Trends and climate
What is the current state of the M&A market in your jurisdiction?
The M&A market in Bulgaria is dynamic and challenging. As a general trend, the number of transactions and the value of M&A projects are both increasing. However, foreign inbound investment affecting the M&A market remains below the levels seen in the past – particularly before the financial crisis.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The M&A market is driven by several factors, including:
- the economic and political situation in neighbouring countries (eg, Greece and Turkey);
- the increasing role of local players on the Bulgarian market; and
- the rapid growth of certain economic sectors (eg, information technology).
Are any sectors experiencing significant M&A activity?
Significant M&A activities can be seen in the banking sector, where there is a clear trend for consolidation. This is driven by the economic situation in neighbouring Greece, which has triggered a number of M&A projects involving Bulgarian subsidiaries of Greek banks. Another sector showing intensive M&A activity is telecoms, where developments are moved by investors exiting their Bulgarian projects and selling businesses to strategic operators. Rapid growth can also be seen in the M&A market for the IT sector, which is characterised by a relatively large number of transactions, although transaction values tend to be modest.
Are there any proposals for legal reform in your jurisdiction?
The Bulgarian general commercial law was amended at the beginning of 2017 and some of these amendments have a significant impact on M&A projects and structures. The most important amendments concern:
- increased formal requirements relating to the transfer of shares and changes in the management and representation of limited liability companies;
- the introduction of stabilisation court proceedings before insolvency proceedings can be opened for commercial companies; and
- the establishment of an electronic public register of special pledges synchronised with the Bulgarian public electronic commercial register.
What legislation governs M&A in your jurisdiction?
The Commerce Act is the main legislative act regulating the manner of incorporation, management and representation, corporate bodies, sale, termination, reorganisation (eg, mergers, splits and spin-offs), liquidation and insolvency of legal entities organised as private capital companies in Bulgaria. The Commerce Act also regulates public companies to the extent that specific regulation thereof is not contained in the Public Offering of Securities Act. The Commercial Register Act regulates companies’ registrations with the Bulgarian commercial register, which is public and electronically available.
How is the M&A market regulated?
Regulation of the M&A market is not codified and, in addition to the above-stated corporate legislation, includes a number of provisions contained in the financial, commercial, tax, employment and antitrust laws.
Are there specific rules for particular sectors?
Depending on which sector the particular M&A transaction involves (eg, banking and other financial services, insurance, energy, telecoms or transportation), specific regulation may need to be considered.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
In addition to the standard and straightforward sale and purchase of shares, an acquisition can be completed through a series of transactions, corporate reorganisations and combinations thereof, such as:
- a transfer and/or in-kind contribution of shares and businesses as a going concern of parts thereof;
- mergers (including upstream and downstream), splits and spin-offs; and
- share-for-share deals, which may involve issuance of new shares or use of own shares.
Due diligence requirements
What due diligence is necessary for buyers?
The necessary due diligence depends on the transaction structure and the specific sector regulations applicable to the target. Fundamental factors to be evaluated include the target’s:
- corporate history;
- ownership title;
- history of insolvency (if any);
- financial statements;
- material contracts;
- loans and credit facilities;
- tax situation;
- environmental matters;
- intellectual property;
- IT systems; and
- employment matters.
What information is available to buyers?
The complete corporate history of the target can be inspected in the publicly available Bulgarian Commerce Register (regarding corporate changes that become effective as of their registration with this authority). Online checks of certain encumbrances over the target’s assets, ownership of intellectual property and real estate, and pending litigation can also be performed.
What information can and cannot be disclosed when dealing with a public company?
The scope of information that can or cannot be disclosed or used with regard to a public company in Bulgaria is regulated by EU Regulation 596/2014/EC. The imposition of measures against market abuse with financial instruments is regulated by a primary legislative act (the Act Against Market Abuse With Financial Instruments), which was adopted by the Bulgarian Parliament during the implementation EU Regulation 596/2014/EC.
How is stakebuilding regulated?
Universally applicable regulation of stakebuilding is provided by the Competition Protection Act, which requires notification to and preliminary approval by the competition regulator for any stakebuilding in a company where the turnover of the concerned enterprises exceeds certain thresholds. Where the process of stakebuilding has community dimensions, the competent authority is the European Commission.
Various regulations apply to stakebuilding where the target companies operate in a regulated environment (eg, banks and financial institutions, investment intermediaries, insurers and leasing companies).
What preliminary agreements are commonly drafted?
Execution of non-disclosure and confidentiality agreements is highly recommended, especially with regard to the manner in which personal data and sensitive information are to be disclosed within the due diligence process. These may be preceded by signing term sheets or memoranda of understanding.
What documents are required?
The principal documentation will depend on the proposed acquisition structure and agreed payment mechanism; a share purchase agreement, shareholders’ agreement and escrow agreement are usually considered as the main transaction documents.
Which side normally prepares the first drafts?
