Expulsion of a shareholder from a Bulgarian OOD: grounds and procedure

The expulsion of a shareholder is one of the most serious steps a Bulgarian limited liability company (OOD) can take against a shareholder. It terminates the shareholder’s participation against their will, and the shareholder loses the rights arising from membership – to take part in management, to vote at the general meeting and to receive a portion of future profits.

Because of the serious consequences, a shareholder cannot be expelled merely because their relations with the others have deteriorated or because they refuse to support a particular business decision. There must be a ground provided for by law, and the procedure under the Bulgarian Commerce Act must be followed.

Even where the shareholder is in fact harming the company, any procedural breaches committed may lead to the resolution on their expulsion being set aside.

On what grounds may a shareholder be expelled?

Under Article 126(3) of the Commerce Act, after a written warning, the general meeting may expel a shareholder who:

• fails to perform their obligations to assist in carrying on the company’s activities;
• fails to comply with the resolutions of the general meeting;
• acts against the interests of the company;
• fails to pay an additional cash contribution for which they voted.

A separate procedure is provided for where the shareholder has failed to pay the amount due on their capital contribution.

These grounds must be applied in the light of the specific circumstances. Not every instance of non-performance or disagreement is serious enough to justify the termination of membership.

Failure to assist in the company’s activities

An OOD has characteristics not only of a capital company but also of a partnership. A shareholder is not merely the holder of a certain percentage of the capital. Under Article 124 of the Commerce Act, a shareholder is obliged to take part in management, to assist in carrying on the company’s activities and to comply with the resolutions of the general meeting.

The scope of the shareholder’s duty to support the company’s business depends on:

• the company’s scope of business;
• the provisions of the articles of association;
• the allocation of functions among the shareholders;
• the resolutions of the general meeting;
• the established way of working.

There may be a failure to assist where the shareholder systematically refuses to provide documents, information, access or other necessary assistance and thereby obstructs the company’s activities.

However, mere absence from general meetings or voting against the proposals of the other shareholders is not always sufficient. A shareholder has the right to defend a different position. A ground for expulsion arises where the shareholder’s conduct goes beyond permissible disagreement and becomes a substantial failure to perform membership obligations.

Failure to comply with the resolutions of the general meeting

A shareholder may also be expelled where they fail to comply with validly adopted resolutions of the general meeting.

For this ground to apply, it must be clear:

• what obligation has been assigned to the shareholder;
• when and how it is to be performed;
• whether the shareholder was notified of the resolution;
• whether performance was objectively possible;
• whether there has been actual and substantial non-performance.

A general resolution that “the shareholder is to provide the necessary assistance” may prove insufficient. Non-performance is considerably easier to prove where the resolution specifies particular actions, documents and deadlines.

A shareholder should not be expelled for failing to comply with a resolution that is unclear, falls outside the competence of the general meeting or is contrary to the law and the articles of association.

Acts against the interests of the company

This is the most broadly worded ground for expulsion and one of the most frequently used.

Acts against the interests of the company may include, for example:

• diverting clients to a competing business;
• using confidential information for personal benefit;
• unlawfully disposing of funds or property;
• concealing or destroying commercial documents;
• concluding disadvantageous transactions for the benefit of related parties;
• obstructing the performance of contracts;
• damaging the company’s commercial reputation;
• setting up a competing business by using the company’s resources and clients.

It is not enough for the warning merely to state that the shareholder is “disloyal” or has “lost the trust” of the others. Specific acts or omissions directed against the interests of the company must be described.

A personal conflict, a different vision for the business or a refusal to support a particular transaction does not in itself constitute a ground for expulsion.

May a shareholder be expelled for their acts as manager?

A shareholder and the company’s statutory manager (управител) act in different legal capacities. Removal as manager does not automatically result in the termination of membership of the company.

In Interpretative Decision No. 1 of 31 May 2023 in Interpretative Case No. 1/2020, the Supreme Court of Cassation held that a shareholder may also be expelled for acts performed in the capacity of manager, where the same conduct also constitutes a breach under Article 126(3), items 1–3 of the Commerce Act.

For example, disposing of company funds for personal benefit may constitute, at the same time, a breach of managerial duties and an act against the interests of the company.

If the person must be both expelled as a shareholder and removed as manager, the two resolutions should be included in the agenda separately and voted on by the general meeting.

Failure to pay an additional cash contribution

In the event of a temporary need for funds or to cover losses, the general meeting may adopt a resolution for additional cash contributions to be made under Article 134 of the Commerce Act.

A shareholder may be expelled if they fail to pay the additional contribution set for them, where they voted for the resolution. Beforehand, it should be verified whether the resolution is valid, sets the amount and the deadline for payment, and has been brought to the shareholder’s attention.

An additional cash contribution is not part of the capital and must be distinguished from the obligation to pay the capital contribution.

The written warning

The prior written warning is a mandatory precondition for expulsion under Article 126(3) of the Commerce Act. It has two functions:

• to inform the shareholder of the specific breach attributed to them;
• to give them the opportunity to cease the conduct or to remedy its consequences, where this is possible.

The warning must contain:

• the specific acts or omissions;
• the time and circumstances in which they were committed;
• the obligation breached;
• what is expected of the shareholder;
• an appropriate period in which to respond;
• a clear statement that expulsion may follow.

