Minority Shareholders Rights in Unlisted Companies in Bulgaria

Corporate Clients, Corporate and M&A, Private Equity, Private companies

Minority shareholders in unlisted companies in Bulgaria (i.e., those holding shares making up less than half of the registered share capital of a Bulgarian OOD or AD company) enjoy certain legal rights protecting their position in the ventures in which they are invested.

Focusing in this note on the two most common corporate forms in Bulgaria: (1) the private limited company (abbreviated in Bulgarian as OOD) and (2) the public liability company (AD), we review certain major risks facing shareholders who alone or in combination with others hold less than the majority of shares in these companies, and summarise the main protections of minority shareholder rights that they may have access to.

This note may be of special interest to shareholders in the minority including those planning their future investment (e.g. in the context of an unequal joint venture; a private equity or venture investment); financiers considering extending credit secured by minority shareholdings and their advisors. This document is an overview and is not intended to provide in-depth information but rather to catalogue the issues.

It is recognised that minority shareholders may be further protected legally among others by contractual arrangements into which they have expressly entered with other shareholders or the company, including shareholders’ agreements (and including ones not governed by Bulgarian law). These have their own challenges of enforceability, and otherwise.

New Balkans Law Office regularly advises on the cross-over between foreign-law governed legal agreements (traditionally governed by English law), and the local legal system.

Lastly, this note should be read as being for information purposes only and not used in lieu of advice, which should be obtained as needed.

MINORITY SHAREHOLDER RIGHTS IN A PRIVATE LIMITED COMPANY (OOD)

In an OOD, minority shareholders are entitled to the following, among others:-

(1) Distributions

Shareholders are entitled to distributions of dividends and/or liquidation shares (as appropriate), pro rata to their holdings at the relevant times.

(2) Share transfers to existing shareholders

Shareholders can transfer their shares to another existing shareholder of the OOD or to a third party, subject to the statutory limitations described below. The limitations are of a mandatory nature and cannot be overridden by a shareholder agreement or the Articles of Association. Conversely, if the shareholders in an OOD wish to transfer their shares to someone who is external to the company, they would need to comply with the statutory requirements for accepting a new shareholder, including the assent of other shareholders to the joining shareholder and such shareholder’s acceptance of the Articles of Association as they stand at the time of admission.

(3) Participation in the affairs of the company

Shareholders may:

1. Participate in general meetings of the company (GMs) and vote in them;
2. Request the directors to convene a GM;
3. While voting in GMs, veto resolutions for increases and/or decreases in the capital or to subdivide the OOD’s shares;
4. “Participate in the management” of the company, which has a broad meaning and serves as a catch-all phrase to ensure fair participation at all times.

(4) Information and control rights

As part of this category of rights, minority shareholders may:-

1. Apply to court to set aside a resolution of the GM, where there are grounds to believe that such a resolution is in breach of mandatory legal provisions or of the Articles of Association of the company.
2. Apply to court for the protection of their rights as a shareholder, in other cases which do not concern breaches contained in shareholder resolutions.
3. Be informed of the company’s affairs, i.e. each shareholder has the right to be given on request and in a timely manner any information pertinent to the company’s affairs; such request to be made to any other shareholder and/or the company’s employees.
4. Obtain access (personally or through a proxy) to examine the company’s entire universe of documents and books (the practical limit here perhaps being the ability to prove that a certain document exists).
5. Petition for the company’s winding-up for “important reasons” (this is a concept different from the “just and equitable” ground familiar in the context of English companies), subject to limitations set out below.

LIMITATIONS ON THE RIGHTS OF A MINORITY SHAREHOLDER IN AN OOD

The exercise of the rights set out in the section above is however limited. For two of the groups of rights we set out above, the following limitations apply:-

(1) Limits on participation in the corporate affairs

With respect to participation rights, the following minimum amounts of share holding are required for the respective right to be exercisable:-

1. 50% of the registered capital is required to pass a GM resolution;
2. 10% of the registered capital are needed to convene a GM (however, any holding is enough to add an item to the meeting’s agenda, once the meeting has been convened);
3. In the context of a liquidation of an OOD, whether voluntary or compulsory, at least 10% of the registered capital is required to propose liquidators to be approved by the court;
4. 25% plus one vote of the registered capital is required to veto an OODs voluntary winding-up;
5. 20% of the registered capital are required to petition for the company’s winding-up;
6. Minority shareholders cannot initiate court proceedings against the directors of the company for losses caused to the company by one or more of the directors. The right to initiate such proceedings is reserved for the company as such, acting through the directors, who in turn exercise their power as directed by the Articles. Unlike in common law jurisdictions, there is no doctrine of “unfair prejudice” and accordingly, the appointment of directors as a remedy for a wronged minority shareholder in cases of “unfair prejudice” is not possible under Bulgarian law.

(2) Limitations on rights to distributions

1. Transferring shares to an outsider requires prior approval by more than a 75% majority of the registered capital in GM;
2. Consequently, a 25% or more of the registered capital can veto such a resolution.

THE RIGHTS OF A MINORITY SHAREHOLDER IN AN AD

The rights of a shareholder in an AD, subject to the limitations described below, are similar to those which shareholders in an OOD and are as further described below. However, a general difference is that unlike in an OOD, AD resolutions are adopted by a majority of votes by shares voting (whether attending in person or by proxy) and not out of the total potential number of votes (“represented capital”), unless specified otherwise below.

The rights of minorities in the AD include:-

(1) Rights to distributions

1. As in an OOD, the shareholders of an AD are entitled to dividends (whenever these are declared) and to a liquidation share, pro rata to the nominal value of the shares they hold.
2. In distinction to the OOD, an AD shareholder may freely transfer its shares to anyone (existing shareholder or not) – unless this is prohibited by the Articles of Association.

