Legal justification and basic principles

Seeking to simplify their corporate structure and transform their operations between companies incorporated in different jurisdictions, clients with complex international corporate structures are increasingly taking the opportunity to transform their companies through cross-border mergers.

This procedure is regulated in the Bulgarian Commercial Act ("CA"), which, among others, transposes Directive 2005/56/EC of the European Parliament and the Council of 26 October 2005, repealed by Directive (EU) 2017/1132 of the European Parliament and the Council of 14 June 2017 on certain aspects of company law ("the Directive").

Reorganization under this procedure shall be carried out (by merger with absorption or with amalgamation) only where at least one of the companies involved in the reorganization has its registered office in another state – a member of the European Union, or in a state – a party to the European Economic Area (EEA) Agreement and the companies involved in the reorganization with their registered office in Bulgaria are capital companies, excluding investment companies of open-ended type. This is the only exception provided by the applicable law.

The CA does not permit reorganizations where any of the companies involved in the reorganization has its registered office outside the European Union, respectively, with its registered office outside a state – party to the Agreement on the European Economic Area, or where the law of the Member State, applicable to any of the companies involved in the reorganization, does not permit such a reorganization. In some cases, special requirements may apply in respect of companies holding real estate rights.

The main purpose of this type of reorganization is to simplify and streamline an international structure, reduce the number of entities in the corporate structure, thereby reducing administrative, accounting, tax and legal costs, improve corporate governance and cutting remuneration costs for employees, managers and other staff. Streamlining and simplifying the corporate structure in turn leads to centralization of control, efficient allocation of resources and optimization of business operations, as well as elimination of inter-company transactions. The legal succession of rights, obligations and factual relations without initiating liquidation between the companies results in maintaining the contractual and business relations of the companies involved in the reorganization, which continue their corporate existence.

Cross-border reorganization is based on the principles of free establishment and free movement of capital as fundamental principles of rights and freedoms within the European Union. Restrictions on its implementation can only be justified in accordance with the case-law of the Court of Justice of the European Union, in particular, by imperative requirements of public interest, and are necessary, as well as proportionate, for the fulfilment of imperative requirements.

Procedure for cross-border reorganization (mergers with absorption or with amalgamation)

1. Common merger plan and management bodies' report as essential restructuring documents

The common merger plan and management bodies' report are the essential documents of the merger providing for the legal, accounting and management implications and consequences of the merger. Their minimal content and the procedure for their announcement are strictly regulated by European Union law, Bulgarian law and the law of the involved Member State.

Once all the eligibility conditions for cross-border reorganization are met, the companies involved in the reorganization shall draw up a common plan of reorganization. This is the main document that determines all the details, specifics and legal features of the reorganization.

The Directive, as well as the CA, set forth minimum content requirements for the common plan of reorganization. They mainly relate to the definition of the most essential terms of the reorganization, as well as the manner in which it will be carried out. Part of these relate to the amount of cash payments, the exchange ratio (if there is an obligation to calculate such a ratio in respect of the reorganization under consideration), the point of time at which the actions of the reorganizing companies are considered to have occurred for accounting purposes, etc.

An integral part of the common plan of reorganization shall be the draft the articles of association of the newly incorporated company in the event of a merger with amalgamation or the articles of association of the acquiring company in the event of a merger with absorption, respectively, containing all amendments in connection with the reorganization, as well as the annual financial statements and the management report and/or the balance sheet of the companies being reorganized and of the acquiring company on the basis of which the merger plan has been established.

Together with the merger plan, each of the companies involved in the reorganization shall adopt a report of its management bodies pursuant to their designated representative capacity. The report must contain a detailed legal and economic justification of the common merger plan and of the exchange ratio, if applicable, as well as of the impact of the reorganization on the situation of the shareholders, creditors, workers and employees. There is no statutory prohibition on the adoption of a joint report of the companies involved in the reorganization instead of separate ones. The report shall be adopted in simple written form.

Based on our practice, both documents should be reviewed and tailored also from accounting and tax perspective for the possible implications and specifications.

2. Analogy applying to the gap in the legal regulations

Applying the rules stipulated for the local mergers by analogy is required due to the lack of special rules for some specific matters, related to cross-border merger as stated below.

The CA does not envisage specific rules on the exchange ratio and the moment from which actions are deemed to have been performed for accounting purposes to apply in these cases. In general, it seems that there is a gap in the law in respect to these matters.

