Category: Bulgaria

Wolf Theiss, working with Clifford Chance, has advised Allianz Bank Bulgaria on the review, negotiations, and regulatory compliance of a synthetic securitization agreement with the European Investment Bank Group.

According to Wolf Theiss, this arrangement allows Allianz Bank to free up to “EUR 291 million (USD 315.9 million) in financing for Bulgarian small and medium-sized enterprises and mid-cap companies with a focus on transitioning to climate neutrality, while continuing to maintain its leading market position. The European Investment Fund offers a layer of protection through a junior tranche worth EUR 29 million, with a counter-guarantee from the EIB, and a senior tranche exceeding EUR 175 million, secured solely by the EIF. The covered portfolio includes consumer loans, as well as loans and leases to SMEs, with total commitments of approximately EUR 207 million.”

The Wolf Theiss team was led by Partner Katerina Kraeva.

Wolf Theiss did not respond to our inquiry on the matter.

How M&A lawyers add value to our clients deals? That’s our job and primary goal.

Identify, quantify, reduce and mitigate the risks. Design and offer practical, workable solutions that would be accepted by both/all parties. Be quick about it.

Every moment in a sale or acquisition process matters. But, always, in the process, some moments are of critical importance and matter the most. There will be decisive points that can determine the outcome of the entire process: make or break, deal or no deal. Principals, sellers or buyers, may want the full control and responsibility in these moments. Oftentimes, they may decide to delegate that responsibility to their advisers – and this is when we are prepared to step in and act in their best interest.

To illustrate, see some examples of critical moments:

In a partial acquisition scenario, where the buyer acquires either a majority or minority interest, and the seller retains the rest, the parties need to negotiate the terms of their deal with patience, mutual respect, empathy and looking to their common future. In the heat of the bargaining it is often better to have your advisers speak for you and make your points.

Where a deferred payment of the purchase price has been agreed (i.e. earn outs, subsequent payments depending on milestones, etc.), the parties should be aware that such payment/s cannot possibly be set in stone, exhaustively, in the signed transaction documents. The viability of such arrangements will depend on multiple factors including, without limitations,

• precision of the agreed metrics, definitions and formulas,
• feasibility of business plans and budgets,
• validity of the underlying assumptions and projections,
• availability and cost of funding/capital,
• good standing and solvency of major customers,
• retaining key customers and suppliers, and key employees,
• each party’s motivation going forward, and so on,

External factors are also in play:

• increased competition,
• new market entrants,
• demand for and introduction of new/superior, similar or substitute products,
• industry and economy cycle (note what currently happens in a high inflation, higher interest and delinquency rates, lower liquidity, stagnation or recessionary environment),
• force majeure events, etc.

Standing on years of training, practice and experience, corporate lawyers can advise and act in these circumstances. That’s what clients should expect and ask for.

By Pavel Hristov and Dragomir Stefanov, Partners, Hristov & Partners

One of the significant questions concerning ESG issues is the cost of transitioning to a more sustainable business environment. Will it result in increased financing costs and restricted access to new borrowing, or will it, on the contrary, lead to the development of new market segments and gradual change? While we cannot provide definitive answers to these questions, in this article, we will examine five ESG drivers and regulatory changes that will be pivotal in 2024. From the introduction of the New Green Asset Ratio to the Corporate Sustainability Due Diligence Directive (CSDDD/CS3D), we will explore the conditions associated with these new requirements and the potential penalties for non-compliance.

Environmental, Social, and Governance (ESG) risks are increasingly influencing investment decisions, expansion strategies, business partner selections and market choices. Following the introduction of the taxonomy, banks have begun aligning their lending policies with the new regulatory requirements. Consequently, their financing through European funds, guarantee instruments or bonds has become dependent on these criteria. Private investors are progressively considering the impact of their investments beyond just financial gain. This shift is motivated by ethical considerations, risk management strategies, and the recognition of the higher long-term value of sustainable products and services.

2024 is anticipated to be a pivotal year in terms of regulatory developments. An increase in mandatory ESG requirements is expected to intensify pressure on businesses to integrate ESG considerations more effectively into their operations, financial statements, and relationships with banks, suppliers, and contracting authorities. Below, we highlight five ESG drivers and regulatory changes that will be defining in 2024.

1. New Green Asset Ratio

Since 2022, it has been mandatory for European banks to report against targets aligned with the Taxonomy Regulation. The focus of reporting is now evolving to include key transparency indicators such as the “Green Asset Ratio” (GAR).

To whom does it apply? This change applies to banks licensed in the EU.

What is required? The Green Asset Ratio calculates the proportion of a bank’s financial assets, such as loans, investments in debt instruments (including green bonds), equity securities, acquired collateral, and other assets in taxonomy-compliant economic activities, relative to the total value of the bank’s assets. The calculation of the total value includes loans to sectors not yet covered by the taxonomy, loans to SMEs not yet required to report on sustainability, interbank loans on demand and exposures outside the European Union. 

