Source: https://iclg.com/practice-areas/corporate-governance-laws-and-regulations/bulgaria
Timestamp: 2018-12-12 08:08:26
Document Index: 761033783

Matched Legal Cases: ['art. 221', 'art. 229', 'art. 224', 'art. 232', 'art. 115', 'art. 223', 'art. 223', 'art. 240', 'art. 118', 'art. 251', 'art. 118', 'art. 222', 'art.115', 'art. 222', 'art. 222', 'art. 223', 'art. 118', 'art. 240', 'art. 118', 'art. 179', 'art. 145', 'art. 114', 'art. 114', 'art. 116', 'art. 114', 'art. 114', 'art. 238', 'art. 240', 'art. 238', 'art. 238', 'art. 116', 'art. 237', 'art. 237', 'art. 237', 'art. 116', 'art. 116', 'art. 240', 'art. 116', 'art. 220', 'art. 224', 'art. 13', 'art. 117', 'Art. 115']

Corporate Governance 2018 | Bulgaria | ICLG
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Corporate Governance 2018 | Bulgaria
The main corporate entities discussed in this overview are Private Joint-Stock Companies and Public (Stock-Exchange Listed) Joint-Stock Companies.
The sources of corporate governance in Bulgaria can be classified into two categories:
I. Regulatory Sources:
1. The Commercial Act
The Commercial Act applies to any Bulgarian company, whether privately held or listed on the stock exchange. This act regulates all general issues regarding the company, e.g., the relations of shareholders vis-à-vis the company, the company vis-à-vis the board and the shareholders vis-à-vis the board. It also governs the power of the General Meeting and the boards, and the management system specifics – one- or two-tier systems of governance, procedures regarding the convention of the annual and extraordinary General Meeting, etc.
Particularly the following chapters apply:
Chapter 10 containing general rules applicable for all types of company, among them the most important related to some aspects of the incorporation of a company.
Chapter 14 named “Stock Company” which contains detailed regulations regarding the Private Joint-Stock Company, partially applicable for the Public Joint-Stock Company too, unless there are mandatory provisions in the Public Offering of Securities Act.
2. The Public Offering of Securities Act
This Act provides specific rules for incorporation, management and corporate governance of the Public Joint-Stock Company.
3. The National Code for Corporate Governance
The Code is, by its nature, a standard for good practice. It provides companies with a framework for corporate management and control. The Code applies to Bulgarian public joint-stock companies according to the “comply or explain” principle. This principle is espoused by all corporate governance codes adopted by EU Member States. It means that companies should comply with the Code, and if they do not, the company or its corporate board must explain and disclose the reasons for non-compliance. Following the principles of the Code is one of the requirements for admission to trading on the official market of securities. The requirement is set as a criterion for the level of the corporate governance and culture of the companies that are admitted to trading to the highest tiers of the Bulgarian Stock Exchange-Sofia.
Moreover, unlisted companies are also advised to comply with the Code.
II. Non-regulatory Sources:
1. By-laws of the company (Statute)
These contain provisions regarding: the scope of business activity of the company; the amount of capital; the types of shares and specific rights for particular class of shares, if any; the system of corporate governance, etc. It is published in the Company Register.
2. Rules and Procedures /Charter of the Board of the company
This act is not compulsory but if adopted, it regulates the special requirements regarding convention of the Management Board, Board of Directors and the Supervisory Board, such as invitations, absences, restriction of the power of the board for particular transactions above a certain value, etc.
As far as the implementation of the EU Law has been successfully completed recently, there are no pressing tasks for the development of the legislation. In practice, attempts for the application of the National Code for Corporate Governance by Private Joint-Stock Companies are implemented.
It should be pointed out that, as a result of the financial crises and the increase of the number of insolvency proceedings, the duties of the board members for filing of applications in a timely manner have been analysed by the Supreme Court of Cassation (SCC). In its recent judgment, held on the procedure for interpretation of the law in case of contradictions in the case law of the SCC, which is mandatory for all courts, the SCC analysed the criminal liability imposed on the board members who didn’t abide by the Criminal Code, i.e. s.227 “b” which stipulates that the individuals who manage and represent the company, have to file an application to the court for opening of insolvency proceedings within 30 days as of the day of the insolvency (cash-flow insolvency). The breach of this duty, which is governed also in the Commercial Act, constitutes a crime under the Criminal Code and is punishable with imprisonment of up to three years or with a fine of EUR 2,500. There were disputes whether the board members could be held liable if a resolution of the general meeting of the shareholders or the sole proprietor of the shares was not passed. In the Judgment for interpretation of the Law №5 dated December 22, 2014 the Penalty Division of the SCC held that there was no need for such resolution of the general meeting and the board member/manager of the company is obliged to file the application for the opening of insolvency proceedings notwithstanding whether the general meeting of the shareholders passed resolution in this regards.
