The primary law governing the formation, operation, transformation and termination of companies is the Commercial Act, effective from 1 July 1991.
There are five forms of business association in Bulgaria under the Commercial Act:
• unlimited partnership (sabiratelno druzhestvo – SD)
• limited partnership (komanditno druzhestvo – KD)
• joint-stock company (aktsionerno druzhestvo – AD)
• limited liability company (druzhestvo s ogranichena otgovornost – OOD)
• limited partnership with shares (komanditno druzhestvo s aktsii – KDA)
All types of business association are recognized as legal entities. The founders may participate in one or more companies provided that the law does not prohibit such participation. Irrespective of the nationality of its founders, each type of company is considered to be Bulgarian.
The most usual forms of business association for foreign investors are the limited liability company (OOD) and the joint-stock company (AD).
Rules applicable to all forms of business association
Articles of association
The adoption of the Articles of Association is an initial step in the establishment of a company.
The Articles of Association must contain:
• trade name, seat and address of the company
• scope of the company’s activities
• management and representation of the company
• identity of the partners/shareholders of the company (except for the AD)
• type (cash or in-kind) and amount of partner contributions (for SD and KD), and/or the amount of company’s capital (for OOD, AD and KDA), and
• other matters as regulated by the Commercial Act which may differ for each form of company.
In cases when a partner or a shareholder intends to make an in-kind contribution, the Articles of Association must state the name of the contributor, the full description of the in-kind contribution, its monetary value, and the grounds for the contributor’s rights.
In the case of a limited liability company, a joint-stock company or a limited partnership with shares, the in-kind contribution must be valued by three experts appointed by a registration official from the Registry Agency. The conclusion of the experts must contain a full description of the in-kind contribution, the method of valuation, the valuation and its consistency with the share of the capital or the number, the nominal and issuing value of the shares being subscribed for by the contributor. The monetary value of the in-kind contribution stated in the Articles of Association may not exceed the experts’ valuation.
A newly established company comes into legal existence with its entry in the Commercial Register with the Registry Agency. The standard registration application form must be filed by the appointed management body. The managers of the company have an obligation to notify the Commercial Register with the Registry Agency, within seven days of any change in the circumstances already registered. If the manager fails to perform his or her duties, he or she is subject to an administrative fine.
Prior to registration with the Commercial Register, the founders may reach an agreement on the actions that must be taken in preparation for incorporation. The founders’ actions create rights and obligations for the persons who have undertaken the said actions.
The latter are held liable jointly and severally for these obligations. Eventually, with the registration, these obligations are automatically assumed by the newly established company.
Announcement of the annual financial statements
All forms of business associations under the Commercial Act, including sole proprietors, are obliged to present their annual financial statements for the previous financial year to the Commercial Register. The deadline for announcement is different for the different types of associations – by 31 May of the year following the reported year for sole proprietors, by 30 June of the year following the reported year for limited liability companies, and by 31 July of the year following the reported year – for all other forms of business associations.
Termination of business associations
There are several grounds for the termination of a company:
• expiration of the term of the company or other grounds/circumstances provided for in the Articles of Association
• resolution by the shareholders/partners of the company adopted with the qualified majority prescribed by the law or the Articles of Association
• resolution of the respective district court for declaring the company insolvent
• transformation of the company in certain cases
• termination by a resolution of the district court in cases provided by the law (e.g. where the company pursues objectives against the law)
• in the case of an AD company – when the company’s net asset value drops below the amount of the registered capital and within one year the company has not resolved
to reduce its registered capital or to transform the company in accordance with the requirements of the law
• other specific grounds regarding the SD, KD and KDA (e.g. insolvency of a partner, etc.).
When one of the above occurs, the company undergoes liquidation proceedings unless an insolvency procedure has already been initiated. The company loses its legal status being deleted from the Commercial Register.
Transformation of business associations
Chapter 16 of the Commercial Act regulates mergers, consolidation of two or more companies, demergers into two or more companies, the spin-off of certain operations into a new company, and transformations whereby the type of the company changes.