What will the penalties for non-compliance be? Violating the reporting obligation, which is explicitly regulated in legislation (such as the Bulgarian legislation), may lead to the imposition of administrative measures by the Financial Supervision Commission against banks licensed as investment firms. Additionally, the indicator has a reputational impact. Despite numerous regulatory initiatives to date, initial forecasts suggest that the EU-wide Green Asset Ratio could be significantly below 10%. In the future, it is possible that minimum thresholds for this ratio could be introduced to encourage financial institutions to increase their level of green funding. Furthermore, this ratio could be linked to capital requirements for banks and reach a level of importance comparable to their credit ratings.

When will it apply? The new requirements will apply from 1 January 2024.

2. Which Projects Will Be More Attractive for Funding?

The Green Asset Ratio, which has not been disclosed by most banks to date, may influence the projects they finance and lead to changes in lending terms. As a result of regulatory changes and in response to criticism from the European Banking Authority about the increased risk of greenwashing (sustainability claims that lack substance), more complex “Sustainability Linked Loans” have started to enter the market, following “green loans” and “social loans“.

What are Sustainability Linked Loans? These are loans that incentivise borrowers to achieve predefined sustainability goals. The use of funds in Sustainability Linked Loans is not limited to specific green or social projects, nor are the funds required to be spent on such projects. Any type of business activity that the borrower undertakes can be financed, including project finance, acquisition finance or revolving working capital credit. In practice, model clauses and principles developed by the private sector for this product are used. These are not mandatory but can be included in the loan documentation to facilitate the designation of the loan as ‘sustainability-related’ in line with regulatory standards:

• Sustainability Indicators (Targets) or Key Performance Indicators (KPIs): These are determined jointly by the bank and the borrower, prior to the granting of the loan, based on the specific business. Therefore, they cannot be generally set under European or local regulation. They depend on the knowledge of the project and the data available for the sector. The targets should be ambitious yet at the same time measurable, realistic, and achievable.
• Financial Incentives for Achieving the Targets: The borrower may be incentivised with a lower interest rate premium (i.e., lower financial costs overall) or penalised with a higher one accordingly.
• Experts: The initial selection of KPIs and the subsequent verification of compliance over the life of the loan require special expertise. The bank may have this expertise in-house, or external consultants may be brought in, which may include ESG rating agencies.

Negotiating sustainability metrics is anticipated to be the most challenging aspect of Sustainability Linked Loans. For instance, for a technology company, appropriate sustainability indicators might include the greenhouse gas emissions of its servers and the diversity and equity of its employees and board members (in terms of age, gender, education, and work experience), provided these can be measured correctly according to scientifically sound standards. In contrast, for a manufacturing company, the targets might differ, relating to supply chain management, employee benefits, waste management, and carbon reduction. Borrowers are encouraged to present their sustainability-related strategy to the bank, along with any sustainability ratings they possess, to aid in the selection and refinement of their targets. In the real estate sector, the experience gained by developers, real estate investors, commercial building owners and banks has primarily focused on the environmental component—specifically, improving the energy performance of buildings and reducing the carbon emissions of existing ones. Other considerations, such as improving water efficiency and recycling building materials, as introduced in the Taxonomy, are still being developed. Moreover, the potential for so-called “brown buildings” that require retrofitting to become sustainable in the future, is still underestimated. The other components of ESG, namely the social and governance aspects, are also less developed in this sector. Often, borrowers in the real estate sector are special purpose vehicles (SPVs) established with no trading history or assets other than the property being financed. These SPVs may not have a sustainability strategy themselves. However, a sustainability strategy at the group level is necessary and can be applied to the company acting as the borrower.

3. ESG Ratings

ESG ratings, primarily utilised by bond issuers in capital markets in recent years, have faced scepticism from investors due to concerns over their reliability, comparability, transparency, and independence. The European Commission has pledged to address these concerns, and on 5 February 2024, the Council and the European Parliament reached a preliminary agreement on a proposal for a new regulation governing the activities of ESG rating agencies.

To whom does it apply? This regulation targets ESG rating providers operating within the EU, regardless of whether they are based inside or outside the EU.

What is required? The main measures concern ESG rating providers and include, among others: (i) a move to a licensing regime and supervision by the European Securities Authority for those established in the EU; for the rest, the possibility to operate in the EU subject to certain conditions, (ii) separation of rating activities from the core business, allowing the same legal entity to combine these activities as long as they are clearly separated and measures are in place to avoid potential conflicts of interest. This exception will not apply to rating providers that combine advisory, audit, and credit rating activities.

Users of these ratings, including financial market participants and financial advisers, will be required, when disclosing ESG ratings as part of their marketing communications, to include information on the methodologies used to determine the ratings on their websites. This includes the option to offer separate ratings on environmental (‘E’), social (‘S’), and governance (‘G’) factors, as well as a single rating in which the weight of the individual factors must be explicitly stated.

When will it apply? The preliminary political agreement is awaiting approval by the Council and the Parliament before proceeding to the final adoption procedure. Once adopted, the Regulation will become directly applicable 18 months after its entry into force.

