Corporate Law in Bulgaria

These are the highlights if you want to know more about Corporate Law in Bulgaria. This entry was drafted by BAZLYANKOV, STANOEV & TASHEV LAW OFFICES, Link to E-Iure Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case  BAZLYANKOV, STANOEV & TASHEV LAW OFFICES is an excellent option in Bulgaria.

1. Regulations and Rules

Bulgarian corporate law is codified and integrated into the Commerce Act. This act contains most of the rules of company law – incorporation of the companies, rules regarding the decision-making bodies, changes in the capital /increasing or decreasing/, insolvency and liquidation, merges and acquisitions of companies.

It is to be also noted that the resolutions of the EU in the area of corporate law are in force in Bulgaria, as its member state, as well as several commercial directives, that are implemented in the corporate legislation of Bulgaria.

2.Types of Companies

In Bulgaria there are different legal forms to develop business. The most frequently preferred types by Bulgarian and foreign investors are:

• LIMITED LIABILITY COMPANY /LTD/ – is a small and the most commonly incorporated company in Bulgaria. A company with minimum capital of 2 BGN /1 euro/. The partners can be Bulgarian legal or natural entities, as well as foreign legal or natural entities. This is a very adequate form for small or average businesses, where not only capital, but personal relations between the partners play theirs vital part. The law has seen to this specific of the entity by setting the consent of the other partners as a requirement for exception of a new member into the company. As a comparison, such a requirement does not exist for gaining the capacity of a shareholder in a JSC.
• SINGLE – MEMBER LIMITED LIABILITY COMPANY – a single partner /a Bulgarian legal or natural entity, as well as foreign legal or natural entity/ possesses the whole share capital of the company, the minimum capital is 2 BGN /1 euro/.
• JOINT STOCK COMPANY /JSC/ – company with a minimum capital of 50 000 BGN /around 25 000 euro/ of which at least 25 % must have been paid at the time of incorporation. The capital is divided into shares. This form is preferred by the average and major enterprises, where the most valuable asset a shareholder can bring is capital. It should be highscored that the decisions for increase or reduce of the capital are made with the majority of 2/3 of the shareholders, presented at the General meeting, where the other vastly used form of entity – LLC, requires unanimity for such an action. Therefore JSC allows for faster and easier accumulation of funds, which management and control are secured by other detailed provisions of the Commerce Act.
• SINGLE – SHAREHOLDER JOINT STOCK COMPANY – there is only one shareholder who possesses the whole share capital, divided into shares.

All these companies are limited liability companies.

Other less common legal forms are:

• General Partnership – is incorporated by two or more general partners who are unlimitedly liable.
• Limited Partnership – is incorporated by two or more partners, some of the partners are limited liable to the amount of capital contributed and other partners are unlimitedly liable.

THE INCORPORATION OF A BRANCH

A company, duly registered in Bulgarian Registry Agency, Commercial register can open a branch or branches in a town, different from the company’s registered office. The incorporation of a branch requires a formal resolution, taken by the decision-making body, authorising the establishment of a branch and appointing a representative. The branch does not have a legal personality and represents an economic structure, which is managed separately than the company but cannot have a separate balance. It is inscribed in the Commercial register and information about this separate registration should be present in the branch’s correspondence.

The branch of a foreign company

The regulation regarding a branch of a foreign company in Bulgaria is provided in the Commerce Act. A foreign company duly registered under the national law of the respective country can open a branch in Bulgaria. For this purpose, the Commercial Register requires submission of the documents for the registration of the Company and the decision making body has to take a decision about the address of administration, representative, activity of the branch. It is provided that the branch has separate balance and should have, respectively reflecting on the tax issues – the branch of a foreign company is a different tax subject.

3.The Liability of Shareholders

In all of the limited liability companies /Ltd and JSC/ partners’ / shareholders’ liability is limited to the capital contribution. If a partner/shareholder participates actively in the management of the company in the capacity of manager/director, the one becomes liable for corporate wrong management in the event of bankruptcy, but only due to the latter stated capacity.