The applicable provisions specify and classify the types of business transformations, the procedure for execution of the transformation, and the rights and obligations of the companies and their partners/shareholders.
Prior to adopting a resolution authorizing a transformation, companies must draft a transformation plan or conclude a transformation agreement, depending on whether initially there is one or more participating company. The transformation agreement/ plan must be in writing and it must be signed before a notary public by the official
representatives of the participating companies. It must specify the terms and conditions of the intended transformation, as well as the obligations of the participating companies with regard to the transformation. The content of the transformation agreement/plan must be in compliance with the mandatory requirements of the Commercial Act.
The transformation agreement/plan must be reviewed by controllers appointed by the management bodies of each of the companies involved in the transformation. Upon a request from the companies involved, an official from the Registration Agency may appoint a joint controller for all companies. The controller must be a registered auditor. The controller must also meet other requirements set in the law, which guarantee the auditor’s independence from the merging companies, e.g. the companies are not allowed to appoint auditors who have audited them during the last two financial years, or who have performed a valuation of an in-kind contribution to the capital of any of the companies. The controller is not allowed to audit any of the merging companies for a period of two years following the date of the merger.
The review of the transformation agreement/plan is not obligatory, if all shareholders of the companies participating in the transformation express their explicit written consent that no audit of the transformation is performed.
The management body of a limited liability company, joint-stock company, or a limited partnership with shares is required to adopt a report on the transformation. The report must contain a detailed economic and legal explanation of the terms and conditions of the transformation, as specified in the transformation agreement/plan.
The report and the transformation agreement/plan must be presented to the Commercial Register at the Registry Agency simultaneously by each participating company and at least 30 days prior to the date of the General Meeting which will vote on the resolution for transformation.
The transformation agreement/plan, as reviewed and approved by the controller, must be approved by the General Meeting of Shareholders of each of the companies involved in the transformation. The resolutions must be adopted by a qualified majority of three- quarters of the capital in the case of an OOD, or respectively of all voting shares in the capital of an AD.
The transformation enters into force from the date of its registration into the Commercial Register at the Registry Agency.
The Commercial Act outlines some simplified transformation procedures, provided that certain conditions are met.
When all participating companies are solely owned and the sole owner of their capital is one and the same person, the transformation is performed on the basis of a resolution adopted by the sole owner. The rules regarding: (i) the appointment of an independent controller, (ii) the reports to be prepared by the management bodies of each participating company, and (iii) the approving resolution by the General Meeting of Shareholders/ Partners do not apply.
A company is considered insolvent when it is unable to meet its monetary obligations or in the case of over-indebtedness. The company’s management body must file an application with the relevant district court for the commencement of insolvency proceedings. The application may also be filed by any creditor of the company.
If there are grounds for an insolvency procedure, a receiver must be appointed by the court. Immediately upon appointment, the receiver represents and manages the current affairs of the company, collects its receivables and converts its assets into cash and subsequently distributes the cash to the company’s creditors.
The liquidation procedure, in contrast to insolvency, is voluntary, except for a liquidation by a court decision in cases provided for by law, and is initiated in the case of expiration of the term of the company as set out in its Articles of Association, or with a resolution of the members/shareholders.
The General Meeting of Shareholders (or the Partners in a SD or KD), must appoint a liquidator. The latter is responsible for inviting the company’s creditors to claim their receivables through announcement at the Commercial Register with the Registry Agency.
After the satisfaction of the creditors’ claims, the remaining assets are distributed to the partners/shareholders, but not before six months have elapsed from the date of announcement of the notice to the creditors at the Commercial Register. When all liabilities of the company have been settled and the remaining assets distributed, the liquidator applies for deletion of the company from the Commercial Register.
Limited liability company (OOD)
The OOD is a commercial company, whose shareholders’ liability is limited to the unpaid portion of their shares1 . An OOD is liable to its creditors only to the extent of its own assets.
This form of enterprise is convenient for small and medium-sized business activities, because of the advantages it offers over the other types of business associations:
• the minimum capital required is relatively low – BGN 2
• shareholders’ personal assets are protected from business debt because their liability is limited to the amount of their contribution into the capital. By contrast, unlimited partnership partners are liable to creditors with their entire property
• the OOD avoids the higher publicity requirements and the complex incorporation procedures applicable to an AD company.