The matters, which are settled for intra-territorial mergers are not declared inapplicable in relation to cross-border mergers, which may be interpreted as an opportunity to apply by analogy the rules concerning national mergers on cross-border mergers.

Thus, where there is a requirement to comply with the exchange ratio rules, the shares acquired after the reorganization must be equivalent to the fair value of the shares held in the merging company before the reorganization. To achieve such an equivalent ratio, cash payments to partners or shareholders are sometimes required, but not more than 10 per cent of the aggregate nominal value of the shares acquired.

By analogy, the requirement that the application for registration of the reorganization shall be made not later than 8 months following the date on which the exchange ratio is set out in the merger plan shall also apply. This term should neither be extended nor renewed.

In case of a merger with absorption, usually (i.e. in Bulgaria and in some other Member States), the merger date is that on which the registration is made in the relevant Commercial Register. Applying the intra-territorial reorganization rules by analogy allows for an earlier date (by up to 6 months from the date on which the merger plan is adopted) for accounting purposes to be provided in the common merger plan . In this case, the date of the balance sheets to be applied to the common merger plan shall be the same as the date fixed by the participating companies to be the date of reorganization for accounting purposes. From that date determined for accounting purposes, all rights, obligations and factual relationships shall be treated as having passed to the acquiring company as a consequence of the reorganization.

3. Announcement of the common merger plan and the management bodies' report

The companies participating in the cross-border merger shall strictly follow the legislative procedure for announcement of the common merger plan and management bodies' report and comply the mandatory one-month term prior the enforcement of the merger in the respective Commercial Register.

The common merger plan, together with the report(s) (if separate) of the management bodies, must be published in the Bulgarian Commercial Register and the Register of Non-profit Legal Entities in the batch of each of the companies involved in the reorganization and in the Commercial Registers of the other participating states. Although the CA requires the announcement to be made simultaneously in respect of each merging company and acquiring company, this in practice is not always feasible in practice but does not affect the process as long as all other requirements are met.

The announcement shall be made not less than one month before the date of the decisions of the General Meetings of the companies involved in the reorganization by which the merger is approved. The deadline is imperative and fully consistent across countries as it is the same as provided for in the Directive. Within that one-month period, the management body's report shall be submitted to the employees' representatives or, where there are none, to the employees themselves. The opinions received shall be annexed to the report in the Commercial Register and the Register of Non-profit Legal Entities. In cases where the companies involved have no employees, this circumstance, may be certified by declaration(s) to substantiate why the respective procedure concerning employees is not applied.

Together with the common merger plan and the report of the management bodies, a list shall be published in the Commercial Register and the Register of Non-profit Legal Entities containing information about the name, registered office, address and register in which each merging and/or acquiring company is entered, as well as information on the rules for protection of its creditors and minority shareholders and the place where full information on this matter may be obtained.

The documents to be disclosed or submitted in addition to the merger plan and the management report(s) in foreign registries are determined by the laws of the relevant country and quite often differ.

The common merger plan shall be subject to verification by a qualified expert, unless all shareholders of the merging and acquiring company have consented in writing not to make such verification. This is quite often applied by companies in one corporate group, i.e. in intra-group cross-border reorganizations as per our practice. It also contributes for a more time and cost-efficient completion of the process.

4. Completion of the merger plan and the merger itself

The completion of the cross-border could be considered as the second stage of the merger in which the lawfulness of the merger has been approved by an authority from one side and by the companies participating in the cross-border merger from the other.

Upon expiry of the one-month term, the general meeting/sole owner of each merging and acquiring company shall separately adopt a decision by which it shall resolve to complete the reorganization, approve the common merger plan, as well as decide on the corporate changes in relation to the reorganization – capital increase, change in the management body, etc. The decision of the merging or acquiring company having its registered office in the Republic of Bulgaria shall be taken by the general meeting in a limited liability company of the shareholders by a majority of ¾ of the capital and by a majority of ¾ of the shares represented with voting rights at the general shareholders' meeting in joint stock companies.

Once the decisions have been taken, a procedure is initiated to issue a certificate of lawfulness in the relevant country of the company being reorganized. Each Member State shall designate a court, notary or other authority competent to supervise the lawfulness of the cross-border reorganization in respect of that part of the procedure regulated under its national law. In some countries, this certificate is issued by a notary, but more often, by the relevant Commercial Registries and Chambers of Commerce. The certificate of lawfulness is an absolute prerequisite and condition for processing the documents for implementing the reorganization and for its successful completion.