The buyer typically prepares the first drafts of the transaction documents, taking into account the conclusions contained in the due diligence reports. However, in some cases the vendor may provide drafts of the transaction documents for review during the due diligence process, indicating which clauses of the transaction documents are negotiable or non-negotiable.
What are the substantive clauses that comprise an acquisition agreement?
Substantive clauses cover topics including:
- an exact description of the subject of the acquisition;
- the consideration (payment mechanism/post-closing purchase price adjustments);
- conditions for closing;
- the closing mechanism;
- covenants pending closing;
- representations and warranties of the parties;
- governing law; and
- dispute resolution.
What provisions are made for deal protection?
Termination/break fees can be negotiated and included as a form of deal protection.
What documents are normally executed at signing and closing?
The main acquisition agreement (typically the share purchase agreement) is executed at signing, while the remaining transaction documents usually represent schedules thereto and are executed before or on closing. Depending on the target and transaction structure, the closing mechanics involve execution of title transfer documents and delivery of proof of payment.
Are there formalities for the execution of documents by foreign companies?
No specific requirements apply.
Are digital signatures binding and enforceable?
Digital signatures are binding and enforceable insofar as they comply with the Digital Document and Digital Signature Act, which provides special rules for making, proving and transmitting the digital volition.
Foreign law and ownership
Can agreements provide for a foreign governing law?
There is no prohibition against acquisition agreements concerning targets incorporated under Bulgarian law to be governed by a foreign law. If this is the case, the agreement – especially those sections regulating the closing mechanics and granting/release of securities – should still be reviewed from a local law perspective.
What provisions and/or restrictions are there for foreign ownership?
Bulgarian law is quite liberal with regard to non-Bulgarian ownership of commercial companies and businesses. One of the ongoing restrictions relates to ownership and limited ownership rights over lands in favour of non-EU entities and individuals (although they may own land through Bulgarian subsidiaries). Another restriction exists with regard to ownership of companies operating on certain regulated markets (eg, financial institutions, insurance, energy and media), which cannot be owned by or through companies registered in offshore jurisdictions (where the term ‘offshore’ is defined in line with the tax treatment of offshore zones within the European Union).
Valuation and consideration
How are companies valued?
Companies are valued for the purposes of M&A projects on the basis of standards and methods generally accepted worldwide. In most cases, the valuation is formed on the basis of the target’s earnings before interest, tax, depreciation and amortisation (EBITDA) (with specifically agreed adjustments) and multiples deemed applicable to the relevant sector. In certain cases, business valuation is made on the basis of the EBITDA of specific income-generating units of the target companies.
What types of consideration can be offered?
Bulgarian law is liberal as to the types of consideration that can be offered and paid. These can include cash consideration, consideration in kind, negative price consideration and zero consideration. For M&A projects, it is increasingly common for the parties to agree to split the transaction consideration between consideration for shares and consideration for receivables, with the latter used to redeem debts of the target as part of the respective M&A transaction. Locked-box and post-closing price adjustment concepts are well known in the local market.
What issues must be considered when preparing a company for sale?
Every company has its own specific features that need be taken into consideration in order to establish and carry out a smooth and efficient sale process. Nevertheless, Bulgarian practice and experience reveal some common issues that should be addressed, such as:
- title over materialised shares in joint stock companies;
- ownership issues related to real estate owned or operated by the companies, mainly with regard to restitution claims and claims by the state and municipalities;
- encumbrances such as securities for financing;
- territorial and construction status of the operated immovable properties;
- intra-group, contingent and hidden debts;
- bank finance and other types of financing; and
- regulatory and compliance issues.
What tips would you give when negotiating a deal?
There is no universal approach to negotiating a deal in Bulgaria. However, practice shows certain generally acceptable or achievable provisions that are commonly agreed in M&A projects, including:
- changing the target’s management at completion;
- a pre-completion period before the target is acquired, in which it operates in the normal course of business and the purchaser gives its consent on various issues;
- various price adjustments;
- the retention amount for securing warranty claims;
- unlimited liability for intentional misconduct and gross negligence;
- maximum liability for breach of title warranties and essential business warranties; and
- arbitration arrangements.
Are hostile takeovers permitted and what are the possible strategies for the target?
Bulgarian law does not specifically regulate hostile takeovers. M&A transactions are principally considered a matter within the free discretion of the shareholders, where the target’s management has no say. There are no legal instruments available to the management to prevent or stop the takeover.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
The representations and warranties typically cover:
- essential company law matters (eg, constitution and title in ownership);
- operational matters;
- accuracy of the financial statements (fair representation in accordance with the applicable accounting standards); and
If the transaction involves a pre-completion restructuring, a lack of negative legal or tax effects therefrom could be covered as well. A favourable approach from a buyer’s perspective is to negotiate and agree on a representation stating that the vendor has provided full disclosure of the relevant information with the presence of a knowledge qualification (with or without limitation of the vendor’s knowledge). Thresholds on the indemnification baskets in combination with a cap on the indemnification (usually with carve-outs) are typically included.
Limitations and remedies
Are there limitations on warranties?
The representations and warranties can be limited by exceptions indicated in the disclosure schedules (which may or may not be updated before closing).
