With the adopted amendments to the Commercial Law, our legislator has introduced a completely new type of company in our country – the Variable Capital Company (VCC).

The need for this new type of commercial company was dictated by the fact that our previous legislation does not adequately address the needs of the increasingly popular startup (startup) sectors in our country in recent years, FinTech (innovation in financial services), BioTech (innovation in biotechnology), RegTech (innovation in regulatory process management), AI (artificial intelligence), machine learning, blockchain and IoT (Internet of Things), including a large number of innovative new companies with both Bulgarian and international participation.

Most of these companies begin their existence as private companies founded by entrepreneurs with an innovative idea for a product or service that has the potential for rapid growth or market penetration due to the lack of an adequate competitive counterpart. Following the example of leading countries in the start-up and technology sectors, such as the USA, Japan, China and Western European countries, this type of company needs financial support in the early stages of its existence, with investment from third parties through various new forms of financing, such as crowdfunding, convertible loans, option contracts or so-called vesting, etc. The highly flexible legal form of this new type of company gives third party investors in these companies a wide range of options for acquiring shares, giving them different numbers and types of ordinary or pre-emptive rights in return for their initial financial investment.

Of the commercial companies we have known so far under our legislation, the closest to this new type of company seems to be the joint stock company, but unlike it, the new variable capital company (VCC) does not have a number of burdensome requirements, such as those for high initial capital, as well as the rules set out in the Commercial Law for the formation, structure, activity and interaction of the bodies of the joint stock company, which are too complex and expensive for small innovative companies in the early stages of their development. On the other hand, the limited liability company, which has been the most commonly used form of business start-up in Bulgaria, does not offer the possibility of issuing different types of instruments to raise initial investment or to support employees.

Certain member states of the European Unio already have provisions in their national legislation for companies similar to VCCs. Examples include the German Unternehmergesellschaft (UG or Entrepreneur’s Company), the French Société par actions simplifiée (SAS or facilitated joint stock company), the Spanish Sociedad Limitada Nueva Empresa (SLNE), the Slovakian Jednoduchá spoločnosť na akcie (facilitated joint stock company), the Polish Prosta spółka akcyjna (facilitated joint stock company).

The new structure of the variable capital company is characterized by a high degree of contractual freedom in determining the structure, powers and functioning of the management bodies and in regulating relations between the shareholders. An essential novelty, hence the name of this new type of company, is the introduction of inherent variable capital, which aims to increase the flexibility and operability of management, to respond to the dynamics of social relations linked to R&D (research and development) of innovative products, services and business models, and to reduce the administrative burden and costs linked to the change of capital.

The new type of company with variable capital is not a capital trading company within the meaning of the Commercial Law. The capital of a VCC is not subject to registration in the Commercial Register. The new legislation explicitly states that only micro and small enterprises can exist in this form. Specific rules are introduced for the accounting of capital and company shares, and the freedom of negotiation between the partners is further extended compared with other types of company, thus guaranteeing the rights characteristic of and necessary for venture capital investment, such as drag-along rights, pre-emption rights and tag-along rights. Shares in a VCC are freely transferable and inheritable unless restricted by the Articles of Association.

VCC is given the opportunity to acquire its own shares, which can then be granted to the company’s employees for their additional involvement and interest in the development of the business, for which the management of VCC is obliged to report in detail to the general meeting of shareholders on an annual basis.

Maximum flexibility is provided by agreeing in the Articles of Association requirements for the personal contribution of some partners to the activities of the company, failure of which will result in the exclusion of the partner concerned.

As in the case of a joint stock company, in the case of a company with variable capital, the persons entitled to vote at the general meeting are determined on the basis of their entry in the register of members on the last day of the month preceding the date of the general meeting. Increased use of electronic means of communication in the convening and conduct of the General Meeting of Shareholders. Minority shareholders holding more than a certain percentage of shares are granted privileges in the exercise of their voting rights at the Annual General Meeting and are given the right to veto certain categories of decisions.

The management of a company with variable capital is vested in a board of directors or a managing director. The members of the board of directors of a VCC are jointly and severally liable for damages caused to the company.

In continuation of the concept of the variable capital company as a suitable company form for start-ups, the new legal framework of the VCC provides for an obligation to convert the VCC if, at the end of the financial year, the company no longer qualifies as a micro or small enterprise within the meaning of the Small and Medium Enterprises Act. In this case, the VCC is converted into a capital trading company.

It is expected that the variable capital company will seriously stimulate the start-up segment, economic activity and generally change the “corporate landscape” in Bulgaria. In most countries where this type of company exists, it has gained in popularity since its introduction and has become the most preferred form of business. Whether this will happen here remains to be seen, but for the time being the variable capital company seems to be the most appropriate form for a start-up.

For more information, please contact the team at Benov & Vasilev Law Firm.