4. The Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464 or CSRD)

At the core of the new European regulations, qualitative data stands out as the primary driver. As evident in every proposed regulatory change to date, the emphasis lies heavily on the collection, monitoring, and evaluation of new data to facilitate evidence-based decision-making by investors. Moreover, high-quality and verified ESG data serves as the foundation for the sustainable products and services packages already offered by European banks, as highlighted previously.

The phased implementation of ESG public disclosure obligations, under the Corporate Sustainability Reporting Directive, was launched in early 2024. This initiative aims to modernise and tighten the rules on social and environmental information that companies must report, building upon the foundation laid by the previous Non-Financial Reporting Directive. In Bulgaria, the process of transposing the Directive into national legislation is already underway. On March 5, 2024, the Ministry of Finance published a package of legislative amendments for public consultation, which will largely implement the Directive’s requirements. These amendments are proposed through a Bill to amend and supplement the Accounting Act. The Ministry anticipates that the entire package of legislative changes will be enacted by July 6, 2024.

To whom does it apply? Initially, the Corporate Sustainability Reporting Directive (CSRD) applies to all large companies covered by the previous Non-Financial Reporting Directive. Subsequently, it will also extend to public SMEs and third-country companies. The draft law amending and supplementing the Accounting Act proposes revised and increased values for the indicators used to categorise “micro,” “small,” “medium,” and “large” enterprises. These categories are determined based on meeting two out of three indicators: book value of assets, net sales revenue, and average number of employees. The changes in the values align with the amendments introduced by the European Commission’s Delegated Directive (EU) 2023/2775 on October 17, 2023, to the Accounting Directive.

What is required? Under the CSRD, companies will be required to provide sustainability reporting under the newly introduced European Sustainability Reporting Standards (ESRS). These standards mandate more detailed and granular data on the sustainability impact of their business. Key aspects of reporting include:

• The adoption of a double materiality approach, which entails reporting on both (a) the financial performance of an activity (such as cash flow, risk, access to finance), and (b) its impact on sustainability issues. This includes disclosure of information regarding how the business activity affects the planet and people, such as carbon emissions, workforce diversity, and respect for human rights.
• A broader scope of the data to be disclosed, which encompasses the company’s entire business chain.

This approach ensures the integration of ESG factors into the overall business cycle and promotes the transition towards a circular economy model that minimises waste. Implementing this reporting will require significant strategic planning, particularly concerning people and resource utilisation. According to the rationale provided by the Ministry of Finance regarding the proposed amendments to the Accounting Act, it is anticipated that approximately 3,700 enterprises will experience a reduction in administrative burden. These enterprises are expected to transition from the small category to micro-enterprises due to the changes in the size of financial indicators used for categorisation. Additionally, around 350 medium-sized enterprises are projected to transition to small enterprises. All these companies could potentially benefit from a simplified form of the new financial reporting.

What will be the penalties for non-compliance? The Directive mandates EU member states to establish investigation and compliance structures to impose “effective, proportionate, and dissuasive” sanctions for non-compliance. Penalties will be determined by individual Member States in transposing the CSRD into local legislation, considering factors such as the severity and duration of the breach and the financial condition of the company.

When will it apply? The CSRD is being phased in as of 2024. Initially, public companies with more than 500 employees, including those whose shares are traded on EU regulated markets, banks, insurance companies, and other entities designated by national authorities as public interest entities, will be obligated to comply.

5. The Corporate Sustainability Due Diligence Directive (CSDDD/CS3D)

Following the political negotiation by the EU in December 2023 of the Corporate Sustainability Due Diligence Directive (CSDDD/CS3D), its final draft was published on 30 January 2024. The next steps involve voting on the text in the European Parliament and adopting it by mid-2024.

To whom does it apply? The directive will apply to a wide range of companies, including those based outside the European Union (as outlined in Article 2 of the directive) broadly as follows:

From the EU 

(a) ‘Very large companies’ with more than 500 employees and a net worldwide turnover of more than EUR 150 million for the last financial year for which they publish annual accounts. 

(b) Companies in ‘high impact’ sectors (this includes sectors such as textiles, agriculture, food and beverages, mining, fossil energy, construction and building materials, and chemicals) that have more than 250 employees and a net worldwide turnover of more than €40 million, of which more than €20 million is generated in ‘high impact sectors’.

Outside of the EU

(a) ‘very large companies’ that have generated a net turnover of more than EUR 150 million in the EU.

(b) companies in ‘high impact’ sectors that generate, within the EU, a net turnover covering the thresholds specified for those from the EU.

