Annex No. 1 to Art. 16 of the Ordinance on the Scope and Methodology for Conducting Impact Assessments
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Over recent years, Bulgaria has established itself as one of the key centres for innovative development in Europe. The number of technology startups is growing every year, and a significant upward trend in revenues in the technology sector as a whole is also being observed. Numerous local and international events were held (in the period before the crisis caused by the spread of Covid-19), bringing together leading figures from business, academia, investors and international experts engaged in developing policies to improve digital transformation, research and development, talent retention and creation, increasing volumes and creating strong and functioning markets for venture capital financing and the education system. At the same time, according to A.T. Kearney's Global Services Location Index 2021 (see Chart 1), Bulgaria ranked second in Central and Eastern Europe, fourth in all of Europe and seventeenth in the world as a preferred destination for establishing KPO (knowledge process outsourcing), BPO (business process outsourcing) and ITO (IT outsourcing) centres of global companies.
Chart 1.
Alongside the significant role our country plays as a strategic hub in the production chain, the number of companies that create and develop in Bulgaria technological products and systemic solutions contributing to the global shared economy is also growing. Talented engineering teams are creating a new generation of FinTech (financial technology), BioTech (biotechnology) and RegTech (regulatory technology) companies and products based on AI (artificial intelligence) and machine learning, blockchain and IoT (Internet of Things). The number of proptech (property technology) solutions, drones and robotics, space developments and other high added value industries is growing (see Chart 2). Most of them are so-called startup companies — small companies (by number of employees) with the potential for rapid economic growth based on high added value technologies. According to the "Endeavor Insight Report" survey, in Sofia 84% of all digital companies have 50 or fewer employees. Approximately two in every three of these companies report that their unique selling proposition contains an innovative component. 21% of innovative companies provide an innovation specific to the local market, 7% to the regional market and 6% to the European market. A total of 29% of companies offer innovations of global scale. The "State of IT sales in Bulgaria" report indicates that 53.3% of technology companies generate revenues from international markets (see Chart 3).
Chart 2.
Chart 3.
Specific characteristics associated with the start-up and development of innovative and growth-oriented small companies:
1. The need to raise capital (equity investment) from external sources, because small and/or recently started companies have no own resources or no access to loans. Companies typically seek venture capital to secure the necessary financing to expand and/or break into new markets and grow faster. The availability of venture capital is essential for the growth of innovative companies. Equity investment can be secured both from individual investors and from public and/or private venture investment funds. Due to the risky nature of equity investment in small enterprises, the question arises of reducing the risk of loss of the invested funds. In countries with developed markets for such investment in innovative and growth-oriented small companies, whose products and/or services are yet to be developed and/or yet to be placed on the market, certain practices have been established that address the risks of investment, namely the possibility of agreeing specific rights and obligations related to the management of the company and the distribution of equity participation in it, and respectively the rights and obligations of partners/shareholders. Examples of such specific rights include: the obligation under pre-determined conditions for a partner/shareholder to transfer their share to a specific person; the possibility of concluding equity financing agreements with a deferred moment of acquiring the equity participation/share; the possibility of determining a specific manner of decision-making and management of the company, responding to the specific needs of the investor and the company in which investment is made, and others.
In order to implement such practice in our country, the existence of a legal framework that responds to the stated specificities is necessary.
2. The activity of innovative and growth-oriented small companies is knowledge-based, for which highly qualified employees are required. Attracting and retaining such employees in the workplace requires resources that small enterprises do not have. These companies identify the shortage of qualified personnel as their main difficulty. This is reported by 68% of companies as their greatest challenge according to the "Endeavor Insight Report" survey (see Chart 4).
Chart 4.
Practice in various countries has found a solution to this problem by providing employees in these companies with the possibility, under certain conditions, of acquiring an equity stake in the company where they work. In order to implement such practice in our country, the existence of a legal framework that responds to the stated needs is necessary.
3. Dynamism and speed in the relations between stakeholders — founders of innovative and growth-oriented companies, investors and employees — conditioned by the pace of development of technologies and innovations on a global scale.
Identified problems:
As a result of the difficulties in applying the specificities in creating, maintaining and developing innovative and growth-oriented companies offering products and/or services with high added value as pioneers in the country's economy, other negative consequences for the country are also observed: according to a McKinsey report, the level of digitalisation in the key sectors of Bulgaria's economy is far behind that of the leading European countries (Sweden is used as a benchmark in the chart).
