TO Mr. Vladislav Goranov,
Minister of Finance of the Republic of Bulgaria
TO the Director of the “Financial Market Regulation” Directorate,
Ministry of Finance, e-mail: masspriv@minfin.bg
FROM the Bulgarian Startup Association (BESCO)
Sofia, 03-06-2020
regarding the draft Law on the Settlement of Relations Concerning Personal Accounts for Book-Entry Securities, maintained in the central securities register by “Central Depository” AD
On 13.05.2020, pursuant to Article 26, paragraph 2 of the Law on Normative Acts (“LNA”), a draft Law on the Settlement of Relations Concerning Personal Accounts for Book-Entry Securities, maintained in the central securities register by “Central Depository” AD (hereinafter the “Draft Law”), was published for public consultation on the website of the Ministry of Finance and on the Public Consultation Portal of the Council of Ministers. Within the prescribed deadline (until 15.06.2020), we hereby submit for your consideration this Opinion-Proposal, focused mainly on the thus far scarcely discussed problem of the violation of the fundamental rights and legitimate interests of controlling shareholders in a significant number of public companies, which would arise upon the adoption of the Draft Law.
We express our disagreement with the adoption of the Draft Law in its currently proposed wording.
The approach adopted in the Draft Law for resolving the problems set out in its explanatory memorandum will not contribute to overcoming them. Achieving the objectives set by the Draft Law is doubtful and unclear. In practice, it provides for the nationalization of shares held by Bulgarian and foreign natural persons (inasmuch as the value of a vast portion of those shares would ultimately be acquired by the state), followed by the privatization of the rights attached to those shares in favor of arbitrary private entities. The goal of activating shareholders from the mass privatization process and stimulating the Bulgarian capital market cannot be achieved by legally requiring these shareholders’ shares to be mandatorily transferred into client sub-accounts with investment intermediaries, or, if they fail to comply, by forcibly expropriating those shares from their holders.
On the one hand, the low liquidity of the Bulgarian capital market is categorically not due to inactive shareholders from the mass privatization process, but rather to the lack of an active state policy and sufficient incentives for current and potential participants in that market. The existence of numerous inactive shareholders is the result of the privatization policy pursued by the state over the past 30 years, and a change in the course of that policy cannot come at the expense of rights of private individuals guaranteed by the Constitution and international instruments, especially through unpredictable and unclear legislative solutions with unclear, unevaluated in advance, and even questionable outcomes.
On the other hand, concentrating inactive shares in a single investment fund and creating the possibility for the company managing that fund to dispose of them will in no way increase the liquidity and attractiveness of the domestic capital market. On the contrary, it will create conditions for a certain circle of persons to benefit by acquiring attractive shareholder assets under initially unclear and undefined criteria for determining the price of those assets. The mechanism proposed by the Draft Law for regulating relations concerning inactive shares from the mass privatization process will not solve any of the identified problems. As we set out below in this opinion, that mechanism will result in the violation of fundamental constitutional rights and rights guaranteed by international legal norms of some issuers and their shareholders.
In connection with the above, we fully support and join the negative opinion expressed by the Association of the Industrial Capital in Bulgaria regarding the Draft Law, as well as the negative opinions on the concept presented at the beginning of 2019 (largely reproduced in the Draft Law), expressed by the Association of the Industrial Capital in Bulgaria, the Bulgarian Industrial Association, the Bulgarian Association of Supplementary Pension Security Companies, the National Corporate Governance Commission, the Association of Investor Relations Directors in Bulgaria, the Association of Bulgarian Employers’ Organizations, the Bulgarian Chamber of Commerce and Industry, the Confederation of Independent Trade Unions in Bulgaria, the Confederation of Labour “Podkrepa,” the Ombudsman of the Republic of Bulgaria, and the Civil Parliament of Bulgaria – the Economic and Social Council.
Without prejudice to the above, this opinion is focused mainly on the official transfer provided for in the Draft Law to an investment fund, managed by a management company (hereinafter the “Fund Manager”), of shares acquired against investment vouchers under Chapter Eight of the Law on Transformation and Privatization of State and Municipal Enterprises (“LTPSME”), admitted to trading on a regulated market, held in inactive personal accounts within the meaning of the Draft Law, and which, within 12 months of the entry into force of the Draft Law, have not been transferred to client sub-accounts with an investment intermediary. The Fund Manager will be able to exercise without restriction all rights attached to the shares transferred to it, including voting rights, dividend rights, liquidation quota rights, the right to pledge and lend them, and to sell them.
