and how it will help the Bulgarian start-up scene

Тhe Bulgarian start-up community now has a new horizon open fer development with the new form of commercial partnership – the company with variable capital (CVC). The latter is a fact after the effective second voting by the parliament of an Act for amending and supplementing the Commerce Act on 20.07.2023 and its promulgation in the State Gazette issue number 66, dated 01.08.2023.

The CVC combines the advantages of a limited liability company (LLC) and a joint-stock company (JSC) in one. Thanks to its flexible structure and perspective design, based on western European legal theory and experience, the CVC will provide start-up enthusiasts, entrepreneurs and investors (especially in the technology sector) with a tool that adequately and up to date serves their interests.

The idea of the CVC is to give momentum to people with big ideas and an action plan to realize them by:

1. opening a company with low initial capital, incorporating their idea;

2. choosing the most appropriate management method for the company;

3. developing the idea in it with work and/or with the help of qualified specialists;

4. attracting external investors and freely negotiate terms of participation with them;

5. new company to becoming a competitive entity in the market environment and potentially its shares to be publicly traded.

Familiar and borrowed from LLC and JSC, the main advantages of CVC, among others, are 1) the low initial capital, 2) choice and flexibility in the method of management, and 3) the potential opportunity for public offering of shares on regulated markets.

The participants in the CVC will have the freedom to arrange its structure, governing bodies, work rules, restrictions and privileges, etc., all to be writen down in a company’s Articles of Association (AoA). Therefore, this document will have the greatest organizational authority for the CVC, after the imperative norms of the law.

A CVC, being a mix of somewhat a personal and mostly a capital company, is characterized by the presence of 1) capital; 2) share allocation; 3) governing bodies, as well as 4) some new moments on participation and acquisition of shares and 5) transformations.

The most special feature of CVC lies in its name – its variable capital. In contrast to the existing capital companies, the figure of the capital in a CVC is planned not to be announced in the Commercial Register and the register of the NPLE, but only to be recorded in the balance accounting sheets and reported on an annual basis. In this same way, the its corresponding increase and/or inflow of investments will be reflected. In addition, practically the minimum nominal size of a share will be 1 BGN stotinka. Of course, formal logic leads to the conclusion that the minimum number of shares should again be two, as in the LLC, although it is not explicitly fixed in the Act. This refers only to the nominal value of the shares in the capital, necessary to fix a ratio of the shares owned by the partners, while their actual value may exceed the nominal by several times, which is the purpose here.

In connection with the paying-in of the capital into the company, there was a noticeable movement and discussion in the legal and civil communities that was long-awaited. Before the second voting of the Act, proposals were made to give even greater flexibility to the CVC and speed for commercial turnover – the possibility of depositing the registered capital of up to BGN 1,000 with the manager, who would certify the latter with a declaration. The latter excluded the need to engage a commercial bank when establishing a company. However, the proposal was not passed in the second voting of the Act, so citizens will still have to rely on commercial banks to open a account and deposit capital for a company.

To the question “And who is a partner in the CVC and how can I have a guarantee of his status and legitimacy?” the legislator has decided to use the approach as with a JSC – a special Shareholders Book will be kept, analogous to the one in a JSC. It will include all current partners, the amount of their shares, their privileges, transfers, etc. Accordingly, the quorum and validity of the held general meetings will be assessed based on the entries in the Shareholders Book. It is planned that shareholders will have access to it, and third parties – under certain conditions.

Freedom is given to the shareholders to arrange that the company shares can grant more rights to them, again by example from the regulations in a JSC, or to have additional restrictions. The right of veto, the right to acquire a vote in the initial absence of one, the right to additional dividends, etc. are introduced. Also, a brief regulation I given of the right of first refusal, of tag-along, drag-along, etc., established in practice when transferring shares. An option to limit the disposal of shares has also been introduced, for example in the case of an upcoming or available investment and the need to “lock” the participation in the company for a certain period of time. According to the stipulated terms in the AoA, transfer of company shares will be possible both freely and subject to agreed conditions. The shareholders are given the option to state in the AoA a simplified form for the share-purchase agreement – a simple written one. If not explicitly stated, a from of notary certification of the signatures will be sufficient, instead of a notarization of signatures and content, as is the case with an LLC. After the acquisition of shares, the new shareholder is to be entered in the Shareholders Book by the relevant management body. The share in the CVC is also inheritable, and unless otherwise agreed in the AoA, heirs are given a period of 3 months from the discovery of the inheritance to declare whether they will participate in the company on an equal basis with the other partners, or only benefit from the value of the share of the deceased shareholder at the time of his death.

