As of late ESOP (Employee Stock Option Plan) and similar employee share schemes are becoming increasingly common among foreign-owned companies in Serbia (especially start-ups) and by now they are practically a must-have for attracting and retaining top talent in the IT and connected industries. The emergence and prevalence of these schemes is an elegant way of aligning employees’ interests with the long-term prospects of the company. In that sense, they provide a significant incentive for the employees while the employers do not have to incur additional expenses in the early stages of development of their respective businesses.

Having said that, do ESOP schemes raise any legal issues that the issuers and beneficiaries should keep in mind and address? Moreover, are they even recognized or permitted under Serbian law?

Serbian legislation does not specifically regulate employee share schemes with respect to securities issued by foreign entities (which is almost always the case in practice). On the other hand, capital markets regulations have for some time provided base regulations on securities issued to employees by Serbian joint stock companies, while legislative changes from 2020 introduced a legal framework for ESOP schemes in local limited liability companies. However, to date their use remained rather limited and it is doubtful whether this will change in the future. This especially as the prospects of cashing-in from shares in local companies are much less promising in comparison to most foreign securities (due to regulatory constraints as well as limitations of the local market for such shares).

In absence of specific rules designed for employee share schemes as they are applied in practice (i.e., concerning securities issued by non-Serbian entities), the only applicable rules are the general rules which regulate issuance, registration, purchase and disposition over shares or financial instruments, comprised principally in the Capital Markets Act [Zakon o tržištu kapitala].

In line with this regulation, the notion of ”public offering” of securities is very broadly defined, as it encompasses any notification which provides sufficient information about the conditions of the offer and of the offered securities and which is directed to Serbian residents. In addition, if a certain activity regarding securities or financial instruments is considered to be a public offering, this would entail fulfilment of several procedural requirements, which would render ESOP schemes highly impractical and costly.

Prompted by interested parties aiming to reduce the existing legal uncertainty, the Securities Commission (“SEC“) has issued several official interpretations about shares or stock options issued by foreign issuers to their Serbian employees (or employees of their local subsidiaries). Pursuant to SEC’s interpretations, the Capital Markets Act is generally applicable to these practices, unless foreign shares or options are provided without remuneration, or if the employees are the ones who initiate acquisition of options or shares from the employer (and if investment services regarding acquisition of shares are provided abroad).

Although opinions by the SEC provide some guidelines, they still leave some important practical issues unanswered. Many issuers find it difficult or impossible to issue shares without remuneration, on account of laws and regulations in their respective jurisdictions, while the notion of ”employees’ initiative” may be subject to different interpretations. It is also important to consider the method of issuance and realization of financial instruments in question, and whether the employer and/or the issuer can be deemed to be providing investment services to the employees. To make matters even more complicated, payments made for the purpose of acquisition of shares or options may be subject to Foreign Exchange Regulation under certain conditions.

In practice employers typically rely on the aforementioned exceptions, but also on the notion that ESOP arrangements are not necessarily visible to the authorities and (especially in case of smaller companies with few employees) that they will simply be ”under the radar” of the enforcement authorities. The importance of compliance is often underestimated, and not enough attention is given to details which may decisively influence legality of the scheme. Nonetheless, employee share schemes create long-term arrangements and thus it should not be taken for granted that the enforcement policy will always remain lax, especially if the companies in question grow in size and revenue (which is the aim of virtually all share schemes offered to employees).

As this form of remuneration continues to gain in importance, the issue of compliance should be taken seriously as employees’ future earnings as well as the credibility of the employer are at stake. In particular, employers should avoid generic solutions and each particular ESOP should be analysed individually so that that the ”paperwork” as well as its practical implementation (which is equally important) are adjusted to the existing regulatory framework and interpretations provided by the SEC (incomplete as they are) to the highest degree possible.

This text is for informational purposes only and is not legal advice. Feel free to contact us if you need additional information.


Damjan Despotović, partner

Srećko Vujaković, partner

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