1 Relevant Authorities and Legislation
1.1 What regulates M&A?
Mergers (incl. takeovers) and de-mergers (spin-offs and splits), share transfers and business (going concern) transfers are regulated, on a general level, by the Commerce Act. A number of other statutes, such as the Obligations and Contracts Act, the Competition Protection Act, the Ownership Act, the Labour Code, etc., may also apply to certain aspects of M&A transactions.
Where the target is a public company, the specific rules set forth in the Public Offering of Securities Act ("POSA") need to be observed. Takeover bids with respect to public companies are extensively regulated under Regulation No. 13/2003 enacted by the Financial Supervision Commission ("FSC") by delegation under the POSA. Special laws are in place for mergers and de-mergers of certain categories of companies, for example: pension funds are subject to the Social Insurance Code; banks and other financial institutions – the Credit Institutions Act; privatisation funds – the Privatisation Funds Act; insurance companies – the Insurance Code; and special purpose vehicles – the Special Purpose Investment Companies Act. Acquisitions and reorganisations of companies that are fully or partially municipality-owned or State-owned are governed by the Privatisation and Post-Privatisation Supervision Act.
1.2 Are there different rules for different types of company?
Generally, different and more complex rules govern M&A transactions which involve joint stock companies ("AD") compared to those which involve limited liability companies ("OOD"). The principal differences concern the form of M&A documentation, required approvals and registrations, and voting majorities. Please see also our answer to question 2.11 below.
Furthermore, M&A transactions, and in particular for takeover bids, in respect of shares in public companies (which may be joint stock companies ("AD") only) are subject to special rules. Takeover bids are supervised by the FSC, provided that the public companies:
- have a registered seat in Bulgaria and their shares are admitted to trade on a regulated market in Bulgaria or in another country;
- have shares admitted to trading on a regulated market in Bulgaria, provided that their shares are not admitted to trading on a regulated market in the EU Member State where their registered seat is located;
- have shares admitted, for the first time, to trading on a regulated market in Bulgaria; or
- have shares admitted simultaneously to trading both on a regulated market in Bulgaria and in another EU Member State, but the issuer has chosen the FSC as the competent authority to supervise the takeover bid.
Special rules are in place for the cases where the shares have been admitted to trading on a regulated market in another EU Member State, in addition to their admission on a regulated market in Bulgaria. The bid in such cases also has to be made accessible to the shareholders in the other EU Member States where the shares are traded on a regulated market.
Once a company has ceased to be "public" in the meaning of the POSA and this circumstance is duly registered with the Trade Registry, the M&A transactions in respect of such a company fall under the regime of the Commerce Act.
Furthermore, the general regulations on takeover bids do not apply to bids relating to securities issued by collective investment schemes. Lastly, as mentioned above, foreign target companies in M&A transactions are affected by the Bulgarian legislation as long as: (i) they have a registered seat in another EU Member State and are admitted to trading on a regulated market in Bulgaria; or (ii) they have subsidiaries or branches in Bulgaria; in which case, certain registration requirements may apply.
1.3 Are there special rules for foreign buyers?
As a general rule, investments by foreign entities are governed by the same provisions that are applicable to Bulgarian investors. Therefore, all investor-friendly provisions applicable to Bulgarian companies apply likewise to foreign investors. Furthermore, if an international agreement provides for more favourable provisions towards entities from certain countries, these provisions have priority over the local Encouragement of Investments Act ("EIA"). Similarly, restrictions on investments also apply on an equal footing to Bulgarian and foreign entities. By way of example, such restrictions apply to companies which are in the process of liquidation or in bankruptcy proceedings. In accordance with Commission Regulation (EC) No. 1628/2006, there are investment restrictions towards certain sectors – the same indicated in the said Regulation (for the manufacture of products in the coal and steel industry, the shipbuilding and synthetic fibres sectors, and in fisheries and aquaculture). Furthermore, there are investment restrictions for investors from countries which treat Bulgarian investors in a discriminative manner. These countries are listed in an official list adopted by the Council of Ministers.
