The Right of First Refusal in Bulgarian corporate law

Corporate Clients, Corporate and M&A, Private companies

A Right of First Refusal (ROFR) gives existing shareholders or a company the first opportunity to purchase shares or assets before the owner can sell them to a third party and prohibits the seller from subsequently selling the asset to a third party on better terms than those offered to existing shareholders. 

Such rights are common in acquisition and shareholders’ agreements because they enable current shareholders to control who can acquire a stake in the company and simultaneously increase their own ownership interests. 

Although ROFRs entail clear advantages, they also carry certain risks and challenges. In this article, we outline some common risks associated with ROFRs and offer practical advice on how to mitigate them effectively.

Timing

The inclusion of ROFR clauses can slow down the acquisition process, as existing shareholders must be given a reasonable opportunity to exercise their rights. This could deter potential buyers or lead to missed opportunities.

You should aim to specify a reasonable timeframe for existing shareholders to respond and complete the purchase and balance their interests against the need to conclude a deal quickly.

Shareholders’ Disputes

ROFRs can lead to disputes among shareholders, especially if some shareholders wish to exercise their rights while others do not.

To avoid this, you may include an out-of-court dispute resolution mechanism in the agreement, such as arbitration or mediation to defuse tensions among shareholders efficiently.

Administration of Right of First Refusal

Managing the ROFR process can be administratively burdensome for both the owner and existing shareholders.

You should subject the exercise of ROFRs to clear procedures and timelines and consider appointing a third-party administrator to handle the logistics.

Change in Ownership

A ROFR can complicate the ownership structure of the company if existing shareholders frequently exercise their rights.

You should review and update the ROFR provisions periodically to ensure they align with your company’s evolving needs and goals.

Right of First Refusal vs Right of First Offer

Unlike a ROFR, a Right of First Offer (ROFO) provides the non-selling shareholders with the right to make an offer for the selling shareholder’s shares before the selling shareholder can solicit for third party offers for its shares.

In essence, a ROFO gives the party with the ROFO the first opportunity to negotiate a deal on the property or asset but does not guarantee that they will ultimately acquire it. It provides a level of preference without the automatic right to match competing offers, which is a key distinction from the ROFR, where the holder has the right to match any third party offer made by the owner. A disadvantage of this approach is that shareholders must agree to a price at a time when they do not know whether any other parties are interested.

A selling shareholder will often prefer a ROFO over a ROFR because they will not have to first find a third party buyer who then has to wait until the other shareholders decide if they wish to exercise their ROFR.

In general, shareholder agreements will include either a ROFO or a ROFR. The inclusion of both provisions is impractical because they both require following lengthy procedures that ultimately achieve the same goal.

Bulgaria-specific considerations

Right of First Refusal and Bulgarian LLCs

The transfer of shares in a limited liability company is limited due to the semi-personal character of this type of corporate vehicle – such transfer must be agreed to by all shareholders. Although the Bulgarian Commerce Act does not provide for default ROFRs, they may be granted by agreement and they are often accepted by the parties.

Irrespective of any party-agreed ROFRs, LLC share transfers to third parties are only allowed if no wages, benefits and compulsory social security contributions remain unpaid. This includes entitlements due to employees whose employment has been terminated up to three years prior to the envisaged transfer.

ROFR and Bulgarian ADs

As a general rule, shares in public companies (ADs) are freely transferable. It is possible however to attach certain restrictions to the shares, including  ROFRs. In order to incentivise founder involvement and investors, ROFRs are often used in relation to ADs. The Commerce Act states that the transfer of registered shares must be effected by an endorsement and the transferee must be entered in the register of shareholders (section 185(2) of the Commerce Act). The same provision allows shareholders to subject transfers to additional conditions (including ROFRs). Shares issued under such restrictive conditions are called “vinculated shares”. 

ROFR and Bulgarian VCCs

The newest company form in Bulgaria, the variable capital company (VCC), provides for the easiest and most flexible access to ROFRs and other similar clauses widely used in English and US law-governed contracts as there are no statutory restrictions. As this is a very novel type of corporate vehicle, first introduced in 2023, it is yet to be put to widespread use. An important legal limitation is that only SMEs can be VCCs.

Case law 

Bulgarian courts routinely recognise and enforce party-agreed restrictions to the free transferability of shares, including ROFRs.

Recent case law reaffirms section 185(2)(2) of the Commerce Act, which permits shareholders to impose additional restrictions on share transfer via the articles of association, thereby creating the so called “vinculated shares”. Such shares require adherence to mandatory transfer procedures provided for in the company’s articles. Provided these conditions are met, the transfer will be valid and the transferee will be able to exercise all shareholder rights, including taking part in general meetings. If any of these conditions are breached or circumvented, however, the transfer will be unenforceable against the other shareholders and the company. Consequently, the transferee will not be recognised as a shareholder and will not be able to exercise any shareholder rights. The courts have also emphasised the need for strict compliance with the articles of association to ensure the validity of registered share transfers and the proper recognition of new shareholders. 

Conclusion

ROFR clauses are a strategic and increasingly favoured mechanism for facilitating flexible investment arrangements. Although Bulgarian law has only recently provided explicit recognition of these clauses, they have long been a prevalent feature in the dynamic Bulgarian economy. 

At New Balkans Law Office, we specialise in advising investors and founders on effectively leveraging ROFR and similar clauses to maximise their benefits. If you require our assistance, please do not hesitate to reach out to us.