Over the past years, Bulgaria has established itself as one of the key centers for innovative development in Europe. Alongside the significant role that our country plays as a strategic center in the production chain of major international technology companies, the number of Bulgarian companies that create and develop technological products and system solutions in Bulgaria, contributing to the Bulgarian and global economy, is also growing. Talented teams are creating a new generation of Bulgarian companies and products in various fields such as FinTech (innovations in financial services), BioTech (innovations in biotechnology), RegTech (innovations in regulatory process management), AI (artificial intelligence), machine learning, blockchain, and IoT (Internet of Things). The number of companies operating in fields such as drone engineering and robotics, space technologies, and other high value-added industries is increasing.
Most of these new Bulgarian companies, similarly to their competitors from the United States, Europe, Japan, and China, have started their life cycle as startup companies. These are non-public companies established by entrepreneurs and financially supported through investments from third parties, whose primary objective is the creation and development of an innovative product and/or service with the potential for rapid growth. The ultimate goal of startup companies is either to be sold in their entirety to another entity or to be transformed into public companies through the offering of their shares on regulated markets.
The existing regulatory framework governing commercial companies in Bulgaria is unable to respond to the specific characteristics associated with the activities of innovative and growth-oriented startup companies. Bulgarian startup companies that have worked with, been in contact with, or are familiar with the Silicon Valley model in the United States for starting and financing companies are seeking instruments similar to the model established overseas, which would allow them to use established mechanisms for raising funding without the need to re-register their Bulgarian companies in foreign jurisdictions.
The joint-stock company has certain characteristics that may correspond to these specific needs; however, several key issues prevent its use by entrepreneurs in the country—the high initial capital requirement, as well as the conditions provided in the Commerce Act regarding the structuring, functioning, and interaction of the governing bodies of joint-stock companies, are complex and costly for small companies in the early stages of their development.
On the other hand, the limited liability company, as the most commonly used legal form for starting a business in Bulgaria, does not provide the possibility to issue shares and other instruments for raising funds or for providing incentives to retain employees.
The Draft Act Amending and Supplementing the Commerce Act (the “Draft”) aims to modernize the regulatory framework in the field of corporate law by adapting the legal framework to the evolving social relations in the field of entrepreneurship, in line with its development described above. The draft law provides for the creation of a new type of commercial company—“company with variable capital” (“CVC”)—which will provide competitive conditions for establishing innovative and fast-growing startup companies in Bulgaria.
The company with variable capital is based on the principle of contractual freedom in determining the structure, competence, and functioning of its governing bodies, respectively in determining the relationships between partners. Its legal regime incorporates the elements from the regulation of joint-stock companies and limited liability companies that are most suitable for startup companies. The introduction of the possibility for the new type of company to have variable capital will lead to greater flexibility and operational efficiency in its management, corresponding to the dynamics of social relations related to the development and implementation of innovative products, services, and/or business models, and will reduce administrative burden and costs associated with increasing and decreasing capital.
From a comparative law perspective, several Member States of the European Union have undertaken and continue to undertake measures to create favorable conditions for the development of startup companies at the local level by modernizing their corporate law and introducing new types of corporate forms. Examples in this regard include the German Unternehmergesellschaft (UG), the French Société par actions simplifiée (SAS) (simplified joint-stock company), the Spanish Sociedad Limitada Nueva Empresa (SLNE), the Slovak Jednoduchá spoločnosť na akcie (simplified joint-stock company), and the Polish Prosta spółka akcyjna (simplified joint-stock company).
In order to achieve the objectives set out in the draft law, it is proposed to amend and supplement the existing Commerce Act by creating a new Chapter Fifteen “a” titled “Company with Variable Capital,” structured into five sections.
The creation of an entirely new type of company, previously unknown to Bulgarian commercial law, is envisaged, and for this reason the provisions are structured as a completely new chapter of the Commerce Act, without references to specific provisions governing the currently existing types of companies in Bulgaria. Its systematic placement is designated after the regulation of limited liability companies and joint-stock companies, since, although it is not itself a capital company within the meaning of the Act, it is based on and combines many solutions known from the regulation of limited liability companies and joint-stock companies.
In the general provisions (Section I of the Draft), the requirement is established that the company name must contain the designation “company with variable capital” or the abbreviation “CVC.” The name of the company reflects its most essential characteristic—variable capital—which should be understood to mean that the capital is not subject to entry in the Commercial Register and is therefore defined as “variable.” It is explicitly provided that this legal form will be suitable for the implementation of entrepreneurial projects, as only micro and small enterprises may exist in this form. The minimum content of the articles of association is specified, while the leading principle of contractual freedom is emphasized by allowing the inclusion of additional conditions related to the incorporation, existence, management, and termination of the company.
In the following Section II, the main requirements concerning the accounting of capital and company shares are developed, and the principle of freedom of contract between partners is elaborated, allowing the implementation of rights specific to venture capital investment, such as drag-along rights, preemptive rights, and tag-along rights. The draft law establishes the fundamental freedom of transfer and inheritance of company shares, insofar as such transfer is not restricted by the articles of association.
