A guide to minority shareholder rights in Bulgaria

A guide to minority shareholder rights in Bulgaria

Increasingly, international companies establishing a presence in Bulgaria will do so through a subsidiary. Often such companies are not wholly-owned, for example because:
· the subsidiary company was incorporated for the purpose of a joint venture with a Bulgarian partner;
· the subsidiary company was acquired by way of takeover while certain shareholders retained an interest;
· shares have been retained or allotted to management and/or directors;
· tax, regulatory or other legal requirements require a second or additional shareholders;
· the company is listed and has a number of its shares held by the public.

This article summarises the protections given to minority shareholders in both private and public companies by the Bulgarian law. We shall assume that the public company is listed on the Bulgarian Stock Exchange.

Specifically, this article deals with (A) when a minority can be forced to sell its shares to a majority, conversely (B) when a minority can force the majority to buy its shares, and (C) when a controlling shareholder must make an offer for all the other shares in the company. Lastly, there is (D) a summary of what percentage holding a minority shareholder (or shareholders acting together) needs to prevent any of a roster of actions by the company.

Future development

Upon joining the EU in 2007 or 2008, Bulgaria will be governed by, and will need to adopt law in compliance with, the EU legal framework for takeovers, which deals with minority shareholders rights. The Council and European Parliament Takeover Directive adopted in December 2003 came into effect in May 2004. Current member states must implement this into national law by May 2006. The Takeover Directive applies to companies listed on a recognised EU exchange.

Private Companies

Although the general Bulgarian law does protect minority shareholders in certain aspects, the greatest protection that can be afforded a minority shareholder is usually contained in a shareholders agreement. Shareholders in a company are, subject to limited restrictions, free to agree amongst themselves that certain of them will have rights to buy shares from, or sell their shares to, the other shareholders (drag- or tag-along rights).

However, shareholders agreements are not commonplace in Bulgaria, and a non-Bulgarian joint venture party will need to understand the other party’s reluctance to conclude such an agreement. The main reason is that a shareholders agreement does not over-ride the provisions of Bulgarian corporate law and, as such, a breach of the shareholders agreement can only be remedied through a long court process.

When a minority shareholder in a private company wishes to sell its shares, and in the absence of applicable provisions of a shareholders agreement, the minority shareholder may sell to any third party. However, sometimes the articles requires the shares to be offered first to the majority shareholder. There are no compulsory provisions in Bulgarian law that can force the majority shareholder of a private limited company to purchase the shares of a majority.

In fact, that the Commercial Act of 1991 permits an increase of the capital of the company sub conditio, which means that the majority shareholder may resolve that only he be eligible to obtain the new shares!

As a consequence, unless the parties can negotiate a shareholders agreement that they are confident they can enforce in court, it is not advisable to enter into joint ownership of private Bulgarian companies, in which one of the shareholders owns more than 50% of the shares. In any event, the parties should ensure that the articles of association prevent the majority shareholder from unilaterally managing and disposing of the company, the business or its assets.

Public (listed) Companies

The Bulgarian law that governs listed companies assumes that, as the shares in that company are listed, any minority shareholders who are unhappy with the company can sell their shares on the market. However, sometimes the market can be illiquid, such as when the share price has dropped very low. Therefore, in addition, the law and regulations governing listed companies tries to ensure that all shareholders are treated equally. The rules on disclosure to the market of certain information is designed, inter alia, to ensure that minority shareholders have equal access to information.

When a person acquires more than 50% of the shares in a public company (or two thirds of the shares together with a related party) it shall in fourteen days, following the date of acquisition, offer to the minority shareholders to purchase their shares, at a price which is subject to preliminary approval by the Financial Supervisory Committee.

When a person acquires more than 90% of the shares in a public company (alone or together with a related party) it shall inform the minority shareholders of its plans for management of the company, and shall inform the minority shareholders of its intention to make an offer for the entire share capital at least three months prior to the making of such offer. The minority cannot be forced to sell its shares.

The management of public companies is subject to special regulation aiming to disclose as much information for the shareholders/investors, as they need to be fully informed as to how the company is being run. The management must submit to the Financial Supervisory Committee quarterly reports and an annual report.

