In early August, Bulgaria officially promulgated an amendment to the Bulgarian Commerce Act, setting the legal framework for the incorporation of legal entities with variable capital. The amendment aims to create a new legal structure that will ease the foundation of start-ups. The benefits of such variable capital companies (VCC) range from low capital requirements to reduced administrative burdens for corporate changes.
Variable share capital
In order to qualify as a VCC, a company must meet two criteria determined by the legislator at all times: an average number of employees lower than 50, and an annual turnover and/or value of assets up to BGN 4,000,000. If either of these criteria are not met, the VCC must reorganize into an LLC or a JSC.
The capital in VCCs is distributed in shares, and the value of one share may be as low as BGN 0.01. Unlike other legal entities (LLC and JSC), a VCC will not declare the amount of capital in the commercial register, but will establish it at the end of the financial year with the conclusion of the annual financial statements.
Unlike for LLCs and JSCs, no capital raising account is required for VCCs, the amount of capital is not entered in the commercial register, there are no minimum capital requirements, shareholders are not entered in the commercial register, and making in-kind contributions to the share capital is quicker and easier, as the appraisers will be appointed by the manager of the company (and not by the commercial registrars).
Another important aspect of the amendment is the provision for granting employee stock options. According to this provision, VCCs will be able to resolve to grant stock options from the company’s own shares. An employee may hold up to 15% of the overall share capital of a VCC at a time, pursuant to a stock option agreement entered into by the company and the employee. This right cannot be transferred, but it can be inherited.
Shareholders’ agreements
One of the most important characteristics of a VCC is that the bylaws will be established in a shareholders’ agreement (SHA). The SHA will be the binding and legally enforceable document governing the VCC. This allows the VCC to provide for certain shareholders’ privileged rights depending on different classes of shares. In other words, the SHA may assign exclusive rights to shares, such as the right to more than one vote in the general meeting of shareholders, the right to a guaranteed or additional dividend and/or a liquidation quota, the right to buyback of shares, the right to veto the adoption of resolutions by the general meeting, and others. A certificate must be issued to the shareholders stating the nominal amount of their share capital, privileges (if any), and all other associated rights. These shares (certificates) will not be considered as securities.
The SHA may also provide for limitations on transferring shares, such as a right of first offer, pre-emptive rights, lock-in periods, etc. On the other hand, if established by the SHA, shares may be transferred freely without the need for a notary to certify the share transfer agreements, which would put an extra burden on the parties, especially if they are foreign entities. Any other transfers in breach of the SHA will be considered contestable by the VCC and any third parties.
Business implications
The amendment is expected to benefit a wide range of business stakeholders. The VCC legal form will essentially support an increase in foreign and local investors’ activity, the number of start-ups, and private equity deals in general. The flexibility of a VCC ensures faster movement of capital while securing investors’ rights.
In addition, putting into place a VCC with its legal implications solves many problems previously encountered by investors, such as complicated or limited employee stock option plans, tedious procedures for increasing/decreasing share capital, and inflexible schemes for different classes of shares. Overall, the implementation of the VCC structure is expected to prompt and incentivize venture capital projects and private equity investments, essentially diversifying sources of financing in the local market.
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