With the State Gazette No. 66 of 2023, the Law on Amendments and Supplements to the Commercial Law was adopted, the main change being the creation of the legal form of the Company with variable capital, which we will call ” VCA ” for short. It is regulated in the new chapter “Chapter fifteen “a” of the Commercial Law and represents the first addition of a new type of commercial company since the creation of the Commercial Law until now.
The VCA was envisaged by the legislator in order to create a legal form that meets the needs of businesses and more specifically start-up and innovative companies that wish to attract investors and grow, but are still at an early stage of development, due to which do not meet the regulatory requirements for joint stock companies (JSC) and do not have the resources to establish one. The legal form is tailored to the actual economic situation in the country. A large number of innovative and modern businesses seek financing in a way borrowed from the Anglo-Saxon legal system – through fundraising, taking out convertible loans and the opportunity for startup associates to become partners due to their contribution, as well as freely negotiating various terms with partners. which meet the company’s goals and development plan.
The new “Chapter fifteenth “a” of the Commercial Law provides extremely extended powers for the bodies of the VCA, and the phrase “unless otherwise agreed in the company agreement” is the leitmotif of the legislative change – the provisions that provide for this are numerous, and the goal is obvious The DPC should be as free as possible to determine the rights and obligations of the partners. With the figure of the DPK, the legislator puts a more serious emphasis on the will of the partners.
1. What Company is VCA?
To be a VCA, the enterprise must meet the following requirements:
- to have an average number of personnel less than 50 people;
- the annual turnover should not exceed BGN 4,000,000 and/or the value of the assets should not exceed BGN 4,000,000.
It follows that a VCA can be a micro or small enterprise. The company can also be a sole proprietorship (EDPK), but in view of the regulatory framework, the main goal should be the recruitment of investments and the inclusion of partners with different rights and obligations, according to the needs of the enterprise.
2. The capital and shares of VCA.
The main legal innovation that the VCA figure provides is the absence of registered capital in the Commercial Register, insofar as it is variable and is established during the examination of the annual financial report at the end of the financial year.
The capital of the VCA, like the limited liability company (LLC), is divided into shares, which, however, have a minimum nominal value of 1 cent. In addition to the reduced nominal value of the shares, the VCA already provides that the shares may be of different classes, similar to the shares that make up the capital in joint stock companies (JSC).
The main change does not consist in the lowered nominal value of the shares, namely in the different classes of shares, and each class may have special rights (privileges) compared to the other classes. The law clearly lists certain types of privileges – right to more than one vote per share, shares without voting rights, guaranteed or additional dividend or liquidation share, right to buy back company shares, as well as other rights provided for in the company agreement. Structured in this way, the provision allows various privileges to be provided, according to the needs and objectives of the enterprise. The difference in rights does not exclusively refer to the different classes of shares – the legislator has foreseen that some partners specifically and by name determined by the partnership agreement may have the right to veto or exercise their right to vote with privilege.
In this regard, shares in VCA are freely transferable to third parties, without the need for approval by the remaining partners, unless otherwise agreed in the partnership agreement. However, in fact, the legislator gives the partners the opportunity to determine the rules for the transfer of shares themselves, insofar as any transfer of company shares is unopposed by the company if it is carried out contrary to the clauses of the company agreement. It is even possible with the company agreement to stipulate a complete ban on the disposal of the shares for a certain period of time, conditions under which the transfer is mandatory, the right of preferential redemption as well as various other privileges or restrictions on the disposal of company shares can be agreed. The emphasis is on the will of the partners.
DPK will also be able to acquire its own shares under the terms and conditions stipulated in the company agreement, but with the imperative condition that it does not have the right to exercise the rights under them.
With the changes, two situations that are already often used in practice find a legislative justification:
- the so-called “convertible loan” – by decision of the General Assembly, VCA can enter into loan agreements that can be converted into company shares, or in other words – the company can be financed with loans and, subsequently, the funds provided with the loan can be converted into in equity shares;
- right to acquire shares for persons in a legal relationship with the company – when VCA has its own shares, it can establish a right to acquire shares for persons with whom it is in a legal relationship, by determining conditions under which the person can exercise this right. In practice, this is often done in limited liability companies as a reward for loyal and/or extremely helpful employees, but so far it has not been objectified in law. At first glance, the established right is in view of the personality of the person, inasmuch as it cannot be transferred, but on the other hand it is inheritable.
3. Management of VCA
The bodies of the Company are the General Assembly and the manager or the management board. By introducing a choice between a manager or a management board, the legislator makes it possible to choose a management similar to that of a limited liability company (with a manager) or a management more similar to that of joint-stock companies (with a management board) in the VCA.
In the event that a management board is elected, it may have executive members, as is the case with the executive members in the AD Board of Directors. Thus, the legislator has provided an instrument with which the possible later transformation of VCA into JSC will go more smoothly. Alternatively, the articles of association may provide that the company will be managed similarly to a limited liability company – by one or more managers who will represent it jointly or individually. The choice provided guarantees greater flexibility and adaptation to the specific needs of the company.
To the extent that the figure of the General Assembly was created in order to meet the needs of the modern economy, the legislator paid specific attention to the electronic management of the company by providing for convening and participation in meetings of the General Assembly by electronic means, with the electronic invitation being sent in the relatively short 7-day period before the date of the General Assembly. This avoids the slowness that is present when convening a General Assembly of JSC.
As we mentioned earlier, the VCA was created to meet the needs of the modern economy, taking into account the investment agreements that are common in practice, which are signed between investors and start-up and innovative companies. Currently, in order to achieve the same goal, an LLC is often established, investment agreements are concluded, the logical outcome of which is for the Company to grow and subsequently transform into a JSC.
In effect, enacting the VCA into law creates a legal framework for pre-existing relationships. That is why the legal thresholds described in item I. above are provided. The changes provide that when the General Assembly determines that these thresholds have been exceeded during the adoption of the annual financial report, the VCA follows within the framework of next financial year to be transformed into a capital company in accordance with Chapter Sixteen of the Commercial Law. Where a company with variable capital participates in a conversion, the rules for personal companies apply to it.
In view of this, with the VCA a legal-organizational form was conceived, which is transitory and serves a certain purpose, namely the achievement of certain results and transformation. Therefore, VCA has both the characteristics of JSC and those of OOD, and the regulatory framework places it in an intermediate position between the two. To what extent this idea will actually be realized will be established after seeing the practical application of the normative texts. However, interested parties should bear in mind that the actual benefits of establishing a VCA are inextricably linked to the achievement of certain goals and the subsequent transformation.
Author: Ivan Fregulia