A single or a group of shareholders representing 5% of the issued share capital are entitled to call a general meeting of the company. Any shareholder having 5% is entitled to bring an action on behalf of the company against a third party in the event of inaction of the management.



The increase of the capital sub conditio is forbidden. Each of the shareholders is entitled to obtain a percentage of any new shares that is equal to his percentage prior to the increase. If one does not obtain the new shares they shall be compulsory sold through the stock exchange.

The management of the company cannot dispose of the company’s assets, which are at the value over 2 per cent of the last audited balance unless three quarters of the shareholders have authorized it in advance.

Any shareholder is entitled to bring an action against the management of the company. However, there is limited number of such claims in practice, as the court process is expensive and time-consuming, with a very high burden of proof on the claimant to prove mis-management and loss.

Registration of a branch of a non-Bulgarian incorporated company in Bulgaria

Registration of a branch of a non-Bulgarian incorporated company in Bulgaria

a) Summary
b) Documents required
c) Costs
d) Timeframe
e) Legal issues

a) Summary

New Balkans Law Office (“NBLO”) will be able to assist with the following primary and ancillary aspects of the registration of a branch office of a non-Bulgarian person:

· Advice on the relative advantages of establishing a Bulgarian private limited liability company, a branch of a foreign company, and a commercial representation office of a foreign company;
· Advice on the documentation required for the registration of a branch;
· Drafting and preparation of documents for the registration of a branch including documents to be executed/provided by the parent company;
· Effectuation of a registration with, inter alia, the National Statistics Institute, National Social Security Institute and the Local Tax Authority;
· Registration under the VAT Act of 1999 of the new branch;
· Preparation of branch/company books as required by law.

In addition, NBLO can assist with:

· the setting up of a bank account for the new branch;
· the negotiation of a lease of office space;
· the conclusion of employment contracts with new staff.

b) Documents required

The following documents will need to be prepared and filed with the relevant Bulgarian authorities to effect the branch registration (and if they are not signed in front of notary in Bulgaria then they will need to be witnessed by a suitable official and apostiled in the country of signature):

· Power of Attorney of the person who will be in charge of initiating and completing the procedure for registration of the branch;
· Minutes of a meeting of the directors of the parent company explicitly showing the decision: i) to establish a branch of the parent in Bulgaria, ii) to approve the registered address and business address, iii) to define its scope of activity, iv) to appoint its manager and lawful representative, and v) the limitations of his powers, if any;
· Declaration under Article 141, sub-Article 3, of the Commercial Act of 1991 and a specimen signature of the manager and lawful representative;
· A certificate for current standing of the parent issued by the Registrar of the companies or the respective body as per national company’s registration legislation;
· Certificate for reservation of the branch’s commercial designation issued by the Bulgarian National Reservation System DELFY;
· Receipts for payment of the registration fees.


c) Costs

Generally, the process will cost in the region of EUR 750 (approximately 15 billable hours) and plus registration costs and other disbursements, which are typically as follows:

Typical Disbursements
Value (in BGN)
Value (in Euro)
Translations
30
15
Validation/Notarisation
20
10
Reservation of the name of the branch
100
50
State Gazette Publication
30
15
Sofia City Court Company’s Registrar Fee
60
30
Official copy of the decree for registration
1.50
0.75
Registration with the Statistics Institute
100
50
Official stamp of the branch
33
16.50
Opening of a current bank account
25
12.50



Total
399.50
199.75


d) Timeframe

The registration can be completed by NBLO in approximately 7-10 working days.

e) Legal Issues

Clients should consider carefully whether registering a branch office is the most appropriate form of presence for the business they wish to conduct in Bulgaria.

Branch offices require a manager, who can be a foreign person. There are certain limits on the capacity of the branch office, acting by its manager. As a branch is not a separate legal entity, distinct from its parent, it is normal for the other party to a transaction to require an explicit confirmation by the parent company that the branch is able to conclude the relevant contracts in Bulgaria. As such, a great deal of attention will be paid to the capacity of the branch manager. This may result in delays to the business activity of the branch. Consequently, NBLO recommends that a client register a branch only if it plans to develop a short-term or small to middle-size business activity within Bulgaria.

