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Corporate Control Mechanisms in Bulgaria

Corporate Control Mechanisms in Bulgaria

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As a result of several mid-sized acquisitions in 2016, many foreign companies interested in buying shares in limited liability companies in Bulgaria have faced questions about how the management of such business entities are controlled and what the risks are of detection, after the acquisition, of “hidden liabilities” due to the potentially non-compliant behavior of those companies’ statutory representatives with good corporate standards.

Good examples of such liabilities are bills of exchange signed on behalf of the company which are not reflected in the company’s accounting books or preliminary agreements for the sale of its real estate assets (or any deal which could be considered as such) entered contrary to good corporate practices, corporate policies, or without giving consideration to loss-profit analysis and risk.

Apart from this, investors are interested in how, in the future, the company could be run by the “old management” (in most cases the former shareholders) free of any risk, by establishing different control and other coordination mechanisms within the company. 

The most secure option is to follow the example of German businesses by establishing joint-representation of the company. This is done mainly by appointing two managing directors to represent it, and manage it, together. A similar result can be achieved by appointing one managing director who would act severally and one general commercial proxy who would be obliged to seek the consent of the managing director for any transaction that should be concluded by him or her on behalf of the company. 

However, as in most cases the second director is not physically present in Bulgaria, this “four-eyes principle” is not generally a very good control mechanism, especially in smaller entities where the management is responsible for the conclusion of many day-to-day contracts and the accomplishment of certain administrative duties, such as hiring personnel and making banking transfers. 

Is there any other mechanism that could be used to control the local management? The answer does not seem to be very encouraging, as there is no way to restrict the representation powers of the managing directors of a limited liability company towards third parties other than to provide a joint representation mechanism. 

However, a softer measure could be the introduction of transaction restrictions and coordination mechanisms within the management agreements entered into with the company by the managing directors.

In this way, the company may ensure, by means of a potential sanction of severe contractual penalties, that in the case of a breach of the directors’ duties, one director would be liable for not consulting the other or for not addressing certain matters to the shareholder(s) of the company or their representatives. Representatives could also act as external compliance officers of the company. Recent practice shows that especially for law firms the market for providing such external compliance services is growing slowly every day. 

Another possible but not very often used control mechanism for shareholders to review the current situation of the company and be notified on all important developments of the business is the establishment of a supervisor within the company. 

The supervisor could be a natural person appointed by the shareholders of the limited liability company to be responsible for the correct execution of their decisions, the compliance of management acts with the provisions of the articles of association, and ensuring that the assets of the company are spent properly. 

As this supervisor may not be someone employed by the company, this function is usually performed by a representative of the shareholder(s) and is usually a legal controller able to check the books of the company, participate in important negotiations, and/or simply check the contractual documentation that should be undersigned by the managing director of the company. 

The supervisor may only be appointed if this is explicitly provided for by the articles of association of the company. There is no burden to provide that the supervisor would also be responsible for other control duties of the shareholders.

By Dimitar Stoimenov, Head of the Compliance & Regulatory Practice Group for CEE, Peterka & Partners Bulgaria
This Article was originally published in Issue 4.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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