Due to the specific features of the legislative framework of the mass privatization process and the subsequent regulatory acts governing the status and functioning of public companies whose shares are traded on the Bulgarian capital market, at present a significant number of public companies—issuers whose shares are listed on the stock exchange—are controlled by a minority shareholder or a group of minority shareholders (hereinafter the “Controlling Minority Shareholders”). Under the current legal framework, it is practically impossible for the Controlling Minority Shareholders to acquire a majority package of shares and, respectively, majority control. This is due to the extremely high fragmentation of the shares of natural persons acquired during the mass privatization process, as well as their inactivity. On the one hand, making a tender offer within the meaning of the Public Offering of Securities Act (“POSA”) is practically inapplicable in most cases, and on the other hand, the probability of a positive result given the features of the shareholder base is negligibly small—to the point of impossibility.
It is precisely these features of the shareholder composition of the above-mentioned issuers that are also the reason why majority shareholdings have not been acquired by third parties different from the Controlling Minority Shareholders.
Against this background, and considering the expectation that the activity of shareholders with personal accounts will be only around 20% (which we consider to be too high a percentage given the decades-long inactivity of these persons and the insufficient financial and administrative facilitation for them envisaged in the Draft Law), the mechanisms embedded in the Draft Law provide for the easy, problem-free and legally guaranteed acquisition of majority shareholdings by the Fund Manager, and for the possibility of it disposing of the acquired shares in favor of third parties, including the possibility of transferring the entire majority package of shares of a given issuer to one specific third party.
This acquisition amounts to a legislatively guaranteed forced substitution of control in a significant number of issuers, forced deprivation of the Controlling Minority Shareholders of the economic value of their minority, yet still controlling, share packages, and direct legislative state interference with the property rights of those shareholders.
It is surprising and baffling that the explanatory memorandum to the Draft Law even states that one of the problems expected to be overcome by the Draft Law is the “taking advantage by some public companies of shareholders’ lack of knowledge, as a result of which companies are managed with a minority stake and poor corporate practices are applied that are not in the interests of minority shareholders.” It is thus clear that the above-mentioned forced change of control and deprivation of shareholders of the economic value of their shares is an effect intentionally sought by the state. The lawmaker’s motives in this regard are false, misleading, and unsubstantiated.
First, the explanatory memorandum to the Draft Law contains no substantiated references to any specific “poor corporate practices that are not in the interests of minority shareholders.” This claim is false and unsubstantiated. All issuers, including those controlled by minority shareholders, apply the National Corporate Governance Code adopted by the National Corporate Governance Commission (“NCGC”) in full compliance with shareholders’ rights, respect for the interests of stakeholders, quality and full disclosure of information, and full accountability of corporate governing bodies. Issuers’ corporate practices are fully in line with POSA and other applicable laws and secondary legislation, and in this regard full cooperation is provided to the regulatory authority, namely the Financial Supervision Commission (“FSC”), in the regular exercise of its supervisory powers specifically to prevent such poor corporate practices. It is difficult to understand the lawmaker’s view that compliance with all legal requirements concerning the management of a public company, full disclosure of information, and the FSC’s numerous supervisory functions and powers are not sufficient to overcome otherwise unspecified “poor corporate practices,” thereby necessitating forced legislative measures for removing the control of the Controlling Minority Shareholders. The existing special legislation in the area of public companies, both national law—into which the applicable secondary EU law has been transposed—and directly applicable EU regulations[1], creates the necessary guarantee against abuse by controlling minority shareholders toward the majority group of individual shareholders.
With regard to the shareholders’ right to dividends, it should specifically be noted that, like any other claim right, the right to dividends is extinguished upon expiry of the limitation period provided for in the Obligations and Contracts Act (“OCA”). In the event that dividends are not distributed, or if, after the expiry of the limitation period and the return of unclaimed dividends to the assets of the issuer, the latter form a higher value of the issuer’s equity, they therefore also form a higher stock market and market value of the shares of all shareholders. The reserves thus formed create an opportunity for the issuer to react in the event of possible adverse developments affecting business in Bulgaria (this is especially relevant in light of the recent COVID-19 events in Bulgaria and worldwide and the emerging economic challenges facing business globally). In addition, as a result of undistributed profit by the issuer or the return of unclaimed distributed dividends, additional reserves are also created for increasing the amount of dividends in future years.