1.4 Are there any special sector-related rules?
Transactions within certain regulated sectors (i.e. banking, insurance, pension assurance, media, telecommunication, etc.) may trigger compliance with various special rules in addition to the general rules governing the transaction under the Commerce Act. Typically, before execution of the transaction, an approval must be obtained from the relevant supervising body. As an example, an acquisition or sale of a shareholding in a Bulgarian bank, whereby the thresholds of 20%, 33% or 50% shareholdings are reached or exceeded, triggers the requirement to obtain the prior approval of the Bulgarian National Bank.
1.5 What are the principal sources of liability?
In addition to the contractual liability and liability in tort, participants in M&A transactions must consider the administrative liability for non-compliance with any notification/approval requirement, such as those described under question 1.4 above, or similar restrictions under regulatory statutes (i.e. insider dealing, market manipulation, etc.). The consequences of non-compliance with regulatory provisions include suspension of the voting rights of the acquired shares (where a transaction required a regulatory approval), suspension of the voting rights of all shares in a company (where a mandatory takeover was not made), and severe fines.
For example, the completion of a M&A transaction without the prior approval of the Competition Protection Commission (where this is required) may trigger a penalty in the amount of up to 10% of the aggregate turnover of a company. However, the acquirer will be entitled to exercise all rights (including voting rights) pertaining to the acquired shares.
The fines for infringement of the POSA may be equally harsh, i.e. a breach of the rules regarding takeover bid procedures may reach up to BGN 20,000 (ca. EUR 10,225), or where the perpetrator is a legal entity, BGN 50,000 (ca. EUR 25,564) and, in both cases, lead to suspension of the voting right of all shares in a company. In addition, any income from activities in breach of the POSA, insofar as it is not paid as compensation to the person being harmed, is to be confiscated by the State.
2. Mechanics of Acquisition
2.1 What alternative means of acquisition are there?
Acquisition of a Bulgarian company may occur not only by way of an outright purchase of its shares (completed, in the case of a public company, by registration of the share transfer with the Central Depository), but also through a purchase of its business (going concern), merger or de-merger.
The Commerce Act regulates in detail the merger/de-merger procedure, including the mandatory steps which should be followed, documentation which must be prepared, granting the shareholders access to information, and the publication and registration of the relevant decisions. Additional and more complex rules and procedures are set forth in the POSA in respect of the takeover and merger/de-merger of a public company.
2.2 What advisers do the parties need?
In a customary M&A transaction, the parties must be advised by local legal, financial and tax consultants. With regard to specific industry sectors, additional specialist advisers may be necessary for certain aspects, such as technical, environmental and construction issues. Professional investment advice must be obtained where the target is a public company.
2.3 How long does it take?
The timeframe of a M&A transaction depends on its structure and the approvals/notifications that might be required. Takeover bid procedures under the POSA involve a prior examination of the bid by the FSC. The FSC has 20 business days to approve (explicitly or tacitly) or suspend the bid. Following this, the bid must stay open for a minimum of 28 days and a maximum of 70 days as of the date of publicising the takeover bid in two national newspapers.
If the transaction requires a prior merger clearance from the Competition Protection Commission, a fast-track investigation takes up to 25 business days, but the running of this term is automatically extended in cases of procedural inaccuracies or where it is necessary to produce additional information. An in-depth investigation may be launched by the Commission if the latter has established (within the fast-track investigation) that a dominant position would be enhanced and, as a result, a threat on competition would be posed. Such an in-depth investigation may take up to four months, but in cases of factual complexity, the term may be further extended by 25 business days.
2.4 What are the main hurdles?
M&A transactions may be delayed where a prior notification must be served, an administrative approval must be obtained or a tax certificate (in the case of merger, de-merger or transfer of business) must be issued. Apart from these formalities, another hurdle, on a practical level, might be the lack of established guidelines or case law for more specific or novel circumstances.
2.5 How much flexibility is there over deal terms and price?
As a rule, the price and other transaction terms can be freely negotiated between the parties.
