1.1. Types of Companies
Bulgarian law recognises the following types of commercial companies exhaustively listed in the Law on Commerce1: (i) general partnership; (ii) limited partnership; (iii) limited liability company or one-person-owned limited liability company, hereinafter referred to as LLC; (iv) joint stock company or one-person-owned joint stock company, hereinafter referred to as JSC; and (v) company limited by shares. A JSC might be publicly listed or private. Under Bulgarian law, public company could only take the form of a JSC, which has issued shares under the conditions of initial public offering or has a registered share issue for the purpose of trading on regulated securities market. The Law on Public Offering of Securities2 sets forth the general legal framework of public companies. In addition to the five types of commercial companies enumerated above, the following forms for doing business are also recognised under Bulgarian law: (i) sole trader (abbreviated as "ET"); (ii) holding; (iii) branch; (iv) representative office; and (v) cooperative.
Under Bulgarian law, the sole trader, the partners in the general partnership, as well as the unlimited partners in the limited partnership and in the company limited by shares, have unlimited personal liability to the creditors. On the other hand, the shareholders' exposure in the limited liability companies and the joint stock company is limited to the amount of their shareholding in the company's capital.
Below is provided a more detailed description of the regulatory framework of the limited liability company and the joint stock company.
1.2. Establishment of a Company
The procedure for incorporation of a company in Bulgaria does not differ when local or foreign persons participate in its establishment. Under Bulgarian law there are no restrictions as to the size of the foreign participation in the capital of a Bulgarian company and, therefore, up to 100% of the registered capital can be held by foreign persons in LLC and JSC.
All types of commercial companies are incorporated by way of registration with the commercial register with the companies' department of the district court where the seat of the respective company is located. The procedure and the documents required for the establishment of each particular type of commercial company are set forth in the Law on Commerce. The incorporated company becomes a capable legal entity as of the date of its entry into the respective commercial register.
2. Subsidiaries and Branches
The Law on Commerce allows sole person ownership of LLC and JSC. Where one person owns the entire capital of an LLC or JSC, such company is referred to as one-person-owned LLC (abbreviated as "EOOD") or respectively one-person-owned joint stock company (abbreviated as "EAD"). As a type of LLC/JSC, the one-person-owned LLC/JSC is subject to the same regulation as the LLC/JSC, with certain exceptions relating to its specific structure of shareholding. Thus, a foreign or local person could create in Bulgaria wholly owned subsidiary.
The incorporation of a branch is one of the alternatives for the establishment of business operations of a foreign company in Bulgaria. Foreign companies registered abroad, as well as foreign individuals or persons other than legal entities can register a branch in Bulgaria if they are properly incorporated and/or entitled to conduct business under the national law of their home country. A branch of a foreign company is established by means of registration into the commercial register with the companies' department of the district court where the seat of the respective branch is located. The branch of a foreign company, after being registered under Bulgarian law, will have certain independency. Thus, it will have to keep commercial books as a separate business establishment and will be obligated to prepare a separate balance sheet. However, the branch is not considered a separate legal entity, and its assets and liabilities are deemed to be assets and liabilities of the parent company. Therefore, the branch is not required to comply with capital registration requirements or to have separate bylaws and management structure, except for a manager. Although the branch should register its scope of activities, it is free to enter into any transactions and activities, which are not included explicitly into its registered scope of activities.
3. General Meeting of the Shareholders
3.1. Limited Liability Company
The corporate governance structure of a limited liability company consists of (i) a general meeting of the shareholders; and (ii) one or more managers, who manage the company and represent it before third parties jointly or severally.
The general meeting of the shareholders consists of all shareholders in the company and has the exclusive powers to: (i) amend and supplement the articles of association; (ii) approve new shareholders and expel shareholders, and give consent for the transfer of a share to a new shareholder; (iii) approve the annual accounts, distribute the profit and resolve on payment thereof; (iv) resolve on increase or decrease of the registered capital; (v) appoint the manager, determine his remuneration and his release of liability; (vi) resolve on participation in other companies and opening or closing of branches; (vii) resolve on acquisition or disposal of real estates and rights in rem; (viii) resolve on filing claims against the manager or the controller of the company. The aforementioned exclusive powers are determined by statute. In addition to these, the company's articles of association can vest other powers with the general meeting of the shareholders.