The company will be able to acquire its own shares. This rule aims to facilitate the attraction and retention of highly qualified specialists by creating the necessary regulatory framework for granting employees of the company with variable capital the opportunity to acquire shares in the company through the conclusion of an agreement (an option agreement, or the so-called vesting arrangement). Under certain conditions specified in the agreement, persons employed by the company will have the right to acquire up to 15 percent of all shares in the company with variable capital, which right will be exercised exclusively through the transfer of the company’s own shares.
At the end of the financial year, the management board or the manager shall determine the number and value of shares acquired during the financial year by employees and shall submit, together with the annual financial statements, a report containing information about the agreements concluded for the acquisition of shares by employees.
The draft provides for a minimum set of rights and obligations of partners in Section III, which may be further developed or restricted on the basis of provisions in the articles of association. In this sense, the company with variable capital may impose an obligation for personal contribution by partners and/or by some of them, as well as a corresponding possibility to exclude a partner if that partner does not contribute to the activities and development of the company.
It is envisaged that the shares of an excluded partner shall be taken over, by resolution of the general meeting, by the remaining partners and/or by the company in accordance with the conditions and procedure provided in the articles of association.
Furthermore, the statutory grounds for termination of participation of a partner may be further developed in the articles of association, thereby addressing specific expectations and agreements reached between the partners. After termination of participation, the company shall pay to the departing partner the value of his or her share as of the moment of termination, unless otherwise agreed in the articles of association.
The rules governing the management of the company through its corporate bodies (the general meeting of partners and the management board or manager) are set out in Section IV of the draft law. It is envisaged that each partner shall have as many votes in the general meeting as correspond to the nominal value of his or her share, unless otherwise provided in the articles of association.
The composition and structure of persons entitled to vote in the general meeting of the company with variable capital shall be determined on the basis of entries in the register of partners as of the last day of the month preceding the date of the general meeting.
The draft law provides for traditional methods of convening the general meeting—through a written invitation to the partners, which shall be announced in the Commercial Register or delivered personally against signature. The period for publication of the invitation in the Commercial Register shall be at least 15 days prior to the date of the general meeting, and where the invitation is delivered to all partners, the period shall be 7 days.
Furthermore, the use of electronic means of communication is strengthened by providing the possibility for convening a general meeting of the company with variable capital through an invitation to all partners at least 7 days prior to the date of the meeting by electronic means with explicit confirmation of receipt.
Written materials related to the agenda of the general meeting must be provided to the partners in the manner specified in the articles of association no later than the date of publication or dispatch of the invitations convening the general meeting.
Participation of partners in the general meeting may be carried out in person, remotely, or through electronic means, with details to be specified in the articles of association or in the invitation convening the meeting. The recording of the proceedings of the general meeting may be carried out either on paper or in electronic form.
The draft law also regulates issues related to the competence of the general meeting, quorum, and majorities, while deviations from and further development of the minimum statutory framework may be adopted through the articles of association. Additionally, based on contractual freedom, it may be provided that specifically designated partners, as well as one or more partners holding at least 30 percent of the voting rights in the general meeting, shall have privileges in exercising voting rights and/or veto rights in the adoption of resolutions by the general meeting.
In Section V of the draft law, the rules governing the transformation and termination of the company with variable capital are set out. Mandatory transformation is envisaged if, at the end of a financial year, the company ceases to meet the requirements for a micro or small enterprise within the meaning of the Small and Medium-Sized Enterprises Act. In such case, the company shall be transformed into a capital company in accordance with the procedure provided in Section III of Chapter Sixteen of the Commerce Act.
For the sake of clarity in other cases of transformation of a company with variable capital, the transitional and final provisions of the draft law introduce two new provisions in Chapter Sixteen of the Commerce Act, providing that the resolution for transformation must be adopted by the general meeting of partners by a majority of three-quarters of the votes.
Furthermore, if a company with variable capital participates in a transformation, the rules applicable to partnerships shall apply to it.
Only one amendment to the Civil Procedure Code is envisaged, which is necessary in order to regulate the method of enforcement against shares in a company with variable capital.
The adoption of the draft law will be associated with expenses for the Registry Agency – Commercial Register for adapting its information systems with respect to the registration of companies with variable capital and the registration of changes in their electronic files.
The adoption of the proposed draft law will lead to a reduction in the initial costs associated with the incorporation of a new company, as well as its maintenance, compared to a joint-stock company.
The draft law is expected to create greater flexibility and accessibility in the establishment and management of innovative and fast-growing small companies, without creating additional administrative obstacles, which will make them more attractive for attracting investment.
Allowing participants in a company with variable capital to determine and structure its management according to their needs and based on investor expectations would facilitate management and reduce administrative burden.
In turn, the creation of incentives for persons employed by a company with variable capital to support its development is an additional prerequisite for the development of this type of investment instrument. The motivation of employees to accept such additional incentives lies in the expectation that the company will develop successfully and that the shares received at this stage of its development will subsequently have a significantly higher value.
The facilitations provided by the draft law for the establishment of startup companies will ultimately create new opportunities for economic growth as a result of the presence of more innovative and growth-oriented companies developing products and services for the global market, digitalization of production, and growth of gross domestic product (GDP).
The new type of commercial company proposed in the draft law does not have a full equivalent in the legislation of the Member States of the European Union, but it does not contradict any of the requirements of legislation harmonizing company law at the European level.
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