What are the remedies for a breach of warranty?
Breaking the agreement, its termination and/or indemnification may be agreed as a remedy or remedies for breaches of representations and warranties. Limitation of the remedies only to indemnification in combination with certain carve-outs is a frequently used remedy tool. The local market often encounters retention amounts provided by local sellers since retentions are viewed as the most reliable remedy for a breach of warranties. Corporate guarantees (provided by domestic corporations) are not viewed as solid enough. Warranties and indemnification insurances are quite new and an untested ground in the local market.
Are there time limits or restrictions for bringing claims under warranties?
The general legally prescribed time limit is five years, although the applicable legislation provides certain exceptions (eg, in relation to tax matters).
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Bulgarian law provides a flat tax rate of 10% for personal and corporate income taxes. This is also the tax rate for capital gains that is most frequently on the agenda in M&A projects. No value added tax (VAT), local taxes or stamp duties apply to share transfers. Pursuant to Bulgarian law, majority shareholders who transfer their shares and/or holdings may be liable for outstanding obligations with regard to taxes and social insurance contributions (subject to specific prerequisites). This rule also applies to the management and directors of the company in light of their neglectful actions. The liability is proportionate to the shareholders’ participation in the alienated part of the capital and management will be liable for the outstanding amount of the obligation.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
No further tax exemptions or reliefs are available.
What are the common methods used to mitigate tax liability?
Tax liabilities or consequences related to M&A projects are most frequently mitigated by means of in-kind contributions of shares, assets or receivables, which achieve the optimal treatment of tax.
What fees are likely to be involved?
The minimum notary fees for signature certification of up to €3.50 plus 20 % VAT might apply to transfers of shares in limited liability companies or voluntary notarisations of transfers of materialised shares in non-listed Bulgarian joint stock companies. Some notaries public base their fee calculation on the nominal value of the shares transferred or the share transfer price and in this case the expenses could be higher. Registration fees for the Bulgarian commercial register are minimal and do not materially affect the budgeted costs for M&A projects.
Management and directors
What are the rules on management buy-outs?
Bulgarian law does not specifically regulate management buy-outs. Therefore, the acquisition of a Bulgarian company by its own management is generally considered a contractual matter between the shareholders and the management. However, as a basic principle of Bulgarian commercial law, the managers of a company owe loyalty to the shareholders as first priority. In this regard, any leveraged buy-out would need be approved by the shareholders. Bulgarian financial assistance rules prohibit the use of loans and provision of securities by the target for the purposes of acquiring the same company.
What duties do directors have in relation to M&A?
As stated above, the directors have duties to the shareholders. In an M&A project, the directors should be acting on instructions and for the benefit of the shareholders.
Consultation and transfer
How are employees involved in the process?
In the case of a simple share transfer, employees are not affected or involved in the process, as the change in the company’s ownership does not represent a change in the employer. In other cases – such as mergers or transfers of an enterprise or activity – a change of the employer is considered to occur and the rights and obligations of the former employer (the transferor) are transferred to the new employer (the buyer). The employees are to be notified by the former and new employer at least two months in advance of:
- the expected changes and the completion date;
- the rationale for such changes;
- any potential legal, economic or social consequences for the employees which derive from the changes; and
- any measures planned with respect to the employees.
What rules govern the transfer of employees to a buyer?
The Labour Code replicates the provisions of the EU Acquired Rights Directive (2001/23/EC).
What are the rules in relation to company pension rights in the event of an acquisition?
There are no specific rules concerning pension rights in the event of an acquisition.
Other relevant considerations
What legislation governs competition issues relating to M&A?
The Competition Protection Act sets the rules on when and how to obtain merger clearance. The Competition Protection Commission (the antitrust watchdog and regulator) should be notified of a concentration of economic activity if the sum of the total turnover of all undertakings participating in the concentration within Bulgarian territory for the previous financial year exceeds Lev25 million and one of the following criteria is also fulfilled:
- the turnover of each of at least two of the undertakings participating in the concentration within Bulgarian territory for the previous financial year exceeds Lev3 million; or
- the turnover of the target in Bulgaria for the previous financial year exceeds Lev3 million.
In principle, the commission grants clearance if doing so would not lead to the establishment or reinforcement of a dominant position which would significantly impede effective competition in the relevant market. The state fee collected by the commission (payable by the buyer and calculated on the basis of the turnover of the participants) should be considered when the respective transaction is planned.
Are any anti-bribery provisions in force?
The Criminal Code comprehensively regulates bribery and applies to bribery of any person acting in the capacity of a representative or decision maker.
What happens if the company being bought is in receivership or bankrupt?
Bulgarian insolvency legislation does not regulate the transfer of shares in the capital of companies that are in receivership or bankrupt. Such transfers would not affect the development of the insolvency proceedings. The insolvency proceedings and their development are public and can be accessed electronically in the Bulgarian Commerce Register.
Law stated date
Correct as of
Please state the date as of which the law stated here is accurate.
10 September 2019.
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