Concentration on short-term goals has been prevalent, with public companies being pressured to deliver short-term results to their shareholders. In terms of legal developments that promote long-term value there have not been any in Bulgaria.
The main characteristic of the Joint-Stock Company is the limited power of the General Meeting concerning the management of the company. Apart from that principle, there are such categories of decision and actions which are of vital importance to the company and could be taken by the management only after special resolution of the General Meeting, usually with majority of more than 50% (art. 221 of the Commercial Act). This constitutes specific shareholder rights, which are classified as non-pecuniary rights. The non-pecuniary rights consist of several groups of rights, divided by the legal doctrine as follows:
Each shareholder has the following rights:
to participate at the General Meeting, to express his opinion and to demand answers to his questions by the members of the boards;
to vote at the General Meeting. The principle is that each share has one vote, unless otherwise agreed in the Statute. In particular cases when conflict of interest arises, this right is restricted (art. 229 of the Commercial Act); and
to vote and to be elected as a member of the boards.
They concern mainly the right of information about the status and the activity of the company. This category consists of, but is not limited to, the shareholders’ rights described below:
to be provided with access to or to receive at least 30 days before the date of the General Meeting the materials subject to discussions, according to the agenda (art. 224 of the Commercial Act);
to receive a copy of the minutes of the General Meeting (art. 232, par. 5 of the Commercial Act); and
to ask questions at a General Meeting of shareholders (not necessarily related to the agenda) to the Board members regarding the economic and financial situation of the company and its commercial activity, the members being obliged to answer correctly, and exhaustively unless for issues considered inside information (art. 115, par. 11 of the Public Offering of Securities Act).
These rights belong to a shareholder/group of shareholders who own at least 5% of the capital of the company since a date not later than three months before the date of the General Meeting:
to convene a General Meeting (art. 223, par. 2 of the Commercial Act);
to enlist questions to the agenda of the General Meeting (art. 223a of the Commercial Act);
right of a shareholder/group of shareholders who own at least 10% of the capital of the company (5% for a Public Joint-Stock Company) to bring an action against member/s of the board for damage caused to the company by them (“action pro socio” or “derivative suit”) – art. 240a of the Commercial Act; art. 118, par. 2, item 1 of the Public Offering of Securities Act; and
right of a shareholder/group of shareholders who own at least 10% of the capital of the company (5% for a Public Joint-Stock Company) to ask the boards or the court to appoint an auditor for revision of the Annual Financial Report of the company (art. 251a of the Commercial Act and art. 118, par. 2, point 1 of the Public Offering of Securities Act).
There are no responsibilities of the shareholders to participate in corporate governance. See question 2.4 below.
There are two types of General Meetings – annual General Meeting and special (extraordinary) General Meeting. The annual General Meeting must be held during the first six months of the calendar year at the headquarters of the company, according to art. 222 of the Commercial Act and art.115 of the Public Offering of Securities Act (unless otherwise agreed for Private Joint-Stock Companies but on the territory of Republic of Bulgaria, pursuant to art. 222 of the Commercial Act).
The special (extraordinary) General Meeting takes place when special circumstances occur (e.g. art. 222, par. 3 of the Commercial Act) or when it is convened by authorised persons at their own discretion (art. 223 of the Commercial Act).
The rights of the shareholders are described in question 2.1 above.
As a matter of statutory law they do not owe any duties, but the issue can be regulated in the constitutional documents of the company or an SHA.
Generally, shareholders cannot be liable for acts or omissions of the company. The “Piercing the Corporate Veil” doctrine is not adopted by Bulgarian legislation.
However, as regards a Public Joint-Stock Company, in art. 118a of the Public Offering of Securities Act it is provided that liability for damage caused to the company by person/s or company/ies who control the Public Joint-Stock Company, or every other entity which by its influence on the Public company caused an act or omission by the members of the board, if this decision/act/omission is not in the interest of the company. In this case, the person or entity is jointly liable with the member of the board who took the action or failed to do so. Consequently we could state that there is an explicit obligation of shareholders to refrain from interfering in the management of the company directly or indirectly by influencing the management to act not in the interest of the company.
