The Articles of Association of a limited liability company are not merely a formality or a document required for company registration with the Serbian Business Registers Agency (APR). They govern the relationships between the members of the company, the decision-making process, the rights and obligations of the partners, as well as the procedures for resolving disputes when business relationships no longer function smoothly. It is precisely through poorly drafted or overly simplistic Articles of Association that problems arise concerning company management, the withdrawal of a member, profit distribution, and control over the company’s operations.
What Is the Purpose of the Articles of Association?
The Articles of Association are often perceived as just another document that needs to be completed in order to register a company with the Serbian Business Registers Agency (SBRA).
A large number of companies use generic templates downloaded from the internet. Such Articles of Association will generally be accepted. The APR will most likely issue the registration decision, the founders will move on with their business activities, and the document will practically be forgotten. However, these standard Articles of Association usually regulate only the basic elements:
- company name,
- registered seat,
- principal business activity,
- share capital,
- percentage ownership interests of the members.
As long as the partners have a good working relationship, this is usually sufficient. However, once relations between the members are no longer as harmonious as they were at the beginning, it becomes clear how important it is for the Articles of Association to regulate not only the formal elements but also the essential relationships within the company.
Practice shows that serious disputes between company members most often arise because key issues were left “for later”, based on the assumption that conflicts would never occur.
What Exactly Are the Articles of Association?
The Articles of Association constitute the company’s principal constitutional document.
In a single-member LLC, the Articles of Association take the form of a Decision on Incorporation, while in a company with two or more members they are executed as an Incorporation Agreement.
Since the Decision on Incorporation is adopted by the sole member of the company, it does not regulate matters such as decision-making procedures, voting majorities, the rights and obligations of members, or other issues that are relevant only to multi-member companies.
On the other hand, an Incorporation Agreement should regulate in as much detail as possible:
- the basic rules governing the company’s operations,
- the relationships between the members,
- the management structure,
- decision-making procedures,
- the rights and obligations of the members,
- as well as numerous other matters relevant to the company’s business operations.
The Serbian Companies Act prescribes the mandatory elements of the Articles of Association while leaving considerable room for the members to tailor their mutual rights and obligations to their specific business relationship.
It is precisely this substantive part that is often neglected when generic templates are used.
When Do the Articles of Association Become Most Important?
A large number of companies are established by friends, family members, spouses, long-time colleagues, or business partners who have a high level of mutual trust.
For that reason, founders often believe there is no need to complicate the Articles of Association with detailed provisions.
However, business relationships change.
Someone may gradually stop contributing to the business.
Someone may seek greater control, while another may wish to leave the company.
One member may advocate bringing in investors, while another may believe they contribute significantly more than the others and consider the situation unfair.
Sometimes, the members simply lose trust in one another.
In such situations, generic Articles of Association usually fail to provide answers to the questions that become essential for the company’s continued operation.
Who Makes Decisions and How?
One of the most important issues that should be regulated by the Articles of Association is the decision-making process.
The law assigns certain matters to the company’s General Meeting, but the members may also provide for:
- voting majorities different from those prescribed by law,
- special veto rights,
- qualified majorities,
- or additional decision-making procedures.
In practice, the most common problems arise in relation to:
- the division of powers between the director and the General Meeting,
- decision-making deadlocks in companies with a 50/50 ownership structure,
- pre-emption rights and the valuation of ownership interests,
- as well as non-compete obligations among the founders.
For example, without more specific limitations contained in the Articles of Association, a director may undertake obligations or enter into transactions that the other members would never have approved.
In companies with two members holding equal ownership interests, complete decision-making deadlock frequently occurs because no mechanism for resolving such situations has been agreed in advance. If the Articles of Association do not provide mechanisms for resolving deadlocks, the company may effectively become paralysed.
Similarly, while the law provides for pre-emption rights regarding the transfer of ownership interests, it does not regulate the method of determining their value, which frequently becomes a source of disputes between company members in practice.
Another common issue arises where one of the founders develops a competing business while the non-compete obligation has not been adequately regulated in the Articles of Association.
For this reason, the difference between Articles of Association that merely satisfy the APR’s registration requirements and Articles of Association that genuinely protect the interests of the company’s members usually becomes apparent only once a serious business dispute arises.
