Corporate Governance in Bulgaria

1. Corporate Structure Of The Companies

1.1. General Legal Framework

There are several types of legal entities through which investors can do business in Bulgaria such as a limited liability company (LLC), joint-stock company (JSC), general and limited partnerships, European company (SE), and others. The most commonly used type by foreign investors are LLCs and JSCs, hence they are the focus of the information below.

The corporate structure of companies in Bulgaria does not depend on the size of the company, i.e., micro, small, medium size, and large companies, but it depends rather on their type. 

1.1.1. LLCs Corporate Bodies

The mandatory corporate bodies of an LLC are the General Meeting of Shareholders, and the Executive(s). Where all shares are held by a single person (a single-member LLC) the sole owner assumes the competence and powers of the General Meeting of Shareholders. Appointment of a Controller(s) in an LLC is also allowed by the law but is only optional.

The General Meeting of Shareholders is comprised of all shareholders. The Executive (if not a shareholder) and employee representatives where the company has more than 50 employees are allowed to participate in a general meeting of the shareholders in a consultative role.

The Executive organizes and directs the activities of the company in accordance with the law and the decisions of the General Meeting of Shareholders. Relations between the company and the Executive are regulated by a management agreement concluded in writing.

An LLC may have one or more Executives and is allowed to determine the manner of representation (basically jointly or severally) where Executives are more than one or a general commercial proxy is appointed for the purposes of management.

As indicated above, the articles of association may provide for a Controller to be appointed to supervise the observance of the articles of association and the preservation of the company’s assets. In such a case, the Controller is appointed by and reports to the General Meeting of Shareholders. A Controller should be a natural person other than the Executives, their deputies and company employees, or other groups of related persons. Persons who have been deprived of the right to hold a position of financial accountability also cannot be elected as Controllers.

1.1.2. JSCs Corporate Bodies

As to JSCs, the corporate bodies of this type of company are comprised of the General Meeting of Shareholders and, depending on the type of management system, a Board of Directors where the company is set up with a one-tier management system or an Executive Board and a Supervisory Board in JSCs with a two-tier management system.

In a single-member JSC, the sole owner of the capital assumes the competencies and powers of the General Meeting of Shareholders.

In JSCs, the General Meeting of Shareholders is comprised of all voting shareholders. Employee representatives in a JSC with more than 50 employees are allowed to participate in the General Meeting of Shareholders in a consultative role while shareholders holding non-voting preference shares, as well as the members of the boards who are not shareholders may participate in the General Meeting of Shareholders without having the right to vote.

Board members in both one and two-tier management systems may assume a mandate of up to five years and those of the first boards may be elected for a term of up to three years. A board member may be any natural person of full legal capacity to act and, where the articles of association so provide, a legal entity whose functions as a board member are carried out by a person designated thereto. Relations between the company and management boards are regulated by a management agreement in writing.

In JSCs with a one-tier management system, the Board of Directors is comprised of at least three but not more than nine members. One or more of the board members can be appointed to act as Executive Directors, the number of which should in any case be lower than the rest of the board members.

The Executive Board of a JSC with a two-tier management system is comprised of at least three but not more than nine members appointed by the Supervisory Board, which in turn may have three to seven members appointed by the General Meeting of Shareholders.

Both LLCs and JSCs may appoint one or more general commercial proxies to perform management functions in addition to executives/board members.

1.1.3. Shareholding in LLCs and JSCs

There is no statutory limitation as to the number of shareholders of a company. Company shares can be held by one or more local or foreign legal entities and/or natural persons in full legal capacity to act.

If the shareholder is a legal entity, its shareholder’s rights are exercised by its statutory representative or by a person designated thereby.

In general, shareholders in LLCs and JSCs are not liable for the obligations of the company and their liability may be enforced in a limited number of cases set out in the law, e.g., the joint liability of founding shareholders for obligations assumed on behalf of the company prior to its registration.

Further, the liability of a shareholder in an LLC towards the company can be enforced in case of a breach of its obligation to make contributions and, where applicable, additional contributions as per the shares owned, to assist the company in its business activities, to comply with the decisions of the general meeting and not to act against the interests of the company.

Lastly, in certain specific circumstances defined by the law, majority shareholders in LLCs and JSCs may be liable for taxes and social security contributions due by the company in question.