When the target is a public company, the price in a takeover bid is subject to the restrictions provided by the POSA. The price may not be lower than the highest of the following three: 1) the fair price of the shares, supported by a detailed reasoning following the application of appraisal methods that are regulated in detail in a piece of the Regulations enacted by the FSC; 2) the average weighted market price of the shares within the last three months; or 3) the highest price paid for the shares by the bidder during the last six months. Moreover, specific rules regulate the investment activities of a special type of company called Special Investment Purpose Joint Stock Companies ("SIPJSC"). The purpose of these companies is to create investment incentives to small investors, which allows them to benefit from tax exemptions. Before a SIPJSC acquires or disposes of receivables or real estate property, it must assign one or more experts to determine the price of the respective asset. This procedure is subject to a detailed Regulation under the Special Investment Purpose Companies Act. The price at which the SIPJSC actually acquires receivables or real estate property may not be substantially higher, and the price at which it sells such assets may not be substantially lower than the expert valuation price, unless there are exceptional circumstances.
2.6 What differences are there between offering cash and other consideration?
In the prevailing number of cases, M&A transactions in Bulgaria are based on a cash or cash and debt consideration. If consideration other than cash is offered (e.g. shares or receivables), the rules regulating the effectiveness of such another consideration will also apply (e.g. endorsement of the transferred shares, notification of the debtor under a transferred receivable, and consent of the creditor under an assumed debt).
In a takeover bid scenario, a share exchange bid must always include, as an alternative, the option for cash consideration.
2.7 Do the same terms have to be offered to all shareholders?
As mentioned above, the transaction terms may be freely negotiated between the parties; for example, different terms for the different target companies' shareholders.
However, where the target is a public company and a takeover bid has been launched, the POSA provides that all shareholders in that company have to be treated equally. There is no court practice fleshing out whether this principle applies only towards the price or if it can be interpreted as a general prohibition on discriminative terms.
2.8 Are there obligations to purchase other classes of target securities?
Generally, each purchase envisages only a specific (single) class of target company securities.
However, where the target is a public company and a takeover bid has been launched, the POSA provides that the offer must be geared to all shareholders with voting rights. Therefore, if there are different classes of shares carrying voting rights, all of these classes will be covered by the takeover bid.
2.9 Are there any limits on agreeing terms with employees?
The employment contracts concluded by the target company remain in force irrespective of a M&A transaction. The latter may not serve as a basis for the transferee to amend employees' rights and obligations resulting in worse working conditions for the employees, except by mutual agreement with the employees.
Employment rules would only affect a M&A transaction in cases of a change of employer as a result of a merger, de-merger, business transfer, etc. No change of an employer occurs in a share transfer scenario. In the case of a merger, de-merger or another company re-organisation, the transferee is liable for the employer's obligations assumed under employment contracts entered into before the transaction. In the case of a transfer of whole or part of the business of the company, both parties to the transaction are jointly and severally liable. This is how Article 3, Paragraph 1 of Council Directive No. 2001/23/EC (couched in permissive terms) has been transposed in Bulgaria.
2.10 What role do employees, pension trustees and other stakeholders play?
Firstly, certain notification obligations exist affecting a wide range of transactions, including a merger, de-merger, change in the legal form of the company, change in the company's owner, transfer or lease, rent or concession of a business (going concern) or parts of it. In any of those cases, the employment agreements of the affected employees are transferred automatically as they are to the new employer. However, both the transferor and the transferee have an obligation to inform the trade union/employees' representatives or, if there are no such bodies, the individual employees, of the details of the change.
Secondly, in cases where any measures towards the employees are being contemplated (i.e. a relocation, redundancy cuts, change of employment terms and conditions, etc.), there is a further obligation to consult the trade union/employees' representatives/individual employees, and to make efforts to reach an agreement with them on those measures.
The information and/or consultation process should be completed within two months before the occurrence of the change of the employer (completion of the transaction).