Because of these advantages, the vast majority of foreign-owned companies operate in this legal form.
The Bulgarian OOD resembles the German and Austrian “GmbH” (Gesellschaft mit beschränkter Haftung), the French “Sarl.” and the English private company limited by shares.
The English word “share” does not explain the difference between a share in an OOD and a share in an AD. The most important differences are that the share in an OOD is not freely transferable and is not necessarily of equal value, while the AD can issue only shares of equal value and these are more easily transferable. In addition, the shares of an AD are securities. For simplicity, shares in an OOD will be referred to as an “interest.”
An OOD can be formed by one or more persons. The Bulgarian Commercial Act does not provide for a minimum or maximum number of shareholders in an OOD. It should be taken into account that a large number of shareholders will make the company’s management cumbersome, since all important decisions must be taken unanimously or with a majority of shareholders representing 75 percent of the OOD’s capital.
The specific formation rules applicable to the OOD are as follows:
• all the capital must be subscribed on incorporation and at least the minimum statutory capital (BGN 2) must be paid in before the standard registration application form is submitted to the Commercial Register
• the founders must appoint Managing Director(s) for the company. The Managing Director does not necessarily have to be an OOD shareholder, Bulgarian citizen or resident
• the company has to be registered in the Commercial Register with the Registry Agency
• in the case of an EOOD (single member limited liability company), an Incorporation Deed must be drawn up instead of Articles of Association.
The statutory minimum capital of an OOD is BGN 2. The capital of the company is divided into interests and the size of each shareholder’s interest determines his or her rights
and obligations concerning the company. It is possible for the interests of the individual shareholders to be of unequal value. The interests of shareholders in an OOD are not securities.
One of the main characteristics of the OOD is related to the transfer of shareholders’ interests. The transfer of an interest from one shareholder to another is unrestricted but transfer to a third party is subject to a more complex procedure. The new shareholder has to be admitted by the General Meeting of Members of the company following a written application stating that he/she accepts the terms of the Articles of Association. In the case of admittance by the General Meeting of Shareholders, a Transfer of Interest Contract must be notarized and the transfer must be registered in the Commercial Register with the Registry Agency.
The OOD is managed by the General Meeting of Shareholders and by the appointed Managing Director(s).
Each OOD must hold at least one General Meeting of Shareholders each calendar year (Annual General Meeting). It is usually convened at the Managing Director’s discretion, but it can also be convened upon the written request of shareholders whose interests amount to at least one-tenth of the company’s capital.
Apart from the Annual General Meeting, the Managing Director may convene additional meetings commonly referred to as Extraordinary General Meetings. An Extraordinary General Meeting must be called immediately when the losses of the company exceed one-fourth of the registered capital or if the company’s net asset value falls below the amount of the registered capital. There is no limit to the number of General Meetings a company may hold each year.
The General Meeting is the company’s highest management body. It is empowered to make key strategic and executive decisions regarding the company. The shareholders are authorized to decide on the admission and expulsion of shareholders, the appointment of Managing Director(s), a capital increase or reduction, approval of the annual report and balance sheet, the distribution of profits, etc.
The day-to-day management of an OOD is conducted by at least one Managing Director. The Managing Director represents the OOD in court and in dealings with third parties. He/ she is financially liable for damages caused to the company. For example, in the case of over-indebtedness or insolvency, the Managing Director must file an application initiating insolvency proceedings. If the Managing Director does not perform his/her duty, he/she commits a criminal offence and may be held liable for damage to both the company and its creditors.
The Managing Director(s) in an OOD is/are required to have written management contracts executed with the company. The management contract must be signed by a person authorized by the General Meeting of Shareholders or, in the case of an EOOD, by the sole owner of the capital.
In the case of an EOOD, the sole owner of the capital manages and represents the company either personally or through an appointed Managing Director(s). When the owner is a legal entity, the Managing Director of the legal entity or a person designated by him/ her manages the company.