Bulgaria will have the right to decide whether to expand the scope of the Directive to include pension companies regulated by Regulation (EC) No 883/2004 and Regulation (EC) No 987/2009. For now, banks, alternative investment funds, undertakings for collective investment in transferable securities, insurance and reinsurance companies are exempt from this regulation, although this exemption is subject to review. Micro-enterprises and SMEs are also not among those entities that are currently obligated, but they could potentially be indirectly affected by the measures. To ensure clarity, the European Commission is expected to publish a list of non-EU companies that will be subject to these requirements. Several Member States already have legislation in place to regulate the sustainability screening of companies, such as the French law on vigilance of parent and contracting companies and the German law on supply chain. For many multinational companies, determining which regulation to apply proves to be a highly intricate issue. For instance, consider a German limited liability company ‘X’ with 2,000 employees, a turnover of €140 million, and a balance sheet of €45 million. Despite meeting the headcount requirement, this company falls short of the financial requirements of the Sustainability Check Directive. However, it will be subject to the German Supply Chain Due Diligence Act starting from 2024, as a result of different criteria under this law. Additionally, the company will also be obligated to comply with the Sustainability Reporting Directive as it meets two out of three criteria specified therein. On the other hand, let’s consider the English company ‘Y’, which has 2,000 employees and a turnover of EUR 200 million in the EU, but lacks physical or legal presence within the EU. Despite this, the company will still be subject to the new reporting legislation, specifically the Sustainability Reporting Directive, as it meets the turnover requirement.

What is Required? Companies will basically need to:

• Integrate effective due diligence policies into their corporate policies and procedures, including:
• Identifying, assessing, preventing, mitigating, and stopping actual and potential human rights and environmental harm.
• Implementing due diligence measures not only within their own operations but also within those of their subsidiaries and business partners throughout their supply chain, focusing on their “chain of custody” (i.e., specific links in the supply chain).
• Adopting and implementing remedial measures to cease and minimise adverse impacts. These remedial measures may take various forms, such as providing targeted support for ESG measures to suppliers.

Companies will also need to establish and maintain a notification mechanism and a complaints procedure, monitor the effectiveness of their due diligence policies and measures and publicly disclose information regarding their due diligence. Furthermore, companies will also need to adopt a transitional climate change mitigation plan, ensuring that their business strategy is compatible with the Paris Agreement target of limiting global warming to 1.5°C.

The Directive will increase pressure for greater transparency regarding the chains of activities of the affected parties, necessitating adaptations in their commercial relations and policies. To address negative impacts, companies need to engage directly not only with their direct suppliers but also their indirect suppliers. There will be an increasing reliance on ESG to provide quality and reliable data, leading to the inclusion of specific provisions in contracts between counterparties.

Private litigation is also likely, in addition to the currently prevalent proceedings initiated by state regulators or NGOs. Such commercial disputes may relate to the failure of suppliers or customers to meet their obligations to ensure sustainable business or even disputes relating to the management and protection of commercially sensitive information.

What will the penalties for non-compliance be? The local legislation transposing the Directive will introduce administrative penalties, which can be up to 5% of the net worldwide turnover of the previous financial year. Additionally, civil liability for damages caused by non-compliance will also be provided for.

When will it apply? The largest companies affected by the Sustainability Check Directive will be given a three-year grace period from its enactment and incorporation into local legislation to meet the new requirements. It is anticipated that 2027 will serve as the deadline year for compliance for these major enterprises. Meanwhile, smaller entities will likely have a more extended timeframe, ranging from four to five years, to adapt to the new sustainability check requirements.

By Katerina Kraeva, Partner, Katerina Novakova, Counsel, and Ivan Mangatchev, Consultant, Wolf Theiss

Regulatory updates – mostly driven by EU acts – keep lawyers on the toes in Bulgaria with digital markets being at the forefront of the country’s Competition Protection Commission according to PPG Lawyers Partner Mariya Papazova.

“At the beginning of January 2024, the Bulgarian Competition Protection Commission adopted a Block Exemption Decision,” Papazova begins. “This decision reflects EU regulations on prohibited practices, including vertical and horizontal agreements, as well as certain sectors. This decision transfers the newly adopted block exemption EU regulations to the respective type of agreements and practices with effect on national markets,” she explains, advising that “during the decision’s transitional period, market operators, need to be vigilant and ensure full compliance with the new legal framework. Especially in critical sectors like pharmacy, fuels, food, and energy, which are fundamental for the economy and thus, under continuous scrutiny by the Competition Protection Commission.”

Focusing on the priorities list of the Bulgarian Competition Protection Commission, Papazova reports that “digital markets are at the forefront, prompted by recent EU acts. These markets are rapidly evolving. In addition, the Competition Protection Commission’s sector inquiry into e-commerce of commercial consumer goods that began in 2021 is still ongoing. The sector inquiry may result in further compliance work and may also lead to antitrust investigations by the Bulgarian Commission.” She adds that “this scrutiny extends to fintech, where innovation outpaces regulation, potentially leading to anti-competitive practices. Additionally, the CPC is focused on the pharmacy, food, and nutritional goods sectors, particularly in terms of pricing, labeling, and advertising practices, underlining the importance of fair competition and consumer protection.”

Talking about how these developments impact the fintech and digital market operators, Papazova says that “the relative lack of regulation in fintech opens doors for non-compliant practices. Given the CPC’s intent to monitor these areas closely, fintech companies, in particular, must tread carefully.” 

“Companies must stay abreast of new regulations, especially those introduced in the past two years concerning consumer protection — it’s a challenge but also an opportunity for businesses to align their practices with these standards, ensuring they operate fairly and transparently,” she adds. “This requires diligent compliance work and an understanding of the legal landscape to navigate potential investigations effectively.”

