Before the introduction of the latest amendments to the Company Law of the Republic of North Macedonia (Company Law) on April 29, 2022, it stipulated that only loans provided by sole shareholders to their companies may be converted into share capital. The practice of conversion overseen by the Central Registry of North Macedonia (CRM) was strict. For example, loans taken over by the shareholder from the companies of the same group were considered ineligible for conversion.
Due to rising inflation, increasing market interest rates, limited sources for financing, as well as the need for improving the legislation for financing by business angels, Macedonian lawmakers revised this approach. As a result, the latest amendments to Company Law were adopted, introducing the possibility for third-party loans to be converted into share capital of the borrower.
Such conversion is subject to the fulfillment of previous conditions, and subsequent registration with the CRM. The Company Law regulates strict procedures and rules for conversion (e.g., the convertible loan provided by the third party must be monetary, the principal of the loan must be contributed via a share capital increase, certain documents must be provided to the CRM, including the convertible loan agreement, etc.).
The Company Law appears not to regulate certain matters, and to overregulate others, which may lead to ambiguity in practice, or slow down the execution of the loan and the registration procedure in front of the CRM. As an example, the Company Law does not regulate the accrued interest connected to the convertible loan agreement. Consequently, the obligation to pay the interest appears to be left to the borrower, which ultimately decreases the borrower’s available cash flow, and the CRM has no regulation enabling them to harmonize the practice. Also, providing the convertible loan agreement may trigger certain confidentiality issues for the investor and the borrower.
Also, the procedure for the execution and consequent registration of the convertible loan provided by the Company Law appears to be formal (e.g., the law regulates the mandatory elements of the convertible loan agreement, such agreement is subject to notarization which creates additional obligations for the parties, in case of foreign loans the obligation for notification of the National Bank of North Macedonia is triggered, etc.).
The loan can be transformed into a contribution until the expiration of the third year after signing the convertible loan agreement, which is not necessarily favorable for the investors, especially in cases when the loan’s maturity period exceeds three years. The lawmakers should maybe consider a more business-oriented approach (e.g., framing the rules, and leaving it up to the parties to contractually agree on the period during which the loan could be converted).
On the plus side, the Company Law allows the shareholders to agree that their shares in the company differ from their actual contributions in the share capital with the incorporation agreement, which may be useful information for investors.
Although more than 11 months have passed since the provisions for convertible loan agreements came into force, it appears that the CRM has not registered any conversions. Having the above in mind, it appears to us that an additional period would be needed for determining the effects of this amendment or any specific need to update it.
By Marija Filipovska Jelcic, Partner, and Aleksandar Josimovski, Attorney at Law, CMS
This article was originally published in Issue 10.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.