Distribution of profits
Shareholders cannot claim their interest back while the company is in operation. They are only entitled to profits in proportion to their interest, unless otherwise agreed by the shareholders.
Payment of interest on a shareholder’s profits is explicitly prohibited.
Joint-stock company (AD)
A joint-stock company is a company which capital is divided into shares. The AD’s liability to its creditors is limited to the amount of its assets. Foreign investors prefer this type of business association when larger amounts of capital need to be raised, particularly when public capital markets need to be tapped. The Bulgarian AD resembles the French “Societe Anonyme,” the German and Austrian “AG” (Aktiengesellschaft) and is similar to the English public company limited by shares.
An AD is incorporated by a Constituent Assembly whereby all persons, who have already subscribed for shares into the capital of the new company, decide to constitute the company and adopt its Articles of Association. These resolutions must be unanimous if several legal entities and/or individuals are involved. An AD may also be formed by an individual or legal entity. In the case of a single member joint-stock company, the sole owner decides on the issues otherwise addressed by the Constituent Assembly.
The AD is registered in the Commercial Register with the Registry Agency by filing its Articles of Association and other documents evidencing that:
• its capital is fully subscribed
• a portion of the value of each share stipulated by the Articles of Association, but not less than 25 percent of the nominal or issuing value, has been paid
• the Board of Directors or, respectively, the Managing Board and Supervisory Board have been appointed, and
• the remaining requirements of the law have been fulfilled (e.g. banks, insurance and investment companies have to obtain the necessary licenses granted by the Bulgarian authorities).
The statutory minimum capital of an AD is BGN 50,000. A higher statutory minimum is required for credit and financial institutions, investment companies, insurance and health insurance companies.
The capital of the company is divided into bearer or registered shares. Within these two types of shares, the AD may issue ordinary and preference shares. An ordinary share entitles its holder to one vote. Preference shares may provide a guaranteed or additional dividend or a specified share in the company’s assets in the case of liquidation. Non-voting shares cannot represent more than 50 percent of the company’s capital. Multiple voting shares are permitted only if provided for in the Articles of Association. ADs can issue dematerialized2 shares.
The shares in an AD can be traded on the stock exchange if the company is registered as a public company under the Public Offering of Securities Act.
The AD must set up a reserve fund mainly to cover losses. At least one-tenth of the company’s profit must be set aside until the fund’s assets reach at least one-tenth of the company’s registered capital. In addition, any premium over the par value for shares and debentures obtained upon their issuance must be included in the reserve fund.
Dematerialized shares have no physical substance and are issued in a book-entry form.
The Bulgarian Commercial Act has a requirement that regulates the capital-credit ratio of joint-stock companies. The net value of the assets of a joint-stock company, i.e. the
difference between the value of the assets and liabilities of the company according to its balance sheet, cannot fall below the amount of the registered capital of the company. If this ratio is not observed, then the shareholders are obliged to adopt a resolution either to decrease the company’s capital, or to transform the joint stock company into another form of business entity. If this is not done within one year, then a court ruling issued upon the request of the public prosecutor can terminate the company.
Increase of capital
A company’s capital may be increased in one of the following ways:
• issuing new shares
• increasing the nominal value of shares already issued, or
• converting debentures into shares.
The resolution to increase the capital must be taken by the General Meeting of Shareholders.
The Articles of Association may empower the Management Board (Board of Directors) to increase the company’s capital up to a specified amount. Under this provision, new shares may be issued within five years from the date of the company’s incorporation. A resolution which allows for the issue of new shares may also be passed by amending the Articles of Association of the company. If this is done, then the Management Board (or Board of Directors) may increase the company’s capital up to the amount specified in the amending resolution for up to five years from the date of registration of the amendment in the Commercial Register.
Decrease of capital
A company’s capital may be decreased through either of the following:
• reduction in the nominal value of shares, or
• cancellation of shares.