1.1.4. Criteria for Differing Small and Medium vs. Large Companies

The criteria to determine the type of a legal entity from a size perspective depend on the purpose, i.e., implementation of state aid policy for the setting up and development of small and medium size companies, or accountancy and tax purposes.

1.1.4.1. State Aid Policy Criteria

With respect to the implementation of state aid policy for setting up and developing small- and medium-sized companies, the division of legal entities is based on the total annual turnover, balance value of assets, and the number of employees, as follows:

• medium size companies – with a total annual turnover of not more than BGN 97.5 million (approximately EUR 49.85 million), and/or balance value of assets of not more than BGN 84 million (approximately EUR 42.94 million), and an annual average number of employees of fewer than 250;
• small size companies – with a total annual turnover of not more than BGN 19.5 million (approximately EUR 9.97 million) and/or balance value of assets of not more than BGN 19.5 million (approximately EUR 9.97 million), and an annual average number of employees of fewer than 50;
• and micro size companies – with a total annual turnover of not more than BGN 3.9 million (approximately EUR 2 million) and/or balance value of assets of not more than BGN 3.9 million (approximately EUR 2 million), and an annual average number of employees of fewer than 10.

1.1.4.2. Accountancy and Tax Criteria

For accountancy and tax purposes, legal entities are divided on the basis of their net sales revenues, balance value of assets, and average number of employees for the reference period, provided that at least two of the criteria set out for each of the entities are met as of December 31 of the respective year, namely:

• large entities – balance value of assets is more than BGN 38 million (approximately EUR 19.42 million), net profit from sales is more than BGN 76 million (approximately EUR 38.85 million), and the average number of employees for the reference period exceeds 250;
• medium entities – balance value of assets is less than BGN 38 million (approximately EUR 19.42 million ), net profit from sales is less than BGN 76 million (approximately EUR 38.85 million), and the average number of employees for the reference period is lower than 250;
• small entities – balance value of assets is less than BGN 8 million (approximately EUR 4.09 million), net profit from sales is less than BGN 16 million (approximately EUR 8.18 million), and the average number of employees for the reference period is lower than 50;
• micro entities – balance value of assets is less than BGN 700,000 (approximately EUR 358,000), net profit from sales is less than BGN 1.4 million (approximately EUR 716,000), and the average number of employees for the reference period is lower than 10.

1.2. The Function of the Supervisory Board

1.2.1. Functions

As indicated above, only JSCs with a two-tier management system have a Supervisory Board. Its function is to represent the company in its relations with the Executive Board only and does not take part in the management of the company.

The Supervisory Board reviews the activity reports of the Executive Board and may request from the latter, at any time, to submit information or report on any issue that concerns the company. Also, the Supervisory Board may carry out checks/studies in the course of performing its duties, and, in doing so, its members have access to all of the necessary information and documents, and they may require support from experts.

1.2.2. Board Members

Specific requirements apply to all board members including to members of the Supervisory Board so as to ensure performance in the best interests of the company.

To be elected as a board member a person needs to have not been a member of a management or supervisory body of a company dissolved on grounds of bankruptcy in the last two years preceding the date of the judgment on the declaration of bankruptcy if unsatisfied creditors have remained; have not been an executive, member of the executive or supervisory board of a company that violated specific obligations related to creation and storage of amounts of certain reserves or does not meet other requirements provided for in the articles of association.

Board members have equal rights and obligations, regardless of any internal division of functions among them and the delegation of management and representation rights to any of them. They must perform their functions with due care and in the interest of the company and of all shareholders.

A person nominated to be a member of a board must, prior to their appointment, notify the General Meeting of Shareholders, or the Supervisory Board, as the case may be, of their participation in any other company as a general partner, of holding over 25% of the capital in any other company, as well as of their participation in the management of other companies or cooperatives as a general commercial proxy, executive director or a board member. An active board member must notify the company of the occurrence of any such circumstance without delay.

Board members are not allowed to disclose any information they have become aware of in that capacity, if that could affect the activity and development of the company, including after they no longer occupy this position. However, this obligation does not apply to information that, pursuant to a law, is accessible to third parties or has already been disclosed by the company.