The bodies of the CVC are the general meeting of the partners (or sole shareholder) and the management body. Regarding the competences, convening, conduct, quorum and decisions of the general meeting, it is the supreme governing body of the company here as well, and the competences correspond to those of the general meetings of LLC and JSC. The partners in the CVC are free to add more competences in accordance with the law, by including them in the AoA.

The governing body itself, can be either singular (Manager), or collective (Board of Directors/ BD) – the choice is left in the hands of the shareholders. Thus, the latter can best assess which management method is most suitable for them, what management rules and terms to introduce and whether at a certain stage they should be changed. There is no limit for the number of members in in the BD, but there is one for the representatives of the company, as in a JSC – the executive members must be fewer that the total amount of BD members. The responsibilities of the members of the BD are also similar to those of JSC. The care which its members are bound to take is like that of high professionalism, as they must consider the risk of the activity with the expected income for the company. Although the capital is not entered in the register, the names of the representatives must be entered, their names being visible, as a guarantee for all third parties that they are validly entering into relations with the company. In this regard, the representatives of the CVC during its registration should still submit a notarized consent to their appointment to the position. The latter was also the subject of debate in the draft Act, with proposals made for a technical solution by using a qualified electronic signature for electronic identification instead of notarizing a signature, but the proposals were not passed on second voting of the Act.

As mentioned, the idea is for the CVC to give an easy start to the growth of an idea that can be monetized. Its development is often related to attracting specialists whose knowledge and experience contribute to increasing the value of the start-up product. Here, the legislator has decided to settle, albeit briefly, the quite common in practice moment regarding the granting of the right to acquire shares, or the so-called vesting options. Although not fully regulated in Bulgarian law, the vesting agreement is gaining ground in the local market, by encouraging employees to work for an enterprise as if it were their own property. With the new regulations for the CVC, the legislator specifies that the offering of such type of shares will be directly from the company, i.e. regarding shares owned by the latter only in itself, which cannot be more than 50% of the equity capital. The latter will be done through a written contract with persons employed by the company, regardless of the type of contract or legal relationship. That is, both contract employees and managers will be able to benefit from vesting options, as even third parties such as freelancers in the tech industry or consultants. A limit has also been set that the shares acquired by new shareholders through vesting agreements cannot be more than 15% of the company’s capital, and rules have been introduced for reporting this percentage on an annual basis to the General Meeting.

The other side of the coin given the easy start of the CVC is the need to guarantee the stability of the commercial turnover during its existence. The legislator has provided for this protection to be achieved in two ways: 1) by setting criteria for the initial registration; and 2) through annual supervision and mandatory transformation/conversion of the CVC under certain conditions. Which means that in practice, the CVC will have a conditionally limited term of existence as such.

First of all, according to the Act in its latest version, the CVC can only be an enterprise that has an average number of personnel less than 50 people, and an annual turnover that does not exceed BGN 4,000,000, and/or the value of the assets , which does not exceed BGN 4,000,000. This places it in the middle between a micro- and a small enterprise with mixed characteristics between the two (precisely these two forms were chosen as the quantitative criteria under the previous draft act).

If, after the first year of its existence, the CVC crosses the described thresholds for personnel and turnover, it should be transformed in accordance with the Commercial Act into an LLC or JSC (in the case of plans for a public offering of shares on regulated markets) by the end of the next financial year. The Act emphasizes that, upon conversions, the CVC should be treated as a personal and not a capital company.

There is also a focus on preventing the abuse of CVCs, which have collected huge investments and do not operate, much like shell companies. Therefore, the legislator gives the prosecutor the power to terminate the company with a claim to the district court, if the mandatory conversion does not take place in the stipulated term.

At of the moment, the Act has established a period of 6 months from its adoption, in which the institutions of the state should take the necessary measures for its smooth implementation. In particular, the Registration Agency has been given a deadline until 30.06.2024 to provide a technical possibility for the implementation of the Act. This means that we will officially have a practically real opportunity to register the CVC after this date.

Whether you are aiming to establish, participate in, or acquire vesting options, you can contact our team to get advice on the ideal solution for you.

Published on: 07/08/2023

Atty. Marin Sarafov

Marin Sarafov specializes in corporate, commercial and bond law. His main focus is helping both local and foreign investors to gain a foothold in the Bulgarian market, gaining a strong start and a clear concept of the processes ahead. To find the best solutions, Marin relies on experience gained in an international corporate law firm, combined with direct contact with clients, as well as the indispensable help of a good team. A major goal for him is to convey to clients a clear picture of what the options are in front of them, the obvious and hidden risks as well as next steps in order to keep the workflow running like clockwork. Member of the Sofia Bar Association since 2019, fluent in English and German.