In a takeover bid scenario, one of the mandatory requisites of the bid is to contain information about any intention to make important changes in the labour agreements, as well as information about the strategic plans which might have an impact on the employees of both the bidder and the target companies.
The management boards of both the bidder and the target must present the takeover bid to the representatives of their employees or to the employees themselves (if there are no representatives). Additionally, the management board of the target company must present to the representatives of the employees or the employees themselves a reasoned opinion about the impact on employees of the contemplated transaction. Should the management board receive in advance an opinion by the representatives of the employees, it must attach the latter opinion to its opinion that must be presented to both the FSC and the employees.
Other stakeholders of the target company, such as creditors, must be notified in the case of mergers and de-mergers (spin-offs and splits) as well as business (going concern) transfers. Generally, these stakeholders may not block a transaction but are entitled to certain statutory protection of their rights. For example, the seller may remain liable for creditors' claims which have been transferred to the purchaser as a result of a merger, de-merger or business transfer.
2.11 What documentation is needed?
The Commerce Act provides for certain mandatory documentation to be executed in cases of corporate reorganisations, i.e. mergers and de-mergers, such documentations including a reorganisation plan, agreements, reports of the management body, reports of the controller (auditor), minutes of the general meeting of the shareholders of each company participating in the reorganisation, and certificates of good standing for each company participating in the transaction, etc.
The transfer of shares in a limited liability company ("OOD") requires the minutes of the general meeting of the shareholders (setting out the shareholders' resolution to transfer/acquire the shares), a notary certified share purchase agreement, new articles of association of the target company (to reflect the transfer) and a certificate of good standing of each of the target company's shareholders (if legal entities). The transfer of shares in a joint stock company ("AD") requires, generally, endorsement of the materialised shares only or, if the shares are de-materialised (electronic) – registration of the transfer with the Central Depository. The transfer of business (going concern) requires a notary certified business transfer agreement. The implementation of a bid procedure under the POSA requires, as a minimum, the following documents: a bid offer (including details about the offer which may affect the shareholders – for example,
a strategic plan of the bidder, the mandatory elements of which, in turn, are laid down in detail); a declaration that the bidder has informed the management board of the target about the offer, in addition to the employees and the regulated market where the shares have been admitted to trading; a certificate of good standing of the bidder; evidence of the financial stability of the bidder in view of the bid that has been made; and sample forms of the bid acceptance, etc.
2.12 Are there any special disclosure requirements?
In cases of mergers and de-mergers, a licensed auditor's report must be prepared on the contemplated transaction and made public, along with other key transaction documents, for a period of at least 30 days prior to the merger or de-merger. Where prior accounting/ financial assessments are required by law, those are to be made by an accounting/financial expert. In most M&A transactions, the target company must present a recent financial report, and in particular the statutory M&A rules usually refer to the annual financial report. Furthermore, each company that is being terminated as a result of a merger or de-merger transaction must produce a final financial report, while each newly-created company as a result of such a transaction must produce an initial financial report.
Where the M&A transaction involves a public company, either as a target, a buyer or a seller, such a public company must disclose to the regulated market where its shares are traded, in addition to the general public, any specific information, including any key progress in the M&A negotiations, which may reasonably be expected to affect the price of its shares (inside information).
Moreover, any acquisition or disposal, or any binding commitment for an acquisition or a disposal, of at least 5% (or a multiple of 5%) of the votes in a public company must be disclosed to the public company and the FSC. In turn, the public company must disclose such information to the general public.
2.13 What are the key costs?
The State fees due to the Trade Registry for the compulsory promulgation are nominal. Advisory and investment professionals' fees (if applicable) depend on the individual arrangements with the specific adviser/investment professional.
In cases which require a prior notification to the Competition Protection Commission, a State fee of the BGN equivalent of approximately EUR 1,000 must be paid upon filing of the notification. Provided that the transaction is approved, the State fee due is 0.1% of the total turnover of the undertakings concerned for the previous year but not exceeding the BGN equivalent of approximately EUR 30,600.