In Bulgaria, issuing the certificate of lawfulness requires the submission of at least the decision to reorganize, the assessor's report, evidence that the decision was taken in compliance with the legal requirements for doing so. The certificate for lawfulness shall be issued no earlier than 14 calendar days.

For the purposes of implementing the reorganization, corporate changes may be made in connection with the reorganization. Such changes usually concern the amount of the registered capital, the number of representatives and their representative powers, etc. The changes are envisaged in the merger plan and in the draft articles of association. They shall be implemented by the decision on the reorganization.

Following the adoption of the decisions for reorganization by the merging and the acquiring company and the issuance of the certificate of lawfulness, the reorganization shall be filed for registration in the respective register of the acquiring or the newly incorporated company. The registration of the merger shall be made under the batch of the acquiring company or the newly incorporated company, respectively. The deadline for registering the reorganization shall not be earlier than 14 calendar days from the submission of the documents. Concurrently with the registration of the merger any other corporate changes shall be registered with the competent register.

With regard to the effectiveness of the reorganization, the law of the state in which the registered office of the newly incorporated or acquiring company is situated shall apply, i.e., the reorganization shall become effective from the moment of completion of the registration of the reorganization in the Commercial Register and the Register of Non-profit Legal Entities or from the moment specified in the legislation of the other member State, in case when the surviving company is with a seat outside Bulgaria.

After registration of the reorganization, the companies under reorganization shall be deregistered on the grounds of notification from the register of the Member State in which the acquiring or the newly incorporated company is registered. Until recently, this was not possible, but with effect from 30 March 2022, the Commercial Register is linked to the Business Registers Interconnection System (BRIS). The European central platform connects the national registers of all EU Member States, Iceland, Liechtenstein and Norway.

5. Simplified legal procedure for a cross-border merger

Bulgarian law provides for rules for simplified cross-border mergers in specific cases where the complexity of the entire cross-border merger procedure is not necessary in view of the corporate structure.

A simplified legal procedure is possible in cases where the acquiring company is the sole owner of the capital of all the companies being reorganized, i.e., in cases where the subsidiaries are merged into their sole owner. This is because the successor in title to the rights, obligations and factual relations will be the direct owner of the shares, respectively, the rules on exchange ratio, cash payments, description of the shares to be acquired do not apply. In this case, the reorganization is carried out on the basis of a decision of the sole owner of the capital, which contains only some of the requisites of the merger plan in the general case, some of which relate to a description of the company being reorganized, the acquiring company, the newly incorporated company, information on the property to be transferred under the reorganization, the impact of reorganization on employment, etc.

6. Digitalization of the process

There has been a significant development of services performed electronically, which has greatly eased the process and made it more flexible.

The introduction of e-government on the one hand and the restrictions imposed by the pandemic on the other, have made it possible for this complicated process of cross-border merger to be carried out almost entirely remotely.

An example from our practice is that applying for announcement of the envisaged merger of a company registered in Bulgaria to the National Revenue Agency is now accepted by an email, which practically simplified the process.

Other example is that the application and issuance of a certificate of lawfulness by the Commercial Register is also carried out electronically. An exception still makes a certificate on which an apostille will be placed, which is still physically certified. We expect this process to be digitized as well.

To an even greater extent is digitization in other Member States, which is partly due to the better development of administrative services and the e-government model.

Disputing the reorganization

The specific point in relation to the dispute is that the decision to reorganize a company domiciled in the Republic of Bulgaria cannot be subject to an action for annulment. It is also not possible to request that the reorganization be declared invalid. However, it could be challenged by the entities and under the provisions of the CA, namely, any shareholder in a company involved in the reorganization, as well as any of the companies involved in the reorganization may file a claim before the court where the acquiring surviving company is registered based on a number of explicitly listed violations. Similar to intra-territorial reorganizations, a non-equivalent exchange ratio is not a valid ground to request invalidation of the reorganizations.

The filing of the claim suspends the issue of the certificate. On the grounds of the final judgment upholding the claim, the certificate shall be denied.

Where the acquiring or the newly established company has its registered office in the Republic of Bulgaria, the claim shall be filed at the latest by the date of registration of the reorganization. The filing of the claim shall suspend the registration of the reorganization. On the grounds of the final decision upholding the claim, the registration of the reorganization shall be declined.

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.