Finally, according to Papazova, merger control remains a critical area in Bulgaria, with “the number of filings and decisions remaining stable in recent years.” The newly adopted national FDI regime adds an extra layer for dealmakers with the PPG Partner concluding that market players “must factor in these regulations when pursuing mergers and acquisitions, which only goes to show how our regulatory environment continues to gain complexity at a regular pace.”

Djingov Gouginski Kyutchukov and Velichkov, working with Kennedy Van der Laan, has advised OTP Bank and DSK Bank on a EUR 30 million financing for AES Geo Energy. Spasov & Bratanov advised AES Geo.

AES Geo Energy operates the 156-megawatt Sveti Nikola wind farm, located in the Municipality of Kavarna, in northeast Bulgaria. It is part of the AES Corporation, a multinational energy company.

The DGKV team included Partner Georgi Tzvetkov, Senior Associate Deyan Bogdanov, and Associate Irina Mihaylova.

The Spasov & Bratanov team included Partner Vassil Hadjov, Counsel Nadia Hadjova, Attorney at Law Krasimir Mitkov, and Associate Vladimir Tashev.

Dentons and Boyanov & Co have advised UniCredit Bulbank, Raiffeisen Bank International, the United Bulgarian Bank, and Eurobank Bulgaria on the financing for the construction and operation of a 160-megawatt solar plant in Maglizh, in the Stara Zagora region of Bulgaria. Stoeva Tchompalov & Znepolski reportedly advised the borrowers.

According to Dentons, “the Belozem Solar Park 2, which will have an expected generation capacity of 160 megawatts, is being developed under a special program to preserve and protect the region’s natural biodiversity. The project is sponsored by Eurohold, the largest public company in Bulgaria, and by 360 Energy, which has been successfully developing and managing renewable projects in Bulgaria for the past 12 years.”

The Dentons team included Partner Mark Segall, Counsels Patrycja Polasz and Pawel Dlugoborski, and Associate Paulina Surma.

The Boyanov & Co team included Partners Alexander Chatalbashev, Damian Simeonov, and Nickolay Nickolov and Principal Associate Ralitsa Nedkova.

On February 22, 2024, Bulgaria, previously one of the few remaining EU countries without foreign direct investment (FDI) controls, introduced a new FDI screening regime in accordance with the EU FDI Screening Regulation 2019/452 (the “EU FDI Screening Regulation”).

The Act to Amend and Supplement the Investment Promotion Act (the “FDI Screening Act”) [1] now requires prior review and approval on national security grounds for foreign direct investments (“FDI”) in certain key areas of interest for national security.

The regime will apply to investors controlled by non-EU shareholders or themselves constituting non-EU individuals or entities.

Indirect investments – such as those occurring via an EU-based holding company – and changes to such investments, are also caught by the new FDI regime.
This Note aims to provide a brief outline.

Investments caught by the new FDI approval regime

What is a “foreign direct investment”?

According to the FDI Screening Act:

– Foreign Direct Investment (FDI) means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in Bulgaria, including investments which enable effective participation in the management or control of a company carrying out an economic activity. A FDI is also the expansion of an existing investment, including the expansion of the capacity of an existing enterprise, the diversification of an enterprise’s production with products not previously produced and the establishment of a new place of carrying out commercial activity or the increase of the capital of the investment target, provided that the shares are acquired by the foreign investor. A portfolio (passive) investment is not a FDI.

The first part of the definition closely follows the definition of FDI under the EU FDI Screening Regulation. It, no doubt, covers investments leading to positions of control or to the ability to participate in the management of a local target.
What other investments (that come short of control or ability to participate in management) will be caught will likely be made clear in the subsequent secondary legislation. The screening thresholds provide a lower-end threshold of 10% of the capital of the target for some investments, which may serve as a safe harbor.
In the general case passive (portfolio) investments, that entail no influence on the target, are not caught.
In contrast to the EU FDI Screening Regulation, the local definition also catches expansions of an existing investment. The list of possible scenarios is broad and clearly not exhaustive, but arguably the expansion needs to result from a financial input by the foreign investor.

Who is a “foreign investor” for the purposes of FDI screening?

According to the FDI Screening Act:

– Foreign investor means:
(a) a person who is not an EU national or an entity whose registered seat is not located in a Member State, who/ which has made or intends to make a FDI in Bulgaria;
(b) a legal entity, the registered seat of which, according to its constituent act, is in a EU Member State, intending to make or having made a FDI in Bulgaria, in which control is exercised directly or indirectly by: one or more natural persons who is/ are not an EU national(s), one or more legal entity(ies) whose registered seat is not in a EU Member State, or another legal entity existing under the laws of a state which is not a EU Member State;
(c) a legal entity or other legal establishment, the registered seat of which, according to its constituent act, is in a EU Member State, which has made or intends to make a FDI in Bulgaria, in which, by virtue of a contract or internal rules, one or more natural or legal persons established in non-EU countries have direct or indirect control over the specific investment, or which, by virtue of a contract or multilateral transaction, makes a FDI falling within the scope of the FDI Screening Act, on its own
name, but on the behalf of the person under points “a” and “b” above.

