New Type of Company – Variable Capital Company (VCC)

15 August 2023

At the beginning of August 2023, the long-awaited changes in the Bulgarian legislation with a strong practical focus entered into force, which introduced a new type of company, namely the so-called variable capital company (VCC). These changes address a number of identified problems, which until now have been mostly resolved through agreements, but not always to their full extent. The new changes create a comprehensive new regulation of entire institutes in company law, which, although already familiar in the entrepreneurial and consulting circles, aim to enable their full practical implementation (e.g. clauses of the type tag-along, drag-along, right of first refusal, etc.).

The practical focus of this new type of company is mostly on individuals who wish to develop innovative and fast-growing businesses (start-ups). It was created with the aim to respond to the contemporary needs for a modern type of company in Bulgaria, which is in accordance with the accepted practices in the entrepreneurial ecosystem. At the same time, now already explicitly, provides various tools to the founders of this type of company, e.g. to attract highly qualified employees through the so-called share option plans.

It should be noted that the changes also provide for other limitations and special rights, which we have usually observed to be included in an agreement between investors and founders, but now explicit regulation is given in that regard. It should also be noted that the new rules for this type of company are flexible, allowing investors and founders in a number of cases to “personalize” their relationship, providing rights and obligations that best suit their interests.

Thus, along with the already familiar forms – limited liability company (LLC) and joint stock company (JSC), a new type of company is created – VCC, which can be regarded as a simplified joint stock company, since it possesses a number of its features, but at the same time, it is simpler and more flexible and adapted to the needs of the entrepreneurs. Below we give a brief overview of the new type of company:

I. Requirements for VCC

    VCC can be established by one or more natural or legal persons. It should meet at any moment the following two requirements: (i) have an average number of personnel less than 50 people and (ii) annual turnover and/or value of assets up to BGN 4,000,000. If one of these two requirements ceases to be present, the VCC should be transformed into an LLC or JSC.

    II. Capital

    Unlike LLC and JSC, the capital of VCC is not fixed, but variable, and is not subject to entry in the commercial register.

    Every year, with the decision of the general meeting of shareholders, by which the annual financial report of the company is adopted, the amount of the capital at the end of the financial year is established, as well as its change compared to the previous financial year.

    III. Company Shares

    The capital of VCC is divided into shares. The minimum nominal value of one share is one stotinka (BGN 0,01). Capital contributions can be monetary or non-monetary. In the case of non-monetary contributions, a facilitation is provided vis-a-vis LLC and JSC, as the value of the non-monetary contribution to the capital of the VCC is assessed by three experts, who are appointed by the managing body of the VCC (and not appointed by the Registry Agency, as is the case with the LLC and JSC). The names of the shareholders in the VCC are not entered in the commercial register.

    The capital of the VCC may consist of different classes of shares. Each class consists of shares with equal rights. Thus, a class of shares may provide for special rights (privileges), for example: the right to more than one vote in the general meeting; guaranteed or additional dividend, etc.

    In the VCC, a shareholders’ book is kept, which contains data on the shareholders and the shares acquired by them.

    IV. Transfer of Company Shares

    The transfer of company shares is carried out in writing with notarization of signatures, unless a written form is provided for in the articles of association.

    The transfer of company shares is carried out freely, unless special rights and/or restrictions are provided for in the articles of association. Such can be, for example: right of preferential purchase of shares offered for sale (right of first refusal); a shareholder’s right to sell his shares under the same conditions as those under which another shareholder plans to transfer his shares (tag-along); it may be stipulated in the articles of association that under certain conditions a shareholder may be compelled with a decision of the general meeting of shareholders to transfer his shares (drag-along), etc.

    The Bulgarian legislation also provides explicitly the possibility for the VCC to grant its employees options to acquire shares (vesting), as well as to enter into convertible loan agreements – loan agreements that can be converted into company shares.

    V. Management of the VCC

    The bodies of the VCC are (i) a general meeting of shareholders and (ii) a management board or manager.

    The general meeting consists of the shareholders and has the competence to make decisions on the most important issues for the company, for example: amendment and addition of the articles of association; issuance of new shares, determination of the manner of their acquisition, invalidation of shares and exclusion of shareholders; transformation and termination of the company, etc.

    The governing body of the company can be a management board or a manager – at the discretion of the founders. A member of the management board can be an individual or a legal entity. There is no requirement for a certain minimum number of board members. The management board elects one or more members from among its members as executive members (executive directors) to represent it.

    VI. Deadlines

    Although the texts regarding the VCC have already entered into force, the Registry Agency needs to provide the necessary technical infrastructure so that this new type of company can be registered in the commercial register. The deadline for this is 30 June 2024.

    Author: Konstantin Mladenov