companies or co-operativesas a procurator, manager or board member. If a servingboard member acquires or is appointed to any of theabove, s/he must issue a written notice of theacquisition or appointment to the shareholders orto the supervisory board.

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Limited Liability CompanyThe manager is appointed by the general meeting of thequotaholders of the company, which also determines his/ her remuneration and releases him/her from liability.

Release from ofce

Joint Stock CompanyA board may be released from ofce at any time by thegeneral meeting of shareholders or by the supervisoryboard. A board member may request his/her release from

ofce by serving a written notice addressed to thecompany. Within one month of the receipt of such notice,the company must apply for de-registration of the boardmember from the Commercial Register. If the company failsto do so, the board member may notify the CommercialRegister directly and le personally the notice for therelease from ofce. The board member will then bede-registered from the Commercial Register regardless ofwhether another person has been elected to replace him/ her on the board.

Limited Liability CompanyThe manager may be released from ofce by the generalmeeting of quotaholders at any time. The manager mayrequest his/her release by serving a written noticeaddressed to the company. Within one month of receivingsuch notice, the company must apply for the registration ofthe discharge with the Commercial Register. If the companyfails to do so, the manager may notify the CommercialRegister directly and personally le the notice for therelease from ofce. The manager will then be de-registeredfrom the Commercial Register regardless of whetheranother person has been elected to replace him/her asmanager.

The release from ofce has effect with regard to good faiththird parties as of its registration at the CommercialRegister.


Joint Stock CompanyThe members of the board of directors or the managementboard respectively, represent the company collectively,unless otherwise provided by the articles of association.The board of directors or the management board (subjectto approval by the supervisory board) may delegate theauthority to represent the company to one or more of itsmembers. Authority so delegated may be revoked at anytime.

The names and specimen signatures of the authorisedrepresentatives of the company are registered in theCommercial Register.

A companys articles of association may provide thatcertain transactions can be entered into only with the priorapproval of the supervisory board, or upon the unanimousdecision of the board of directors. Such restrictions mayalso be imposed by the supervisory board or the board ofdirectors. The following transactions require, by operationof law, the prior authorisation of shareholders at a generalmeeting:

transfer or provision of the use of the entire commercialenterprise;disposal of assets, (the total value for the current yearwhich exceeds half of the value of the total assets ofthe company as per its latest audited annual nancialstatements);assumption of liabilities or the provision of collateral toone person or to related parties, the amount of whichexceeds, in the current year, half of the value of assetsof the company as per its latest audited annual nancialstatements.

The transactions listed above can only be entered intowithout the prior authorisation of the shareholders wherethe companys articles of association expressly provide that



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the board of directors or the management board mustunanimously authorise such transactions in advance.

Any transaction concluded in violation of the aboverequirements shall be valid with respect to third parties, butthe person who concluded it on behalf of the companyshall be liable for any damages incurred by the company.

Limited Liability CompanyThe manager organises and directs the activities of thecompany in accordance with the resolutions of the generalmeeting of quotaholders. Without the consent of the

company the manager may not: (i) effect commercialtransactions which are similar to those of the company onhis/her own behalf or on a third partys behalf;(ii) participate in partnerships, partnerships limited byshares, or in limited liability companies; or (iii) holdmanagement positions in other companies. The managershall indemnify the company for any damage caused to thecompany from a violation of his/her obligations.

Rules of Procedure

Joint Stock CompanyThe executive members of the board of directors, or themembers of the managing board, jointly manage thecompanys operations. The shareholders may modify thisrequirement and allocate certain tasks to one or moreboard members. Furthermore, the internal rules ofprocedure of the board may provide for a more specicallocation of the tasks among the board members.Nevertheless, such distribution of responsibilities cannotoverride the joint responsibility of the board members forthe operations of the company.

Limited Liability CompanyEven if an LLC has more than one manager, the managersof the company do not constitute a collective body. Rather,each of them is responsible for the management of the

companys operations. The articles of association shalldetermine whether the managers can represent thecompany severally or jointly.