With regard to disclosure of information, issuers, including those controlled by minority shareholders, regularly comply with all regulatory requirements under POSA in this regard. In addition to providing all required information to the FSC and the Bulgarian Stock Exchange (with the amendments to POSA expected to enter into force in September 2020, additional guarantees are also envisaged through the provision of information to Central Depository AD), issuers maintain websites on which they publish all information required by law for their shareholders. In today’s information society, this is an extremely suitable way of informing shareholders about the company’s status, upcoming and past corporate events, detailed financial information about issuers, all upcoming dividend distributions, and other important shareholder information. The POSA requirements for informing the public and shareholders are also fulfilled through the provision of the information specified by law to specialized internet websites and online platforms, which also constitutes compliance with the issuers’ obligation to fully inform shareholders. Shareholders also have access to the permanently functioning investor relations units at the issuers (investor relations directors), from whom shareholders may at any time obtain the information they request without delay.
All of the above shows that the “problem” stated in the explanatory memorandum to the Draft Law regarding the existence of “poor corporate practices” does not correspond to objective reality. There is no problem that should be solved by the Draft Law, much less through the forced removal of control from the Controlling Minority Shareholders. The above unquestionably demonstrates that the lack of interest of mass privatization shareholders in exercising the rights attached to their shares is not due to the corporate practices applied by issuers. It is difficult to imagine how this lack of interest would be resolved if a large part of the shareholders do not identify themselves within the one-year term envisaged by the Draft Law and their shares are acquired by the Fund Manager and subsequently by one or more third parties. This demonstrates the paradoxical nature of the Draft Law, which in no way provides for solving the “problems” which, according to the lawmaker, justify its adoption.
Second, the explanatory memorandum to the Draft Law suggests that the Controlling Minority Shareholders “take advantage” of shareholders’ lack of knowledge and manage the company with a minority stake in the shares. Such a suggestion not only does not correspond to the truth, but also contradicts the opportunities granted by law to exercise influence over the management of issuers.
Under § 1, item 14, letter “c” of the Supplementary Provisions of POSA, control also exists where a person can otherwise exercise decisive influence over decisions concerning the activity of a legal entity. The concept of control is a legally regulated possibility that finds its concrete manifestations in numerous requirements and restrictions under POSA. Exercising control does not need to take place through majority participation.[2] The specific features of the mass privatization process, which was carried out through multiple central government normative acts in Bulgaria in the 1990s, created the factual possibility that some public companies may be managed and controlled by minority shareholders. As already noted above, the possibility for the Controlling Minority Shareholders to acquire majority participation is practically impossible given the strong fragmentation of the remaining shareholding in the public company and the lack of awareness of minority shareholders caused by the inactivity of the state over three decades.
The suggestion that managing an issuer with a minority share package in full compliance with the mandatory requirements of POSA and under the strict control of the FSC, while dedicating substantial financial, personnel, and time resources to the issuer’s development, financial stability, and growth, constitutes “taking advantage” of the shareholders’ lack of knowledge is, to say the least, impermissible and untrue. Introducing such a falsehood as a motive for adopting legal regulation that legally provides for the removal of control from the Controlling Minority Shareholders and the taking away of the economic value of their shares casts serious doubt not only on the conformity of the Draft Law with the Constitution of the Republic of Bulgaria and applicable international instruments such as the European Convention on Human Rights (“ECHR”), but also on the actual motives for adopting the Draft Law and whether they are not related to benefiting a certain circle of persons through the easy acquisition of majority participation in well-performing public companies at the expense of mass privatization shareholders and the Controlling Minority Shareholders.