In addition to non-EU established investors, the FDI Screening Act expands the definition of a foreign investor to include FDIs by a legal entity registered in an EU-country, which (or the particular FDI) is directly or indirectly controlled by a legal entity registered in a non-EU country. This approach appears contrary to the Judgement of the European Court of Justice on Case C-106/22 (Xella Judgement)2, which ruled against systematic screening of investments originating from EU holdings of non-EU ultimate parents, but seems in line with the European Commission’s proposal for a new FDI Regulation, whose scope also intends to include investments by EU investors that are ultimately controlled by individuals or entities from a non-EU country.

Low-risk jurisdictions

Certain non-EU countries, which will be additionally approved by the national parliament, along with the United States, the United Kingdom, Canada, Australia, New Zealand, Japan, South Korea, the United Arab Emirates and Saudi Arabia will be considered low-risk countries and enjoy the same screening rules as those for EU Member States for the purposes of applying the screening mechanism. The expected secondary regulation should make clear to what extent preferential treatment will be afforded to investments originating from these jurisdictions.

Which industries and fields are controlled? What are the screening thresholds?

A. General criteria, which trigger a mandatory filling

Investments in the fields of activity listed in Article 4(1) of the EU FDI Screening Regulation:

• critical infrastructure (for example, FDIs related to energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and others);
• critical technologies and dual use items (for example, FDIs related to AI, robotics, semiconductors, cybersecurity, quantum and nuclear technologies, and others);
• supply of critical inputs, including energy or raw materials, as well as food security;
• access to sensitive information, including personal data, or the ability to control such information; or
• the freedom and pluralism of the media;

which meet one or more of the following conditions:

(i) the FDI exceeds the threshold of EUR 2,000,000 or at least 10% of the capital of a target operating in the country will be acquired; OR
(ii) at least 10% of the capital of a target, which operates in the country and is engaged in high-tech activities, will be acquired; OR
(iii) a new investment is made which exceeds the threshold of EUR 2,000,000

should be notified in advance and cleared by the new Interdepartmental Council on FDI Screening.

In addition, a FDI made by аn investor that has a direct or indirect public participation in its capital from a country outside the EU, including significant financing by a public authority, would also be subject to a prior mandatory notification obligation and clearance as per the general criteria above, without, however, taking regard to the investment threshold.
In the latter case, a minimum shareholding of 5% by the non-EU country would be required if the foreign investor is a company whose shares are traded on a regulated market.

Low-risk jurisdictions (see above) will be excluded from this special case. It remains to be seen, whether they will also be excluded from the general notification obligation under the common thresholds above.

The FDI Screening Act introduces a suspensive screening regime in respect of investments crossing the thresholds above. It consists of an obligation for the foreign investor to notify its planned investment, and a prohibition to undertake the investment until it has received clearance. The notification will be reviewed under a two-step procedure, subject to specific deadlines, which will end in an express conditional or unconditional clearance, a tacit unconditional clearance, or an express prohibition. This procedure is discussed in more detail below.

FDIs caught in all cases

Certain investments may be caught by the new screening regime in all cases – i.e. irrespective of whether the above thresholds are met.

Where these investments have triggered the notification obligation, they should be completed after clearance is obtained.

However, they may still be screened even where they have not triggered the notification obligation, either because they are below the thresholds, or because they were completed before the notification obligation came into effect. In that case, the FDI Screening Act provides, neither an obligation to notify, nor a voluntary notification regime allowing to obtain legal certainty in respect of such investments:

B. FDIs by Russian and Belarusian Investors. FDIs in petroleum and petroleum products

FDIs by a foreign investor from Russia or the Republic of Belarus, as well as all FDIs related to the production of energy products from petroleum and products of petroleum origin at sites forming part of the critical infrastructure of the country according to Article 2, para. 1, item 8 of the Administrative Regulation of Economic Activities Related to Petroleum and Petroleum Products Аct, fall within the scope of the FDI screening regime, irrespective of value.

C. “Ex officio” criteria

The new Interdepartmental Council on FDI Screening has also ex officio powers to review FDIs in the following exceptional cases:

(i) New investments or FDIs that do not exceed the threshold of EUR 2,000,000 upon proposal of a member of the Council, in cooperation with the national security authorities;
(ii) A FDI that may have an impact on security or public order at the initiative of the national security authorities, regardless of whether the general criteria above have been triggered or not;
(iii) Based on the оpinion of the European Commission or a notification from an EU Member-State, where no FDI filing has been made and the FDI has commenced within 2 years prior the receipt of the opinion or the report.

Despite not being completely clear, according to the wording of the FDI Screening Act the ex officio powers of the Interdepartmental Council on FDI Screening to review FDIs due to national security reasons under B or C above may be exercised either before or after the investment has been completed. No time limit for exercising this ex officio power has been laid down in the FDI Screening Act. Upcoming secondary regulation may provide more clarity.