General accusations such as “you are not providing assistance” or “you are acting against the interests of the company” do not afford sufficient protection and may lead to the resolution being set aside.

The general meeting should not expel the shareholder on the basis of breaches that were not included in the warning. If new facts are established in the meantime, they must be duly communicated.

How is the warning served?

The Commerce Act requires written form but does not prescribe just one permissible method of service.

In practice, the most commonly used methods are:

• a notice served through a notary;
• delivery by post or courier using a service that provides evidence of the contents;
• personal service against signature;
• the method specified in the articles of association.

A notice served through a notary usually provides the most reliable proof of the contents, the date and the steps taken to effect service. However, it must be sent to the correct address and in accordance with the rules of the articles of association.

For the grounds under Article 126(3) of the Commerce Act, the law does not set a minimum period between the warning and the expulsion. However, the period given must genuinely allow the shareholder to respond. In the case of an unpaid capital contribution, a special period applies, which cannot be shorter than one month.

Convening the general meeting

The resolution on expulsion is adopted by the general meeting. Neither the manager nor an individual shareholder can terminate another shareholder’s membership on their own.

As a rule, the written notice must be received at least seven days before the meeting, unless the articles of association provide for a different period.

The notice must clearly state:

• the date, time and place of the meeting;
• the proposal for expulsion;
• the shareholder whose expulsion will be considered;
• the specific ground;
• the related resolutions concerning the shares, the capital and the articles of association.

Expulsion cannot lawfully be voted on under a general agenda item such as “any other business” or “discussion of relations between the shareholders”.

The shareholder facing expulsion must be invited and has the right to attend and to present their objections. They do not, however, vote on the resolution concerning their own expulsion.

What majority is required?

The resolution on expulsion is adopted by a majority of more than three quarters of the capital, unless the articles of association require a larger majority.

In determining the majority, the shareholder facing expulsion does not vote, and their share is deducted from the capital against which the majority is calculated.

This rule is particularly important in an OOD with two shareholders each holding 50%. In principle, one shareholder may vote for the expulsion of the other, since the holding of the shareholder facing expulsion is not included in the basis of calculation.

However, the possibility of voting does not mean that the shareholder with 50% may arbitrarily remove the other. In court proceedings, the statutory ground, the prior warning and the proper conduct of the general meeting must be proved.

Form of the resolution

As a rule, the resolution on expulsion must be recorded in minutes with notarisation of the signatures and the contents, carried out simultaneously.

The articles of association may expressly provide for simple written form. In the absence of such a provision, the statutory requirement for notarisation must be complied with. Failure to observe the applicable form results in the nullity of the resolution.

The minutes must accurately record those present, the capital represented, the objections, the voting and the method of calculating the majority.

What happens to the expelled shareholder’s shares?

The resolution on expulsion must also deal with the consequences for the shares and the capital.

Possible resolutions include:

• acquisition of the shares by the remaining shareholders;
• admission of a new shareholder;
• reduction of the capital;
• conversion of the OOD into a single-member limited liability company (EOOD), if only one shareholder remains;
• amendment of the articles of association.

It is not sufficient to resolve only that the shareholder is expelled. The Supreme Court of Cassation takes the view that the general meeting must also deal with the resulting changes in the capital, the composition of the membership and the legal form.

The expelled shareholder is also entitled to a settlement of the financial consequences under Article 125(3) of the Commerce Act, on the basis of a balance sheet as at the end of the month in which their participation was terminated. The amount due is not necessarily equal to the nominal value of the shares.

Registration in the Commercial Register

The expulsion and the related changes are filed with the Commercial Register using application form A4. The following are usually submitted:

• the minutes of the general meeting;
• the warning and the evidence of its service;
• the notices of the general meeting;
• the evidence of their service;
• the updated articles of association;
• the documents relating to the acquisition of the shares and the change in the capital;
• the declarations provided for by law.

Registration does not cure the breaches committed and does not prevent the expelled shareholder from challenging the resolution in court.

How can the expelled shareholder protect themselves?

The expelled shareholder may bring an action under Article 74 of the Commerce Act to set aside the resolution where it is contrary to the law or the articles of association.

Grounds for a challenge may include:

• the absence of an actual breach;
• an unclear warning or a warning that was not served;
• the absence of a reasonable period in which to respond;
• an improperly convened general meeting;
• an incomplete agenda;
• an incorrectly calculated majority;
• failure to observe the form of the minutes;
• expulsion on the basis of facts not covered by the warning;
• abuse of rights by the majority.

The action must be brought within a strict statutory deadline. Where the shareholder attended or was duly invited, the time limit is 14 days from the meeting. In all other cases, it is 14 days from becoming aware, but no later than three months from the date on which the general meeting was held.

Missing the time limit may result in the loss of the opportunity to have the resolution set aside by this procedure.

Conclusion

The expulsion of a shareholder from an OOD is a measure of last resort which cannot be based solely on a loss of trust, a personal conflict or a different business position. A specific breach, a proper warning and a duly adopted resolution of the general meeting are required.

Alongside the expulsion, the shares, the capital, the articles of association and the financial settlement due to the expelled shareholder must be dealt with. Omitting even one essential step may lead to a refusal of registration or to the resolution being successfully challenged in court.

If you are considering expelling a shareholder or have received a warning about your own expulsion, we can analyse the grounds, prepare the necessary documents, assist with holding the general meeting and represent you before the court and the Commercial Register.