Chart 5.
The existing regulatory framework for capital commercial companies — limited liability company, joint-stock company and partnership limited by shares — cannot respond to the specificities described in point 1.1 above related to the activities of innovative and growth-oriented small enterprises. For example, the limited liability company as the most commonly used legal form for starting a business does not provide the possibility of issuing shares and other instruments for raising funds or providing company shares as incentives for retaining employees. Unlike the freedom of transfer of shares in a joint-stock company, the transfer of shares in a limited liability company is a strictly formalised process, involving the participation of third parties — notaries — which makes it slow and expensive (for example, to transfer a company share of BGN 50 from a partner to a third party the costs are: BGN 50 notary fees for certification of the content and signature of the share transfer agreement and the minutes of the general meeting, BGN 15 state fee for registration of the changes, BGN 300 costs for legal services, or a total of BGN 365 for the transfer of a company share of BGN 50. The process up to the submission of the application to the Commercial Register can take up to 2 working days).
The provisions on joint-stock and partnership limited by shares companies also cannot respond to the specificities of innovative and growth-oriented companies. First, the conditions provided for in the Commercial Act for the structuring, functioning and interaction of the management bodies of joint-stock companies prove complex and costly for small companies. This is also supported by the number of joint-stock and partnership limited by shares companies registered in the last 5 years compared to the number of limited liability companies registered during the same period (according to data from the Registry Agency, the average number of registered joint-stock companies for the period 2014–2018 was 307 and 1.2 partnerships limited by shares, compared to an average of 9,450 limited liability companies registered annually during the same period). In the Bulgarian Startup Association we have specific examples of startups that decided from day one to register as joint-stock companies, because of the needs of their investors that limited liability companies do not satisfy. In conversations with them we understand that this decision led to multi-month delays in the start of their business, loss of money and constant difficulties with company administration — something that for a team of three people developing a company from the "idea" stage is completely impossible to do correctly. In the end, the very act of registering a joint-stock company at the outset leads to the rational decision to seek re-registration of the business abroad, where a more flexible form of company can be used.
Furthermore, practice in countries with developed markets for venture capital investment in innovative and growth-oriented small companies has established certain specific arrangements for this type of activity, related to the management of the company and the rights and obligations of partners/shareholders, with the aim of reducing the risk of the investment. Such arrangements in the existing framework of the joint-stock company are either inapplicable or require great effort and expense, making them unattractive. For example, the arrangement whereby upon the occurrence of pre-determined conditions, a given shareholder is obliged to sell their shares to a specific person (the so-called drag-along right) — while there is no prohibition on including such an arrangement in the content of the articles of association of a joint-stock company, the question of its practical application upon the occurrence of the conditions is debatable, and this leads to uncertainty and an increase in risk for the equity investor and ultimately to a refusal to invest. A barrier to the use of the joint-stock company at the early stage of development of a business idea is also the minimum value of capital that the founders of the joint-stock company must have: BGN 50,000, as well as the costs of incorporating the joint-stock company compared to limited liability companies (total minimum costs for opening a joint-stock company BGN 13,345, of which: BGN 12,500 available initial capital, paid in at the date of registration, a minimum of 3 notarially certified consents and declarations under Art. 234 of the CA — BGN 45 notary fees, BGN 600 costs for legal services, BGN 200 state fees to the Registry Agency (name reservation, registration). Practice has led to costs for printing shares being limited by using interim certificates).
The specificity of the relations connected with the raising of equity capital by innovative and growth-oriented small enterprises presupposes a fast and easy procedure for the transfer of shares in such companies, and respectively for the increase and reduction of their capital. In some EU member states this possibility has been provided through the introduction into their company law of the possibility, if the founders, shareholders or partners so decide, for the capital of the company not to be of a fixed but of a variable value — so-called "variable capital companies." In the case of variable capital, the articles of association or the articles of incorporation determine maximum and minimum values within which the variable capital company can make multiple, successive increases or reductions of capital without it being necessary for such changes to amend the articles of association or articles of incorporation, or, if the shareholders/partners have so decided, without it being necessary for the supreme collective management body to adopt a resolution on the increase or reduction of capital, and without the acts of increase or reduction of capital within the stated limits having to be announced to third parties by registration of the changes in the relevant public register. Such a possibility is not regulated in the current Commercial Act.
