Мinority Shareholder Rights in Unlisted Companies in Bulgaria

BACKGROUND

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

 

Shareholding Description Reference
1/3 In an AD, a resolution for repurchase of own shares can be passed (unless a different mechanism for repurchase is not expressly provided for in the Articles of Association), by a majority of two-thirds of the represented shares.
This means that a 1/3 shareholding in an AD has always veto powers provided that the repurchase is not expressly provided for in the Articles of Association. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 187b(1),(2) of the Commerce Act
In an AD, the shareholders’ preemption rights may be restricted or set aside only by a resolution of the GM, passed with a majority of two-thirds of the votes of the represented shares.
This means that a 1/3 shareholding in an AD has always veto powers. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 194(1),(4) of the Commerce Act
In an AD, the GM’s resolution to increase the capital shall be passed with a majority of two-thirds of the votes of the shares represented. The Articles of Association may provide for a larger majority, as well as for additional conditions.
This means that a 1/3 shareholding in an AD has always veto powers. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 192(2) of the Commerce Act
In an AD, resolutions for amendment and supplement of the Articles of Association, to increase or decrease the registered capital, or to wind up the company shall require a majority of two-thirds of the votes of the shares represented. The Articles of Association may provide for a larger majority in these cases.

This means that a 1/3 shareholding in an AD has always veto powers. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 230(2) of the Commerce Act
25% plus one vote If an AD is wound up upon expiration of its term or with a resolution of the competent company bodies, the latter may resolve by a majority of three-quarters of the capital to continue its business, unless the distribution of its assets has started.

This means that a 25% plus one vote shareholding in an AD has always veto powers. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 274(1),(2) of the Commerce Act
In an AD, in order to pass any resolutions restricting the preferences of the non-voting preference shares, it shall be necessary to obtain the consent of the preference shareholders, which shall convene at a separate meeting. The resolution shall be passed with a majority of at least 3/4 of the shares represented.

This means that a 25% plus one vote shareholding in an AD has always veto powers. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 182(5) of the Commerce Act
An OOD may be wound up with a resolution of the GM passed with a majority of three-quarters of the capital, unless the Articles of Association provide for a greater majority.

This means that a 25% plus one vote shareholding in an OOD has veto powers.
S. 154(1) of the Commerce Act
The resolution for transformation of a company shall be passed by the GM with a majority of 3/4 of the capital.

This means that a 25% plus one vote shareholding in an OOD or AD has always veto powers. In an AD, where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 262o(2),(3) of the Commerce Act
In an AD, the GM may resolve to increase the capital by partial capitalisation of the profit with a majority of 3/4 of the votes of the shares represented.

This means that a 25% plus one vote shareholding in an AD has always veto powers. Where the turnout at a GM is lower, even less than that could suffice since it is the shares actually represented at the GM that are counted rather than all shares in the company.
S. 197(1) of the Commerce Act
25% In an OOD, resolutions on the amendment and supplement of the Articles of Association, admission and expulsion of shareholders, giving consent for the transfer of a company share to a new member, and on additional monetary contributions shall be passed by a majority of more than three-quarters of the capital, whereas greater majority may be provided for in the Articles of Association.

This means that a 25% shareholding in an OOD has veto powers.
S. 137(3) of the Commerce Act
20% In an OOD, 20% of the shareholders may petition the court to wind up the company for important reasons. S. 155(1) of the Commerce Act
10% In an AD, shareholders holding at least 10% of the company’s capital, may file a claim with the court against the company’s directors for damages caused to the company. S. 240a of the Commerce Act
In an AD, shareholders holding at least 10% of the company’s capital may table to the GM a resolution to appoint an auditor to audit the company’s annual financial statement. S. 251a(1) of the Commerce Act
In an OOD, shareholders holding at least 10% of the company’s capital may request from the director to convene the GM. S. 138(2) of the Commerce Act
Upon petition by the controller or by the shareholders holding at least 10% of the company’s capital, the court may appoint new liquidators. S. 156(3) of the Commerce Act
5% In an AD, a GM may be convened upon request of the shareholders who have held shares representing at least 5% of the company’s capital for more than three months. S. 223(1) of the Commerce Act
In an AD, shareholders who have held shares representing at least 5% of the company’s capital for more than three months may add additional items on the GM’s agenda. S. 223a(1) of the Commerce Act
In an AD, the court may, when important reasons exist, appoint or discharge liquidators upon petition by the shareholders holding at least 5% of the company’s capital. S. 266(4) of the Commerce Act
One share A shareholder may apply to the court to protect their shareholder right and individual rights as a shareholder, when these have been infringed upon by company’s bodies. S. 71 of the Commerce Act
A shareholder may petition the court to set aside a resolution of the GM, if it is in breach of mandatory provisions of the law or the statutes of the company. The petition shall be filed against the company. S. 74(1) of the Commerce Act
In an OOD, a shareholder may participate in the affairs of the company, be informed on the course of the company’s business, inspect the company’s documents, and be entitled to dividends and a liquidation share. S. 123 of the Commerce Act
In an OOD, resolutions on the increase or decrease of subscribed capital shall be adopted unanimously by all shareholders.

This means that a single shareholder in an OOD has veto powers.
S. 137(3) of the Commerce Act
If an OOD is wound up upon expiration of the term or with a resolution of the competent company bodies, the latter may resolve unanimously to continue its business, unless the distribution of property has started.

This means that a single shareholder in an OOD has veto powers.
S. 274(1),(2) of the Commerce Act

Authors: Kamen Shoylev and Yavor Markov



Recent work:

An ~€1M claim on behalf of real estate consultants

NBLO’s dispute resolution lawyers represented UK-based real estate consultants who had structured a € 40-million-worth commercial property project on the Bulgarian Black Sea coast.  In breach of an applicable contractual obligation, the consultants had not been paid the agreed success fees for their services. The then director of the defaulting party had been tragically shot dead in the meantime.

Following a hotly contested first instance, with below-the-belt attempts by the other side (the least untypical perhaps being the claim that the contract had been a forgery and a trial-within-a-trial on the issue), our team succeeded in obtaining a judgment at first instance.  The parties were then able to achieve a significant settlement.

The key skills we were able to bring to bear in providing a solution included searching for solutions across the problem domain; appropriately involving representatives of Bulgaria’s EU partner member-states to buttress judicial independence; and resourcefully dealing with heterodox approaches by our judicial opponents.

© New Balkans Law Office 2020