Company with variable capital – Part I

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With the promulgated amendments to the Commercial Act (SG 66/01.08.2023) a new type of commercial company has appeared in the Bulgarian legal order – a company with variable capital or abbreviated – a CVC. It reveals some of the features of the capital commercial companies, and some of the provisions governing it occupy an intermediate position between the existing regulation of the limited liability company and the joint stock company, yet it is distinguished by some of its characteristic features, which give grounds to consider it also as a partnership or a company where the personal element prevails. This article aims to briefly present these peculiarities and the general regulation of a CVC as set out in Chapter Fifteen “a” of the Commercial Act.

General provisions

A CVC, similarly to an limited liability company and a joint stock company, may be established by one person. However, a limitation has been introduced with regard to the number of employees – not more than 50 persons and the amount of annual turnover and/or the value of assets – up to four million leva.

The establishment of the company requires the conclusion of articles of association in written form and, in the case of a sole proprietorship, a memorandum of association. Its content is influenced by the requirements for LLCs and those for JSCs, but it also reveals peculiarities of the new company – for example, unlike LLCs and JSCs, the provision of Article 260в of the Commercial Companies Code does not require the indication of the amount of the company’s capital, nor the indication of the persons making in-kind contributions (compare with Article 165 (1), p. 5 of the Commercial Act), although, as we shall see below, this follows from Article 72(1)(b) of the Commercial Act. 1. These peculiarities are also reflected in the requirements for the registration of the company in the commercial register, where no proof of capital deposited in a bank or other financial institution is required. In this regard, it is worth noting that at the moment the necessary changes have not been made to Ordinance No. 1 of 14 February 2007 on keeping, storing and access to the Commercial Register and to the Register of Non-Profit Legal Entities, which would regulate in detail the procedure for registration and announcement of circumstances on the account of the CVC, and there is no approved form, which in practice makes the establishment of the company impossible at the moment. In the Transitional and Final Provisions to the Act, § 105 (1), p. 2, letter “b”, states that the Ordinance will be brought into conformity with the law within 6 months of its entry into force, and according to § 107. the Registry Agency will provide technical enablement for the implementation of this law by 30 June 2024.

However, Article 260г of the Commercial Act states that the company’s articles of association must be submitted for registration and a manager/board of directors must be elected, and the names of the representatives, as well as the manner of representation, must be entered in the register, together with the company, registered office, business field and term of the articles, if any.

In contrast to the requirement to provide a license or permit, which is stipulated in the registration of LLCs – Art. 119, para. 3 of the Commercial Act and of the JSC – art. 174, par. 3 CA, in the case of a company with variable capital it is not foreseen to submit such licenses or permits.

Capital and company shares

As the name of the company implies, its capital is variable and is not subject to registration in the commercial register; its amount is established by the general assembly of the company at the close of the financial year. The capital is divided into shares, which may be of different classes, similar to stocks, and shares of the same class have the same nominal value, which may not be less than one stotinka (1/100 lev), unlike in the case of limited liability companies, where an individual share may not have a nominal value of less than one lev – Art. 117, para. 1 LC.

Against the assumed shares, the partners make contributions, the term for which is determined in the articles of association or by a resolution of the general assembly – Art. 260д, para. 4 CA, which in practice means that the company may be incorporated without any part of its capital having been contributed, insofar as there is no explicit provision similar to Art. 119, para. 1, par. 4 and 5 CA and Art. 174, par. 1, p. 3 CA.

The legislator’s solution regarding in-kind contributions made to the company is also interesting. Their valuation is not carried out by three independent experts appointed by the registration officer of the Registry Agency, but by three experts appointed by the board of directors (BoD), respectively by the company’s manager. We have no choice but to assume that the fourth paragraph of Article 260д CA is a special law in relation to Article 72(2) CA, leaving open the questions of the application of the remaining four paragraphs of Article 72 CA – whether Article 72(2) CA still applies to the requirement that the articles of association must contain the name of the contributor, a full description of the contribution in kind, its monetary valuation and the basis for the contributor’s rights, whether a contributor who disagrees with the valuation may participate in the company by making a monetary contribution or may refuse to participate in the company at all, and whether the contribution may have as its object future labour or services. At first glance, it would seem that the answer to these questions should be affirmative, insofar as they are addressed in the general provisions of Title Three of the CA – commercial companies.