A capital decrease requires shareholder’s approval. The resolution of the General Meeting of Shareholders on the capital decrease should be announced in the Commercial Register. By its announcement it is presumed that the company is committed to secure or repay all creditor claims. Creditor consent is assumed if no written objections are filed within three months from the date of announcement of the resolution for capital decrease with the Commercial Register.
The joint-stock company’s governing bodies are the General Meeting of Shareholders and the Board of Directors (one-tier system), or the Supervisory Board and the Management Board (two-tier system). There are no requirements regarding the nationality or residence of members of either board. A member of the Management Board may not be a member of the Supervisory Board. The members of the Board of Directors, the Management Board and the Supervisory Board may be shareholders. All Board members are held liable jointly and severally before the company for damages caused in the course of their duties.
In a single member joint-stock company, the owner is empowered to decide on all issues otherwise handled by the General Meeting of Shareholders.
The General Meeting of Shareholders consists of all shareholders entitled to vote. The first General Meeting of Shareholders must be held within 18 months of incorporation. Subsequently, a regular General Meeting of Shareholders must be held at least once a year, not later than 30 June . General Meetings of Shareholders are usually called by the Board of Directors/Management Board or by the Supervisory Board, or upon a request of shareholders representing no less than 10 percent of the company’s capital.
The General Meeting of Shareholders may amend and supplement the Articles of Association, transform and dissolve the company, elect and recall members of the Board of Directors or the Supervisory Board, appoint and dismiss registered auditors, approve the annual financial statements as certified by the appointed registered auditor and resolve other matters which fall into its prerogatives by law or by virtue of the Articles of Association.
The company’s constituent Supervisory Board must be elected prior to company registration. Subsequent members of the Board are appointed by the General Meeting of Shareholders. The total number of Supervisory Board members may vary from three to seven.
The Supervisory Board does not effectively take part in the management of the company. Its primary function is to represent the company in its relations with the Management Board. The Supervisory Board appoints the members of the Management Board and exercises control over its activities and resolutions. The Management Board must report on its activity to the Supervisory Board quarterly.
Members of the Supervisory Board and the Management Board are required to execute management contracts with the company. Management contracts with members of the Supervisory Board must be signed by a person authorized by the General Meeting of Shareholders or by the sole owner of the capital of the company, in the case of an EAD. All management contracts with members of the Management Board must be executed on behalf of the company by the chairperson of the Supervisory Board or by their authorized representative.
The day-to-day management of an AD with a two-tier management system is carried out by the Management Board under the control of the Supervisory Board. The number of members of the Management Board may not exceed nine and not be less than three. Subject to Supervisory Board approval, the Management Board may effectively delegate company representation to one or several of its members.
If provided in the Articles of Association, certain resolutions of the Management Board may require prior approval from the
One-tier companies are managed and represented by a Board of Directors. It consists of a minimum of three and a maximum of nine persons. The Board of Directors delegates the actual management and representation of the company to one or more of its members who are subsequently designated as executive directors. They serve at the discretion of the Board of Directors and can be replaced at any time. The executive director of a joint- stock company is required to have a written management contract with the company. The management contract must be executed on behalf of the company by the chairperson of the Board of Directors.
Non-executive members of the Board of Directors can conclude management contracts with the company at the company’s discretion.
Other forms of business association
European forms of business association
The European forms of business associations are unions of legal entities, individuals or both, from different Member States of the European Union. The legislation of the EU regulates the following forms of business associations: (i) European company, established as European joint-stock company; (ii) European cooperative society; (iii) European economic interest grouping. In Bulgaria, these entities are mainly regulated by the Commercial Act, the Cooperatives Act and the Commercial Register Act, all in conformity with EU legislation.
Unlimited partnership (SD)
The unlimited partnership is an entity formed by two or more partners who are jointly and severally liable to the entity’s creditors. Their liability for the entity’s debts is unlimited. There is no capital requirement.
The Bulgarian unlimited partnership (unlike the German and Austrian general partnerships for example) is a separate corporate entity from its partners.
Each partner is entitled to take part in the management of the partnership’s business unless the Articles of Partnership have assigned the management to one or several of the partners or to a third party.
