VARIABLE CAPITAL COMPANY: THE NEW STAR OF THE BULGARIAN CORPORATE LAW SCENE
- Introduction and background
The Variable Capital Company (VCC), a new company type, was introduced through the latest legislative changes to the Commercial Act in August 2023. It must be mentioned that the incorporation of such a company will be possible after the completion of the necessary adaptations to the rules of the registry agency, which is expected by mid-2024.
To provide some background, the most popular form of incorporating a company in Bulgaria currently is a limited liability company. This is largely due to its affordability, as its capital can be as low as two leva (approximately 1 euro), and the advantage of limited liability, making it preferable for most startups. However, it lacks the flexibility found in a joint stock company and entails personal involvement in the company matters.
With the introduction of the variable capital company, efforts have been made to combine the favorable aspects of the two most popular company forms: a limited liability company and a joint stock company, while incorporating new unique features specific to the variable capital company, including concepts new to Bulgarian legislation. It is intended to support the long-term growth of start-ups by enabling simplified registration procedures as well as flexible fundraising and company management solutions. In general, what is specific to the regulation of the VCC is its flexibility, as it provides for many options that are left to the discretion of the partners.
While this new company type has been eagerly anticipated by the business community, the legal society in Bulgaria holds mixed feelings towards it. This is due to the fact that, along with the undoubtedly beneficial improvements compared to the existing regulation of limited liability companies and joint stock companies, the specifics of the variable capital company also bring forth numerous unanswered questions, necessitating several years of real practice to formulate viable solutions.
- What is a variable capital company?
2.1. According to the legal definition of Art. 260a of the Commercial Act, a variable capital company may be founded by one or more individuals or legal persons, and it is liable to its creditors up to the expend of its property. (A legal person declared bankrupt may not be a founder). This company type is intended for small businesses. A VCC may only be an enterprise with less than 50 employees, whose annual revenue does not exceed 4 000 000 BGN (approximately 2 million euros) and the value of its assets is less than 4 000 000 BGN (approximately 2 million euros). Should any of these thresholds be exceeded, the variable capital company is required to transform into a different company type or face dissolution.
2.2. Comparison with a limited liability company (LLC) and a joint stock company (JSC).
2.2.1.With regard to the capital:
Unlike a limited liability company and a joint stock company (whose capital is a fixed amount specified in their Articles of Association and registered at the Commercial Register), the capital of a VCC is not fixed but varies in accordance with the company's net assets, and its amount is not subject to recording in the Commercial Register. The capital amount at the closing of each financial year and the changes thereto in comparison to the previous year are established annually by the general meeting of shareholders on the basis of the annual financial statement (the latest is subject to announcement in the commercial register).
This flexible approach simplifies registration as it eliminates the need for opening a special fund-raising account (which is quite problematic when it comes to companies in which partners and managing directors are foreiners) and providing evidence to the commercial register that the capital has been paid in. The only requirements for registration of a VCC in the commercial register are the Articles of Association to be presented, together with the decision of the partners on the election of the managing director or management board and the manner of representation. Moreover, it eliminates the necessity to register further changes to the company's capital, along with the associated procedures and costs.
On the other hand, once registered, the company will need a current account to perform its business activities. Another concern is that the annual financial statements are typically finalized by the end of March, and the general meeting is held by the end of June, meaning that the company's financial picture established by the general meeting captures the capital as of the 31st of December of the previous year, which may raise uncertainty among the company’s creditors.
2.2.2. Regarding contributions in kind:
VCC enjoys simplified procedures for in-kind contributions to the capital, which include the appointment of assessors by the company’s management (instead of by the registry agency, as is the case with limited liability companies and joint stock companies), thus offering more flexibility and speeding up the procedure.
2.2.3.Regarding company shares:
LLC's: minimal nominal value of a share is 1 BGN. Each share grants equal rights and obligations (proportional to the share value). The names of the partners and the shares they own are specified in the articles of association and recorded in the commercial register.
JSC's: minimal nominal value of a share is 1 BGN. A joint-stock company may not issue shares of different nominal value. A share is a security which certifies that its holder participates in the capital with the nominal value specified therein. The company may issue preferential shares (e.g., granting a guaranteed or additional dividend or a share of the company's assets on liquidation, as well as other rights provided for in the articles of association. The articles of association may provide that preference shares may be non-voting, and this must be stated in the share.). Shares with identical rights form a separate class. No limitation of the rights of individual shareholders of the same class is permitted. The register of shareholders is kept and maintained by the company itself and is not public.
Variable Capital Company: minimal nominal value of a share is 0.01 BGN (half a eurocent). The shares may be of different classes. All shares of the same class shall have the same face value, and the face values of the shares in the different classes may be different. The rights conferred by the possession of the share of a VCC arise upon payment of the contribution to the capital and shall be proportional to the face value of the shares, unless agreed otherwise in the Articles of Association. It might be regulated in the Articles of Association that the company may issue shares with special preferences, such as granting more than one vote in the Partners General Meeting, a guaranteed or additional dividend, a right to buy back company shares, etc., as well as non-voting company shares. Moreover, the Articles of Association may contain provisions granting a certain class of partners or individually named partners preferential voting power or veto power. Similarly to the JSC’s, a VCC shall keep a register of partners wherein the names of the partners, the number of shares held, their value, the type of contribution against which they have been acquired, and the class to which they pertain shall be recorded. The information from the register is not public, but each partner (and, on certain conditions, a third-party stakeholder) may request an abstract from it.
2.2.4. As regard the rights and obligations of the partners/shareholders:
LLC's: personal element – the partners have the right, but also obligation to participate in the management of the company and to provide assistance for the implementation of its activities.