In addition, members of the boards are required to provide a management guarantee in the amount set by the General Meeting of Shareholders but not less than their gross remuneration for three months. Also, members of the boards are jointly liable for damages caused by them to the company.

If a legal entity is elected as a board member, some of the obligations above, i.e., confidentiality obligation, a duty of care, and notification obligations apply also to the natural persons who represent it in this capacity. Also, as a board member, the legal entity is jointly and severally liable with the rest of the board members for obligations arising from the actions of its representative.

1.3. The Function of the Executive Board

1.3.1. Executive Body in LLCs

An LLC has no Executive Board as a corporate structure, the executive functions are assigned to the Executive(s). The Executive organizes and directs the company’s business activity and represents the company before third parties in compliance with the law and the decisions of the General Meeting of Shareholders.

An LLC Executive can be a natural person who has not been declared insolvent, has not been an executive, member of a managing or controlling body of a company declared insolvent within the last two years preceding the date of the court order declaring insolvency if any creditors have remained with unsatisfied claims. Further restrictions refer to persons who have been executives or members of a managing or supervisory board of a company breaching the obligations related to the creation and storage of certain amounts of reserves. No legal entity can be an Executive in an LLC (i.e., only a natural person can be appointed). There are no limitations in terms of citizenship or requirements for the Executive to be residing on the territory of Bulgaria.

Where more than one Executive is assigned in an LLC, they are all jointly liable to the company for damages caused to it by any of them.

1.3.2. Executive Board in JSCs

In a JSC, the management and representation of the company are assigned to the Executive Board or the Board of Directors, depending on the type of management system. Members of both boards must comply with the requirements and perform their duties as set out in Section 1.2.

Members of the Board of Directors and of the Executive Board represent the company collectively unless otherwise provided in the articles of association. The Board of Directors, respectively the Executive Board, subject to approval by the Supervisory Board, may authorize one or more of its members to represent the company. Limitations of the representative powers of the Board of Directors and the Executive Board and of the persons authorized by them have no effect in respect of third parties.

It should also be noted that a member of the Executive Board cannot be simultaneously elected as a member of the Supervisory Board.

1.4. Conflicts of Interest and Related Party Transactions

1.4.1. Rules for Preventing Conflicts of Interest

Certain statutory restrictions apply to the voting rights of shareholders whereby a shareholder in a JSC, either in person or by proxy, is not allowed to vote on actions brought by the company against him/her or on steps to enforce their liability to the company. Similarly, a shareholder in an LLC is not allowed to participate in the voting process on their expulsion.

LLC Executives are not allowed, without prior approval by the company, to engage in commercial transactions in their own or in a third party’s name; participate in general and limited partnerships and in limited liability companies, or hold positions in management bodies of other companies with similar (competing) activity. 

Similar rules apply also to members of the Board of Directors and the Executive Board of a JSC who, unless otherwise prescribed by the articles of association or explicitly approved by the electing body, are not allowed, on their own behalf or on behalf of another, to engage in commercial transactions, to participate in other companies as general partners, or to be appointed as general commercial proxies, executives or board members of other competing companies. If a legal entity is elected as a board member, this obligation applies also to the natural person who represents it in this capacity.

Further, statutory representatives of an LLC/JSC are prohibited from engaging in transactions with themselves without the prior approval of the company. However, this restriction does not apply to transactions between legal entities in which the same natural person acts as the statutory representative of both parties. Also, this rule does not apply to agreements between the sole owner and the company, when represented by the sole owner.

1.4.2. Regulation of Related Party Transactions

A decision of the General Meeting of Shareholders of a JSC is required for the assumption of obligations or furnishing security to related parties, the amount of which exceeds half of the company’s value of assets as per the most recent audited annual financial statement. Where the articles of association allow such a decision to be adopted by the Board of Directors or Executive Board, it must be unanimous and, in JSCs with a two-tier management system, pre-approved by the Supervisory Board. 

Board members are required to notify the Board of Directors/Executive Board if they or parties related to them engage in transactions with the company if the transaction falls outside of the scope of its activity or significantly deviates from the market conditions. In such a case, the transaction should be pre-approved by the respective board.

Transactions between related parties are not forbidden from a tax perspective, however, they should take place under market conditions in line with the arm’s length principle.