Yes, the “derivative suit” is provided for such purpose, both for shareholders in Private and in Public Joint-Stock companies. This issue is governed by the provisions of art. 240a of the Commercial Act (for Private Joint-Stock Companies) and of art. 118, par. 2, point 1 of the Law for Public Offering of Securities (for Public Joint-Stock Companies).
The main peculiarity of this suit is that by bringing the action, shareholders act not on their own behalf, but on behalf of the company and the aim of the claim is all damages to be paid to the company.
Regarding shareholders in Private Joint-Stock Companies there is an obligation for shareholders with registered shares to be registered in the company book (art. 179 of the Commercial Act). No limitations concerning acquisition of shares are established.
As regards a Public Joint-Stock Company – provisions of the Public Offering of Securities Act apply (art. 145) and anticipate disclosure of circumstances such as:
Acquisition or disposal of shares by shareholders when the total amount of these shares represents 5% of the voting rights at the General Meeting, either more than 5%, or the amount is divisible by five. In this hypothesis the shareholder is obliged to inform both the company and the Financial Supervision Commission.
Transactions with interested or related parties at a value less than 2% of the company’s assets are subject to preliminary authorisation by the board of the company, according to art. 114, par. 2 of the Public Offering of Securities Act.
Transactions with interested or related parties at a value more than 2% of the company’s assets are subject to preliminary authorisation by the General Meeting pursuant to art. 114, par. 1, letter “b” of the Public Offering of Securities Act, the respective shareholder being disenfranchised.
Please see question 2.6.
There are two systems of corporate management and the incorporators of the company could choose one of the following in the Statute:
One-tier system (Board of Directors)
Where the company is represented and managed entirely by the Board of Directors.
Two-tier system (Management Board and Supervisory Board)
Where the company is represented and managed by the Management Board but the actions and resolutions of the Management Board are controlled by the Supervisory Board.
At least one-third of the members of the Board of Directors/Management Board of Public joint-stock company should be independent members (art. 116a, par. 2 of the Law for Public Offering of Securities provides a definition of the term “independent member”). In addition, a director for communication with the investors should be appointed.
Meeting. They elect among them a chairman, a vice-chairman, and one or more executive members.
The members of Management Board (three to nine members) are appointed and removed by the Supervisory Board whose members (three to seven) are appointed and removed by the General Meeting. The legal relations between the members of the Management Board and the company are governed by management contract and signed by the chairman of the Supervisory Board on behalf of the company. The rights and obligations of the members of the Supervisory Board are settled in contract.
The Obligations and Contracts Act is the main source of provisions regarding the contracts executed between the company and the members of the boards.
There are also certain relevant rules in the Commercial Act and the Public Offering of Securities Act.
The members of the boards of both the Private and the Public Joint-Stock Companies are required to declare before their appointment the ownership of more than 25% of the capital of other companies. When shares above this limit are acquired during the tenure of the member, an immediate written notification to the company is required.
The members of the boards of the Public Joint-Stock Company are obliged, in addition to the described above, to declare in front of the company and the Financial Supervision Commission circumstances described in art. 114b of the Public Offering of Securities Act such as current or forthcoming transactions in which they could be interested parties (art. 114b, point 3). Other obligations of the members are required in the subordinate legislation acted by the Financial Supervision Commission.
As regards Public Joint-Stock Company, the limitations described in question 2.5 apply when the members of the boards are shareholders. The general rule, set forth in art. 238, par. 4 of the Commercial Act and applicable for Private and Public Joint-Stock Companies, provides that the members of the board are obliged to notify the chairman of the board in written form not later than the beginning of the board meeting regarding the fact that they or a third party related to them is interested in the resolution subject to discussion in the agenda. Such members do not participate in the decision-making process in question.
The members of the board are also obliged to notify in written form the boards when they or a third party related to them form a contract with the company and its subject-matter is beyond the scope of the ordinary business activity of the company (art. 240b of the Commercial Act). These contracts are formed following a resolution of the Board of Directors or the Management Board. This transaction is binding and valid even if a special resolution was not taken, but the board member who knew or ought to have concluded about it is liable for damage caused to the company.
