Category: Bulgaria

Companies have until 1 February 2019 to register their beneficial owners in the Bulgarian Commercial Register and Register for Non-profit Legal Persons (the “Commercial Register”). This obligation comes as a result of the adoption of a new Law on the measures against money laundering in March this year (the “AML Law”).

Who is obligated under the AML Law?

Under the new AML Law, legal persons and other legal entities established on the territory of the Republic of Bulgaria are obligated to receive, dispose of and provide appropriate, accurate and up-to-date information about the natural persons, who are their beneficial owners, including details about the rights they hold. This information must be registered in the respective files of the entities in the Commercial Register and the BULSTAT Register. Further, natural and legal persons and other legal entities acting on the territory of Bulgaria in their capacity as trustees of trusts, trust funds and other similar foreign legal entities established and existing in accordance with jurisdictions that allow such forms of trusts are obligated to receive and dispose of appropriate, accurate and up-to-date information on the beneficial owner. This information must be registered in the BULSTAT Register.

What kind of information needs to be registered?

The new AML Law and Ordinance No 1 for the Administration, Maintenance and Access to the Commercial Register, which was also recently amended (23 October 2018) in order to reflect and effectuate the legislative changes, specify the data that needs to be entered in the Commercial Register. Subject to registration are circumstances regarding the legal entities that directly or indirectly exercise control, personal data of the physical persons that are beneficial owner(s), personal data of the contact person(s) permanently residing in Bulgaria (if the legal entity does not have a legal representative permanently residing in Bulgaria).

The beneficial owner definition

The beneficial owner definition under the new AML Law pretty much coincides with the definition under Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015, which the new AML Law implements. A beneficial owner is a natural person(s) who ultimately owns or controls a legal person or other legal entity and/or a natural person(s) in whose name and/or on whose account an operation, transaction or activity, is carried out and who meet(s) certain criteria that vary depending on if a corporate legal persons/other legal entity, or a fund, or a foundation or legal form similar to a fund, is concerned. Further, the definition in the AML Law foresees that where all possible means have been exhausted and the beneficial owner cannot be established or where doubts exist that the established beneficial owner is not the real beneficial owner, the natural person acting as senior management shall be deemed the beneficial owner.

Registration Term and Fines

The Bulgarian Registry Agency, the administration responsible for organizing the keeping, maintenance and access to the Commercial Register in Bulgaria, had until 1 October 2018 to enable the registration of circumstances regarding the beneficial owner in the database. Companies now have four months as of that date (i.e. until 01 February 2019) to enter the required data in the Commercial Register. The fines in case of non-compliance are from BGN 1,000 to BGN 10,000. Subject to higher fines, namely BGN 2,000 to BGN 20,000, are entities like banks, payment service providers, financial institutions, insurers, leasing undertakings, investment intermediaries. Furthermore, entities that have been fined and have not fulfilled their registration obligation, will be fined every month until they enter the required data in the Commercial Register.

By Gergana Roussinova, Associate Schoenherr

The Supreme Court of Bulgaria has clarified important aspects of enforcement over real estate assets that form part of an enterprise pledge.

Enterprise pledges embracing the whole pool of a pledger’s assets are a favorite security interest for banks in Bulgaria. They resemble English floating charges, since prior to an enforcement event, pledgers are free to deal with the pledged property. However certain assets within the enterprise may be fixed charged, and thus dealings in them would be restricted. Normally, this applies to valuable properties, and therefore real estate assets within the enterprise are typically fixed charged.

The enterprise pledge with fixed charged real estate has certain advantages over the classic real estate mortgage. First, whereas mortgage registration fees are calculated as a proportion of the secured obligation’s amount, the registration costs of real estate with fixed charge assets are primarily symbolic. Thus, in large financings a mortgage may result in costs of thousands of euros, while the registration of an enterprise pledge with a fixed charged real estate in the land registry would typically cost less than EUR 100. Furthermore, enforcement over real estate within an enterprise pledge may take place in an out-of-court procedure which is less costly and less cumbersome than bailiff enforcement, which is the only option in the case of a mortgage.

