August 2019 – The Bulgarian Supreme Court of Cassation (“Supreme Court”) has recently issued a decision (No.19, dated 8 August 2019, under commercial case No. 2511/2017) that recognises for the first time the concept of right of first refusal (“ROFR”) clauses. This decision opens the door for the enforcement of such clauses in Bulgaria. It is a step toward aligning Bulgarian law with certain English law concepts that for a long time have been the market standard for investment and shareholder agreements relating to Bulgarian companies.

What is the case about?

In the case before the Supreme Court, the majority shareholder with 80% of а company’s capital sent the minority shareholder a notice pursuant to the ROFR clause set out in the company’s articles. The notice contained details about an intended third-party transfer of 200 shares (“ROFR Shares”), the identity of the third-party buyer, the price and the terms for its payment. Pursuant to the ROFR clause the minority shareholder had 30 days to elect to participate in the proposed sale of shares. Failing to do so would allow the majority shareholder to transfer the ROFR Shares to any third party within 30 days under the same terms as those set out in the ROFR notice.

As the minority shareholder did not exercise their right to purchase the ROFR Shares, the majority shareholder proceeded to the third-party transfer. However, only 10 shares from the initially offered ROFR Shares were sold, and these were sold to a third-party buyer that was different from the one indicated in the ROFR notice. When the third-party buyer tried to exercise their voting rights during a shareholders’ meeting, the minority shareholder brought the case to court.

The position of the Supreme Court

In its decision, the Supreme Court reiterates that the shareholders in a joint stock company are free to agree on share-transfer restrictions, which, when included in the company’s articles, become binding on the company and its shareholders. Share transfers executed in breach of or in circumvention of such transfer restrictions are considered void towards other shareholders and the company. The purchaser of such shares cannot become a shareholder in the company and cannot exercise shareholding rights.

Further, the Supreme Court took the position that the notice concerning all ROFR Shares cannot be interpreted as covering the subsequent sale of a smaller stake. According to the judges, each ROFR notice relates to the particular number of shares indicated in it. The subsequent sale of a significantly smaller number of shares affects the financial terms of the whole transaction. In such cases, the financing of the share purchase is apparently much easier, also considering the initial requirement for the purchase price to be paid in full on closing.

The Supreme Court explicitly states that the assessment on whether a share transfer complies with the restrictions set out in the articles should consider the overall aim of the share-transfer restrictions. When applying such restrictions, one should not rely on a strict interpretation of the provisions in the articles. The economics behind the share-transfer restrictions should also be taken into account, including the different values attached to different shareholding stakes.

Key take-aways

The decision is the first to shed light on the enforceability of ROFR clauses under Bulgarian law. Although it relates to ROFR clauses for shares in joint stock companies, the decision sets an important precedent. It gives valuable arguments that may help to set similar enforceability tests for other transfer restrictions typical for investment and shareholder agreements.

From now on, investors in Bulgaria should carefully draft the share-transfer restrictions included in a company’s articles so that they mirror all relevant details of the ROFR clause under the shareholders agreement. Doing so increases the chances for the successful protection of their rights as shareholders.

This decision is of particular importance for venture capital and private equity funds investing in Bulgarian companies as well as for strategic investors looking to enter the Bulgarian market through joint ventures. It further reduces the legal risks before investing in Bulgaria and provides greater protection of investors’ interests.

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.