The stated special needs of innovative and growth-oriented companies and the impossibility of resolving them within the existing legal framework for capital commercial companies makes it necessary to create a new company form that will overcome the stated problems. The creation of a new type of company, combining within itself the freedom of entry and exit that the pure capital joint-stock company offers, the accessibility upon incorporation and the personal nature inherent in the limited liability company, and the contractual freedom in determining the structure and organisation of its management, will respond to all the specificities stated above concerning the activities of innovative and growth-oriented small companies. Such an approach is not unknown in other EU member states. Thus in France in 1994, with amendments adopted to the Commercial Code, a new type of company was created — the Société par actions simplifiée (SAS) (simplified joint-stock company) — as a type of joint-stock company combining within itself the financial strength of joint-stock companies with great freedom in the manner of organising the company's bodies and their powers, so that they respond to the fullest extent to the needs of the founders and shareholders. As of 2017, a new company was introduced in Slovakia — Jednoduchá spoločnosť na akcie (simplified joint-stock company). The Slovak simplified joint-stock company was created with the aim of becoming the primary legal instrument used by persons carrying out venture capital investment in innovative and growth-oriented companies, with which to regulate the specific relations associated with such investment, and the way of achieving these objectives is the freedom provided for determining the structure and functioning of the management bodies of this new company. In 2020 in Poland a new company was introduced — Prosta spółka akcyjna (simplified joint-stock company) — where again the focus is on freedom in determining the management bodies, its accessibility by providing the possibility of having capital of 1 euro, etc. By creating a new type of company, Bulgaria will have the opportunity to rank among the first countries in the EU with such types of companies, responding to the needs and dynamism of the knowledge-based industry.
No subsequent assessment has been carried out.
Chart 6. (2015/2016): Period 2015/2016 — to be read as: "1.95% of entrepreneurs in 2015/2016 were in the nascent phase of entrepreneurship." Group 1 (G1) consists of Turkey and Greece — the two countries neighbouring Bulgaria. Reference Group 2 (G2) includes Poland and Estonia — two EU member states with the ambition to create conditions for an active entrepreneurial process. Reference Group 3 (G3) is composed of Ireland, Israel, the United Kingdom and Canada.
Chart 7. (source: Open Society Institute)
Chart 8. Forecast for the number of registered LLCs and VCCs (X-axis — years, Y-axis — number of registered companies; VCC (Variable Capital Company) — variable capital company, LTD — LLC; source: Bulgarian Startup Association)
The envisaged measures as a whole will lead to the creation of conditions for facilitating the start of entrepreneurial activity. According to the Global Entrepreneurship Monitoring (GEM) report for Bulgaria, our country occupies one of the last places in Europe in terms of the percentage prevalence of entrepreneurial activity among the adult population. Chart 9 presents the data from which the lagging of our country compared to other European countries can clearly be seen.
Chart 9. (Global Entrepreneurship Monitoring)
Chart 10. (McKinsey survey demonstrating the possibility of GDP growth through digitalisation)
Specify the objectives of the regulatory change in a specific and measurable manner and schedule, if applicable, for their achievement. Do the objectives correspond to the existing strategic framework?
Identify all potential affected and interested parties on whom the proposal will have a direct or indirect impact (business in a given sector/all entrepreneurs, non-governmental organisations, citizens/their representatives, state bodies, etc.).
Action Option 1: "No amendment and supplement to the Commercial Act":
Under this option, the proposed introduction in the country of a new type of variable capital company, responding to the needs of innovative and fast-growth-oriented companies, does not take place, and the problems identified in point 1 do not find their resolution.
Action Option 2: "Introduction of a new legal framework for a commercial company through amendments and supplements to the Commercial Act":
Under this option, a new type of variable capital company is introduced into the Bulgarian legal system, based on contractual freedom in forming the structure, activities and competence of its management bodies, corresponding to the specific needs of the founders/partners, without referencing specific texts of the companies known until now in Bulgaria. Adoption of the proposal will lead to a reduction in the initial costs of incorporating a new company and a reduction in the transaction costs of transferring shares. The new company will introduce into the existing legal framework the conditions specific to equity investment in innovative and fast-growth-oriented small companies, related to management and the rights and obligations of partners. The possibility will be regulated, and respectively the costs of providing shares in a variable capital company to persons employed by it will be reduced. The introduction of the possibility for the variable capital company to have variable capital will lead to greater flexibility and efficiency in the management of the company, corresponding to the dynamism of the social relations connected with the development and implementation of innovative products, services and/or business models, and to a reduction of the administrative burden and costs associated with the increase and reduction of capital.