There was, however, lots of contradictory case law as to whether buyers in such out-of-court enforcement sales acquire the real estate assets free of other security interests. To unify the practice, the Supreme Court of Bulgaria issued an interpretative judgement (mandatory for all other courts) on July 11, 2018, holding that out-of-court enforcement sales do not affect mortgages and attachments over the same real estate assets even if those mortgages and attachments had been established after the date of the enterprise pledge. Thus, if a creditor has an enterprise pledge with a fixed charge over real estate registered on January 1, and subsequently a mortgage is established over the same real estate on February 1 (e.g. to secure a EUR 100,000 loan), an out of court sale by the enterprise pledge creditor (e.g., for EUR 90,000) would not affect the second ranking mortgage. So, the buyer could purchase the asset encumbered with a mortgage for an amount exceeding the purchase price paid by him.

As a result of the Supreme Court’s judgment, and some other recent statutory amendments, real estate sales in out-of-court enforcements would be quite uncertain, as buyers in such sales could find the real property encumbered with security interests which could render their investment a hazardous endeavor.

Therefore, it is to be expected that following the Court’s judgement creditors will be more inclined to take recourse to the general bailiff enforcement sale. Although that procedure is more cumbersome and costly, it results in extinguishing all encumbrances over the real estate.

This would in turn affect the drafting of enterprise pledge agreements, as certain arrangements around the bailiff procedure should be reflected in the parties’ arrangements.

By Tsvetan Krumov, Attorney-at-Law, and Milena Angelova, Associate, Schoenherr Bulgaria

This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Ever since the CEE market opened for private practice CEE lawyers have sought to work on international mandates in collaboration with international lead counsels. Apart from the obvious (we take an oath to serve justice, but it is no secret that we also in fact work for money), the benefits of this cooperation also include the opportunity to draw on the international counsel’s expertise, particularly in transactional work. Such cooperation has greatly influenced the work of local counsel. Those who seized the opportunity had a steep learning curve and developed their practices to a level that is generally referred to, mostly in lawyers’ own pitches, as reaching an “international standard.”

It is thus only natural that transactions of a particular importance and/or significant value, which an international client in earlier years would have engaged international counsel to lead, can now be handled independently by local counsel. And, where the parties on both sides of the table and their respective counsels have a comparable level of expertise in transactional work – they “speak the same language” – both the workflow and communication are smooth, and the exchanged drafts (as to structure, wording, and provisions) are generally based on internationally established standards and easily comprehensible to all sides.

However, a fair portion of the transactions happening across CEE do not take place among experienced international players. As our markets are characterized primarily by inbound investment, many deals involve international investors acquiring local businesses. The sell-side impatiently looks forward to finalizing the transaction but tends to underestimate the scope of and the timing of the transaction process. Local businesses and their owners may have achieved tremendous success and impressive results. However, for many of them the sale of their business or the taking on of a joint venture partner would be the first (and likely only ever) transactional experience. At the outset, they often do not anticipate the volume of work and the time required on their side to prepare for the due diligence process, nor do they expect that a share purchase, joint venture, or shareholders’ agreement created “according to international standards” would go beyond the type and scope of agreements they have processed in the past. Despite being new to the process, a vast number of local businesses still do not recognize the benefit of and are not willing to spend on hiring external counsel with relevant expertise.

As a result, we have repeatedly seen CEE sellers entering into a transaction supported only by their or target’s in-house counsel. Such lawyers have, no doubt, greater knowledge about the specifics of the operational business than any transactional lawyer may gain during the process – which is why they remain a valuable source of support throughout the process. However, not having gone through such a transaction before, in-house counsel are often overwhelmed by the type of and scope of transactional documentation they are expected to comment on and negotiate regarding, within (what else?) the shortest time period.

Even those local sellers who do recognize the benefit of external advice often tend to hire lawyers they know personally and thus trust, regardless whether such trust-worthy lawyers have the necessary background (and, as is often required, foreign language capability) to efficiently advise through the process. To avoid misunderstandings, no lawyer’s qualification is being underestimated here. But a sound litigation lawyer can be as misplaced in an M&A process as a top M&A lawyer is having to plead before court.

It is situations like this, CEE counsels who have trained for years to deliver transactional work at “international standards,” however defined, may misjudge the reality in their own markets. Work product that is considered standard in M&A can easily be perceived by the local counterparty as hostile, particularly in the absence of specialized counsel of its own. Standard due diligence request lists are often considered “far too broad” and to put a “disproportionate burden” on the sell-side. A standard-draft SPA, with structure and contents that are usual in M&A processes, may be considered “unacceptable” and “overkill.”

