New regulations regarding key resolutions at LTD companies in Bulgaria apply as of this year. The statutory amendments introduce drastically onerous formal requirements for some of the most common deals and corporate amendments with Bulgarian Ltd companies.

The issue:

1. The new regulation of Art. 137, para. 4 of the Commercial Act (CA) brings in a mandatory rule: Minutes with a notarization of the signatures and of the content, performed simultaneously, shall be composed for the resolutions for acceptance and exclusion of shareholders, transfers of company shares to a new shareholder; decrease and increase of registered capital; manager's election, as well as the resolutions for acquisition and alienations of real estate and property rights over them.

The new statutory regulations affect equally LTD shareholders and sole owners of the capital (OOD/EOOD). Up until now, the abovementioned resolutions had to be recorded in a standard written protocol - i.e. without any requirements for notarization.

2. Additionally, the same formal requirement (simultaneous certification of signatures and content) has been made mandatory for transfer of company shares contracts, either to current shareholders, or to third parties.

3. In addition, the registering the respective amendments requires a mandatory check from the Trade register authorities as to whether "all documents that require notarization of the signature, or of the signature and the content, are duly entered into the Notary's Information system data base under Art. 28B of The Notaries and the Notary Activity Act, and whether the presented documents comply with the corresponding data, entered for them within the Information system data base."

4. The new para.5 to Art. 137 stipulates that all resolutions that breach the described procedure, are void.

The effect on foreign shareholders who own Bulgarian Ltd companies:

Foreign shareholders usually prefer to notarize documents in their country of residence, and have them translated and legalized under the Bulgarian law. The new statutory framework makes this praxis impossible for LTD companies, since the mentioned type of notarization, and the requirement for the Information system data entry (see p. 3 above) makes notarization outside Bulgaria impossible.

All this makes the procedures more cumbersome, burdening them with disproportionally excessive time and money expenses. There's also the fact that now the performance of some of the most common corporate amendments (manager election, transfer of shares, etc.) depends on a complementary action which is completely outside the shareholders' control: whether or not the respective Bulgarian Notary Public has entered the corresponding data within their private Information system.

Simultaneously, the legislator adopts that, if a registration has been held in violation of the described procedure, and despite all "bars and locks", then the adopted amendments, duly registered within the Trade register, are void. This means, ATTENTION, the shareholder is no shareholder; the manager is no manager; the property isn't acquired - and that’s a defect that cannot be overcome. This affects not only internal corporate affairs and corporate rights, but all business affairs where one party is a Bulgarian LTD company.

The consequences

In terms of time and money expenses, the new statutory amendments place a serious barrier before some of the most common transactions with company shares and property, on the one hand.

On the other hand, however, remains the issue of what happens with every deal where one of the parties is an LTD company, whose manager has been elected under the new regime and "in violation of Art.137, para.4" of the CL, and when exactly such violation is present? Is the company itself, or any third party, entitled to challenge deals due to lack of representative authority of the manager? Is every third party, including a private entity or a consumer, supposed to research the company's corporate documentation, and make their own judgment as to whether or not the registered manager represents the company, or their election is void under the law?

The legislators from the 44-th Parliament leave these questions unanswered. The answers will have to be found in court, and the case-law is bound to be rich and controversial. The first blatant examples of how problematic the rules will be are already emerging.

How are registration and initial manager election handled?

Although the legislator has left this question open, the case law accepts that the restrictions regarding the manager's election under Art.137, para.4, actually apply to a subsequent change of an elected manager, and not their initial election at the company's registration. This, at least is

the purpose of the statutory amendments – as best as one can be derived from the commented texts.

An alleged motive for the new status quo is "company theft prevention", although the amendments seem more likely to be a rather inconsiderate response to a media scandal in 2016. Even if protection from eventual document fraud was indeed the motive, it's hard not to notice that there are five types of trade companies in Bulgaria, but the "protective" restrictions apply to LTDs only - all other types will keep the plain written protocol for the mentioned minutes.

Not to mention that everything that has been described above regarding the onerous form is practically optional. Since

The law provides Ltd company owners the right to avoid the new regulations

All it takes is the company's Articles of association (AoA) to explicitly state that said minutes of the resolutions will be drafted in (plain) written form. Naturally, almost none of the currently existing LTD company in Bulgaria has this provision included in their AoA. Amendments to the company's AoA can be made at any time. Besides, the minutes of the resolution for adoption/amendment of a company's AoA do not require any notarization. So when it comes to document fraud prevention, the “protective” notarization forms practically close a door and open a window.

It’s worth noting that according to the new regulations a proxy can represent a shareholder or the sole owner of the capital, and can notarize their own signature on behalf of the represented person in order to adopt any single one of the resolutions under Art. 137, para. 4 of the CL – without needing a notarized Power of Attorney for their authorization (Art. 137, para. 6 of CL).

In context of everything discussed here, if the shareholders want to take advantage of the possibility to neutralize the obstacles presented by the new burdening regulations by adopting the necessary changes in the company’s AoA, it’s highly recommended to do so in a timely manner. The issue with the new regulation's impact on LTD counteragents remains permanent and problematic.

Conclusion:

Three newly rewritten regulations expectedly will raise serious obstacles for the business world, complicating the performance of a series of common trade deals and procedures. The intended goal of “protection” against fraud and theft is somewhat doubtful, considering the abovementioned workaround. Meanwhile, conscientious persons and traders can easily become scapegoats of the new regulation that, on top of everything else, weakens the key principle of trust in the Trade Register.

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