The shareholders are not liable for the Company’s debts as the company and its shareholders are considered for company law purposes as separate legal persons.

4. Share Capital /minimum and minimum paid in amount/

5. Shares and Share Rights

The JSC and the Single JSC issues shares, which may be registered and bearer, ordinary or preference. It is common for companies to issue only one class of shares, known as ordinary shares. The rights and restrictions attaching to the shares are listed in the articles of association of the Company. The shareholders, who hold preference shares would carry additional rights /for example – to receive extra dividends/. It is accepted for the shares to be freely transferable. However, the article of association is the act that provides the restrictions on the transferring of shares and the way of transfer. When shares are issued or transferred, details of the shareholder are registered in the company’s statutory books and a share certificate is issued.

6. Corporate Governance

Shareholders Meeting

Partners/ Shareholders reserve the right to make certain decisions.

Bulgarian Commerce Act distinguishes ordinary and extraordinary resolutions. As for

the ordinary resolutions, the required majority is more than 1/2 and for the extraordinary resolutions the required majority is higher, such as more than 2/3 or 3/4.

Ordinary resolutions, for example, are: approval of the annual report and the balance sheet, appointing the manager, adoption of resolutions for opening and closing of branch offices and for participation in other companies or adoption of resolutions for acquisition and expropriation of real estates and real rights.

Extraordinary resolutions are: making amendments and supplements to the Articles of incorporation, admittance and dismissal of a partner in LLC, transfer of part of the company to a new member in LLC and adoption of a decision on additional monetary contributions in LLC.

As it was mentioned, the resolutions for reduction and increase of capital in LLC are adopted unanimously by all partners, and in JSC they are taken with the majority of 2/3 of the presented capital.

It is worth highlighting that due to an amendment in the Commerce Act in 2016 some decisions, adopted by the partners in LLC, require a record with simultaneous notarisation of the signatures and contents thereof. Those decisions regard the admition of partners, changes in the capital, appointment of the managing director and acquisitions and transfers of property rights. However, the notarization is not required in the case, where the Memorandum of Association provides for a simple written form of those decisions. Consequently, the current regulation of the LLC gives the partners the choice to stick to the traditional unconditioned way of doing business, to make their LLC a simplified, yet very protested structure, or to create something in between.

Minimum number of broad meetings/year – Once a year

At least one shareholders’meeting must be held each year in order to approve the accounts of the previous year. Both JSC and Single JSC must have a Statutory Auditor. The Board of Directors annually after the end of February composes for the previous year an annual financial statement and report for the Company’s activity and presents them to the expert accountants-auditor appointed by the shareholders for examination and report.

Management

The General meeting of partners of a LLC made the most important decisions concerning the capital, the structure, management of the company, the admittance and expelling of shareholders, the acquisition and disposing of real estates, etc.

The ruling bodies of a JSC are the General meetings of shareholders to decide the most important issues. The other bodies depend on the system of management, which has been chosen. As there are usually a greater number of shareholders the law does not require unanimity for any decisions made by the General meeting. The General meeting is not entitled to make decision for acquisition or disposing of real estates as this issue is in the scope of the Board of directors’ powers.

• The one-level system includes only a Board of directors consisting of 3- 9 members, which is the ruling and representative body of the company. The board chooses one of its members who, in his capacity of an executive director, solely represents the company and performs the basic actions, connected with the management but on the grounds of a relevant decision of the Board.
• The two-level system of management includes a Managing Board and a Supervisory Board, which requires a well experienced method of cooperation between the two boards as some of the actions should be performed by the Managing Board with the consent of the Supervisory Board which chooses the members of the Managing Board and controls them permanently. The first system is widely used because of its larger flexibility and simplicity than the two-level system.

MANAGER AND EXECUTIVE DIRECTOR – appointment, dismissal, duties, remuneration

In the article of association of the company is provided which company body has the rights to appoint or dismiss a manager/executive director of his duties. The person, who is to act as a manager/ executive director, must sign a declaration – consent and provide specified information to the Commercial Register. A management contract can be concluded by and between the Company and the manager/executive director and shall stipulated his duties, remuneration and liability.

