The Bulgarian Variable Capital Company

Corporate Clients, Corporate and M&A, Fund-raising

The Bulgarian Parliament has adopted long-anticipated changes to the Commerce Act (“CA”), introducing a new type of company – the Bulgarian variable capital company (“VCC”) (this name and abbreviation are also in use for what we understand is a structure with a different purpose in Singapore, intended to be used for funds; this is different to the Bulgarian VCC). 

The new type of business vehicle aims to provide startup technology companies, in particular, with enhanced flexibility by eliminating barriers such as pre-incorporation bank account opening and capital deposit requirements. Moreover, the VCC should reduce the need for businesses to make filings to reflect changes to the shareholding structure in the Company Registry, and other formalities.

Limitations

As it goes against ingrained Bulgarian legal constructs, and is therefore the fruit of legislative compromise, the VCC is limited to businesses while they stay small.

Specifically, a VCC is intended not to:

• employ more than 49 staff
• have sales over BGN 4 M (~EUR 2 M) or
• own assets over BGN 4 M (~EUR 2 M).  

The VCC must convert into a standard capital company (eg, an AD, OOD, KD, etc) if at the time of any given annual general meeting, the shareholders become aware that any of these thresholds has been crossed. 

The VCC is for now only on paper: the national Company Registry has been tasked to allow for registrations to start from 2024, but despite the passing of the legislation, one cannot for now have such a VCC registered. However, it is expected to be introduced on time and to become frequently used both by tech startups and others.

Ownership Structure of the Bulgarian Variable Capital Company

The first significant feature of the VCC by comparison to what has previously been available is that a VCC’s shares may be transferable (absent a bar in the articles of association) and their transfer does not need notarisation (subject to the VCC’s Articles of Association (Articles) providing so). This enables investors and founders to buy and sell VCC shares easily. As with most other types of corporate vehicles in Bulgaria, shareholders in a VCC enjoy limited liability for the company’s debts, maintaining the “corporate veil”.

The fact that the transfer of shares in a VCC may be by simple written agreement or share transfer form greatly reduces the cost and friction otherwise involved in a transfer of shares in a Bulgarian private limited company (OOD).

Capital and Shares in a Bulgarian Variable Capital Company

In contrast to a Bulgarian OOD (the equivalent to an LLC/Ltd) or a Bulgarian AD (equivalent to a Delaware C-corp or an English PLC), the VCC does not have to register its capital with a central register nor run a capital-deposit account where subscribing incorporators deposit capital prior to being incorporated. Instead, the annual general meeting of the shareholders of the VCC needs to adopt and file a resolution which contains a finding on the amount of capital at the close of the financial year prior.

The VCC’s equity is in the form of shares which may be in different classes. Shares in the same class each have the same par value. By contrast, shares in an OOD/AD cannot have a par value of less than BGN 1, this goes down to no less than BGN 0.01 per share (being ~0.5 US cents/euro cents) in the case of a VCC.

As with shareholders of other Bulgarian company types, the shareholders of a VCC can also pay in capital in the form of in-kind contributions. Again, as with the other business types, contributions in kind are subject to valuation by three independent experts, however in the VCC case, they do not have to be appointed by the Company Registry but may be appointed by the company’s managing body – this is contrast to the position with an OOD or an AD.

A transfer of shares violating the provisions of the Articles is unenforceable against the VCC and third parties, unless the general meeting of shareholders decides otherwise. That is, the general meeting may (by simple majority, it appears) ratify a transfer of shares that is in breach of the Articles.

VCCs must (similar to ADs) keep a shareholder register. The managing body makes entries in the register.

The shareholder register is accessible to all shareholders of the VCC. Certain third parties with recognised interests may also request the VCC’s managing body to provide an extract from the shareholders’ register relating to the shares held by a particular shareholder.

VCCs are built for use with typical venture capital term sheets 

The VCC however keeps on giving, as the new statutory provisions expressly allow for certain widely used legal devices typically found in seed, venture or scale-up term sheets, including:

• Lock-in periods (for more information on Founder Lock-In clauses in Bulgaria, please see our article)
• Drag-along
• Tag along
• Right of first refusal (ROFR)
• Convertible loans
• ESOPs
• Veto rights.

ESOP Regulations in a Bulgarian Variable Capital Company

Taking ESOPs as an example, one of the VCC innovations provides for employee share/stock option schemes. The general meeting of shareholders (or by delegation, the board of directors) may establish an incentive scheme in the form of an Employee Stock Ownership Plan (“ESOP”) for employees, contractors and other staff. By using the ESOP provisions, beneficiaries of ESOPs may not acquire more than 15 per cent of the shares of the VCC.

The right to acquire shares through it is non-transferable. The heirs of the person in whose favour the right was created may exercise it within six months of the person’s death, if the conditions to exercise the right had occurred by the date of death. 

Corporate Governance of the Bulgarian Variable Capital Company

The governing bodies of the VCC are:

1. The general meeting of its shareholders
2. A board of directors or a single director.

The general meeting of shareholders elects the members of the board of directors. In contrast to the AD where the board of directors ought to have at least 3 board members (AD with a single-tier management), the VCC has the flexibility to choose a smaller number of board members, as determined in its Articles from time to time. 

The board elects a chair, who is in charge of convening and organising board meetings. The new statutory provisions expressly allow for virtual meetings.

The board of directors may delegate the management and representation of the company to one or several executive members, who are elected from among its members, and determines their remuneration.

Implementing the Bulgarian Variable Capital Company

The VCC is on the statute book, but not quite yet available. The Company Registry has been set a deadline of 30 June 2024 to start accepting applications. 

The introduction of the VCC will ease things significantly for startups in Bulgaria. It offers a flexible and dynamic framework, enabling startups to attract a broader range of funding sources. 

At NBLO, we are able to provide our expertise to founders as they navigate various legal hurdles on the path to success. In addition to offering startups the opportunity to use our services free of charge through our Startup Pro Bono Clinic, we regularly seek to support founders as they embark on their journeys in navigating Bulgaria’s dynamic business landscape.

If you are interested in learning more about our role in helping clients navigate the boundless opportunities that lie ahead for startups in Bulgaria, please do not hesitate to contact us.

For more information, please contact us at [email protected].