“Art. 123. Each partner shall have the right to participate in the management of the company, in the distribution of profits, to be informed of the progress of the company's affairs, to inspect the company's papers, and to a liquidation share.”
“Art. 124. A partner shall be obliged to pay or deposit the share contribution, to participate in the management of the company, to provide assistance for the implementation of its activities, as well as to implement the decisions of the general meeting.”
JSC's: no personal element – the major obligation of the shareholders is to contribute to the company's capital by paying the value of their shares subscribed.
As for the rights, the share entitles to one vote in the general meeting of shareholders, the right to a dividend and to a liquidation share proportionate to the nominal value of the share (Art. 181 (1)). The issuance of shares with special rights is possible, if specified and provided for in the articles of association of the company. In addition, the shareholders have the right to information (Art.224) and the shareholders who have held shares representing at least 5 percent of the company's capital for more than three months have the right to include matters in the agenda of the general meeting (Art. 223a (1)).
VCC: combined mode – similar to LLC's but allows for exceptions, special rights or limitations
According to Art.260k.(2), a partner shall be obliged to pay the contribution in exchange for the share taken, to carry out the decisions of the general meeting and to assist in the carrying out of the company's business, unless otherwise agreed in the articles of association.
Each partner of a VCC shall have the right to participate in the management of the company, the right to vote, the right to dividend, the right to be informed of the progress of the company's affairs, the right to inspect the company's papers and the right to a liquidation share. Other rights may be agreed in the articles of association and limitations on the exercise of rights may be laid down.
Such special rights or limitations may be:
- the right of one or more partners to buy, on preferential terms, shares offered by another partner or the company itself;
- the right of one or more partners to sell their shares on the same terms as those wherein another partner sells his shares;
- other special rights;
- lock in period – restriction of the sale of the shares for a certain period;
- if it is provided for in the articles of association, the General Meeting may take a decision to compel a partner to transfer their shares, and if the said partner fails to transfer them within one month from the notification about that decision, the company may buy the respective shares under the terms specified in the memorandum of association, unless the latest provides otherwise;
- It is also possible (if the articles of association contains such provisions and the shares have been acquired under this condition) that in the event of a change of control over a partner – legal entity, this partner may be banned from exercising their voting rights or be dismissed by a decision of the General Meeting.
Any such restrictions or special rights can be introduced or revoked by decision of the General Meeting adopted with the majority of two thirds of the votes.
2.2.5. With regard to the transfer of shares:
LLC: The transfer of the company's share from one partner to another is free and to third parties, subject to the requirements for the admission of a new partner and if there are no unpaid wages, benefits, or compulsory social security contributions due to employees, including employees whose employment relationships were terminated up to three years before the transfer of the company's share.
The transfer of the company share is carried out by a contract, concluded with notarized certification of signatures and contents, executed simultaneously, and are entered in the Commercial Register.
JSC's: shares are freely transferable, the share itself is the vehicle for transfer; the transfer is subject to recording in the register of shareholders kept by the company (or by the Central Depository – in case of a company whose shares are listed on the stock-exchange).
VCC: the shares of a VCC are freely transferable and, if agreed upon in the Articles of Association, may be transferred in a simple written form of the agreement without the need for notarization.
The procedure in cases of inheritance of shares is also simplified compared to LLC. The heirs of a partner shall become partners by making a simple declaration to the company within 3 months of the opening of the succession and expressing their will to become partners, unless the Articles of Association states otherwise. (In contrast, in an LLC, any new partner, including in the case of inheritance, is subject to acceptance by the other partners by a decision of the general meeting.)
Any transfer of shares, pledge on them, or acquisition through inheritance must be recorded in the register of partners maintained and kept by the management body of the company. The company is obliged to record the respective change within 7 days from the submission of a request and the supporting documents.
In addition, a VCC may acquire its own company shares, the total nominal value of which may not exceed 50% of the total nominal value of all the shares issued (for comparison, in JSC, such acquisition is only possible under limited conditions, and the threshold is 10%).
2.3. Other unique features of VCC
2.3.1. Possibility to offer share options to employees.
The General Meeting may grant to persons employed by the company, regardless of the type of legal relationship therewith, a right to acquire shares under the terms and procedures set by the decision of the General Meeting of Partners or, by delegation of powers, by the managing body. Such schemes are only possible through the transfer of shares owned by the company, and the total number of shares acquired by the employees in exercising their rights to acquire may not be more than 15 percent of all shares. The employees’ right to acquire shares is non-transferable, but in cases of inheritance, the heirs may exercise the rights of their successor, provided that said right has become exercisable at the time of his death.
2.3.2. The option to attract capital in the form of loans convertible into company shares
Upon decision of the General Meeting, a VCC may grant rights to acquire company shares and may execute agreements on loans convertible into company shares under the terms and procedures agreed upon in the Articles of Association.
2.3.3. Flexible rules with respect to the company management:
- The management body may consist of a sole managing director (like in an LLC) or a board of directors (like in a JSC), whose number is determined by the partners.
- The possibility of communicating with the shareholders regarding the general meeting by electronic means and the options of taking decisions in abcencia and participating in the general meeting or the board meetings remotely are also expressly provided. Some of these options (decision-making in absentia and remote participation, for instance) existed previously, though not applicable to all company types. Including them in the regulation of the variable capital company aligns it with contemporary practices. However, it must be noted that the said provisions are specific to the variable-capital company and do not apply automatically to the other company types.
3. Conclusion
Considering all these advantages, it is expected that the variable-capital company will become the preferred legal form of company incorporation and will replace, in terms of popularity, the LLC.
Author: Lyubka Vasileva - Karapanova©
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