Transferring shares in a Bulgarian limited liability company (OOD)

The transfer of a share is the usual way of changing the ownership and the shareholders of a limited liability company (OOD). It may be carried out between existing shareholders or in favour of a third party who is not already a shareholder.

Although the procedure is often presented as a standard registration change, the contract has significant legal and financial consequences. The buyer does not directly acquire the company’s individual assets but a membership interest in the company itself – together with the rights attached to the shares and the economic risks associated with the company’s existing position.

The procedure should therefore not be reduced to signing a standard form and filing an application with the Commercial Register.

What is a share in an OOD?

A share represents a shareholder’s participation in an OOD. It comprises a set of economic rights, governance rights and information rights, which may include:

• the right to participate in management;
• the right to vote at the general meeting;
• the right to a portion of the distributed profit;
• the right to information about the company’s activities;
• the right to a share of the liquidation proceeds;
• other rights provided for by law or by the articles of association.

The size of a share usually corresponds to the shareholder’s holding in the capital. The nominal value of the shares, however, is not equivalent to their actual market price.

For example, a shareholder may hold shares with a nominal value of €500, but that holding may be worth considerably more if the company has real property, an established business, receivables, licences or other valuable assets. The opposite is also possible – the company may have liabilities that make the holding economically less valuable than its nominal value.

Selling a share or “transferring a company”?

In practice, the expression “selling a company” is often used. Legally, however, the company itself is not sold as a separate legal entity. All or some of the shares in its capital are transferred.

The company itself continues to exist with the same:

• UIC (Unified Identification Code);
• contracts;
• permits and licences, insofar as the special regime governing them does not provide otherwise;
• receivables and liabilities;
• employment relationships;
• assets;
• court and enforcement proceedings.

What changes is who holds the interest in the capital. For this reason, buying all the shares does not release the company from its old debts.

What is the difference between a transfer to a shareholder and a transfer to a third party?

Article 129(1) of the Bulgarian Commerce Act distinguishes between two main situations.

Transfer between existing shareholders

A share may be transferred freely from one shareholder to another. The transferee is already a member of the company and therefore does not need to be admitted as a new shareholder.

Nevertheless, it should be checked whether the articles of association contain additional rules on the disposal of shares – for example, a pre-emption right, a requirement to make a prior offer to the other shareholders or another contractual mechanism.

After the transfer, the new allocation of the capital must be recorded and updated articles of association must be adopted.

Transfer to an outside party

Where the transferee is not a shareholder, the requirements for the admission of a new shareholder apply. A resolution of the general meeting is required, by which:

• consent is given to the transfer;
• the transferee is admitted as a new shareholder;
• the articles of association are amended;
• the new allocation of the shares is recorded.

The new shareholder must submit a written application stating that they accept the terms of the articles of association.

In addition, the law requires the company to have no unpaid wages, compensation or compulsory social security contributions of certain kinds that have fallen due and are owed to workers and employees, including to persons whose employment relationships were terminated up to three years before the transfer.

According to Interpretative Decision No. 1 of 31 May 2023 of the Supreme Court of Cassation, this requirement concerning the absence of outstanding employment-related liabilities does not apply to transfers of shares between persons who are already shareholders.

Who takes the decision to admit a new shareholder?

The admission of a new shareholder and the giving of consent to the transfer of a share to a third party fall within the competence of the general meeting of the OOD.

The resolution is adopted by the majority provided for in the Commerce Act, unless the articles of association require a higher majority.

The minutes of the general meeting must be drawn up in the form required by law. As a rule, resolutions on the admission of a shareholder and on consent to the transfer of a share require notarisation of the signatures and the contents, carried out simultaneously. The articles of association may provide for simple written form.

If the required form is not observed, the resolution may be invalid. The articles of association should therefore be checked before the general meeting and the notarisation are organised.

What form must the contract take?

Under Article 129(2) of the Commerce Act, a share is transferred by a written contract with notarisation of the signatures and the contents, carried out simultaneously.