Furthermore, the explanatory memorandum to the Draft Law lacks any analysis whatsoever as to how the proposed mechanism of transferring shares to the Fund Manager would guarantee achievement of the Draft Law’s stated objectives of reviving and stimulating the activity and liquidity of the Bulgarian capital market. On the one hand, consolidating all unclaimed shares of mass privatization shareholders into one participant (the Fund Manager) will turn the latter into a kind of “investment dictator” of the Bulgarian capital market, which will of course have a devastating effect on the future development of that market. On the other hand, given that the Fund Manager will be able to dispose freely (without any envisaged restrictions) of the majority packages of shares it acquires in a significant number of public companies, there is no guarantee whatsoever that these shares will not be acquired by a third party that will exercise majority control. This will in no way lead to the benefits for the Bulgarian capital market identified in the explanatory memorandum. Control will simply pass from one private person (who has guaranteed rights and a legitimate interest in exercising such control) to another private person (who would have economic and capital benefits), and solely because of the forced legislative intervention of the state. Moreover, upon acquiring more than one-third, one-half (50%), and in some cases even two-thirds of the shares of an issuer, the Fund Manager will be obliged, pursuant to the current rules of POSA, to make a tender offer under Article 149 et seq. POSA. The results of this obligation on the Fund Manager could be twofold: either incurring huge expenses for unsuccessful tender offers in respect of a significant number of issuers (which, of course, will not be the preferred option), or selling all or part of the share packages to third parties. Even a person unfamiliar with the subject matter can see that choosing the second option would lead to the consolidation of majority share packages in third parties, which in turn would in no way change the state of the capital market or increase its liquidity. On the contrary, the goals set out in the explanatory memorandum to the Draft Law, as well as in the Strategy for the Development of the Bulgarian Capital Market adopted in 2016, will not be achieved.
Furthermore, and in connection with the above, the Draft Law does not comply with the principles of reasonableness, predictability, and proportionality enshrined in Article 26, paragraph 1 of the LNA. The envisaged possibility of a forced loss of control by the Controlling Minority Shareholders over the issuer and of the economic value of their shares is not only unjustified (for the reasons already set out above), but also violates predictability with regard to the exercise of constitutionally guaranteed rights of the Controlling Minority Shareholders. As a result of the legal framework governing the mass privatization process, as well as the post-privatization laws, the Controlling Minority Shareholders had a legitimate expectation that they would be able to exercise the rights arising from the shares they had acquired in the capital of issuers. In reliance on that legitimate expectation, they invested significant financial, time, human, and other resources, undertook numerous obligations and risks, and ultimately this has had and continues to have a positive effect on issuers, their shareholders and subsidiaries, their employees, and the state budget. In return for the legitimate expectation of the Controlling Minority Shareholders and the legal acts and actions taken on its basis, the state owes stability and predictability in legal regulation. The adoption of legal regulation depriving the Controlling Minority Shareholders of control and of the economic value of the shares they hold, without providing any guarantee for preserving their rights and legitimate interests as minority shareholders exercising control, unquestionably contradicts the principle of predictability.[3] This unpredictability of the Draft Law will also negatively affect foreign investment in Bulgaria, since the threat of unjustified, disproportionate, and unpredictable interference with investors’ rights has a deterrent effect on foreign investment in this country. Thus, the adoption of the Draft Law will not improve the attractiveness and liquidity of the Bulgarian capital market, but quite the opposite—it will drive investment away from it in view of the threat of disproportionate and unpredictable direct interference with investors’ rights through future legislative changes.
As regards the violated principle of proportionality, it should be borne in mind that where citizens’ and organizations’ rights are affected by normative regulation, the fair balance between the public benefits of such interference and the private rights of citizens must be examined in advance and in depth. Such analysis is lacking both in the explanatory memorandum to the Draft Law and in the overall preliminary impact assessment. Moreover, the lawmaker has not even identified the Controlling Minority Shareholders as persons affected by the Draft Law, but has instead identified them as persons who “take advantage of shareholders’ lack of knowledge” and “apply poor corporate practices that are not in the interest of minority shareholders,” without giving any specific reasons for such claims. As we have already argued above, the declared objectives of the Draft Law cannot be achieved through the proposed removal of rights from the Controlling Minority Shareholders. In practice, there are no points of contact whatsoever between the public goals set by the lawmaker (greater awareness and activity of mass privatization shareholders; increased interest of those shareholders in disposing of their shares; greater liquidity and attractiveness of the Bulgarian capital market) and the private rights of the Controlling Minority Shareholders affected by the Draft Law (property rights expressed in the right of control and the economic value of their shares). In other words, achieving the targeted public goals should not involve directly and/or indirectly affecting the rights and legitimate interests of the Controlling Minority Shareholders. These goals can be achieved by a number of other means that do not affect the rights of citizens and legal entities. Adoption of the Draft Law will not lead to a balance between public and private interest, but will only unjustifiably affect the constitutionally guaranteed rights of a certain circle of private persons.
