There are five forms of business association in Bulgaria under the Commercial Act:
Unlimited partnership (sabiratelno druzhestvo – SD)
Limited partnership (komanditno druzhestvo – KD)
Joint-stock company (aktsionerno druzhestvo – AD)
Limited liability company (druzhestvo s ogranichena otgovornost – OOD)
Limited partnership with shares (komanditno druzhestvo s aktsii – KDA)
All types of business association are recognized as legal entities. The founders may participate in one or more companies provided that the law does not prohibit such participation. Founders may be Bulgarian or foreign companies and/or individuals. Irrespective of the nationality of its founders, each type of company is considered to be Bulgarian.
The most usual forms of business association for foreign investors are the limited liability company (OOD) and the joint-stock company (AD).
Rules applicable to all forms of business association Articles of Association
The adoption of the Articles of Association is an initial step in the establishment of a company.
The Articles of Association must contain:
- Trade name, seat and address of the company
- Scope of the company’s activities
- Management and representation of the company
- Identity of the partners/shareholders of the company (except for the AD)
- Type (cash or in-kind) and amount of partners’ contributions (for SD and KD), and/or the amount of company’s capital (for OOD, AD and KDA), and
- Other matters as regulated by the Commercial Act which may differ for each form of company.
In cases when a partner or a shareholder intends to make an in-kind contribution, the Articles of Association must state the name of the contributor, the full description of the in-kind contribution, its monetary value, and the grounds for the contributor’s rights.
In the case of a limited liability company, a joint-stock company or a limited partnership with shares, the in-kind contribution must be valued by three experts appointed by a registration official from Commercial Register with the Registry Agency. The conclusion of the experts must contain a full description of the in-kind contribution, the method of valuation, the valuation and its consistency with the share of the capital or the number, the nominal and issuing value of the shares being subscribed for by the contributor. The monetary value of the in-kind contribution stated in the Articles of Association may not exceed the experts’ valuation.
A newly established company comes into legal existence with its entry in the Commercial Register with the Registry Agency. The standard registration application form must be filed by the appointed management body. The managing directors of the company have an obligation to notify the Commercial Register with the Registry Agency, within seven days, of any change in the circumstances already registered. If the managing director fails to perform their duties, they are subject to an administrative fine.
Prior to registration with the Commercial Register, the founders may reach an agreement on the actions that must be taken in preparation for incorporation. The founders’ actions create rights and obligations for the persons who have undertaken the said actions. The latter are held liable jointly and severally for these obligations. Eventually, with the registration, these obligations are automatically assumed by the newly established company.
Announcement of the annual financial statements
All forms of business associations under the Commercial Act, including sole proprietors, are obliged to present their annual financial statements for the previous financial year to the Commercial Register. The deadline for announcement is different for the different types of associations – by 31 May of the year following the reported year for sole proprietors, by 30 June of the year following the reported year for limited liability companies, and by 31 July of the year following the reported year – for all other forms of business associations.
Termination of business associations
There are several grounds for the termination of a company:
- Expiration of the term of the company or other grounds/circumstances provided for in the Articles of Association
- Resolution by the shareholders/partners of the company adopted with the qualified majority prescribed by the law or the Articles of Association
- Resolution of the respective district court for declaring the company insolvent
- Transformation of the company in certain cases
- Termination by a resolution of the district court in cases provided by the law (e.g. where the company pursues objectives against the law)
- In the case of an AD – when the company’s net asset value drops below the amount of the registered capital and, within one year, the company has not resolved to reduce its registered capital or to transform the company in accordance with the requirements of the law
- Other specific grounds regarding the SD, KD and KDA (e.g. insolvency of a partner).
When one of the above occurs, the company undergoes liquidation proceedings unless an insolvency procedure has already been initiated. The company loses its legal status being deleted from the Commercial Register.
Transformation of business associations
Chapter 16 of the Commercial Act regulates mergers, consolidation of two or more companies, demergers into two or more companies, the spin-off of certain operations into a new company, and transformations whereby the type of the company changes.