2.14 What consents are needed?
If the transaction takes place in an industry sector regulated by special rules, it may require the prior approval/permission of the relevant State supervision authority. Please see the information provided in our answer to question 1.4.
In the case of a bid procedure under the POSA, the bid offer must be registered with the FSC and could be made public only if there is no prohibition imposed by the FSC within a period of 20 business days following the registration.
In compliance with the Competition Protection Act, a M&A transaction requires the prior approval of the Competition Protection Commission if the aggregate turnover on the territory of Bulgaria for the preceding year of all the undertakings concerned exceeds the BGN equivalent of approximately EUR 12.8 million, and either the turnover of each one of at least two undertakings concerned exceeds, for the preceding year on the territory of Bulgaria, the BGN equivalent of approximately EUR 1.53 million or the turnover of the target entity exceeds, for the preceding year on the territory of Bulgaria, the BGN equivalent of approximately EUR 1.53 million.
2.15 What levels of approval or acceptance are needed?
The general meeting of a limited liability or a joint stock company is required to approve, in advance, an intended merger, de-merger or a business transfer (in the case of a business transfer, an approval is required only if the transfer concerns the entire business of a company). The required minimum majority is three-quarters of the shareholders (in a limited liability company), and two-thirds of the shareholders (in a joint stock company).
A transfer of shares must be approved by the general meeting of a limited liability company ("OOD") by more than half of the shareholders. No such statutory requirement exists in the case of a joint stock company ("AD").
See also our answers to questions 7.3 and 7.4 below.
2.16 When does cash consideration need to be committed and available?
The parties to a M&A transaction are free to negotiate the consideration and the payment terms, i.e. advance payments, deferred payments, and escrow payments.
Nevertheless, the payment terms are strictly regulated in the case of a takeover bid procedure under the POSA. Prior to launching the bid procedure, the bidder must demonstrate to the FSC that it is capable of making the payment. In the case of a successful bid procedure, the payment must be completed within seven days from the expiration of the bid term.
If, prior to the expiration of the bid term, the shareholder who filed a bid acquires shares at a higher price, the transactions with all shareholders who have accepted the bid offer have to be executed at this higher price and not at the one initially proposed in the bid.
3. Friendly or Hostile
3.1 Is there a choice?
The POSA provides for some specific rules relating to hostile transactions. In particular, the general meeting of the target company must approve in advance any steps that the board intends to take in order to undermine the transaction (such as sales of assets or issue of shares), except for steps geared at encouraging competing bids.
3.2 Are there rules about an approach to the target?
In the case of a takeover bid procedure under the POSA, there is a long list of principles which must be observed. For example, all shareholders should be treated equally, including the shareholders who have not accepted the bid offer; all shareholders should be provided with sufficient time and information to make an informed decision; and the target should not be placed in a position which may impede its normal course of business for an unreasonably long period, etc.
Furthermore, there are certain mandatory requisites which the bid must contain.
3.3 How relevant is the target board?
Practically, the cooperation of the target board is of great importance in the due diligence and negotiation process.
Apart from the above, the management bodies of the companies participating in the merger/de-merger are obliged to prepare a written report on the transaction explaining its legal and economic rationale. This report must be filed with the Trade Registry and must be made public for at least 30 days before the date of the general meeting convened to resolve on the transaction. Ultimately, however, it is the general meeting that has to approve the transaction, and also the management body's report. If the transaction is approved by the general meeting, the management body is obliged to complete it. In cases of takeover bids, the management body of the target public company must produce a reasoned opinion on the proposed transaction, including the consequences for the company and its employees if the offer is accepted, the strategic plans of the bidder and their impact on the employees, and the location where the company's business is carried out.
In hostile transactions, the board's tactics to resist the transactions require the prior approval of the general meeting of shareholders (please see our answer to question 8.2 below).
3.4 Does the choice affect process?
In practice, the transaction negotiations and execution processes run more efficiently if the co-operation of the target board has been secured in advance. In general, the management body cannot turn down the transaction if the general meeting has approved it. However, it may delay or constitute a hurdle to it.