And while art. 72 CA will find application in part by way of interpretation, the application of art. 73a CA, which prohibits the remission (except in case of capital reduction) and compensation of the contribution obligation of members of LLCs and JSCs, will be difficult to argue, which in practice would mean that a company with variable capital could end up being a company with no capital or with a capital of one stotinka.

Pursuant to Article 260e, para. 1 CA, the rights which the company share provides shall be proportional to the nominal value of the share, unless otherwise agreed in the articles of association. The second sentence of the same paragraph states that the rights associated with the company share shall arise upon payment of the contribution, which, as we have seen above, shall be made within a period determined by the articles of association or by a resolution of the general assembly, i.e. the rights of the shareholders may not arise for the first few months and, if the contribution is forgiven, should not arise at all. It is another question who will decide on this remission if the contribution has not been made and the rights have not arisen. This, in turn, raises the question of how the company will be liable to its creditors, since under Article 260a(1) CA, the company is liable to its creditors with its property. However, according to Art. 260л, para. 1 CA, if a partner fails to fulfil his obligation to make a contribution within a further period of time granted to him by the General Assembly, he shall be deemed to be expelled. Here it is worth noting that among the provisions of the CVC there is not a single word about the protection of creditors in the event of the reduction of the company’s capital, as this is provided for in Article 152 CA for limited liability companies and in Article 202 CA for joint stock companies.

The company shares may be divided into separate classes, and no limitation of the rights of the shares of one class is allowed – Art. 260e,(2) CA in fine. The shares may be privileged, providing more than one vote in the general assembly or being non-voting, conferring the right to a guaranteed or additional dividend or liquidation share, the right of redemption, etc. The articles of association may provide that a certain class of members or named members shall have privileges in the exercise of the right to vote and/or the right of veto in the adoption of resolutions by the general assembly – Article 260e (5) CA.

The management body or a person appointed by it shall keep a register of members similar to the register of shareholders, in which shall be recorded the name and address, personal identification number/number of shares or UIC of all members, the date of acquisition of the shares, the number of shares, the value and type of contributions against which the shares were acquired, the class of shares.

The shares are inheritable, transferable and pledgeable. They are freely transferable, i.e. no resolution is required for the admission of a new partner, as is required in the case of an LLC. However, the articles of association may provide for special rights and obligations of the partners, such as the right of one or more of the partners to preferential purchase of shares offered for sale by a partner or issued by the company, the right of one or more of the partners to sell all or part of the shares held by him on the same terms as those on which another partner transfers his shares, and other rights – Article 260и (2) of the Commercial Act.

The contract for the transfer of company shares shall be concluded in writing with notarial certification of the signatures (but not of the contents, unlike Art. 129 CA on the transfer of shares in LLCs), unless the company’s articles of association provide for a written form. The company may acquire its own shares under the terms and conditions provided for in the articles of association. The total nominal value of the own shares may not exceed 50 per cent of the total value of the shares – Article 260з, paragraph 5 CA.

Interesting is the solution of art. 260и, par. 1 of the Commercial Act, where it is said that the articles of association may provide for a prohibition of disposal of company shares for a certain period of time. And even more interesting is the third paragraph of the same article, which says: “The articles of association may provide for conditions under which the general assembly may, by resolution, require a member to transfer his shares, and may also provide for an obligation that, until the transfer is effected, members may not exercise their voting rights in the general assembly if the shares are subscribed for on that condition. In the event that a partner fails to transfer his shares within one month of being notified, his shares may be redeemed by the company on the terms and conditions set out in the articles of association, unless otherwise provided in the articles of association.”

In Article 260и, par. 7 of the Commercial Act, the already widely used convertible loan, along with the rights to acquire company shares issued by a resolution of the General Assembly, also finds its legal expression. Acquisition rights may also be granted to persons employed by the company. However, these acquisition rights granted to an employee are non-transferable – Article 260й (5) of the Commercial Act, unlike acquisition rights granted to third parties. The total number of shares acquired upon exercise of the right to acquire shares by persons employed by the company may not be more than 15 per cent of the total shares.

Continuation of the topic in Part II

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