There are no quorum requirements for the sessions of the general meeting. The resolutions under items (i), (ii) and (ix) above require 3/4th majority of the capital, and the resolutions under item (iv) ûunanimity of all shareholders. The general meeting might resolve on any other issues by a simple majority of the capital, unless the articles of association require higher majority. Resolutions for reorganization of the company are taken by a majority of 3/4th of the capital.
The resolutions of the General Meeting of a limited liability company might also be passed in absentio by a memorandum in writing signed by all shareholders.
In case the LLC is a wholly owned subsidiary, the sole owner of the capital resolves all matters within the competence of the General Meeting of the Shareholders,
3.2. Joint Stock Company
The corporate governance structure of a JSC is more complex, and consists of: (i) a general meeting of the shareholders, and (ii) a board of directors (in the case of one-tier governance system), or a supervisory board and a managing board (in the case of twotier governance system).
The powers vested by the law with the general meeting of the shareholders of an JSC are similar to the ones vested by law to the general meeting of the shareholders of an LLC. These powers include: (i) amendment and supplement of the articles of association of the company; (ii) increase and decrease of the registered capital; (iii) reorganisation and windingup of the company; (iv) appointment and dismissal from office of the members of the board of directors, or of the supervisory board, respectively; (v) determining the remuneration of those members of the supervisory board, or of the members of the board of directors respectively, whom the management would not be assigned to, as well as their right to receive part of the company's profit and to acquire shares and bonds of the company; (vi) appointment and dismissal of the company's auditor; (vii) approval of the annual accounts of the company certified by the appointed auditor; (viii) distribution of profit, making contributions to the reserve fund and payment of dividend; (Ix) issuance of bonds; (x) appointment of liquidators in case of dissolution of the company, except for the cases of insolvency; (xi) releasing from liability members of the boards; (xii) any other issues within its competence pursuant to the law or the articles of association of the company.
If the articles of association do not provide otherwise, the following transactions can be concluded only if authorised by the general meeting: (i) transfer or granting the use of the going concern of the company; (ii) transfer of assets with total value, during the current year, which exceeds half of the value of the assets of the company according to the last certified annual accounting report; (iii) undertaking of obligations or granting security to a person or to related persons in an amount exceeding half of the value of the assets of the company according to the last certified annual accounting report.
The law does not establish any quorum requirements for the General Meeting. Such requirements might be provided for in the articles of association of the JSC. At least half of the capital, however, has to be presented in order for the general meeting to pass resolutions on (i) amendment and supplement of the Bylaws of the company; (ii) increase and decrease of the registered capital; and (iii) reorganisation and windingup of the company, as the articles of association might provide for a higher quorum. Lacking quorum, a new meeting might be scheduled not earlier than 14 days, and it shall be lawful regardless of the represented capital. The general meeting passes resolutions by a simple majority of the represented shares, unless otherwise provided for by law, or in the articles of association. Decisions for (i) amendment and supplement of the Bylaws of the company; (ii) increase and decrease of the registered capital; and (iii) windingup of the company, shall be taken by a majority of 2/3rd of the represented shares, unless the articles of association provide for a higher majority. Decision for reorganization of the JSC are taken by a majority of 3/4th of the represented voting shares.
3.3. Public company
The public company has the typical corporate governance structure of a JSC. However, the Law on Public Offering of Securities provides for special rules concerning the convocation and holding of the general meeting and the representation at the general meeting. The general meeting of a public company might be held only at its seat.
4. The Directors of the Companies
4.1. Limited Liability Company
The LLC is managed and represented by one or more managers, appointed by the general meeting of the shareholders. The manger may or may not be a shareholder. If several managers are appointed, they represent the company severally, unless the general meeting has resolved otherwise.
4.2. Joint Stock Company
The Law on Commerce envisages two systems of corporate governance of JSC, namely one-tier system, comprising of board of directors, and twotier system, comprising of supervisory board and managing board. In the case of a one-tier system of governance, the members of the Board of Directors are appointed and released from office and liability directly by the general meeting of the shareholders. The board of directors may consist of three to nine members. In the case of the twotier system, the general meeting of the shareholders appoints and releases from office and liability the members of the supervisory board, and the latter appoints and releases the members of the managing board, and determines their remuneration. The supervisory board monitors and controls the activities of the managing board of a JSC. The supervisory board does not take part in the management of the company and it represents the company only in its relations with the managing board. The supervisory board might consist of three to seven members, and three to nine members might be appointed as members of the managing board.