Joint Stock CompanyTwo-Tier System

The relations between the company and a member ofthe management board are governed by amanagement agreement. The agreement is executed in

writing on behalf of the company through thechairperson of the supervisory board or another boardmember authorised by the chairperson.The relations between the company and a member ofthe supervisory board are governed by a servicesagreement. The agreement is executed on behalf of thecompany through a person authorised by a generalmeeting of shareholders or by the sole owner.

One-Tier SystemThe relations between the company and an executivemember of the board of directors are governed by a

management agreement. The agreement is executed inwriting on behalf of the company through thechairperson of the board of directors.The relations between the company and thesupervisory members of the board are governed by aservices agreement executed on behalf of the companythrough a person authorised by the general meeting ofshareholders or by the sole owner.

Limited Liability CompanyThe relations between the company and the manager aregoverned by a management agreement. The agreement isexecuted in writing on behalf of the company, by a personauthorised by the general meeting of quotaholders or bythe sole owner.

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Conicts of interest

Without the consent of the company a board member or amanager in either a JSC or LLC may not, when the activitiescarried out are similar to those of the company: (i) enterinto commercial transactions on his/her own behalf or on athird partys behalf; (ii) participate in partnerships andpartnerships limited by shares or in limited liabilitycompanies; or (iii) hold managing positions in othercompanies.

Duties

Board members have equal rights and obligations,regardless of any internal allocation of responsibilities,management and representation powers amongst them.Board members must perform their functions with thehighest professional care and in the interests of thecompany and of all the shareholders.

Members of a board of directors and the managementboard may not, on their own behalf or on behalf of others,execute business transactions or serve as procurators,

managers or board members of other companies orco-operatives, if these compete with the company. Thisrestriction does not apply where the articles of associationexpressly allow such competing activities, or where thebody which elects the board member has given its expressconsent.

Board members shall not disclose any condentialinformation which has come to their knowledge in relationto the performance of their duties, if such disclosure couldaffect the activities or the interest of the company. Thecondentiality obligation survives the release of the boardmember from ofce.

Specic obligations for managers and board members arisewhere the company becomes insolvent. Within 30 days the

manager or the executive director of the relevant companymust le for insolvency. If the manager/executive directorfails to full this obligation, s/he shall be liable towards thecreditors for the damages incurred. In addition, thedefaulting manager/executive director may be subject tocriminal liability.

Liability

The directors of a joint stock company are required todeposit a guarantee for their potential liability in an amount

determined by the general meeting of shareholders. Thisamount cannot be lower than three months grossremuneration of the board member and can be depositedwith the company in the form of cash, shares ordebentures.

The directors are liable jointly and severally to the companyfor any damage caused as a result of their actions. Anydirector may be released from liability if it is establishedthat s/he has no fault for the damage suffered by thecompany. Shareholders holding at least ten per cent of thecompanys equity may le a claim demanding that board

members be held liable for damage caused to thecompany.

Board members of JSCs are obliged to notify the board ofdirectors in writing when they or parties related to thementer into agreements with the company out of theordinary scope of activities of the company or in deviationfrom normal market conditions. Such agreements shall beexecuted only upon the approval of the transaction by theboard of directors. However, if executed without theboards approval, such transaction shall be valid but theperson who has knowingly executed it shall be liable fordamages to the company. Much stricter rules concerningrelated party transactions apply to public companies.



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Release from liability

The general meeting of shareholders may release the boardmembers of the JSC from liability. A general meeting ofquotaholders may release the manager of the LLC fromliability. Normally, such release from liability is made yearly,upon the approval of the annual nancial statements andthe annual management report by the general meeting.

Immigration issues

A foreign manager or director working under amanagement agreement in Bulgaria is not required toobtain a work permit and can apply for a long-termresidence permit in Bulgaria.