4.1 What information is available to a buyer?
The law does not require that any information about the target is provided to the buyer. Therefore, in cases where the access to information is impeded by the target's board, the investor may at least obtain information which is publicly available. For example, the actual legal status of Bulgarian companies, including their main corporate documentation (e.g. articles of association) and annual financial statements are publicly accessible, and may be obtained (online) from the Trade Registry. If the transaction involves real estate property, the legal title over it or the existence of any encumbrances may be searched at the Real Estate Registry.
Any information that is not publicly available may be obtained only with the cooperation of the target company. The investor must bear in mind that certain internal rules may be in place to impede information disclosure.
Apart from this, in cases of takeover bids with respect to public companies, the POSA requires that certain minimum information is provided to the buyers, such as information concerning the target shares that are already possessed directly or indirectly by the bidder, the term of the bid, the amount of compensation that will be paid to the other shareholders in the target if some of their rights are not observed, the plan for the future of the target company's business, etc.
4.2 Is negotiation confidential and is access restricted?
Please see our answers to questions 2.12 and 8.1 regarding the obligation of public companies to disclose inside information, including any key progress in the M&A negotiations.
In the case of a bid procedure under the POSA, the bid has to be presented firstly to the FSC for approval before its publication. After publication of the bid, there is no legal requirement to reveal information concerning the negotiations. The negotiations are considered as internal information. The results of the bid, however, must be reported to the FSC and published by the bidder. Apart from the above mandatory disclosure rules, the parties are free to undertake an obligation to keep any information concerning the details of the transaction confidential. Under the Protection of Competition Act, however, companies are generally not allowed to aggravate their competitors' position by, for example, disclosing trade secrets.
4.3 When is an announcement required and what will become public?
In respect of share transfers in a public joint stock company, please see our answers to questions 2.12 and 8.1.
In the case of share transfers in a private joint stock company, there is no legal obligation for public registrations or notification. Thus, all information will remain available only to the participating parties and the target company. A share transfer in a public joint stock company must be registered with the Central Depository, which must keep the target company's shareholders' structure confidential. However, the bid to acquire shares in a public company and any changes therein are public (please see our answer to question 4.2). The transfer of shares in a limited liability company requires registration of the transfer agreement with the Trade Registry (which makes it public). The same applies to merger and de-merger transactions. It is common practice for the parties to present only a brief extract of the final agreement before the Trade Registry without disclosing the main parameters of the transaction or the price. There are special regulations on the information that must be revealed in the process of public offering of securities, the most important one relating to the obligation to publish a prospectus and to disclose certain information on an ongoing basis.
If the transaction would require a prior notification/approval by the Competition Protection Commission, certain information about the transaction would become public. Such information is usually limited to the corporate details of the parties to the transaction, the economic purpose of the transaction and whether the buyer would acquire sole or joint control over the target company.
4.4 What if the information is wrong or changes?
As mentioned above, in the case of bid procedures under the POSA, the bid is subject to the FSC's prior approval. If the information provided in the bid is insufficient or incorrect, the FSC must prohibit the publication of the bid and the bidder has 20 business days to rectify it.
Once the bid has been published, the POSA imposes no prohibition on its further amendments; the latter, however, being subject to the FSC's prior approval. No approval is required if the amendment concerns an increase in the price or the offer term up to the maximum term provided under the statute, i.e. 70 days. In any case, amendments to the bid can be made no later than 10 days before the offer's expiration.
5.1 Can shares be bought outside the offer process?
Under the POSA, shares in a public company may be bought up to the threshold triggering a mandatory offer without initiating a bid procedure. If a shareholder acquires one-third but no more than two-thirds of the voting shares in the target, he may not acquire, within each subsequent annual period, such number of the shares that exceeds 3% of the total shares, without making a bid.
5.2 Can derivatives be bought outside the offer process?
Yes, as long as the derivatives do not entitle the acquirer and/or its related parties to exercise the voting rights under the underlying shares. However, such derivatives may trigger disclosure requirements – see our answer to question 5.3.