The mechanism provided for in the Draft Law for the official acquisition by the Fund Manager of shares of inactive mass privatization shareholders not transferred within the one-year term directly violates the property rights of the Controlling Minority Shareholders in the shares they hold, as guaranteed by the Constitution of the Republic of Bulgaria and the ECHR. Adoption of the Draft Law would amount to a direct violation by the state of the legal guarantee and inviolability of the private property of the Controlling Minority Shareholders (Article 17, paragraphs 1 and 3 of the Constitution of the Republic of Bulgaria) and of investment and economic initiative (Article 19, paragraphs 2 and 3 of the Constitution of the Republic of Bulgaria). The mechanism envisaged by the Draft Law also directly violates the peaceful enjoyment of the property of the Controlling Minority Shareholders in relation to their shares within the meaning of Article 1 of Protocol No. 1 to the ECHR, respectively Article 17 of the Charter of Fundamental Rights of the EU, which are applicable law in Bulgaria.
The property rights in the shares held by the Controlling Minority Shareholders fall within the scope of the above-cited protective provisions of the Constitution of the Republic of Bulgaria, Protocol No. 1 to the ECHR, and the Charter. According to the case law of the European Court of Human Rights (“ECtHR”), the concept of “possessions” used in Article 1 of Protocol No. 1 has an autonomous meaning which is not limited to ownership of tangible objects. Certain other rights and interests constituting assets may also be regarded as “property rights” and thus as “possessions” for the purposes of that provision.[4] The criteria for determining whether a given right constitutes property are its economic expression and sufficient determinability. Insofar as company shares have financial and economic value, they constitute property.[5] In this respect, the property rights in the shares of the Controlling Minority Shareholders also fall within the scope of protection under Article 17 of the Charter of Fundamental Rights of the EU.[6]
The state has both positive and negative obligations in guaranteeing the property rights of citizens and organizations. On the one hand, it must create sufficient mechanisms guaranteeing the peaceful enjoyment of property by citizens and its protection in the event of encroachment or violation. On the other hand, the state, through its legislative, executive, and judicial branches and their bodies, must refrain from adopting acts and taking actions that unjustifiably and disproportionately affect or create the conditions for affecting the property rights of citizens and organizations.
If the Draft Law is adopted, there will be direct state interference with the exercise of the property rights of the Controlling Minority Shareholders in the shares they hold in the capital of issuers, which will lead to loss of control on their part over the issuer, reduction of the economic value of their shares, and the possibility of drastic dilution of their shareholding.[7] In its judgment in Shesti Mai Engineering OOD and Others v. Bulgaria, the ECtHR found a violation by the Bulgarian state of Article 1 of Protocol No. 1 to the ECHR in connection with an unjustified court decision as a result of which the applicants’ controlling minority shareholding in a joint-stock company (which before the violation amounted to 49.83%) was diluted to such an extent that they lost control over the company. The ECtHR held that the decision of the state authority (in that case, the court) made possible the change in control of the company, as a result of which the applicants’ shareholding was diluted to the point implying loss of the economic value of their shares. The ECtHR concluded that the dilution of the applicants’ shareholding was linked to the state’s actions to a degree sufficient to justify the conclusion that the authorities had interfered with the applicants’ possessions and therefore found a violation.
In the present case, the adoption of the Draft Law would amount to even more severe interference by the state (through its legislative branch) with the property rights of the Controlling Minority Shareholders—to the extent of direct deprivation of possessions, insofar as, with the Fund Manager acquiring the unclaimed shares of the mass privatization shareholders (which are expected to be most of them), control in issuers that, due to the particularities of privatization laws in Bulgaria, are controlled by minority shareholders will be directly changed. Of course, the Fund Manager, or the person to whom it has the right to sell all or part of the shares in the issuer’s capital acquired under the Draft Law, may choose to change the composition of the issuer’s management bodies and increase its capital to such an extent as to drastically dilute the shareholding of the Controlling Minority Shareholders.
The state should not allow the adoption of legislation enabling such a violation of the property rights of the Controlling Minority Shareholders. The shares held by the Controlling Minority Shareholders constitute a complex right. A share certifies not only a right to part of the issuer’s equity, but also other rights—the right to vote at the general meeting and the right to exercise influence and control over the issuer.[8] The adoption of the Draft Law, which provides for a mechanism leading to restriction, reduction, and/or deprivation of those rights, would constitute unjustified state interference with constitutionally guaranteed rights of the Controlling Minority Shareholders. Such interference by the state is unjustified, excessive, and will unquestionably upset the fair balance that must be maintained between the public interest and the need to protect the right of peaceful enjoyment of the possessions of the Controlling Minority Shareholders.[9] As already stated above, there is no proportional causal link between the mechanism proposed in the Draft Law and the achievement of its announced objectives that could fairly justify the exceptional burden and unprecedented restrictions and state interference with the property rights of the Controlling Minority Shareholders.