Taxation and social security

Personal income tax at a at rate of 10% is levied on theremuneration of managers and directors, net of mandatorysocial and health insurance contributions.

The remuneration of managers and directors wouldnormally be subject to social and health insurancecontributions of about 28% of their gross income, cappedat EUR 1,000 per month. Thus, the part of theremuneration which exceeds EUR 1,000 per month is notsubject to social and health insurance contributions.

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This guide focuses on the rules relating to the managementof limited liability companies. It does not address the rulesrelating to other types of companies. This updated guidereects Croatian legislation applicable on 1 July 2010.

A Croatian private limited liability company (the company)will generally have one board, usually a ManagementBoard, consisting of one or more directors. Directorsrepresent the company in business dealings and othersituations where representation is required, for examplebefore a Court, in administrative board procedures or inemployment matters.

The Management Board members conduct the business ofthe company in accordance with the Companies Law, thecompanys articles of association, decisions of the foundersand the mandatory instructions of a general meeting ofshareholders (the Assembly), together with theinstructions of the Supervisory Board of the company, ifone is established.

Directors are responsible for representing and running thecompany, but they are not personally l iable for thecompanys acts or for contracts concluded on behalf of the

company, except in the cases below.


There are few legal restrictions governing who can be adirector of a company. An individual director is not requiredto be resident in Croatia and there is no nationalityrequirement. However, only a physical person with full legalcapacity and who is a capable businessperson can beappointed as a director.

The Companies Law also contains provisions that restrictthe appointment of persons as directors who wereconvicted for nancial crimes, barred from certain

professions or were convicted for crimes conducted inprocedure of insolvency of a company.

Furthermore, the articles of association may contain certainconditions or set additional requirements for thenomination of directors, such as holding specic diplomasor having requisite professional skills . However, theseconditions may not limit the free choice of the Assemblyto appoint directors.

Appointment

Directors are appointed by a resolution of the Assembly,unless otherwise stated in the articles of association. Theappointment is effective upon adopting the respectiveresolution. In practice however the appointed directors willonly be able to prove their authority after being registeredwith the Commercial Courts Register. The period ofappointment of a director is not limited unless thecompanys articles provide otherwise.

Notication of the appointment signed by any and alldirector(s), together with certied evidence of the

appointment, certied acceptance of appointment, as wellas a certied sample signature of the director(s), needs tobe led with the Commercial Courts Register.

Any change concerning directors, which is registered withthe Commercial Courts Register (e.g. directors residenceetc.) must be re-led.

Future directors (who are non-Croatian citizens) are nowrequired to obtain Personal Identication Number (inCroatian OIB) before ling notication of theappointment. The Personal Identication Number is issuedby the relevant Tax Ofce on the request of such futuredirector.

Croatia

Gregor Famira, [email protected]



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Removal

Generally, pursuant to the Companies Law, the Assemblycan remove a director at any time without giving a reasonfor the removal.

Removal of a director is subject to any entitlements thedirector may have arising from their employment contractor management agreement (a type of service agreement),or the provisions of Croatian employment legislation. Notethat the Croatian employment legislation does not apply tothe management agreement. However, it could be the

subject of a dispute if a director is only employed under amanagement agreement or an employment agreement.Therefore, such agreements should be drafted precisely.

Dismissing a director from their position removes theirauthority to represent the company but does not affect anyagreements signed between the company and the director.

Although a directors dismissal has immediate effect, thirdparties may rely on the directors authority to represent thecompany as long as the director is registered in theCommercial Courts Register. Therefore any appointment/

revocation should be immediately registered with theCommercial Courts Register.


Under Croatian law, the Management Board members jointly represent the company.

The articles of association may provide a different form ofrepresentation and usually provide that one or moredirectors each solely or two directors jointly or, in cases ofmore than one director, one director together with aProcurist (agent with limited power to represent) areentitled to represent the company. The method ofrepresentation is registered with the Commercial Court

Register, thereby notifying third parties of the extent ofauthority granted to particular individuals.