This means that the notary simultaneously certifies:

• the identity and signatures of the parties;
• the contents of the contract itself;
• the date of the certification.

The form is a condition of validity. A simple written contract, an exchange of electronic messages or an oral agreement cannot effect a valid transfer of a share.

Where one of the parties is represented by an authorised representative, the power of attorney must also meet the applicable form requirements and confer sufficiently specific representative authority.

What must the transfer contract contain?

The minimum content of the contract includes:

• details of the transferor and the transferee;
• details of the company;
• the number and nominal value of the shares;
• the total size of the holding being transferred;
• the legal basis of the transfer;
• the sale price, where the transaction is for consideration;
• the method of and deadline for payment;
• the moment at which the rights pass;
• the parties’ representations and warranties.

In a more significant transaction, the contract should also address matters such as:

• the company’s legal and financial position;
• the existence of liabilities and court proceedings;
• ownership of the key assets;
• tax and social security liabilities;
• the validity of licences and permits;
• related-party transactions;
• non-compete restrictions;
• confidentiality;
• liability for inaccurate information;
• indemnification of the buyer for hidden liabilities;
• conditions for completion of the transaction.

A short contract may be sufficient for the formal registration, but it does not always protect the parties in a subsequent dispute.

Must the sale price match the nominal value?

No. Shares may be sold at a price different from their nominal value.

The price is usually determined on the basis of:

• the company’s assets and liabilities;
• the financial results;
• the market position;
• customer and commercial relationships;
• intellectual property;
• expected future revenue;
• the proportion of the capital being acquired;
• the rights attached to that holding.

It is also necessary to assess the tax consequences for the seller and the buyer. They depend on whether the parties are natural persons or legal entities, whether they are resident or non-resident, and how the transaction is structured.

What documents are required?

The exact set of documents depends on the specific change, but the following are usually prepared:

1. A contract for the transfer of the shares with notarisation of the signatures and the contents.
2. An application by the transferee for admission as a shareholder, where the transferee is a third party.
3. Minutes of the general meeting or a decision of the sole owner of the capital.
4. Updated articles of association or deed of incorporation.
5. Declarations that there are no unpaid wages, compensation or social security contributions that have fallen due, where the law requires them.
6. A declaration as to the accuracy of the particulars submitted for registration and the due adoption of the documents submitted for publication, under Article 13(4) of the Commercial Register and Register of Non-Profit Legal Entities Act.
7. A power of attorney, where the application is filed through an authorised representative.
8. Application form A4 for registration of the changes concerning an OOD or a single-member limited liability company (EOOD).

Depending on the transaction, documents may also be needed for a change of manager, a change of name or address, a transition from an OOD to an EOOD or vice versa, as well as other related changes.

What is registered in the Commercial Register?

Once the contract has been concluded, the changes that have occurred must be filed for registration in the Commercial Register.

The following are usually filed:

• the transfer of the share;
• removal of the departing shareholder’s entry from the register;
• the registration of the new shareholder;
• the new allocation of the capital;
• the updated articles of association;
• any change of manager;
• the transition from an OOD to an EOOD or from an EOOD to an OOD.

As a rule, the application is filed by the company’s manager or by another person authorised under the Commercial Register and Register of Non-Profit Legal Entities Act. It may be filed electronically with a qualified electronic signature or on paper.

The registration officer checks whether the required documents have been submitted, whether the decisions were taken by a competent body, whether the form has been observed and whether the circumstances filed for registration comply with the law.

Where something is missing or inconsistent, instructions may be given and, if they are not complied with within the time limit, a refusal may be issued.

When does the transfer take effect?

The contract takes effect between the parties upon its valid conclusion, unless they have agreed on a condition or a later point in time.

As regards the company and third parties, the resolutions on membership and the registration in the Commercial Register must be taken into account. The transaction should therefore not be viewed in isolation from the admission of the new shareholder and the registration proceedings.

