The Bulgarian Parliament has recently adopted an Act to amend and supplement the Bulgarian Commercial Act[1] implementing the requirements of Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions.
I. INTRODUCTION OF CROSS-BORDER DIVISIONS
1. General requirements
Prior to the adoption of the amendments, the Commercial Act provided for a possibility only for cross-border mergers under the following conditions:
(a) all companies participating in the transformation[2] (“Participating Companies”) have their registered offices on the territory of an EU member state or of a state party to the EEA Agreement, jointly referred to as “Member States”;
(b) at least one of the Participating Companies has its registered office in another Member State, different from the Republic of Bulgaria;
(c) the legal form of the Participating Companies from another Member State is one of those indicated in Art. 1 of First Council Directive 68/151/EEC of 9 March 1968[3];
(d) the Participating Companies, which have their registered office in Bulgaria, are formed as share capital companies (exclusive of investment company with variable capital). Under Bulgarian law, share capital companies are the limited liability company (LLC), the joint-stock company (JSC) and the partnership limited by shares (each of which referred to as “Bulgarian Capital Company”).
The new amendments provide that any company formed in accordance with the law of a Member State, which has not only its (i) registered office, but alternatively its (ii) central administration, or (iii) principal place of business in the same or another Member State may be subject to a cross-border transformation with a company formed under Bulgarian law. This is not to say that a company, which has its registered office outside a Member State is eligible to an EU cross-border transformation, but is rather to be construed in a way that a company, which has its registered office in one Member State and central administration or principal place of business in another Member State, may choose to engage in transformation under the laws of the latter Member State instead of the former.
This is a practical manifestation of the longstanding EU’s legislative practice of regulating private law matters in accordance with the principle of closest connection. In terms of business, this may provide a fair degree of flexibility, unlike keeping solely to the criterion of “registered office”, which is rather rigid and, in many ways, impractical under the conditions of EU single market.
2. Procedure
In essence, the introduced amendments do not change the conversion procedure. For the sake of simplicity, the latter could be described as “two-phase”.
2.1 In the first “phase” each of the Participating Companies takes all the necessary corporate approvals, actions and filings in accordance with the national laws of the Member State of their formation. The implementation of the requirements of the national law of a Member State with respect to a Participating Company is attested by a pre-merger[4] or pre-division[5] certificate, as applicable, which is issued by the authority competent to scrutinize the legality of the transformation and confirm compliance with all relevant conditions and proper completion of all procedures and formalities in the respective Member State. The issued pre-merger or pre-division certificates are shared between the competent Member State authorities through the system of interconnection of registers.
2.2 In the second “phase” of the procedure, where the process of conversion is finalized, the authorities of one of the Member States assume the “leading role” in the actual completion and registration of the transformation. The completion of the registration by the leading Member State gives legal effect to the cross-border transformation and determines its date. Which Member State should have the leading role is largely dependent on the exact form of transformation.
To make it clearer through an example, in all the cases when the registered office of:
(a) the newly formed (as a result of merger by the formation of a new company – it. 3.2 below);
(b) the acquiring (as a result of merger by acquisition – it. 3.1 below); or
(c) the converting (as a result of any form of division – it. 3.3 – 3.5 below)
company is in Bulgaria, the registration of the relevant circumstances in the Bulgarian Commercial Register[6] made under Bulgarian law shall give legal effect to the transformation and its effective date will be the date of such registration. In this case the Bulgarian Commercial Register must notify the competent authorities of the respective Member States of the occurrence of the registration and its date through the system of interconnection of registers. The said facts are to be taken into account by the Member States’ authorities with respect to any registrations related to Participating Companies under their jurisdiction. The above applies vice versa in cases when the registered office of the company under it (a) – (c) above is outside Bulgaria.
3. New forms of transformation
Prior to the discussed amendments, the forms of cross-border transformations under Bulgarian law were limited to two (it. 3.1 – 3.2 below), while at present there are three additional options for cross-border transformations (it. 3.3 – 3.5 below), namely:
3.1 Merger by acquisition
Under this form of corporate transformation, all the assets and liabilities of one or more companies (transforming companies) are transferred to an existing company (acquiring company), which becomes their legal successor and the transforming company(-ies) are wound up without going into liquidation.
3.2 Merger by the formation of a new company
In this case all the assets and liabilities of two or more companies (transforming companies) are transferred to a newly established company, which becomes their legal successor, while the transforming companies are wound up without going into liquidation.
3.3 Full Division
This is a scenario in which all the assets and liabilities of a company (transforming company) passes to two or more newly formed companies (recipient companies), which become its legal successors for the corresponding part of those assets and liabilities. The transforming company is wound up without going into liquidation.
3.4 Partial Division
Upon partial division, part of the assets and liabilities of a company (transforming company) passes to one or more newly formed companies (recipient companies), which become the legal successor(s) of those assets and liabilities. The key difference in comparison to the full division is that upon partial division the transforming company is not wound up and continues its existence.
3.5 Division by separation
The division by separation basically represents a sub-type of the partial division, according to which a separation of the assets and liabilities of a company (transforming company) is made and transferred to a newly formed company (recipient company). Differentia specifica of the division by separation vis-à-vis the partial division is that: (a) the capital of the recipient company is fully owned by the transforming company and not the shareholders in the latter; (b) under Bulgarian law the recipient company may be incorporated either as a single-member LLC or a single-member JSC.