In view of all of the above, we categorically oppose the adoption of the Draft Law on the Settlement of Relations Concerning Personal Accounts for Book-Entry Securities, maintained in the central securities register by “Central Depository” AD, published for public consultation on 13.05.2020. We insist that it be withdrawn and not submitted for consideration by the Council of Ministers.
In a democratic state such as Bulgaria, achieving the goals announced in the explanatory memorandum to the Draft Law should not come at the expense of unpredictable, unjustified, and disproportionate direct interference with the rights of certain persons guaranteed by the Constitution of the Republic of Bulgaria, the ECHR, and the Charter of Fundamental Rights of the EU. We fully support the opinion expressed by AICB that, in order to achieve the targeted goals, the state should direct its efforts toward actions repeatedly and thoroughly discussed and proposed by the investment community, namely: broad informing of mass privatization shareholders regarding their rights and opportunities; facilitation and reduction of the costs of inheritance procedures; electronic identification and remote access to and management of these assets. We would add that improving the liquidity and attractiveness of the Bulgarian capital market (which is another of the announced goals) can only be achieved through targeted state incentives[10] and guarantees for current and potential participants in this market segment, the provision of new services and improved capital market infrastructure, reduced administrative burdens, and, last but not least, targeted campaigns to improve the financial literacy of Bulgarians, starting already at school level.
Alternatively, in the event that the Draft Law is not withdrawn and is submitted for consideration by the Council of Ministers, it should contain explicit legal mechanisms guaranteeing that the rights and legitimate interests of the Controlling Minority Shareholders—guaranteed by the Constitution of the Republic of Bulgaria, international instruments to which the Republic of Bulgaria is a party (such as the ECHR), as well as EU law—to the calm and peaceful enjoyment of the shares they hold and controlling shareholdings in the capital of issuers, are not violated.[11] These mechanisms should include, for example, the right of the Controlling Minority Shareholders to acquire, with priority, as many of the shares transferred to the Fund Manager as are necessary for them to acquire a majority shareholding in the issuer’s capital, at a price equal to the determined cash equivalent of the shares according to the valuation performed.
In order to be effective, the opportunity granted to the Controlling Minority Shareholders to acquire with priority the shares transferred to the Fund Manager should meet the following parameters:
In view of the above, if the Draft Law is submitted for consideration by the Council of Ministers, we insist that the following provisions be supplemented in advance:
The current text becomes paragraph 1.
A new paragraph 2 shall be created:
“(2) Within three days of the valuation of the transferred shares under Article 13, paragraph 1, the management company shall notify in writing the minority shareholders in public companies who, at the time of the transfer of the shares to the investment fund under paragraph 1, individually or as related persons exercise control over the specific public company within the meaning of § 1, item 14, letters ‘b’ and/or ‘c’ of the Supplementary Provisions of the Public Offering of Securities Act, regarding the shares in the capital of the public company transferred to it, their number, and the determined cash equivalent of one share.”
A new paragraph 3 shall be created:
“(3) Within the three-month term under Article 13, paragraph 1, the management company shall identify shareholders in public companies who, at the time of the transfer of the shares to the investment fund under paragraph 1, individually or as related persons exercise control over the specific public company within the meaning of § 1, item 14, letters ‘b’ and/or ‘c’ of the Supplementary Provisions of the Public Offering of Securities Act. For the identification of the persons under the preceding sentence, the management company shall take into account an up-to-date list of all shareholders of the public company issued by ‘Central Depository’ AD at the time of the transfer of the shares to the investment fund under paragraph 1, as well as the most recently declared circumstances under Article 114b of the Public Offering of Securities Act and the publicly disclosed information regarding voting rights exercised at the last two general meetings of shareholders of the public company.”
A new paragraph 4 shall be created:
“(4) Within two weeks of receiving the notification under paragraph 2, the minority shareholders in public companies who individually or as related persons exercise control over the specific public company within the meaning of § 1, item 14, letters ‘b’ and/or ‘c’ of the Supplementary Provisions of the Public Offering of Securities Act shall have the right, before all other third parties, to acquire directly from the management company as many of the shares in the capital of the respective public company transferred to the investment fund under paragraph 1 as are sufficient for them to acquire at least 50 per cent of the votes at the general meeting of the public company, at a price per share equal to the cash equivalent of one share determined by the valuation under Article 13, paragraph 1.”