Identify the main regulatory and non-regulatory possible action options on the part of the state, including the "No action" option.
Action Option 1: "No amendment and supplement to the Commercial Act":
Under this option, the problems identified in point 1 will not find their resolution.
Economic impacts:
Social impacts: The restricted competitiveness in the market for highly qualified employees and the difficulties associated with equity investment in innovative and fast-growth-oriented companies lead to an increase in the tendency for qualified young specialists and entrepreneurs to leave the country. This has a direct impact both on the demographic state of the population and on the related sectors of education, healthcare, culture, etc.
Environmental impacts: Will not lead to negative environmental impacts.
Action Option 2: "Introduction of a new legal framework for a commercial company through amendments and supplements to the Commercial Act":
No negative consequences are expected for the identified groups of interested parties.
Economic impacts: Will not lead to negative economic impacts.
Social impacts: Will not lead to negative social impacts.
Environmental impacts: Will not lead to negative environmental impacts.
Describe qualitatively (and where possible quantitatively) all significant potential economic, social, environmental and other negative impacts for each of the options, including costs (negative impacts) for the identified stakeholders as a result of taking the actions. Clarify which costs (negative impacts) are expected to be secondary and which are expected to be significant.
Action Option 1: "No amendment and supplement to the Commercial Act":
No positive impacts have been identified with respect to the identified stakeholders upon choosing this action option.
Economic impacts: Will not lead to positive economic impacts.
Social impacts: Will not lead to positive social impacts.
Environmental impacts: Will not lead to positive environmental impacts.
Action Option 2: "Introduction of a new legal framework for a commercial company through amendments and supplements to the Commercial Act":
The following positive trends are expected:
Economic impacts:
Chart 11. Market valuation of fast-growth companies from the CEE region.
Chart 12. Amount of venture capital investments per km².
Chart 13. Comparison of indices of companies giving a stake to employees versus the FTSE 100 index.
Chart 14. Venture capital investment activity in Bulgaria.
Source: ROMANIAN–BULGARIAN VENTURE COMPARISON REPORT 2020
According to data from the Bulgarian Venture Capital Association, by the end of 2020 over EUR 120 million had been invested in 286 technology companies in Bulgaria; following the introduction of a new legal framework for the variable capital company, the sum is expected to triple in the next 10 years. According to the above-mentioned formula, exports of products and services will increase dramatically. According to a survey by Edit.bg, 78% of technology companies in Bulgaria export a product/service abroad. By improving the regulatory framework and facilitating access for strategic investors from abroad to the Bulgarian market, a growth of over 20% is expected in companies creating global products/services.
Social impacts:
Providing the opportunity for highly qualified and entrepreneurial persons to develop successfully in the country and not to leave it. Creating conditions for the development of "first-time" entrepreneurs and raising entrepreneurial activity.
Environmental impacts:
Possibility for the development of innovative products and services connected with the improvement of transport and respectively air quality, waste management and others.
Describe qualitatively (and where possible quantitatively) all significant potential economic, social, environmental and other benefits for the identified stakeholders for each of the options as a result of taking the actions. Indicate how the expected benefits correspond to the formulated objectives.
Placing contractual freedom at the foundation of the new company requires a serious and professional approach when drawing up the company's documents. In the event of the absence or imprecise formulation of the arrangements between partners in the company documents, disputes between them may arise, including judicial ones.
Identify the possible risks of adopting the regulatory change, including the emergence of judicial disputes.
☐ Will increase
☐ Will decrease
X No effect
No.
Where the answer is "yes," indicate how many and which ones……………………………….
No new registers are being created.
X The act directly affects SMEs, by:
☐ The act does not affect SMEs.
☐ No effect.
☐ Yes
X No
The draft for amendment and supplement to the Commercial Act will be published on the public consultations portal for a period of 30 days in accordance with the requirements of the Law on Normative Acts and on the website of the Ministry of Justice and the Ministry of Innovation and Growth.
Summarise the most important issues for consultation in the event of a full impact assessment or for the public consultations under Art. 26 of the Law on Normative Acts. Indicate an indicative schedule for their conduct and the types of consultation procedures.
☐ Yes
X No
Please indicate the requirements of European Union law, including the information under points 8.1 and 8.2, whether an impact assessment has been carried out at European Union level, and attach it (or provide a link to the source).
Name and position:
Date:
Signature:
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