In practical terms, it is important that the contract sets out who exercises the rights until registration, when management is handed over and what happens if the Registry Agency refuses to register the change.

Can only some of the shares be transferred?

Yes. A shareholder may transfer their entire holding or part of it, if the structure and the nominal value of the shares allow this.

The possible consequences vary:

• the shareholder may end their participation entirely;
• they may retain some of their shares;
• an EOOD may become an OOD;
• an OOD may be left with a single owner and become an EOOD;
• control of the company may change without all the shares being acquired.

In a partial transfer, the new allocation of the capital and the majorities at the general meeting should be calculated carefully.

Can shares under attachment be transferred?

A registered attachment is a significant obstacle to the subsequent registration of a disposal transaction.

In Interpretative Decision No. 1 of 31 May 2023 in Interpretative Case No. 1/2020, the Supreme Court of Cassation holds that the registration officer should not register circumstances relating to a transfer of shares if the transaction was carried out after an attachment over them had been registered.

Before the contract is signed, the current status of the company and the existence of a registered attachment over the specific shares should be checked.

Is the buyer personally liable for the old debts?

As a rule, the debts belong to the company, not to its shareholders personally. An OOD is liable to its creditors with its own assets.

This does not, however, make the old debts irrelevant to the buyer. If the buyer acquires the shares, the value of their investment depends directly on the company’s financial and legal condition. Unpaid taxes, litigation, bank loans or hidden contractual obligations may reduce the value of the holding acquired or lead to insolvency.

What should the buyer check?

Before acquiring shares, it is advisable to carry out legal and financial due diligence.

It may cover:

• the ownership and history of the shares;
• pledges and attachments;
• the capital and the articles of association;
• the financial statements;
• tax and social security liabilities;
• bank loans and collateral;
• the key commercial contracts;
• employment relationships;
• court and enforcement proceedings;
• real property and other material assets;
• trade marks, software and copyright;
• licences and regulatory permits;
• relationships with related parties.

A search of the Commercial Register is necessary but not sufficient. A significant proportion of the risks are identified through the company’s internal documents, accounting records, contracts and correspondence.

How can the buyer be protected?

The contract may include representations and warranties by the seller regarding the condition of the company. For example, that:

• the shares are the seller’s property and are free of encumbrances;
• there are no undisclosed liabilities;
• the financial data provided are accurate;
• there are no unknown court or administrative proceedings;
• tax and social security liabilities have been declared;
• the company holds the necessary rights to its key assets;
• there are no hidden related-party transactions.

A breach of these warranties should give rise to clearly defined liability. Part of the price may be retained for a fixed period, an escrow account may be used, or a specific indemnity for pre-existing liabilities may be agreed.

In larger transactions, the acquisition may be made subject to conditions precedent, such as receipt of regulatory approval, deletion of an attachment or payment of a specific liability.

Is it necessary to change the manager?

The transfer of the shares does not automatically result in a change of manager. The shareholder and the manager act in different capacities.

If the seller is also the manager but the parties want them to be removed from office, a separate decision of the competent body and registration of the change are required. The following should also be dealt with:

• the handover of the accounting and corporate records;
• access to the bank accounts;
• electronic signatures;
• passwords and administrator accounts;
• stamps and tangible assets;
• communication with customers, employees and counterparties.

Leaving the previous manager registered after the transfer may create a significant practical risk.

Conclusion

The transfer of a share in an OOD involves several related steps: a review of the articles of association, a resolution of the general meeting, the admission of a new shareholder, a notarised contract and the registration of the changes in the Commercial Register.

When an operating business is transferred, the formal registration is only the final stage. Before it, the ownership of the shares, the company’s liabilities, its financial condition and the rights to the key assets should be checked.

We can carry out legal due diligence on the company, prepare the contract and the corporate resolutions, arrange the notarisation and file the changes for registration in the Commercial Register.