A new paragraph 5 shall be created:
“(5) Until the expiry of the term under paragraph 4, the management company shall not have the right to exercise voting rights at the general meeting of the public company in respect of the shares under paragraph 1 transferred to the investment fund, nor to dispose in any manner whatsoever of those shares, including but not limited to selling, exchanging, contributing in kind, pledging, or lending them. A transaction disposing of shares under the preceding sentence shall be null and void.”
A new paragraph 6 shall be created:
“(6) The obligations of the management company/investment fund under Article 149, paragraph 1 of POSA, respectively under Article 149, paragraph 6 of POSA, shall arise within 14 days of the expiry of the term under paragraph 4, in the event that the minority shareholders in public companies who individually or as related persons exercise control over the specific public company within the meaning of § 1, item 14, letters ‘b’ and/or ‘c’ of the Supplementary Provisions of the Public Offering of Securities Act have not exercised their right under paragraph 4.”
“item 11. The conditions and procedure for identifying shareholders in public companies who, at the time of the transfer of the shares to the investment fund under paragraph 1, individually or as related persons exercise control over the specific public company within the meaning of § 1, item 14, letters ‘b’ and/or ‘c’ of the Supplementary Provisions of the Public Offering of Securities Act, as well as an obligation to transfer shares to those persons under the terms of the law.”
The above proposals are merely one possible option for preserving the rights and legitimate interests of the Controlling Minority Shareholders. Other options are also possible that would maximize the protection of their rights. In order to reach an acceptable solution, we express our full willingness to participate in the consultation and drafting of the necessary amendments and supplements to the Draft Law, with the participation of representatives of the affected parties.
Respectfully,
Dobromir Ivanov
Executive Director
BESCO – The Bulgarian Startup Association
[1] For example, Regulation (EU) No 596/2014 on market abuse, recital 27.
[2] In this sense also Directive 2013/34/EU on annual financial statements, consolidated financial statements and related reports of certain types of undertakings, where recital 31 explicitly recognizes the possibility that under certain circumstances control may in fact be exercised with a minority shareholding.
[3] In this regard, Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies, recital 3 proclaims that “effective shareholder control is a prerequisite to sound corporate governance and should therefore be facilitated and encouraged.”
[4] Gasus Dosier-und Fordertechnik GmbH v. the Netherlands, application no. 15375/89, judgment of 23.02.1995.
[5] Olczak v. Poland, application no. 30417/96, admissibility decision of 07.11.2002, § 60; Sovtransavto Holding v. Ukraine, application no. 48553/99, judgment of 25.07.2002, § 91.
[6] See Article 53(3) of the Charter: “In so far as this Charter contains rights which correspond to rights guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms, the meaning and scope of those rights shall be the same as those laid down by the said Convention...”
[7] Shesti Mai Engineering OOD and Others v. Bulgaria, application no. 17854/04, judgment of 20.09.2011.
[8] Sovtransavto Holding v. Ukraine, application no. 48553/99, judgment of 25.07.2002, § 92; Company S. and T. v. Sweden, no. 11189/84, Commission decision of 11 December 1986, DR 50, p. 138.
[9] Sovtransavto Holding v. Ukraine, application no. 48553/99, judgment of 25.07.2002, § 98.
[10] Such as, for example, the pilot grant scheme with vouchers for small and medium-sized enterprises wishing to list on BSE-Sofia, without commenting here on the effectiveness of that particular scheme.
[11] In this regard, attention should be paid to Directive 2004/25/EC on takeover bids, recital 19 of which proclaims that “Member States should take the necessary measures to enable any bidder to acquire majority holdings in other companies and to exercise full control thereof. To this end, restrictions on the transfer of securities, restrictions on voting rights, extraordinary rights concerning the appointment or removal of board members and multiple-vote securities should either be removed or suspended for the time allowed for acceptance of the bid and when the general meeting of shareholders decides on defensive measures, amends the articles of association or appoints or removes board members at the first general meeting of shareholders following the closing of the bid. When holders of securities have suffered loss as a result of the removal of rights, equitable compensation should be provided in accordance with technical arrangements laid down by the Member States.”
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