Publicly traded/listed companies (Public Companies) apply additional measures when it comes to various related party transactions, including prior approvals by the General Meeting of the Shareholder.

1.5. Legal Framework for Large Companies

There is no difference in the legal framework for large companies compared to small and medium size companies.

Specific legal regulations apply to Public Companies. In addition, there are special rules for specific categories of companies, among others, banks, insurance companies, companies operating pension funds, special purpose vehicles, and others. Overall, the information in this Guide does not cover the special rules for such specific categories of companies.

Public Companies are JSCs whose shares are registered with the Bulgarian Financial Supervision Commission register for trading on a regulated market or which have more than 10,000 shareholders on the last day of two consecutive years. The mandatory corporate bodies of a Public Company are those of a standard JSC (see Section 1.1.), however, stricter standards and requirements apply to their members (e.g., independence of a number of the members, no conviction for relevant criminal activities, etc.).

It is worth mentioning that there are certain statutorily defined positions in Public Companies, however, they hardly might be treated as “corporate bodies,” such as an investor relations director or bond holders’ trustee (in the case of the issuance of bonds).

2. Corporate Governance Framework

2.1. Transparency and Public Disclosures

2.1.1. Standard LLCs and JSCs

The names of shareholders in LLCs, sole shareholders in JSCs, Executive(s), and members of the boards are publicly disclosed and registered with the Bulgarian Commercial Register and Register of Non-Profit Legal Entities (Commercial Register).

Limitations on the representative powers of the Executives of LLC (e.g., in the case of more than one appointed Executive, they may be required to act jointly vis-a-vis third parties), are subject to registration. Other limitations are not subject to disclosure and registration and they only apply to the internal relations between the Executive(s) and the LLC. Executive members in a JSC are also indicated in the Commercial Register.

The annual financial statements of companies are subject to public disclosure. Auditor reports (when the company is subject to a mandatory audit) and annual activity reports (in the case of a JSC) are published with the Commercial Register along with the annual financial statements.

Certain categories of decisions adopted by the Board of Directors, Supervisory Board, Executive Board, and the General Meeting of the Shareholders shall be publicly disclosed, among others: decisions to amend the articles of association or any of the company data subject to mandatory entry in the Commercial Register, e.g., company name, registered seat and business address, statutory representatives and manner of representation, shareholders and allocation of shares, capital, company transformation, and winding-up. Subject to public disclosure are also certain JSC-specific decisions, e.g., the decision of the Board of Directors/Executive Board to convene a General Meeting of Shareholders and the invitation thereto, the decision of the General Meeting of Shareholders to buy out shares, decisions on the issuance and conversion of bonds.

2.1.2. Public Companies – Specific Features

Public Companies have greater transparency obligations. Such companies and their shareholders are subject to disclosure requirements that ensure adequate transparency of ownership information – the disclosure threshold is 5% of the shares. Certain changes related to the shares (e.g., changes in the rights attached to the different classes of shares, and changes in the company’s capital) shall also be disclosed to the public.

The annual financial statements and annual activity report of Public Companies contain supplementary information and additional documents in comparison to those of a standard JSC, which shall be disclosed, e.g., a corporate governance declaration and a remuneration policy implementation report. Six-month financial statements, notifications for their financial status/position, and others are among the regulated information which Public Companies shall make publicly available.

Public Companies are required to have a website where certain categories of documents and information shall be published, e.g., prospectuses, notifications for public offerings, protocols of the General Meeting of the Shareholders, invitations for General Meeting of the Shareholders, code of corporate governance, remuneration policy, etc. Public Companies shall provide the necessary information for the facilitation of the exercise of shareholders’ rights.

The Financial Supervision Commission shall be notified of changes in the Executive Board, Supervisory Board, Board of Directors, changes in the articles of association, and reorganization of a Public Company. This information along with other information is published in a special register held by the Financial Supervision Commission.

2.2. Public Authorities Responsible for Monitoring Corporate Governance

There are no public authorities responsible for monitoring corporate governance for the standard LLC and JSC.

Public Companies shall either apply the corporate governance code adopted by the company itself or the National Corporate Governance Code approved by the Financial Supervision Commission. The code typically implements good practices and principles in corporate governance, including in the area of sustainable development.