It remains an open question whether these powers can be exercised in respect of investments which have occurred prior to the entry of the FDI Screening Act into effect. The Act contains nothing to prevent exercise of the screening powers in respect of such investments, even if it does not explicitly state that these powers can be applied to such prior investments.

What is the screening procedure for FDIs, which trigger the notification obligation?

A foreign investor who intends to make a FDI, which triggers the notification obligation based on the general criteria under item 2.3, p. (A) above, is obliged to apply for a prior clearance. The screening procedure has a suspensory effect for such FDIs and the FDI is prohibited before obtaining an explicit or tacit clearance.

Тhe deciding body will be the new Interdepartmental Council on FDI Screening (the “Council”), which will be comprised of representatives of various Ministries, regulators and other authorities related to the national security. The Bulgarian Agency on Investment Promotion will be responsible to administer the application procedure, including in respect declaring the notification complete.

The Council will have to adopt its decision within 45-days following the filing or the correction of any deficiencies in the notification requested by the Agency. This term may be extended once, for up to 30 days. The absence of any decision in the initial or the extended term will be considered tacit unconditional clearance, permitting the FDI.

Express clearance may be issued with conditions attached.

The Council may also reject the application.

The decision of the Council will be subject to judicial review in two court instances.

Assessment criteria

When assessing the applications for a FDI clearance or reviewing FDIs within its ex officio powers, the Interdepartmental Council on FDI Screening needs to apply the criteria, set out in Article 4 of Regulation (EU) 2019/452:

(i) whether there is any interference by a government of a third country;
(ii) whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or
(iii) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

The assessment criteria may be further specified in the Regulation for application of the FDI Screening Act.

Sanctions for infringements of the FDI Screening Regime

According to the FDI Screening Act a foreign investor may incur a fine amounting to 5% of the value of the investment, but not less than BGN 50 000 (c.a. EUR 25 000) for failure to comply with the regime. In addition to the fine, the Interdepartmental Council on FDI Screening may also impose on the foreign investor restrictive measures necessary to ensure security or public order, including change of control, change and/or suspension of activity, termination of the FDI and other appropriate measures.

Next steps

The FDI Screening Act provides for a 6-month period, during which the government needs to adopt or bring the secondary legislation in line with the FDI Screening Act. During this transitional period the notification obligation will not apply, but the relevant investments may still be subject to ex-post screening.

By Peter Petrov, Partner, and Stoyan Surguchev, Associate, Boyanov & Co.

Until recently, Bulgaria was one of the few remaining EU countries not to have adopted a foreign direct investment (FDI) screening regime. However, this was set to change with the introduction of a bill in late June 2023 to amend the Investment Promotion Act. This amendment implements the screening mechanism outlined in Regulation (EU) 2019/452 (the “EU FDI Screening Regulation”).

Several months after the bill’s introduction, and after extensive discussions and multiple revisions, the final text was adopted in Parliament on 22 February 2024. This marks the end of the legislative process to enact a comprehensive foreign investment screening regulation for Bulgaria.

The final version of the bill introduces a much-needed “transitional regime”. Its ambiguous phrasing, however, leaves uncertainty about how the transitional rules will operate in practice. Specifically, the bill exempts from screening foreign direct investments that have “commenced” after the act came into force but before the necessary implementing regulations and regulations on the organisation and operation of the FDI Screening Council were adopted.

As expected, the bill closely follows the concepts of the EU FDI Screening Regulation, albeit with several distinctive features.

Under the final text of the bill, prior screening is required for any foreign direct investment that (i) directly or indirectly originates from a non-EU controlled investor (including those from the USA and UK) and (ii) targets any of the industries listed under Article 4, para 1 of the EU FDI Screening Regulation (i.e. critical infrastructure, critical technologies, supply of critical inputs, access to sensitive information, and freedom and pluralism of the media), when the investment:

• involves the acquisition of at least 10 % of the capital of an enterprise operating in Bulgaria; or
• exceeds EUR 2m (or its equivalent in BGN), including greenfield investments.

By way of exception, the bill allows for discretionary screening of certain investments that do not meet the above criteria, particularly when they could impact security or public order. Furthermore, specific foreign direct investments (involving investors from Russia or Belarus, or individuals engaged in certain activities related to, among others, the production of petroleum-based products concerning critical infrastructure) are subject to screening under the bill regardless of the aforementioned conditions.

Finally, foreign direct investments, which would otherwise fall within the scope of the new regime, are subject to screening regardless of the investment thresholds (EUR 2m and 10 %) in case of direct or indirect non-EU state participation in the foreign investor, including significant financing. As an exception to this rule, certain states (including the USA, the UK, Canada, Australia, New Zealand, Japan, South Korea, the UAE, Saudi Arabia and other “low-risk” states as determined by the Council of Ministers) are treated as EU states for the purposes of this additional screening “trigger”.

Any foreign direct investments subject to screening under the act are to be approved by the newly created Inter-ministerial Council for Screening of Foreign Direct Investments (the “FDI Screening Council”) in charge of administrative control under the act and chaired by the Deputy Prime Minister. The FDI Screening Council may also conduct an ex officio screening of a foreign direct investment for which an application has not been submitted.