The process for board meetings is governed by the Commercial Act (art. 238 and 239) and by the Statute of the company and its Rules and Procedures. The requirement for quorum in the provision of art. 238 provides that at least half of the board members should attend or should be represented by another member of the board. The resolutions are taken with “ordinary majority” (more than half of the members) unless otherwise agreed in the company’s statute. A decision in absentia may be taken unanimously in writing.
The members of the Management Board and the Supervisory Board are obliged to conduct any and all business activities of the company. They have to apply due diligence of a proper and diligent manager in this capacity as board members. The board members are jointly and severally liable for damage caused to the company. Furthermore, specific duties of the members of the boards are set forth in art. 116b of the Public Offering of Securities Act and in the Commercial Act such as:
to notify the board regarding particular circumstances (art. 237, par. 3 CA);
to restrain from exercising competition activity unless otherwise agreed in the Statute (art. 237, par. 4 CA);
for non-disclosure of inside information regarding the company (art. 237, par. 5 CA; art. 116b, par. 1, item 2, letter “c”); and
to be loyal to the company (art. 116b, par. 1, item 2 of the Public Offering of Securities Act).
The corporate governance responsibilities of the members of the board are divided into three categories:
Which include preparation of the annual and the special (extraordinary) General Meeting, incorporation of all committees and bodies of the company, appointment and dismissal of employees, business transactions, accountability, etc.
Concerning all activities for planning and enforcement of the company’s strategy and course of business.
Where mechanisms for internal control are provided in order to supervise the company’s activity and its compliance with the strategy of the company.
The Board of Directors and the Management Board are entitled to act on behalf of the company and these actions must be taken collectively by all of the board members or by executive members, according to the rules of the company’s statute.
The key current challenges for the management body are mainly related to the application of the due care in the ordinary course of business, thus the elaboration of case law on the business judgment rule is necessary for the Bulgarian legal order. Apart from the typical situations such as conflict of interests and related-party transactions, the running of the day-to-day business requires the taking of risks and launching of new products and services upon which failure the liability of the managers could be triggered. It is vital the case law and doctrine to set up the criteria to be applied will take into consideration both the interest of the company and of the managers.
The members of the boards are obliged to secure guarantee for their governance in an amount determined by the General Meeting but not less than three times the amount of their monthly remuneration (art. 240 of the Commercial Act; art. 116c of the Public Offering of Securities Act).
The management body is responsible for the overall strategy of the company and its execution. Shareholders have limited powers in this respect, for example bonds can be issued only if sanctioned by a resolution of the GMS.
Pursuant to art. 220, par. 3 of the Commercial Act, if the number of employees of the company is higher than 50, then one employee can attend the General Meeting as their agent. He/she has right to information access (as in art. 224), but has no voting right (he has “consultative vote”).
The system of “co-determination” elaborated in German Corporate Law is not implemented in the Bulgarian legislation.
There is no explicit regulation of the authorities and the status of other stakeholders as participants in the corporate governance process.
Corporate social responsibility is not governed by the Bulgarian legislation. It is developed by the companies as an element of their PR and marketing strategies.
The board members are responsible for disclosure and obliged to declare relevant circumstances, acts and important issues related to the Company’s activity. They should announce the respective fact in the Company Register and notify the Financial Supervision Commission as well as the regulated market (where its shares and other securities are listed) if it concerns a Public Joint-Stock Company.
The names of all board members and agents of the Company should be published in the Company Register, their specimen, declaration for compliance, the deadline of their tenure if any, and limitations of the agency powers.
The auditors’ report on the Annual Financial Report examines whether the provisions of the Accountancy Act and the Statute of the Company are implemented. The statement of the auditors regarding the Annual Financial Report (AFR) is required in order the AFR to be presented to the General Meeting and approved by the shareholders. The board members are liable for omissions or discrepancy regarding the AFR.
Pursuant to art. 13 of the Commercial Act, the website of the company should contain information regarding the name of the company, its headquarters and registered office, the unified identification number and bank account of the Private Joint-Stock Company. In the Commercial Act there are no particular obligations for disclosure of corporate governance information. However, in the Company Register all information about the company described above is published and updated.
The Public Joint-Stock Companies should publish on their websites information regarding forthcoming General Meetings, their agenda and supporting materials, and also the Minutes of the General Meeting within three days after the date when it was held (art. 117 of the Law for Public Offering of Securities).
Art. 115b par. 4 of the Public Offering of Securities Act allows the Statute of a Public Joint-Stock Company to provide the necessary technical facilities for distant voting including via e-mail and/or via website.