Limited partnership (KD)
Limited partnerships include general and limited partners. General partners are fully liable for the company’s debts while the liability of limited partners does not exceed their contribution to the partnership. General partners must manage and represent the entity.
Limited partnership with shares (KDA)
Limited partnerships with shares are formed by at least three limited partners whose liability is limited to the amount of their contributions to the company’s capital. There are also general partners with unlimited liability.
The formation of a KDA is initiated by the unlimited partners. They have the right to select the limited liability partners as subscribers of the company’s capital.
KDAs are managed by a General Meeting of Partners and a Board of Directors. The General Meeting of Partners consists of all partners. Only limited partners have voting rights. The day-to-day management of the partnership is carried out by the Board of Directors which includes only general partners.
Sole proprietor – ednolichen targovets (ET)
A sole proprietor may be any capable individual who has permanent residence in Bulgaria. A person may register only one trade name as a sole proprietor.
The Commercial Register
The Commercial Register Act (CRA) was adopted in April 2006 and came into force on 1 January 2008.
While the Commercial Act regulates the method of incorporation of business associations in Bulgaria, the CRA regulates the registration of business associations as each newly established entity begins its legal existence with entry into the Commercial Register.
The CRA provides for significant changes regarding the registration of business associations. Pursuant to the CRA, company registration and registration of subsequent corporate changes was removed from district courts and instead a centralized electronic register was designed to make the process more timely, transparent and uniform. The registration procedure is assigned to the Registry Agency at the Ministry of Justice which is the registration authority. The Commercial Register is available to the public, including via Internet – www.brra.bg. The Registry Agency also manages the reservation of company names and announcement of documents and facts such as annual financial statements, Articles of Association, invitations to shareholders, etc. By virtue of the CRA, the need for promulgation of corporate documents in the State Gazette is replaced by documents being recorded at the Commercial Register.
The CRA determines the registration procedure of all five main forms of business associations namely: unlimited partnership, limited partnership, joint-stock company, limited liability company and limited partnership with shares. Furthermore, the CRA regulates the registration procedure of sole proprietors, cooperatives and branches of foreign companies. It does not apply to partnerships, foundations, NGOs, etc.
According to the CRA, all existing companies had an obligation to apply for re-registration in the Commercial Register with the Registry Agency until 31 December 2011. Sole proprietors and branches of foreign companies that had not re-registered within the statutory term, have been deleted from the Commercial Register as of 1 January 2012.
Meanwhile, as from 1 January 2012, companies and cooperatives that had not re- registered within the statutory term continue to exist, however they cannot conduct any business activity, file claims or initiate execution procedures, nor dispose of any property. The only permitted activities for these companies/cooperatives are payment of due remunerations to their employees and payment of public obligations towards the state or municipalities.
In case of outstanding court disputes and execution procedures involving a non re- registered company/cooperative as a claimant, the competent authority shall suspend the procedure and instruct the claimant to submit an application re-registration and liquidation. Should the claimant not fulfill the above instructions, the court dispute/execution procedure shall be terminated.
By 31 January 2015, any entitled third party can submit an application for re-registration and liquidation of non re-registered companies/cooperatives before the competent district court (the court of last registration of the company/cooperative). The liquidation procedure should be completed within one-year term but not later than 31 January 2017.
After 31 January 2017, the Registry Agency shall delete all companies and cooperatives for which: (i) no re-registration and liquidation procedure is initiated; (ii) the liquidation procedure is not completed; (iii) no bankruptcy procedure is initiated.
Following registration with the Commercial Register, companies obtain a registration number – Unified Identification Code (UIC) that is used for taxation, social security and statistical purposes. Once received, this UIC remains unchanged until termination and/ or cancellation. Upon re-registration, the BULSTAT No of the existing companies is transformed into their UIC.
Apart from the registration of a company, the CRA also regulates subsequent corporate changes such as entry into the Commercial Register of a procurator, pledge of shares, pledge over a commercial enterprise, termination and liquidation of a company, transfer or transformation of a commercial enterprise, change of the company’s representatives, seat or name, etc.
However, the district courts retain their competency regarding insolvency procedures.