In its assessment, the FDI Screening Council will apply screening criteria for determining if a foreign direct investment is likely to affect security or public order, in accordance with Art. 4 of the EU FDI Screening Regulation. Upon receiving a complete application for the approval of a foreign direct investment, the Council will have 45 calendar days to conduct the screening and issue a decision. The review period may be extended by an additional 30 days. Notably, the bill explicitly provides that the absence of a decision within the designated timeframes is construed as tacit approval of the investment.

After the screening, the Council may reject the application or approve the investment unconditionally or subject to compliance with certain behavioural or structural measures. If an investment is made without the required approval, the transaction remains valid, but the investor would be subject to a fine of 5 % of the value of the investment, but no less than BGN 50,000 (approx. EUR 25,500). In addition, the investor may be subject to behavioural or structural measures aimed at restoring security or public order, including modification and/or suspension of operations and/or termination of the foreign direct investment.

​The bill is expected to enter into force in the coming weeks, once promulgated, and to become fully applicable once the implementing and organisational regulations are adopted. These latter regulations are to be adopted within six months of the act’s entry into force. We therefore expect the new Bulgarian screening regime to be fully operational from late 2024.

Note: This is based on the final text of the bill on the amendment of the Investment Promotion Act as at the publication date and is subject to amendment pending the finalisation of the act.

By Ilko ​Stoyanov, Partner, Schoenherr

Bulgaria is nearing the home stretch of its Eurozone integration and OECD accession plans, according to CMS Partner Elitsa Ivanova, with renewables, ESG, fintech, and digitalization the hot topics for lawyers and bankers alike.

“Currently, we’re heavily engaged in transactional work, particularly in the renewable energy sector,” Ivanova begins. “This momentum is extending into banking and financing, making renewables a key focus of our practice. Projects that started developments a while ago are now looking for financing, and the surge in project financing within renewables is notable, with an expectation for continued growth,” she explains.

Moving to the connected area of ESG, Ivanova says “ESG is more than a trend; it’s becoming a fundamental aspect of deals, especially for regional banks.” Last year, CMS executed a major deal with a sustainability component, she points out: “Going forward, larger projects and syndicated deals with international institutions will need to adhere to sustainability goals, contributing to net-zero and carbon targets for banks and IFIs, as well as their clients.”

In terms of politics, two targets are on everyone’s agenda, Ivanova says: Eurozone integration and OECD accession. “Preparing Bulgaria for the Eurozone involves legislative changes and rigorous upgrades across institutions,” she explains. “While we meet most convergence criteria, inflation remains a challenge. Banks and state entities are aligning policies and systems for the January 2025 (prospective) deadline – so there is a concerted effort towards that goal.”

The hitch? According to Ivanova, “Bulgaria’s been placed on an increased monitoring list by the Financial Action Task Force – so they’ve seen some deficiencies that need to be addressed. We have a plan and a proactive approach to solving those issues, hopefully in time for a new monitoring report that’s coming up shortly.” Separately, the OECD accession push is a strategic move to enhance Bulgaria’s profile in Europe. “Joining the OECD, along with the Eurozone accession, aims to elevate Bulgaria’s standing, improve its country ratings, and burnish its business credentials for EU and foreign business partners,” she explains.

The other big topic on the banking agenda, Ivanova notes, is “embracing digitalization, while aligning with the EU agenda. Fintech, regtech, crypto, AI, and data commoditization are focal points.” Specifically, she mentions that “fintech is booming and regtech is catching up. The banking sector in general in Bulgaria has recognized the need to embrace innovation to stay competitive. And we’ve recently heard industry pledges – in addition to the digital transformation of banks – for also putting digital skills on the agenda: educating the public at large about the benefits and the risks connected to digital financial services.”

Ivanova then highlights the ongoing “banking consolidation trend, with some large acquisitions and mergers in the past couple of years.” The central bank is unlikely to issue any new licenses. In that context, she explains: “We have some large banks but also a number of smaller outfits – some, primarily license holders. So, investors might be looking into acquiring those small outfits to enter the market and grow from there. And the established players are looking to keep up and maintain their market share – opening the door for bolt-on acquisitions.”

Finally, Ivanova notes a significant course correction on Bulgaria’s NPL and credit servicing legislation. “There’s a notable effort to revamp legislation on credit servicers and credit buyers. The aim is to modernize and bring consistency to an area that has been underregulated. This includes new NPL legislation with stricter requirements for credit servicers and buyers, addressing long-overdue regulatory gaps.”

Djingov Gouginski Kyutchukov & Velichkov has advised Boleron on its two private equity investment rounds in preparation for the company’s IPO.

According to the firm, Boleron AD is 2024’s first company to successfully issue an initial public offering on the BEAM market of the Bulgarian Stock Exchange. Boleron AD is a Bulgarian digital insurance company.

The DGKV team was led by Managing Partner Stephan Kyutchukov and included Senior Associate Peter Angov.