Мinority Shareholder Rights in Unlisted Companies in Bulgaria

Background

Minority shareholders in unlisted companies in Bulgaria (whom we define as those holding shares making up less than half of the registered share capital of an OOD or AD) enjoy certain legal rights.

In this note we focus on the two most common types of corporate business form in Bulgaria:

(1) the private limited company (abbreviated in Bulgarian as ‘OOD’); and

(2) the public liability company (‘AD’).

We review certain major risks and the main protections of minority shareholder rights in these two types of company.

The rights of a minority shareholder in an OOD

In an OOD, these include the following, subject to the limitations below:

Rights to distributions

To a pro rata distribution of declared dividends and/or a pro rata liquidation share, in each case pro rata to the shareholder’s shareholding.

Share transfer rights

To transfer its shares to another shareholder or third party, subject to certain limitations as described below.

To participate in the affairs of the company:

  1. to participate in general meetings of the company (GMs) and vote in them;
  2. to request the directors to convene a GM;
  3. to veto increases and/or decreases of capital or subdivision of shares;
  4. to “participate in the management” of the company.

Information and control rights

  1. to apply to court to set aside resolutions of the GM, where there are grounds to believe that such a resolution is in breach of the mandatory legal provisions or the Articles of Association of the company and to apply to court for the protection of its rights as a shareholder
  2. to be informed of the company’s affairs
  3. to examine the company’s documents and books
  4. to petition for the company’s winding-up on grounds of important reasons, subject to limitations below.

Limitations on the rights of a minority shareholder in an OOD

The exercise of these rights in OODs is however limited. E.g.:

With respect to company participation rights:

  1. A majority of 50% of the registered capital is required to pass a resolution of the GM
  2. Holders of at least 10% of the registered capital are required to convene a GM (however, any holding is sufficient to add an item to the meeting’s agenda)
  3. On a liquidation of an OOD, holders of at least 10% of the registered capital are required to request the appointment of liquidators
  4. Shareholders of at least 20% of the registered capital are required to petition for the company’s winding-up
  5. minority shareholders are not entitled to initiate court proceedings against the directors of the company for any damages caused to the company by the directors.

With respect to rights to distributions:

  1. Any transfer of shares to a transferee who is not an existing shareholder requires prior approval of the transferee in general meeting of the company by a 75% majority of shareholders.
  2. Consequently, a shareholder holding at least 25% of the registered capital can exercise a veto on such a resolution.

The rights of a minority shareholder in an AD

The rights of a shareholder in an AD, subject to limitations below, include:

Rights to distributions

  1. to a dividend and to a liquidation share, pro rata to the nominal value of the shares held - as for the OOD
  2. In distinction to the OOD, a shareholder in an AD may freely transfer its shares to another shareholder or to a third party (though limitations under the Articles of Association of the company are possible).

To participate in the affairs of the company:

  1. to participate in the general meetings of the company, to be informed of the agenda for such meetings,  to request their convention, and vote.
  2. depending on the attendance at the general meeting, to influence in certain circumstances the outcome of resolutions which - in contradiction to the OOD - are adopted with a majority from the capital actually represented at the GM.
  3. Shareholders with more than ⅓ of the represented capital can veto GM resolutions amending the company's statutes, increasing and/or decreasing its capital, and resolving on its winding-up.

Rights of information and control

  1. to petition the court to set aside resolutions of the GM, where this may be in breach of the mandatory provisions of the law or the Articles;
  2. to apply to court to protect its right to be a shareholder and its shareholder rights;
  3. to initiate claims on behalf of the company against the members of the Board of Directors and/or Supervisory Board (subject to holding at least 10% of the registered capital);
  4. to require from the general meeting the appointment of a controller to examine the financial statements of the company (shareholders with shares of at least 10% of the registered capital);
  5. in case of liquidation of the company, 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.

Limitations on the rights of a minority shareholder in an AD

The exercise of these rights in ADs are, 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 for the GM
  2. to require the GM to be convened.

What are the main risks for minority shareholders in unlisted companies?

The main risks for minority shareholders in limited liability companies (OOD) are:

  1. potential expulsion from membership of the company;
  2. dilution of their shareholding.

The main risks for minority shareholders in joint-stock companies (AD) are:

  • potential expulsion from from membership of the company;
  • dilution of their shareholding.

The risk of expulsion

Limited liability companies (OOD)

A risk for a minority shareholder of potential expulsion from an OOD arises on non-payment of capital calls otherwise due.

Irrespective of their holding, minority shareholders do however have a veto power on increases of the nominal value of shares or of the number of shares in issue by the company. Where the company approves a so-called additional monetary contribution, shareholders holding at least 25% of the registered capital may veto it, too.

Any shareholder in a limited liability company may be expelled if it does not  assist the company to conduct its business, ie, in general, to act in good faith with respect to the company’s interests, including to tasks assigned by the director(s) and breaches resolutions of the GM or acts contrary to the interests of the company.

Public liability companies (AD)

The risk for minority shareholders of potential expulsion from a joint-stock company could consist of their possible forced expulsion due to non-payment of their due contributions to capital for shares subscribed by them.

Minority shareholders may also be expelled if the GM resolves to increase the nominal value of shares of the class held by the minority or the number of shares in issue and the minority do not top up their contribution to capital to match. However, a shareholder with shares of more than ⅓ 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?

Limited liability companies (OOD)

Risks connected to mergers and divisions

The 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 do however have the veto power to prevent such an increase of capital.

The risk for minority shareholders in joint-stock companies (AD)

Risks connected to mergers and divisions

As with OODs, the 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 derogable 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 of the share of the minority shareholders may also be achieved by an increase of the registered capital of the company through the conversion of corporate debt securities (bonds, notes or others) into shares (whether these are newly-issued or existing), where: (i) the minority shareholders do not exercise their preemptive right to acquire such an issue; or (ii) the preemptive 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 1/3 of the represented capital may veto a resolution for the increase and/or decrease of capital.

 

For more information, please contact us via our website form or at sofia@newbalkanslawoffice.com

Authors: Yavor Markov & Kamen Shoylev

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