The latest amendments in the Bulgarian Commercial Law and the introduction of the long awaited Variable Capital companies
Variable Capital Companies (in Bulgarian “DPK” or “ДПК”) are a specific types of companies, which are regulated in the new Article 260a – 260e of the Bulgarian Commercial Law. When the company is established by a single person, the designation is “single-member Variable Capital Company” or the abbreviation “EDPK” (“ЕДПК” in Bulgarian).
These new type of companies offer a much more flexible structure. The new legal provisions allow capital to be adapted much easier to the company’s ongoing needs. And all this without requiring compliance with formal capital amendment procedures as with the other (older types) trading companies. But there is much more than that.
Essence of Variable Capital Companies
The new companies are characterised by the following features:
- Variability of capital: a key feature is that the capital of the company can vary within a predetermined minimum and maximum amount without requiring a change in the articles of association or the memorandum of association;
- Flexibility: cash inflows and outflows, as well as shareholder participation, are facilitated, allowing faster adaptation to market conditions;
- Ease of management: changes in capital are recorded directly in the books and do not require entry in the Commercial Register.
Legal framework
The provisions of Article 260a – 260e of the Commercial Law include the following main points:
Formation of a Company with variable capital
- Bulgarian Variable Capital Companies may be incorporated as limited liability companies (LLCs) or joint stock companies (JSCs).
These new type of companies are established by one or more natural or legal persons and are liable to creditors with its assets. The articles of association (for a JSC) or the memorandum of association (for an LLC) must expressly provide that the company will have variable capital. It must state the minimum and maximum amount of capital and conditions for changing the capital.
Important condition for incorporation: a company with variable capital may only be a company which has an average number of employees of less than 50 and an annual turnover not exceeding BGN 4 000 000 (2 045 167 EUR) and/or an asset value not exceeding BGN 4 000 000 (2 045 167 EUR).
Changes in the capital
Capital is automatically changed as a result of:
- Contributions from newly admitted partners or shareholders;
- Resignation of partners or shareholders;
- Allocation of profits or coverage of losses.
The changes do not require recording in the Commercial Register, only an accounting entry.
Membership rights
- The rights of the partners/shareholders are conditional on the amount of their share in the capital;
- Resignation from the company results in termination of membership and restoration of the share of the resigning member (if provided for in the articles/contract).
Management
- The Companies with variable capital are governed by the general rules for the relevant type of company (LLC or JSC);
- The exclusive competence of the general meeting includes decisions to change the minimum and maximum share capital.
Functioning of Variable Capital Companies
The Variable Capital Companies are suitable for business models that require flexibility and dynamic capital management:
Financial advantages
- Capital increases or decreases are carried out without the high administrative and legal costs of ordinary companies;
- Attracting new investors is made much easier.
Admission and release of partners (shareholders)
- New shareholders can join by contributing additional funds without complicated capital change procedures;
- Existing shareholders may leave by getting paid the value of their shares.
Flexibility in profit sharing
- Profit can be distributed in a way that maintains the optimal amount of capital.
Limitations
- The Variable Capital Companies must maintain the minimum capital prescribed by law or the statutes to ensure the solvency of the company;
- Risk of financial exhaustion in case of excessive capital reduction due to exit of shareholders.
Use of Variable Capital Companies
The new type of companies are mostly used in:
- Investment funds, where capital often changes depending on the entry and exit of investors;
- Start-up companies, looking for a flexible mechanism to raise capital;
- Family businesses, where it is necessary to easily include and exclude heirs as partners.
Potential problems and challenges
- Legal uncertainty: There is not yet extensive case law on disputes under the new legal framework, which may lead to legal uncertainty;
- Risk of abuse: The easy resignation of partners can be used to drain capital;
- Accounting complexity: Frequent capital changes may require more complicated bookkeeping.
Conclusion
Variable Capital Companies are a modern instrument that provides significant flexibility in capital management. They are suited to dynamic business models but require careful structuring of the articles of association or memorandum of association to avoid conflicts and financial risks.