The General Meeting of the partners of LLC appoints and sets a manager of the company and his remuneration. It is not necessary for the manager to be a partner. The owners of the share capital have the opportunity to appoint as a manager a person, who represents the company and binds it in its relations with third parties. The manager carries out the current management of the company and concludes agreements on behalf of the company.

The executive directors in a JSC are appointed by resolution of the members of the Board of Directors and the Board determines their remunerations.

There are no specific rules on the level of remuneration and it will usually be a matter of negotiations.

The managers or the executive directors have to act in the Company’s interests and with the care of a prudent businessman, as well as not to accomplish personal gains on behalf of neglecting their aforesaid duties. The representative shall organize and manage the Company’s activities in compliance with the law and the resolutions of the General Meeting/ Board of Directors. The manager/ executive director has the rights to convene the General Meeting, pursuant to Bulgarian legislation and the Article of association.

Minutes /filing with the registry of commerce and companies: Minutes must be kept in

a Minutes Book. They are signed by the Manager of a LLC and the executive director of the JSC and by the partners/ shareholders who are present at the General meeting. Only an authorized by the Board of Directors person can write the relevant information in the books.

In case of amendments and supplements to the Article of incorporation, changes

concerning the capital, the structure and the management of the companies must notify the Commercial Register and an announcement for the convening of the General Meeting shall be done in the Commercial register.

7. The Commercial Register and Register of Non-Profit Legal Persons Act

The new Commercial Register Act was adopted and approved by Bulgarian Parliament in 2006 and came in force on 01.01.2008. Parliamentary approval of the act fulfils a recommendation in the European Commission’s Monitoring Report on Bulgaria of October 2005 to introduce electronic access to the commercial register and the requirements of Directive 2003/58 of the European Parliament and the European Council. Now the Commercial Register Act has been supplemented and as of 01.01.2018, it is to include the regulations of the Register of Non-Profit Legal Persons, where electronic access is introduced, as well.

The enforcement of the Commercial Register Act created a central electronic register and enabled cheaper and faster registration, simplified and secured procedures, accessible through Internet. This implementation is in full synchrony with the activities on European level and a direct link to the Bulgarian Commercial register can be found on the internet site of the EU Commission.

The Bulgarian Registry Agency is the state agency that facilitates the procedures, regarding the incorporation and changes in the companies and ensures more transparency for the partners, shareholders of the companies and the connections between natural and legal persons. The applications, regarding the companies are reviewed very fast which considerably helps the various business activities. If the administrator finds that the legal requirements are not met, he/she has to draw up a motivated refusal. The refusal can be claimed to the District court upon the location of the Company.

An indisputable asset of the act is the provision to introduce a standard centralized electronic registration system for companies and the direct and easy access to the company information.

The provisions of the Act are currently applied in practice with ups and downs as some issues, regarding the Commercial register shall be clarified and solved /such as different requirements of each administrator, especially with regards to any new provisions in the Commerce Act/.

The Commercial register Act provides that till 31.12.2011 is the deadline for free of charge re-registration of the existing companies in the Commercial register. Sole traders and branches of foreign traders in respect whereof no re-registration was requested within the time limit, are considered deregistered as of 1 January 2012. However, the companies and cooperatives which did not re-register in the Commercial register were not immediately deregistered. Those were wound up on 01.01.2012 and were forbidden to pursue business as of that date. Their company was to enter a procedure for liquidation, which is provisioned to start on request of an interested party. The law states that the deadline for such a request is 31.12.2015, the liquidation must be completed until 31.01.2017 and as of the latter date those companies are deemed deregistered.

However, the law also provides that where a property is found in respect of a deregistered trader, an application for liquidation may furthermore be submited after the aforesaid time limit, but not later than 31.12.2022.

Consequently, even though the legislation sets a specific term for filing a request for liquidation and that term expired on the 31.12.2015, many district courts have had the chance to rule that a liquidation is still possible for a deregistered company until 31.12.2022, provided a property is found, and therefore the judges have protected the rights and interests of creditors and shareholders once more.