For alternative methods of starting your business in Bulgaria, please contact NBLO consultants.

Running a bank account in Bulgaria by non-nationals

Opening a bank account in Bulgaria by non-Bulgarian persons

a) Natural persons and legal persons (including branches of foreign legal persons)
b) Money laundering issues
c) Transfer restrictions

a) At heart, the Bulgarian regime is quite liberal. Bulgarian banks open accounts to all natural persons (over 18) and all legal persons irrespective of their place of establishment and place of business.

The prospective account-holder fills in an application form, present his ID card or passport or documents proving establishment (applicable to a legal person), nominates those who have a mandate to transact on the account and provides specimen signatures of those mandated.

With legal persons, banks will generally require a certified copy of a statement of the company’s registration status (such as a certificate of incorporation) and proof of registered address. A proof of address in the country of residence may be required from natural persons. The passport/ID card, if they include this will be an obvious source of proof.

A proxy (a person formally appointed as attorney or proxy) can also act on behalf of a natural or legal person to open an account, upon submission to the bank of an explicit power-of-attorney (suitably witnessed, apostilled and translated if and as required).

b) Money laundering and other checks

The Money Laundering Act of 1999 provides for a number of measures to prevent money laundering. Banks are under a duty to inform the national Financial Intelligence Service of any transaction (including a payment-in on opening of a bank account) with a value in excess of 30,000 BGN (or 10,000 BGN if a cash transaction). This obligation also concerns public notaries, petrol traders, wholesalers, insurance and leasing companies, tax consultants, auditors, and others. The Financial Intelligence Service is entitled to intercept a transaction pending investigation upon a suspicion that it is a money laundering.

The Financing of Terrorism Act of 2003 provides for the freezing of accounts and other assets of persons who are under suspicion of participation in terrorism operations or are on the list of the United Nations of persons and organisations engaged with terror.

c) Restrictions on the use or transfer of money

Bank transfers

Money can be withdrawn/transferred (including expatriated) once the account holder has completed a declaration under the Foreign Currency Act of 1999.

In addition, the account holder must show that he or in case of a legal person, the legal person, has paid all taxes due to the tax administration (usually this is a certificate from the respective regional tax office).

If a foreign person with a Bulgarian bank account wishes to make a transfer abroad then, along with complying with the above rules, he must specify a reason for the transfer and present supporting documentation. If the amount to be transferred abroad does not exceed the amount previously received from abroad into that account there is no need to prove anything and the holder is free to order the transfer.

Taking cash out of Bulgaria

The Foreign Currency Act of 1999 also established rules for the export and import of money in cash. The foreign person is free to import/export cash currency amounting of up to BGN 5 000 (approx. EUR 2 500). If those cases no declaration is required on crossing the border.

If the person wishes to import in cash currency exceeding 5 000 BGN he needs to submit a declaration in two originals to the customs authorities stating the exact amount and type of the currency. The second original must be kept safe after stamping by the customs officer. Upon exit of the country with an amount in cash exceeding 5 000 BGN he shall present the original of the declaration for previously imported currency.

Upon exporting cash currency exceeding 25 000 BGN (12 500 EUR) he shall submit to the tax authorities a declaration of the origin of the money along with the above mentioned certificate issued by the respective regional tax office. Again, if the exported amount does not exceed the value of previously imported in cash and declared, the person is free to export the amount only by presenting the original import declaration for the identical type of currency. If the exported amount does exceed the imported value, the foreign person shall submit to the customs authorities valid proof that he has paid all the taxes regarding the surplus of the value and a certificate that he does not have any obligations to the fiscal service.

Credit or debit cards

The use of credit and debit cards in Bulgaria has increased immensely during the last five years. A foreigner is not under any duty to declare at customs the bank cards he carries on his person. In addition to major bank cards, cheques and travellers cheques are also known and welcomed as means of payment and are equally not subject to declaratory obligations.

If a person holds a Bulgarian bank account and has a credit or debit card associated with that account then there is no Bulgarian-originating restriction on his withdrawing money from that account while abroad.