Any exercise of rights under the derivatives which leads to the acquisition of voting rights under the underlying shares may trigger a bid procedure.
5.3 What are the disclosure triggers for shares and derivatives stakebuilding before the offer and during the offer period?
Any person is obligated to notify the FSC and the public company if it has acquired or disposed of, directly or indirectly:
- voting rights in a public company provided that, following the acquisition or disposal, its voting rights reach, exceed or fall below 5% or a multiple of 5% of the total number of the voting rights; and
- derivatives which give the right to acquire voting rights in a public company, provided that following the exercise of the derivatives, its voting rights may reach, exceed or fall below 5% or a multiple of 5% of the total number of the voting rights.
The above rule applies before and during the offer period.
5.4 What are the limitations and consequences?
If the stakebuilding has not triggered a bid procedure (see our answer to question 5.1), the failure to make a disclosure will result in a fine. If the stakebuilding has triggered a bid procedure, the failure to make a disclosure will result in a fine and the voting rights under the acquirer's shares will be deemed automatically suspended until the initiation of a bid procedure.
6. Deal Protection
6.1 Are break fees available?
Bulgarian law does not provide explicitly for break/inducement fees to be payable by the target or the bidder. There is no legal obstacle for the parties to agree on those types of fees, but such arrangements are not very common.
Nevertheless, the parties are entitled to fair compensation should the opposite party fail to negotiate and enter into an agreement in good faith – culpa in contrahendo
6.2 Can the target agree not to shop the company or its assets?
The Bulgarian law of contracts permits such agreements between the parties. It is common for the target company's board not to shop the target or its assets for a certain period of time. For that purpose, the parties may sign a letter of intent indicating the exclusivity period. However, the target company's board has a principal obligation to manage the company in the shareholders' interest. This is why the board must evaluate very carefully the competing proposals before entering into any lock-out agreement.
6.3 Can the target agree to issue shares or sell assets?
There is no legal rule preventing the target company from issuing shares or selling assets, e.g. crown-jewel assets. Such actions, however, might require the prior approval of the general meeting – the latter is necessary for a capital increase in all types of companies, disposing of real property rights by a limited liability company, and certain high-value transactions of a public company which are specified in detail in the POSA. Furthermore, a prior approval of the general meeting is required if the issue of shares or the sale of assets could be considered as an action, the primary purpose of which is to undermine the acceptance of the bid offer or to create considerable difficulties or costs for the buyer. Please also see the information provided in our answer to question 3.1.
6.4 What commitments are available to tie up a deal?
It is not a customary practice to use commitments other than those indicated in questions 6.1 to 6.3 in order to tie up a deal.
7. Bidder Protection
7.1 What deal conditions are permitted and is their invocation restricted?
As a general rule, Bulgarian legislation requires that the parties negotiate in good faith. Any further conditions on carrying out the negotiations may be agreed between the parties in advance without breaching the good faith principle. Due regard must also be paid to the public companies' takeover bid restrictions. With respect to public companies, the bidder is not entitled to withdraw a mandatory bid after it has been published. Exceptions are permitted where the bid cannot be executed due to circumstances beyond the control of the bidder, provided that the time limit for its acceptance has not expired, and the FSC has granted its approval on the withdrawal. In certain cases, where the bid is voluntary, it may be withdrawn without being subject to the above conditions.
7.2 What control does the bidder have over the target during the process?
There is no legal basis for the bidder to exercise any control over the target during the takeover bid process. Therefore, the bidder may not avoid defensive measures initiated by the target company's board.
However, should the defensive steps be taken in bad faith or in violation of the rules on negotiations (please see questions 7.1 and 6.3 above), the target company's shareholders may claim damages.