The applicable provisions specify and classify the types of business transformations, the procedure for execution of the transformation, and the rights and obligations of the companies and their partners/shareholders.
Prior to adopting a resolution authorizing a transformation, companies must draft a transformation plan or conclude a transformation agreement, depending on whether initially there is one or more participating company. The transformation agreement/plan must be in writing and it must be signed before a notary public by the official representatives of the participating companies. It must specify the terms and conditions of the intended transformation, as well as the obligations of the participating companies with regard to the transformation. The content of the transformation agreement/plan must be in compliance with the mandatory requirements of the Commercial Act.
The transformation agreement/plan must be reviewed by controllers appointed by the management bodies of each of the companies involved in the transformation. Upon a request from the companies involved, an official from the Registry Agency may appoint a joint controller for all companies. The controller must be a registered auditor. The controller must also meet other requirements set in the law, which guarantee the auditor’s independence from the merging companies, e.g. the companies are not allowed to appoint auditors who have audited them during the last two financial years, or who have performed a valuation of an in-kind contribution to the capital of any of the companies. The controller is not allowed to audit any of the merging companies for a period of two years following the date of the merger.
The review of the transformation agreement/plan is not obligatory, if all shareholders of the companies participating in the transformation express their explicit written consent that no audit of the transformation is to be performed. In this case, the written consent must be announced at the
Commercial Register with the Registry Agency.
The management body of a limited liability company, a joint-stock company, or a limited partnership with shares is required to adopt a report on the transformation. The report must contain a detailed economic and legal explanation of the terms and conditions of the transformation, as specified in the transformation agreement/plan.
The adoption of a report on the transformation is not obligatory, if all shareholders of the companies participating in the transformation express their explicit written consent that no adoption is necessary.
In this case, the written consent must be announced at the Commercial Register with the Registry Agency.
The report and the transformation agreement/plan must be announced at the Commercial Register with the Registry Agency simultaneously by each participating company and at least 30 days prior to the date of the General Meeting which will vote on the resolution for transformation. The transformation agreement/plan, as reviewed and approved by the controller, must be approved by the General Meeting of Shareholders of each of the companies involved in the transformation. The resolutions must be adopted by a qualified majority of three-quarters of the capital in the case of an OOD, or a qualified majority of three-quarters of the presented voting shares of the capital in the case of an AD.
The transformation enters into force from the date of its registration into the Commercial Register with the Registry Agency.
The Commercial Act also outlines simplified transformation procedures, provided that certain conditions are met.
When all participating companies are solely owned and the sole owner of their capital is one and the same person, the transformation is performed on the basis of a resolution adopted by the sole owner.
The rules regarding: (i) the appointment of an independent controller, (ii) the reports to be prepared by the management bodies of each participating company, and (iii) the approving resolution by the General
Meeting of Shareholders/ Partners do not apply.
A company is considered insolvent when it is unable to meet its monetary obligations or in the case of over-indebtedness. The company’s management body must file an application with the relevant district court for commencement of insolvency proceedings within 30 days of becoming insolvent or over-indebted (the assets of the company are not sufficient to cover its liabilities). The application may also be filed by any creditor of the company.
If there are grounds to initiate insolvency proceedings, a trustee must be appointed by the court.
Immediately upon appointment, the trustee represents and manages the current affairs of the company, collects its receivables and converts its assets into cash and subsequently distributes the cash to the company’s creditors.
The liquidation procedure, in contrast to insolvency, is voluntary, except for a liquidation by a court decision in cases provided for by law, and is initiated in the case of expiration of the term of the company as set out in its Articles of Association, or by a resolution of the members/shareholders of the company.
The General Meeting of Shareholders (or the Partners in an SD or KD) must appoint a liquidator. The latter is responsible for inviting the company’s creditors to claim their receivables through announcement at the Commercial Register with the Registry Agency. After the satisfaction of the creditors’ claims, the remaining assets are distributed to the partners/shareholders, but not before six months have elapsed from the date of announcement of the notice to the creditors at the Commercial Register. When all liabilities of the company have been settled and the remaining assets distributed, the liquidator applies for deletion of the company from the Commercial Register.