Bulgaria: "The War Of The Roses", Starring Shareholders In A Bulgarian Limited Liability Company

Not every partnership that starts with the popping of champagne corks but ends in a vicious battle for property and regrets at not having obtained proper legal advice in advance is necessarily a failed marriage. The partners in a joint venture in the form of a Bulgarian limited liability company may find themselves in a similar situation.

Risks for the one, opportunities for others

Shareholders in a Bulgarian limited liability company may remove co-shareholders in an out-of-court procedure on grounds loosely defined in the law. The removed shareholders will be compensated at book value for their share in the company. This possibility of removal bears serious risks for unwary shareholders entering into a joint venture without having obtained advice and may be misused by those who seek to get their partners out in the most time and cost efficient way.

Grounds for removal

Shareholders in a Bulgarian limited liability company may be expelled by the remaining shareholders in an out-ofcourt procedure if they have:

• failed to perform their statutory obligation to assist in carrying out the company's activities;
• failed to comply with a resolution of the shareholders meeting;
• acted against the company's interests; or
• failed to pay an additional cash contribution to the company when a shareholders' meeting has decided to make one.

The practice examining the meaning of the above rules is scant and inconsistent. Whether any of the grounds for removal exist is to be decided in the light of all circumstances. The vagueness of the rule brings uncertainty. And the uncertainty may open room for shareholders to construe arguments alleging non-compliance by their partners.

Removal procedure

The removal must be preceded by serving an alert notice to the shareholder who is alleged to be at fault. But the law does not require explicitly that, if the alleged fault is one that might be remedied, the shareholder has a reasonable period to do so. Accordingly, simultaneously with the alert notice or upon expiry of a potentially granted remedy term, the remaining shareholders may take a decision for removal. The decision is taken at a shareholders meeting by a threequarter majority. Notably, the shareholder whose removal is being decided may not vote. Thus, in a two-shareholder limited liability company, either shareholder may remove the other one. For example, a shareholder who has 10% of the capital may remove the majority 90% shareholder and gain control over the company and its assets.

The removal takes effect vis-a-vis third parties following a registration with the Bulgarian Trade Registry. To avoid his removal, the shareholder who has been served an alert notice may, in turn, serve a similar notice to the other shareholder if there may appear to be possible grounds (legitimate or not) for the removal. The shareholders may thus be in a race to see which shareholder will succeed in removing the other by complying first with all formal requirements and terms (see above).

The removed shareholder may still bring a court action to annul the removal. However, once the removal has been registered with the Trade Registry, the remaining shareholders have unlimited control over the company and its proprietary affairs while the court case is pending, which may last for years.

Prevention

All partners in a joint venture in the form of a limited liability company are well advised to obtain legal advice and take measures already at the stage of negotiating the company's articles of association. Appropriate wording of provisions and introducing some corporate instruments at this stage would exclude or considerably mitigate the risk of the shareholders finding themselves in a vicious battle for property.

This article was originally published in the schoenherr roadmap`12 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.