The members of the board of directors, or the managing board, respectively, represent the company jointly, unless the articles of association provide otherwise. Members of the boards of an JSC might be local or foreign individuals or, if the articles of association allow, legal entities. If a legal entity is a member of the board, the latter should appoint a representative to perform its obligations as a board member. Members of the boards are appointed for a term of up to 5 years, unless the articles of association provide for a shorter term, with possibility for reelection without limitation. The members of the first board of directors, or supervisory board respectively, are appointed for a term not longer than 3 years.
4.3. Public company
The Law on Public Offering of Securities provides for additional requirements towards the members of the managing and supervisory bodies of a public company. At least one third of the members of the board of directors or of the supervisory board of the public company must be persons independent from the majority of shareholders and from persons, who exercise control over the public company.
5. Internal Auditors
5.1. Limited Liability Company
One or more controller(s) might be appointed by the general meeting of an LLC to monitor the compliance with its articles of association and the proper use and operation of the LLC's assets. Such controller reports to the general meeting of the LLC.
5.2. Joint Stock Company
Shareholders holding at least 10% of the JSC capital might request the general meeting of the shareholders to appoint a controller to inspect the annual accounting report of the company. In case the general meeting refuses to appoint such controller, the shareholders holding at least 10% of the JSC capital may apply to the competent court to appoint one. The controller prepares a report, which is presented at the general meeting.
5.3. Public company
Controllers might be appointed by the general meeting or by the competent court upon request of shareholders in a public company, holding together or separately at least 5% of the capital.
6. Executive Managers
6.1. Limited Liability Company
LLC is managed and represented before third parties by one or more manager(s) appointed by the general meeting of the shareholders. In the event the General Meeting appoints two or more individuals to act as managers of the company, each of the managers is entitled to manage and represent the company separately, unless the articles of association explicitly provide otherwise. Any other restriction of the representative powers of the manager, except for the joint representation, will not be effective visavis third parties. Under Bulgarian law there are no restrictions for a foreign person to be appointed as a manager.
6.2. Joint Stock Company
The board of directors (in case of one-tier governance system), or the managing board subject to the approval of the supervisory board (in case of twotier governance system), may authorize one or more persons to serve as executive director(s) of the JSC and to represent the company before third parties. The law does not impose any restrictions for appointing foreign persons as executive directors of JSC.
6.3. Public company
The rules applicable to executive directors of JSC also apply to to a public company.
7. Shareholders' Rights
7.1. Limited Liability Company
The shareholders of an LLC have the following rights: (i) right to participate in the company's management; (ii) right to participate in the distribution of profit; (iii) right to be informed for the company's operation; (iv) right to review the company's books and (v) right to a liquidation quota. The rights of shareholders in a LLC may vary with respect to different shareholders. Thus, the articles of association may provide for different shareholders to have different share in the property of the company, different votes in the general meeting, different part from the profit and different liquidation quota. If not otherwise agreed in the articles of association, each shareholder shall have a share in the company's property, votes in the general meeting, part from the company's profit and liquidation quota in proportion to its share in the company's capital. In addition, any shareholder might claim revocation of decisions taken by the general shareholders' meeting when such decisions are inconsistent with a mandatory legal provisions or the articles of association of the company within two weeks from the date of the meeting, or the notification date, but not later than 3 months after the meeting's date.
7.2. JointStock Companies
The shareholders of JSC have the following rights: (i) right to vote in the General meeting of the Shareholders; (ii) right to a dividend; (iii) right to a liquidation quota (iv) right to purchase newly issued securities pro rata to its shareholding in the capital of the JSC (to the extent that such right has not been cancelled by the general meeting). The Law on Commerce provides for the following rights established to protect the minority shareholders: (i) shareholders holding at least 5% of the registered capital might require the management body to convene the general meeting of the shareholders; (ii) shareholders holding at least 5% of the registered capital might apply to the competent court to include additional items to the agenda of the general meeting by filing a written list of such items in the commercial register; (iii) shareholders holding at least 10% of the registered capital might file a claim against members of the boards for damages caused by such members to the company; (iv) shareholders holding at least 10% of the registered capital might require the appointment of a controller by the general meeting; (v) any shareholder might claim the revocation of decisions taken by a general shareholders' meeting when such decisions are inconsistent with a mandatory legal provisions or the articles of association of the company within two weeks from the date of the meeting, or the notification date, but not later than 3 months after the meeting's date.
7.3. Public company
The shareholders' rights in a public company have certain specific features. Only shareholders that have been entered into the Register of public companies not later than 14 days prior to the date of the general meeting are entitled to vote at that general meeting. Similarly, the right to a dividend belongs only to shareholders, entered into the register of the Central Depository as shareholders not later than 14 days prior the date of the general meeting which resolved to distribute a profit.