It is to be noted that Directive (EU) 2017/1132 is still reluctant to adopt rules on cross-border divisions, under which the recipient companies are not newly formed, but already existing. Arguably those would be the most complex among any other forms of cross-border transformations. Besides to technical complications with international element, this caution may be due to reasons of legal character, stemming from all the pre-existing legal relations, which an existing company is bound by. Those could lead to problems e.g. in the order (privileges) for satisfaction of the receivables of private creditors, conflict between tax authorities from different Member States, which are public bodies belonging to the administrative system of sovereign countries, employment and social-security related problems due to the differences between national legislations, etc.
4. Shareholders’ protection
Among other amendments, it is worth mentioning that a shareholder in a transforming company who has voted against the decision of the General Meeting of the Shareholders (“GMS”) for the transformation has the right to leave the transforming company in consideration of a payment of a monetary compensation (corresponding to the equivalent of the shares owned by him/her) if, as a result of the conversion, such shareholder acquires shares in a company from another Member State. Termination of the shareholder’s participation is made with a notarized notification, sent within 1 (one) month as of the date of holding the GMS and the monetary compensation must be paid within no later than 2 (two) months after the date of the transformation.
The above is an example of the manner in which the EU law creates the necessary mechanisms so that the core values and freedoms of the EU, installed in specific individual rights, apply to the majority, but also, in an adequate proportion, to each affected individual.
II. “FREE MOVEMENT” OF COMPANIES
1. Freedom of establishment
The amendments of the Commercial Act take the freedom of establishment under Art. 54, para. 2 of the TFEU to an entirely different level.
The amendments allow for a capital company (converting company), which has its registered office on the territory of Bulgaria (departure Member State) to “move” to another Member State (destination Member State) provided that:
(a) the converting company changes its registered office in the destination Member State;
(b) the converting company adopts the legal form of a company that was established in accordance with the legislation of the destination Member State, which needs to be one the types listed in Annex II Directive (EU) 2017/1132,
following the completion of the conversion in compliance with the above, such company is to be referred as the “converted company”.
The same applies vice versa for any company formed under the laws of a Member State other than Bulgaria (departure Member State) and having a legal form listed in Annex II Directive (EU) 2017/1132, which intends to “move” its registered office to Bulgaria (destination Member State) and adopts the legal form of a Bulgarian Capital Company.
2. Procedure
When the converted company receives its registered office in Bulgaria, the Bulgarian Commercial Register completes the registration of the conversion after the competent authority of the departure Member State issues the pre-conversion certificate[7], to be exchanged through the system of interconnection of registers. The date of the conversion is the date of its registration in the Bulgarian Commercial Register.
In case that the converting company had its registered office in the Republic Bulgaria, it has to be deregistered from the Bulgarian Commercial Register on the basis of a notification sent by the competent authority of the destination Member State, confirming the conversion is duly completed in its register. The date of conversion is a date determined by the legislation of the destination Member State.
3. Legal effect
From the date of conversion:
(a) the converting company from another Member State moves its registered office to Bulgaria and continues to exist as a Bulgarian Capital Company of the relevant type;
(b) the converting company from Bulgaria moves its registered office to another Member State and continues to exist as a company according to the law of that Member State;
(c) the rights and obligations of the converting company become the rights and obligations of the converted company;
(d) the shareholders in the converting company become shareholders in the converted company.
The right under Section I, it. 4 is at the disposal of the shareholders of the converting company, which have voted against the conversion.
4. Potential economic impact
The discussed amendments may be considered as the climax of the right of free establishment in the context of formation of corporate entities. At first sight it may seem as entirely positive due to the flexibility it offers to business.
On the other hand, it may deprive some national economies from profitable business players, which in the pursuit of larger revenue or market share may easily decide to “migrate” to larger national markets. Although this will not be detrimental to the EU single market, it may have its downsides on Member States with smaller-scale economies.
Looking again from the opposite perspective, it may create a positive competition stimulus between Member States, which will likely adopt proper measures trying to retain or attract, respectively, the large commercial players within their national economies and under their tax jurisdictions. Such measures may include lowering tax rates, decreasing the levels of bureaucracy, easing access to markets, investing in the education of qualified workforce, maintaining lower costs/assuming part of the costs of energy supplies and many other.
In conclusion, we can say that there is enough time for Bulgaria to prepare for any effects those amendments could cause, as the Final Provisions of the Act to Amendment and Supplement the Commercial Act gives a term of 1 (one) year to the Bulgarian Registry Agency to ensure the technical possibility for practical application of the amendments discussed.
[1] Published in State Gazette issue No. 82 of 27 September 2024.
[2] “transformation” is used throughout this article as a generic term for mergers, divisions and conversions.
[3] This reference should be read as a reference to Annex II Directive (EU) 2017/1132, which repeals Directive 2009/101/EC repealing First Council Directive 68/151/EEC.
[4] Under Art. 127 of Directive (EU) 2017/1132.
[5] Under Art. 106m of Directive (EU) 2017/1132.
[6] Its full name is Bulgarian Commercial Register and Register of Non-Profit Legal Entities, which is maintained by the Registry Agency at the Ministry of Justice.
[7] Art. 86m of Directive
By Hristian Gueorguiev, Senior Associate, Boyanov & Co