7.3 When does control pass to the bidder?
To acquire control over most of the decisions in the general meeting, i.e. the body deciding on the most important matters concerning a company, the investor should acquire at least 50%+1 of the voting shares. Unless the minority shareholders have been given special veto rights, this level of control would allow the bidder to appoint the entire management of the company. A more efficient level of control (which would guarantee the passing of a broader spectrum of resolutions in the general meeting, including termination of the company, increasing/reducing the capital, amending its articles of association) may be gained by the acquisition of two-thirds of the shares. A total control (over all decisions to be taken by the general meeting, including decisions on merger/de-merger of a company and decisions on certain high-value transactions involving public companies listed in the statute) may be obtained by holding threequarters of the voting shares.
The title to shares in a public company passes to the bidder as from the transfer registration in the Central Depository. In the case of a share transfer in a private joint stock company or a limited liability company, the shareholders' rights pass upon endorsement of the shares, coupled with the registration of the share transfer in the company's shareholders' books, resp. upon execution of a notary certified share transfer agreement. In the case of merger and demerger reorganisations (irrespective of the type of company that is being reorganised), the control passes to the bidder after registration with the Trade Registry.
7.4 How can the bidder get 100% control?
According to the POSA, the bidder who has acquired at least 95% of the voting shares in a public company as a result of a takeover bid is entitled to buy the remaining shares (squeeze-out). The remaining shareholders are obliged to sell their shares to the bidder.
8. Target Defences
8.1 Does the board of the target have to publicise discussions?
This depends on whether the discussions would qualify as inside information, i.e. information that is specific and may reasonably be expected to affect the price of the shares of a public company. If the discussions would qualify as inside information, then the board of a public company must disclose the discussions or key elements of the discussions that qualify as inside information to both the regulated market where the target's shares are traded and to the general public. There are also requirements for the board of the target company to present certain opinions in certain cases. For example, within seven days from receipt of the takeover bid, the board of the target must present to the FSC, the representatives of the employees, if any, or to the employees themselves a reasoned opinion on the proposed transaction.
Apart from such specific obligations, the management bodies have a general obligation to discharge their duties, taking into account the interests of all shareholders and the company. This obligation may be interpreted as an obligation to disclose discussions in important cases. The company's internal rules on the board of directors' activity, or the management agreements entered into with directors, may specifically provide for such a duty.
8.2 What can the target do to resist change of control?
The internationally-known practice to resist a change of control may be applied in Bulgaria, but there are some restrictions in relation to this. If the target is a public company, the target company's board is not allowed to frustrate the acceptance of the offer by, for example, issuing new shares or selling the target company's assets, unless such steps have been approved in advance by the target company's general meeting. The board is, however, permitted to search for a competitive offer.
Furthermore, a general meeting approval would be required for some of the target company's defences, regardless of whether the target is a public company or not.
In view of the measures that may concern the target company's capital structure, Bulgarian law permits the company to acquire its own shares but sets a limit on such acquisitions of up to 10% of the share capital. A public company may acquire its own shares subject to compliance with a bid procedure under the POSA.
8.3 Is it a fair fight?
Under the POSA, in a takeover bid procedure, all shareholders in the target company must be treated equally. Bulgarian law does not provide for further specific rules in this relation. Apart from the takeover bid procedure and the case where the prospective buyer is not a shareholder in the target, the target company's board is not restricted to treat certain companies in a more favourable manner than others.
9. Other Useful Facts
9.1 What are the major influences on the success of an acquisition?
The cooperation of the target company's board has significant importance for the success of a M&A transaction. The board can exercise influence over the major shareholders and the employees. The employees may constitute an influential group, particularly in the former State companies that have been privatised and where the employees still possess a significant number of shares. Depending on the particular industry sector, the State authority responsible for supervision may also affect the transaction whenever its prior approval is required.
Furthermore, the investor should be wary about possible changes in the legislation during the negotiation period, especially for tax changes and changes in the regulatory framework of the relevant industry sector, i.e. concerning requisite permissions, licences or registrations.
9.2 What happens if it fails?
The participants are free to agree in advance on the consequences should the transaction fail, including the liability of each party. If the buyer or the seller is a public company, certain special regulations and procedures might need to be observed.
10.1 Please provide a summary of any relevant new law or practices in M&A in your jurisdiction.
All new cases and major developments have already been addressed in the previous sections.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.