Withdrawal of a Member from the Company
One of the issues that founders and company members most frequently overlook is the withdrawal of a member from the company. While relationships are good, few people think about what happens if someone wishes to leave, how the value of their ownership interest will be determined, who has the right to acquire it, and within what period payment must be made.
It is only when a conflict arises that questions concerning:
- a member’s withdrawal from the company,
- the transfer of ownership interests,
- or even the expulsion of a member from the company,
come to the forefront.
The law provides the basic framework, but well-drafted Articles of Association can significantly reduce the scope for future disputes.
For example, the Articles of Association may regulate:
- additional grounds for a member’s withdrawal,
- the method for determining the market value of an ownership interest,
- pre-emption rights,
- restrictions on transferring ownership interests to third parties without the consent of the remaining members, or
- procedures governing a member’s withdrawal from the company.
The absence of such provisions frequently results in lengthy corporate disputes.
The Director and Control over the Company’s Operations
In a large number of companies, the director is also one of the company’s members. However, this does not always have to be the case.
The Serbian Companies Act regulates the duties and responsibilities of directors in considerable detail, while also allowing the Articles of Association to regulate more specifically:
- the director’s powers,
- limitations on the director’s authority to represent the company,
- the obligation to obtain the members’ approval for certain transactions,
- the procedure for appointment and removal,
- as well as control mechanisms over the management of the company.
This is particularly important in family-owned companies and companies with multiple partners. Otherwise, situations often arise in which one member believes they have no real control over the company’s operations despite formally holding a significant ownership interest.
Profit Distribution Is Not Automatic
Business owners often assume that profits will automatically be distributed in proportion to each member’s ownership interest. However, a company’s operations, as well as the relationships between its members, are often far more complex.
Company profits are not distributed automatically. Sometimes the company has outstanding obligations from previous years, obligations towards members leaving the company, or strategic plans to reinvest profits.
For this reason, the Articles of Association should provide for various profit distribution mechanisms, additional rights for certain members, or specific obligations of the members towards the company. Where such matters have not been regulated in advance, dissatisfaction among the partners is almost inevitable and may have far-reaching consequences.
What Happens if a Member Dies or Enters Bankruptcy?
Although limited liability companies are companies of capital rather than companies of persons, the personal relationship between the founders still plays an important role at the time of incorporation. Two or more business partners decide to establish a company together taking into account each other’s personal and professional qualities.
In practice, partners often completely overlook the possibility of the death of a member or bankruptcy (where the member is a legal entity). Such an event usually brings significant changes to a company that had previously operated harmoniously.
Without explicit provisions in the Articles of Association, the following situations may occur:
- heirs become members of the company,
- the company acquires an entirely new partner whom the remaining members never intended to accept,
- the company’s operations become blocked until probate or other legal proceedings have been completed.
For that reason, the Articles of Association should regulate:
- the rights of heirs,
- the possibility of buying out the ownership interest,
- pre-emption rights,
- or restrictions on the transfer of ownership interests.
Why Generic Templates Are Often Not Enough
Standard Articles of Association templates are generally sufficient for the purpose of company registration. However, registering a company and ensuring its long-term operation are two entirely different matters.
Well-drafted Articles of Association are not intended solely for registration with the Serbian Business Registers Agency (APR). They serve as a framework for the company’s members in managing the business.
Their primary purpose is to:
- prevent future disputes,
- clearly define the relationships between the partners,
- protect the company’s business,
- provide mechanisms for resolving disputes when they arise.
This is precisely why the Articles of Association are not merely a formality, but one of the most important legal decisions that the members make at the very beginning of their business venture.
Conclusion
Most disputes between business partners arise because the law leaves it to the members to regulate their mutual relationships, while the key issues remain either completely unregulated or only superficially addressed through generic templates.
The good news is that the Articles of Association may subsequently be amended and adapted to the specific needs of the company, with such amendments being duly registered.
Although the Articles of Association cannot prevent every business dispute, carefully drafted provisions governing the relationships between the members can significantly reduce the scope for misunderstandings, abuses, and operational deadlocks. That is precisely why they should not be viewed merely as a registration formality for the APR, but rather as one of the key legal documents ensuring the company’s long-term stability.