The public company may not issue privileged shares, giving right to more than one vote. Furthermore, the shareholders in a public company have the right to pose at General Meeting particular questions to the members of the managing and supervisory bodies, who are obligated to answer them, even in case the questions are not related to the agenda.
Minority shareholders holding at least 5 % of the capital in a public JSC have the following additional rights: (i) to file claims on behalf of the company against third persons in case the management of the company fails to take action and the interests of the company are prejudiced; (iii) to file claims against members of the boards for damages caused by such members to the company; (ii) to require the general meeting or the competent court to appoint controllers.
8. The Issue of New Shares/Share Capital Increases
8.1. Limited Liability Company
The capital of LLC may be increased by virtue of a resolution of the general meeting of the shareholders taken unanimously by means of: (1) increasing of the value of the shares; (2) subscription of new shares; (3) accepting new shareholders. The shareholders are entitled to subscribe new shares pro rata to their shareholding, unless otherwise resolved by the general meeting.
8.2. Joint Stock Company
The capital of the JSC may be increased by virtue of a resolution of the general meeting of the shareholders by means of: (1) issue of new shares; (2) increase of the nominal value of the issued shares; (3) conversion of bonds into shares. The capital of a joint stock company may also be increased through conversion of part of the annual net profit into registered capital.
A resolution for a capital increase is taken by the general meeting by a majority of 2/3 of the represented shares, unless the articles of association provide for a higher majority. If the capital is increased by capitalizing the profit of the JSC, the decision has to be taken by a majority of 3/4 of the represented capital. The capital may also be increased by a resolution of the board of directors or the managing board if authorised by the articles of association of the JSC. Such authorisation might be given for a maximum period of five years. The board of directors or the managing board may in such case revoke the preemptive rights of the shareholders only if specifically authorised by the articles of association or pursuant a followup decision of the general meeting taken by a 2/3 majority of the represented capital.
The Law on Commerce entitles each shareholder to acquire newly issued shares on a pro rata basis. The shareholders may exercise their premptive rights within a term specified by the general meeting of shareholders, which may not be less than one month after the publication in the State Gazette of an invitation for subscription of the new shares. The preemptive right of the shareholders to acquire shares on a pro rata basis may be limited or waived by a resolution of the General Meeting of Shareholders passed by a majority of 2/3 of the represented shares. If there is more than one class of shares, the resolution should be passed by 2/3 of the shares of each class.
8.3. Public Company
The capital of a public company may be increased by issuance of new shares, by conversion of convertible bonds to shares, as well as by partial capitalization of the profit. The capital of a public company may not be increased by an inkind contribution or under the condition that the stock is purchased by specified persons for a specified price, except for certain cases provided for by law. Furthermore, the capital of a public company might not be increased through increase of the nominal value of the stock. The preemptive rights of the shareholders in a public company might not be revoked by a resolution of the general meeting. The right to subscribe newly issued shares belongs to shareholders, that have acquired their shares within 14 days after the date of the general meeting which resolved on the capital increase, or within 7 days after the promulgation of the announcement for public offering in case the resolution for capital increase is taken by the managing body.
9. Decrease of Share Capital
9.1. Limited Liability Company
The general meeting of the shareholders may resolve to decrease the capital of the LLC unanimously. The resolution to decrease the capital should specify the purpose and method of the decrease. The capital might be decreased by: (i) decreasing the value of the shares; (ii) repayment of the share of a shareholder who has terminated its shareholding; (iii) release of a shareholder form the obligation to payin the unpaid part of its share. The resolution for the capital decrease shall be published in the State Gazette. The company has to state in the notice for the capital decrease that it is in a position to provide security for its debts and to repay all outstanding obligations as of the date of the publication to creditors that disagree with the capital decrease. The creditors who have failed to express their disagreement in writing within 3 months as of the publication of the notice for capital decrease are presumed to have consented to the capital decrease. The capital decrease shall be entered in the commercial register with the court of registration after the expiration of the threemonths period as of the publication in State Gazette. Shareholders may receive payments of capital only after the capital decrease is registered in the commercial register with the court of registration and after the creditors that disagree with the decrease have received sufficient collateral or payment.