(2) To participate in the affairs of the company

Minority AD shareholders may:-

1. Participate in GMs of the AD; be given advance notice of the agenda; request GMs to be convened and vote in them.
2. Depending on the level of attendance at the GM, to affect the outcome of resolutions.
3. Shareholders with more than a third of the represented capital can veto GM resolutions amending the company’s Articles, increasing and/or decreasing its capital and resolving on its winding-up.

(3) Information and control rights

Minority shareholders may:-

1. Petition the court to set aside resolutions of the GM where the resolution may be in breach of mandatory legal provisions or of the Articles.
2. Apply to court to protect their rights as shareholders generally.
3. Commence legal proceedings on behalf of the company against members of the board of directors and/or of the supervisory board, provided they hold at least 10% of the registered capital (and not of the represented capital). Just as in the OOD, the minority may not appoint directors in “unfair prejudice”.
4. Require from the GM the appointment of a “controller” to examine the financial statements of the company (shareholders with shares of at least 10% of the registered capital are needed here).
5. On liquidation, shareholders with shares of at least 5% of the registered capital may require from the court to appoint and/or release liquidators if there is good cause.

LIMITS ON THE RIGHTS OF A MINORITY SHAREHOLDER IN AN AD

The exercise of these rights in ADs is, similarly to OODs, limited, especially as regards participation in the management of the company. E.g. shareholders with shares less than 5% of the registered capital or who have held their shares for less than 3 months:-

1. Are not entitled to add items to the agenda GM;
2. Require a GM to be convened.

SOME OF THE COMMONLY PERCEIVED RISKS FOR MINORITY SHAREHOLDERS IN UNLISTED COMPANIES

For minority shareholders in both private limited companies (OOD) and public liability companies (AD) two commonly perceived risks are:-

1. Expulsion from membership of the company;
2. Dilution of shareholding.

THE RISK OF EXPULSION

Private limited companies (OODs)

One common scenario for the risk of expulsion may arise on non-payment of capital calls otherwise due. Even where a single share is held, a minority shareholder may veto an increase of the nominal value of shares and/or of the number of issued shares.

However, where the company approves a so-called additional contribution to capital (a form of capital contribution similar to share premium), shareholders holding at least 25% plus one vote of the registered capital are needed to veto this.

Where a resolution for an increase of capital or the payment of an additional contribution to capital is passed rather than vetoed, all shareholders become liable to contribute and may be expelled if they fail to do so.

Secondly, an OOD shareholder may be expelled if it “does not assist the company” to conduct its business. This duty in general requires acting in good faith with respect to promoting the company’s interests, including potentially as to tasks which the OOD’s director(s) may allocate to shareholders. A further element of this duty of assistance is a duty of loyalty, requiring not contravening validly adopted resolutions of the company in general meeting. This makes the OOD a much more “personal” type of company and this may be unexpected for many modern shareholders and would generally require careful further analysis and advice.

Public liability companies (ADs)

A shareholder in an AD may not be expelled on the grounds on which a shareholder in an OOD may, as set out above. The risk for minority shareholders of potential expulsion from a public liability company still arises however, e.g. on non-payment of due contributions to capital for shares subscribed by them. Such an omission is surprisingly common and it may be advisable to confirm e.g., whether a transferor of the shares which are being acquired has fully paid up their required contribution to the full value of the share.

Minority shareholders may also be expelled if the company in GM resolves to increase the nominal value of shares of the class held by the minority or the number of issued shares and the minority holders do not top up their contribution (or participate in what is effectively a rights issue) to close the gap. However, a shareholder with shares of more than one-third of the represented capital may veto such a resolution.

The law on tender offers and mandatory share purchases (squeeze-outs) in listed companies is inapplicable to companies which are not currently listed.

Any purchase of the minority’s stake in those cases is therefore purely a matter of contractual agreement between each shareholder and a potential buyer.

What is the risk of dilution in a private company?

Private limited companies (OOD)

Risks connected to mergers and divisions

Minority shareholders may be diluted on a merger or a demerger.

Risks connected to capital increases

Potentially, a dilution may also occur by an increase of the registered capital through the issuance of new shares, where it is envisaged in the Articles that the increase will not be proportionate to their existing shareholdings. Minority shareholders may however veto such increases of capital.

The risk for minority shareholders in public liability companies (AD)

Risks connected to mergers and divisions

As with OODs, minority shareholders may be diluted on a merger or a demerger.

Risks connected to capital increases or decreases

Potentially a dilution of the share of minority shareholders may also occur by an increase of the registered capital of the company through the issuance of new shares, where: (i) the minority shareholders do not exercise their statutory preemption right to acquire new shares in the rights issue; or (ii) the preemptive acquisition right is derogated from by way of a resolution of the GM.

Similarly, a dilution may be achieved by an increase of the registered capital of the company through the conversion of corporate debt securities (bonds, notes and others) into shares (whether newly-issued or existing), where: (i) the minority shareholders do not exercise their preemption right to acquire; or (ii) the preemption right is derogated from by the GM, or (iii) the increase is through conversion of ordinary bonds into convertible bonds and the minority shareholders have not subscribed to such ordinary bonds upon their issuance.

It should be mentioned that diluting minority shareholders’ interest by way of a decrease of the registered share capital of the company is also theoretically possible. However, a shareholder holding more than one-third of the represented capital may veto a resolution for the increase and/or decrease of capital.

Addendum

TABLE OF PROTECTIONS AND THRESHOLDS

We set out below in tabular form the rights which come with each level of shareholding in companies. The table covers both ADs and OODs.

Table 1

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