A director has full authority to manage the company.However, such authority may be restricted by the articles ofassociation or by shareholder resolutions, for example: byrequiring the approval of the Assembly prior to certaindecisions being made; by providing for a particular way ofrendering decisions; or by requiring approval of certaintransactions.

These limitations on a directors authority have no legal

effect vis--vis third parties, so if the authority is exceeded,the company will be bound and the validity of a contractcannot be challenged on the basis of a directors lack ofauthority to conclude a given contract. If a director exceedshis authority in this manner, the company can sue himpersonally for damages.


Under Croatian law, all directors are vested with the samerights and duties. Generally, the directors are required to

jointly manage the company. The shareholders, articles ofassociation, internal guidelines for directors and theManagement Board itself may modify this concept andallocate certain tasks to one or more director(s).

Nevertheless, such distribution of responsibilities does notaffect the overall responsibility of each director for thecompanys business as a whole.


Appointment to the position of a director does not in itselfcreate a contractual relationship between the director andthe company.

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The company therefore usually enters into a managementcontract with the director, specifying the directors dutiesand remuneration, as well as any other important aspectsof the relationship with the director such as condentiality,non-compete provisions, termination provisions andbenets in kind.

Under Croatian law, the directors are entitled toremuneration proportionate to their engagement, as wellas the companys business results.

Removal of a director does not automatically terminate his

or her management agreement and vice versa. Themanagement agreement may, however, expressly stipulatethat if an individual ceases to be a director, then his or hermanagement agreement shall automatically terminate as ifnotice of termination had been given.

Conicts of interest

A director is subject to a statutory covenant not to competewith the companys business during the tenure of theirdirectorship. Any non-competition and non-solicitation

covenants going beyond the statutory covenant must beset out in the management agreement.

Directors cannot, without the consent of the Assembly,engage in business activities of the company for their ownbenet or for the benet of others. Furthermore, directorsare prohibited from acting as members of the ManagementBoards or the Supervisory Boards of companies thatengage in the same business activities as the companyof which they are directors.

If the Assembly has knowledge that the directors theyappoint are engaged in the above-mentioned prohibitedactivities and still appoint such persons as directors withoutexplicitly seeking that they desist from such activities, theAssembly will be deemed to have consented to theactivities. Consent can be revoked at any time, evenif it is a deemed consent.

A violation of the above-mentioned prohibitions entitlesa company to seek legal recourse for the breach. Thecompany can either seek damages for the breach, orrequest that the director pays the proceeds from the

prohibited activity to the company. In any event, thedirector can be dismissed from his or her position.

Duties of directors

A director must manage the company and act on behalfof the company in line with its business purpose, in thebest interests of the company and in accordance withinstructions given by shareholders, with the diligence of anorderly businessman. Conduct is not dened by law but bythe courts on a case-by-case basis.

A director is subject to a wide range of specic statutoryduties, requiring him or her to, inter alia:

Ensure that all statutory lings were made;Conduct internal reviews;Comply with the statutory requirement to maintainaccounts;

1 Small companies is a term dened by the Croatian Accountancy Act. The small company is any company which does not full two of the following conditions:(1) overall assets in the amount of HRK 32.5 million, (2) income of HRK 65 million and (3) average no. of employees during the business year up to 50.



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Submit nancial statements to the Assembly and theSupervisory Board (if any). Directors of smallcompanies 1 are not required to submit annual nancialreports (in Croatian izvjee o stanju drutva ) to theabove named bodies unless otherwise stated in thearticles of association;Uphold the principles of capital maintenance (i.e. not topay back to the shareholders the stated share capitalof the company);To initiate company insolvency procedure in the termof three weeks as of the day when the cause forinsolvency appeared (as dened by the Croatian

Insolvency Act). From such day, the directors aregenerally required to refrain from executing anypayments. This was already directors obligationbut only according to the Insolvency Act.

