Introduction

Since August 2023, a new type of commercial entity has been introduced into the Bulgarian legal landscape – the Limited Liability Company with Variable Capital (LLC-VC). This innovative form of business combines the advantages of a Limited Liability Company (LLC) and a Joint Stock Company (JSC). It represents an attractive opportunity for 21st-century startups, designed to facilitate the establishment of companies and attract investments.

Despite the legal regulation of the LLC-VC being in place in the Bulgarian commercial law, such companies cannot yet be formed because the commercial register platform is not technically adapted for them. Expectations are that this will change, and LLC-VCs will become part of the commercial landscape in the country by the summer of 2024.

Basic Characteristics Regarding Capital and Shares

As implied by its name, the company operates with variable capital. This capital is not subject to registration in the commercial register, unlike other Bulgarian corporate forms. This is a convenience, as the Limited Liability Company with Variable Capital (LLC-VC) does not need to open a fundraising account, a process that has become increasingly challenging and burdensome for new companies due to recent banking practices.

Instead, changes to the company’s capital occur annually during the regular general meeting of the company to review the annual financial report. During this meeting, the capital amount at the end of the current financial year is determined, along with any changes compared to the previous one.

The company’s capital can be divided into shares, with the value of each share being as low as 1 stotinka, in contrast to a Limited Liability Company (LLC), where the minimum value of a share is 1 lev.

The ability to issue a multitude of shares within a small capital contribution, for example, allows an LLC-VC with a 5 lev capital contribution to issue 500 shares, some of which can subsequently be distributed among employees.

This distribution of shares serves as a fundraising tool or an incentive for retaining employees. Innovative companies with startup ventures that choose the LLC-VC structure can attract the best talent by offering shares in the company. This encourages employees to work for the innovation behind the company and, at the same time, contribute to increasing the company’s capital, ultimately meaning that their shares will be worth more. This approach is known as “vesting” and is primarily applicable to companies expecting significant growth and seeking investments, mainly from international investment funds.

Nevertheless, the LLC-VC retains the advantages of the familiar corporate forms. The law regulates, for example, the LLC-VC’s ability to own its shares, make non-monetary (contribution in kind) contributions, enter into loan agreements, and more.

Transfer of Corporate Shares

The transfer of corporate shares in an LLC-VC is carried out in a more straightforward manner compared to an LLC. The agreement for the transfer of shares must have notarized signatures, but the law allows this to be done in written formas long as it is specified in the company agreement or the articles of association. Additionally, the transfer of shares can be freely done to partners and third parties, unless there is a restriction in the company agreement or articles of association.

Another advantage of the LLC-VC is its extremely flexible regulation, from which partners can deviate by negotiating special clauses in the articles of association that better suit their needs.

Several well-established practices are also regulated to protect the interests of partners in the transfer of corporate shares, such as:

• Right of First Refusal: This entails the possibility that, if a partner initiates the sale of their shares, the remaining partners have the option to acquire the shares under the same conditions, with preference over third parties.
• Change of Control Protection: In the event of a change of control in a legal entity – a partner, that entity must inform the company. If the company’s shares are subject to this condition, the general meeting may decide that the partner does not exercise their voting right or may be excluded, with the company acquiring their shares.
• Drag-Along Right: This clause grants a partner the right to include the other partners in the sale, requiring them to sell their shares under the same conditions.
• Tag-Along Right: In the event of the sale of the shares of the majority partner, minority partners have the right to join the transfer and sell their shares under the same conditions.

Other Key Features

Regarding the general assembly of the LLC-VC, there are no significant differences from the existing corporate forms, but the convening and conduct of meetings are facilitated. The option is provided for the meeting to be convened electronically. Additionally, if the general meeting is not convened within a specified period despite the request of partners holding at least 5 percent of all votes, according to an excerpt from the partners’ book, the requesting partners can convene the general meeting by declaring the invitation for it in the commercial register.

In the case of the management body, an obligation is introduced to align the risk of the activities with the expected income for the company – the so-called business judgment rule.

Limitations

Limitations on the applicability of the LLC-VC are also defined. It can only be applied to an enterprise with an average number of employees less than 50 and an annual turnover not exceeding BGN 4,000,000, and/or assets valued at no more than BGN 4,000,000.

If these limits are exceeded, the company must convert into a capital company by the end of the financial year following the general meeting where it is established that the company no longer meets these requirements. Otherwise, the company will be terminated upon the request of the prosecutor by a district court.

Conclusion

In most countries where such a type of company exists, it becomes the preferred form for conducting business after its introduction. Whether this will be the case in Bulgaria remains to be seen, but at this moment, the LLC-VC appears to be the most suitable form for startup businesses.

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