9.2. JointStock Company
The capital might be decreased by (i) reducing the par value of the shares or (ii) redemption of shares. Shares may be cancelled only if allowed for by the company bylaws and provided that the shares have been subscribed under such condition. The general meeting of the shareholders may resolve to decrease the capital of the JSC by a majority of 2/3 of the presented capital. In case there are classes of shares, each class has to resolve separately on the decrease by a majority of 2/3 of the represented shares of each respective class. The resolution for the capital decrease should specify the purpose and method of the decrease.
The Law on Commerce establishes the same requirements intended to protect the creditors of the JSC such as those for the LLC (see above). Such requirements are not applicable when: (i) the capital of the company is decreased to cover the losses; (ii) the capital is decreased with own shares, which have been fully paidin and which were acquired without consideration or with the companies' own resources.
9.3. Public Company
The capital of a public JSC may be decreased pursuant to the same rules as private JSC.
10. Transfer of Shares (Mechanics)
10.1. Limited Liability Company
The minimum share capital required by the Law on Commerce for incorporation of a LLC is BGN 5,000 (five thousand), distributed in shares with value of not less than BGN 10 (ten). At the time of incorporation of the company and as a condition precedent for such incorporation, at least 70% of the registered capital must be paid in, and every shareholder must have paid in at least 1/3 of its shareholding, but not less than BGN 10 (ten).
The shares in LLC are not tradable instruments. They may be transferred and succeeded, where the transfer is effected by a notarized share transfer agreement. Transfer of shares between shareholders is free, while transfer of shares to third parties requires a resolution of the general meeting of shareholders for accepting a new shareholder. A new shareholder is accepted by a resolution of the general meeting upon written request of such new shareholder, and provided that the shareholder stated in such request that he agrees to the conditions of the articles of association of the company.
10.2. Joint Stock Company
The minimum share capital required by the Law on Commerce for incorporation of a AD is BGN 50,000 (fifty thousand), distributed in shares of nominal value of not less than BGN 1 (one). At the time of incorporation of the company and as a condition precedent for such incorporation, at least 25% of the nominal value, or issuing value determined in the articles of association, of each share must be paid in.
The shares of a JSC are tradable instruments. The types of shares that JSC may issue are: (i) registered or bearer shares; (ii) common or privileged shares, as well as (iii) materialized or bookentryform shares. The articles of association of a JSC may provide that privileged shares grant to the respective shareholder additional voting rights, guaranteed or additional dividend or liquidation quota, or special management rights, such as veto rights. Shares granting equal rights shall form a separate class of shares, as the rights of different shareholders from one and the same class might not be restricted.
Registered shares are transferred by endorsement, whereas bearer shares are transferred by mere delivery. The transfer of the registered shares should be entered into the book of shareholders of the JSC to have effect against the company. In general, restrictions to the transfer of shares may be provided for in the articles of association of the company, and such restrictions shall be binding on the company and on the shareholders. Restrictions on transfer may relate to any type of shares.
10.3. Public company
The public company may issue only common registered bookentryform shares. The transfer of shares of a publicly traded company may not be subject to restrictions. Transfer of shares may be executed only on a stock exchange or overthecounter, where the shares are registered, except for transactions between individuals. Transfer of shares takes effect as of the moment of the registration of the transaction in the Central Depository, which also runs the shareholders' registry of the company.
Both LLC and JSC are dissolved based on a resolution of the general meeting of the shareholders and pursuant to the liquidation procedure provided for in the Law on Commerce. The liquidation is carried out by liquidators within a term approved by the general meeting of shareholders. The liquidators are entered in the commercial register with the company department at the court of registration and jointly represent the company subject to certain restrictions provided for by the Law on Commerce.
Except for voluntary dissolution, explained above, both an LLC and JSC might undergo dissolution on other grounds explicitly enumerated in the Law on Commerce, including, without limitation, upon: (i) expiration of the term of the company, if any; (ii) declaring the company insolvent; (iii) a decision of the court of registration in certain cases provided for by law; and (iv) on grounds provided for in the articles of association of an LLC or the JSC, respectively.
The dissolution of a public company is governed by the general rules, applicable to JSC. In case the public company loses its public status, it does not necessarily terminate its legal existence, which could continue under the legal form of a private JSC.
1 Promulgated in State Gazette, Issue No. 48 of 18 June 1991, as subsequently amended and supplemented.
2 Promulgated in State Gazette, Issue No. 114 of 30 December 1999, as subsequently amended and supplemented.
Nadejda Krastanova is an associate of the Company Commercial Law Dept. of Studio Legale Sutti in Milan.
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.