2.3. ESG

ESG reporting obligations in the strict sense have not yet been implemented. However, disclosure of non-financial and diversity-related information by certain large companies and groups is mandatory.

Large companies (see Section 1.1.1.) which are public-interest entities exceeding the average number of 500 employees during the financial year shall include in the management report a non-financial statement containing information to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters, including: a brief description of the undertaking’s business model; a description of the policies pursued by the undertaking in relation to those matters, including the due diligence processes implemented; the outcome of those policies; the principal risks related to those matters linked to the undertaking’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks; non-financial key performance indicators relevant to the particular business. Additional requirements apply with respect to consolidated non-financial statements.

Auditors shall check whether the non-financial statement has been provided and shall express an opinion on whether the statement has been drafted in line with the applicable regulations.

2.4. Internal Controls and Fraud Measures

The internal control in the standard LLC and JSC is related mostly to the usual exercise of the functions of the Supervisory Board/the Board of Directors and the Controller.

Certain entities which provide services of fundamental public interest (e.g., Public Companies, credit institutions, insurance companies, companies operating pension funds, etc.) shall have an Audit Committee as a special monitoring and consulting body whose main functions are, among others, monitoring of the financial reporting process, the risk management system, and the internal audit procedures.

The Registered Auditors Public Supervision Commission develops rules and methodological guidelines with respect to the activities of Audit Committees and it makes recommendations for improving their functions.

The non-financial statement (see Section 2.2.3.) should contain information on the general features of the system for internal control and the system for risk management applicable in the process of preparation of the financial statement for companies that have an obligation to prepare and publish such a statement.

3. Shareholder And Board Committees

3.1. What Committees Are Prescribed by Law?

In respect to standard LLCs and JSCs, there is no specific regulation requiring the setting-up of Committees outside of the mandatory corporate governance bodies (i.e., Board of Directors, Executive Board, Supervisory Board, Executive(s)), neither are specialized Committees foreseen within the structure of the abovementioned boards.

Public-interest entities shall have Audit Committees (see Section 2.2.4.).

Public Companies may have a Remuneration Committee, which is an optional, not mandatory structure and its members shall be appointed by the General Meeting of Shareholders among the Supervisory Board/the Board of Directors members. Its main functions are related to drafting and submitting to the Supervisory Board/the Board of Directors the remuneration policy, as well as proposals for the individual remuneration of the Executive Board members/executive directors in the Board of Directors. Other Committees might be set up at the discretion of a Public Company.

3.2. What Committees Are Mandatory for Large Companies?

Please refer to Section 3.3.1. The rules apply irrespective of the size of the company.

3.3. Remuneration of Supervisory and Executive Board Members

In LLCs, the remuneration of the Executive is determined by the General Meeting of Shareholders.

In JSCs with a one-tier management system, the General Meeting of Shareholders determines the remuneration of the members of the Board of Directors who will not be assigned the management of the company and the Board of Directors determines the remuneration of all executive Directors elected thereby.

In JSCs with a two-tier management system, the General Meeting of Shareholders determines the remuneration of the members of the Supervisory Board and the latter determines the remuneration of all members of the Executive Board.

Public Companies apply a remuneration policy with respect to their executive and supervisory bodies. The policy shall be prepared by the Supervisory Board/the Board of Directors in cooperation with the Remuneration Committee (if any, see Section 3.3.1.) and it shall be approved by the General Meeting of the Shareholders, which is also the corporate body which shall decide on the remuneration and the amounts of the royalties. The policy is required to be reviewed every four years unless there is a need for substantial amendments in the meantime. The policy and the policy implementation report, which is part of the annual financial statement of the company, shall be published on the company’s website.

The members of the executive and supervisory bodies of Public Companies shall provide a financial guarantee whose amount is usually in a certain correlation with the remuneration. Typically, the remuneration consists of permanent and variable components. Special rules on the provision of the variable component in the form of equity shares, options, or other financial instruments or regarding the rescheduling of the variable remuneration apply.

None of the information above should be considered or interpreted in any manner as legal advice and/or the provision of legal services. This guide has been prepared for the purposes of general information only. PETERKA & PARTNERS does not accept any responsibility for any omission and/or action undertaken by you and/or by any third party on the basis of the information contained herein.