Liability of directors

Due care standardThe standard of due care for directors is to act in a mannerof a prudent businessperson and to keep condential thebusiness secrets of company that they represent.

Directors that breach this standard are jointly and severallyliable to the company. In proceedings to establish whethera breach exists, the directors bear the burden of proof toshow that they exercised due care.

Actions specically dened as breaches by theCompanies LawPursuant to the Companies Law, breaches of due carerelated to the following is considered as exceptionallygrave:

returning assets invested in the company to themembers of the company;making payments in the event that the companybecomes insolvent or over-indebted;distributing the assets of the company;

paying interests or prots to company members;acquiring treasury business interests in the company;andissuing business interests in the company before thecorresponding contribution for the business interestis paid to the company in full.

Also, a breach of the directors obligations under tax andsocial security legislation may lead to the imposition ofnes in accordance with special laws.

Limitations periods for ling claims

The limitation period for ling claims arising from a breachof the duty of due care is ve years from the date on whichthe claim arises.

Unlawful return of capitalApart from the payment of dividends, the Companies Lawprohibits the return of contributed share capital to theshareholders. Therefore, if the Management Board wouldexecute a non-arms length agreement with the companysshareholder(s), the companys creditors would be entitledto claim damages against the shareholders and theManagement Board members.

Additionally, if such payments were made to the companysshareholders abroad, which resulted in a reduction of thecompanys prot, the Croatian Tax Authorities would beentitled to tax the Croatian company as if such anagreement had an arms length consideration.


Directors may be excluded from liability if there are justiedgrounds for such exclusion, or if the directors succeed inproving that they have acted in compliance with the duecare standard. According to the Companies Law, directorswill be exempt from liability if their actions are based onlawful decisions of the Assembly.

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Despite the mentioned exemption, where debts towardscreditors cannot be settled from the companys assets, thecreditors can claim damages from the directors, if thedirectors breached the due care standard.

Immigration issues

A foreign person who is appointed as a director of acompany has to obtain the following:

entry visa (unless the respective country and Croatiahave stipulated differently);

work permit or business permit (if a director works forhis or her, or a majority owned company in Croatia);andresidency permit (issued for a maximum period of twoyears).

Work and business permits are granted on a quota basis.The quotas are dened by the Government of the Republicof Croatia. However, the quota policy does not apply to EUcitizens holding managing directors positions in a companyowned by a company located in a respective EU countryand in some other specied cases.

Taxation

If a director has Croatian residency, his or her income shallbe taxed under Croatian Income Tax provisions accordingto the world income principle. If the director has noresidency in Croatia, only certain income connected to hisor her activities in Croatia will be taxed under CroatianIncome Tax. The income tax rates vary from 12% to 40%.Croatia has entered into many double taxation treaties,which ease the taxation burden on foreigners who aresubject to Croatian income tax.

Social security

If a director is also an employee of the company, therespective pension (20%), health (15%), unemployment(1.7%) and casualty (0.5%) contributions have to becalculated and paid by the employer i.e. the company. If adirector is not an employee of the company, the companyhas to calculate and pay those contributions based on hisor her income, unless the director is already insured on thatbasis abroad.



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Czech Republic

Helen Rodwell, [email protected]

This paper focuses on the law relating to directors duties inrespect of directors of joint stock companies (JSC) andprivate limited companies. It does not cover the rules ofpartnership, state enterprises or other legal forms oforganisations operating in the non-prot sector.All comments relate to both types of companies, unlessspecied otherwise.


A natural person may become a director. A director can not

simultaneously be a director of another company with anidentical or similar business activity, unless the companieshave the same holding company (i.e. they are part of onegroup).


In the case of a JSC:

the method for appointment of a director is determinedby the general meeting, unless the articles of

association expressly provide for appointment ofdirectors by the supervisory board. The appointmentperiod may not exceed ve years although directorsmay be re-elected;the minimum number of directors is th

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