Sensitive CEE transactional lawyers should thus not lose sight of the markets in which they operate and should be able to make a reasonable advance judgement of the deal set-up. It may be less challenging to work on a complex deal with experienced international parties than on a mid-size transaction in which counsel has to balance between meeting international client expectations by delivering at “best international standards” and addressing in a properly comprehensive manner the needs of a potentially less-experienced local counterparty. This balancing act is not taught at law school. It is a skill specifically helpful, as I tend to believe, when practicing in CEE. A skill that a successful CEE transactional lawyer should develop and employ in this exciting job. 

By Alexandra Doytchinova, Managing Partner, Schoenherr Sofia

This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

With Decision No.1046 issued on 20 September 2018, the Bulgarian Commission for the Protection of Competition (the “CPC”) gave the green light to the acquisition of Rapido Express and Logistics OOD by its competitor Speedy AD, in accordance with Article 26(1) of the Act for the Protection of Competition (the “APC”).

At the same time, the CPC sanctioned Speedy AD for failing to provide complete and accurate information in its notification to the Competition Authority, which has a material and substantial importance for the evaluation of the concentration deal.

Failure to provide complete information about the deal was determined to be a violation of Article 47(5) of the APC, which lists a general obligation on undertakings to provide full and accurate informational assistance to the Competition Authority.

What is interesting in the case is that this is the first time in the practice of the CPC in which it sanctions an undertaking for failure to provide complete and accurate information about a concentration under Article 47(5), and at the same time issues clearance for it.

The concentration 

The CPC accepted that the notified operation, under which Speedy AD obtains direct and sole control over its competitor Rapido Express and Logistics OOD leads to a concentration between undertakings, within the meaning of Article 22(1), pt. 2 of the APC. In accordance with Article 24(1) of the Act, the participating undertakings are obliged to inform the CPC in advance of their intention to complete a concentration, when the sum of the turnovers of all the undertakings concerned for the previous financial year is higher than BGN 25 million.

The law also has an additional cumulative requirement with two alternative criteria, namely the turnover of at least two of the undertakings participating, or the turnover of the target to be higher than BGN 3 million. In this specific case, it was estimated that these thresholds had been met and there was an obligation to notify the CPC of the intended concentration, which the undertakings had fulfilled.

The CPC authorises the concentration if it does not lead to the establishment or strengthening of a dominant position, which will materially affect effective competition on the markets on which the operation will have an impact. According to the controlled analysis by the CPC, the concentration will have an impact on the market of provision of internal courier services and the market of provision of international land-based courier services under which there is a horizontal overlap between the activities of the participants in the concentration.

After the relevant market analysis, it was established that the leaders in the two markets in Bulgaria are, respectively, Ekont Express EOOD for the internal courier services in Bulgaria with around a 50 % share, and DHL Bulgaria EOOD for the international courier services with around a 40 % market share.

After conducting the necessary analysis of the concentration, it was established that the structure of the market would remain unchanged as the planned deal does not possess the nature to lead to the establishment of dominant position, because the market share of Speedy AD after the concentration is going to be no larger than 40 %. Therefore, the Commission found no evidence to lead to the rejection of the authorisation of the proposed concentration. 

Sanctioning Speedy AD

However, there were enough reasons for the CPC to penalise Speedy AD for failure to provide the information needed to conduct an objective evaluation of the deal. The reason for imposing the sanction was an opinion of a registered competitor of Speedy AD, Tip-Top Courier AD, which informed the CPC about a prior concentration deal, according to which Rapido Express and Logistics OOD had acquired the going concern of its competitor D&D Express EOOD.

It was held that Speedy AD was obliged to provide complete and accurate information to the Competition Authority about the activities and the market presence of the undertakings participating in the concentration – something which the notifier failed to do in this case by omitting to disclose the prior deal. Therefore, Speedy AD was penalised with 0,2 % of its turnover for 2017, or the sum of BGN 205,622.

What is interesting is that this is the first instance in which the CPC penalises an undertaking for failing to provide complete and accurate information specifically for a concentration. Up until now, this violation of Article 47(5) of the Act has been applied only in instances of unfair competition.

The provision issues a general obligation to undertakings to provide full and accurate information to the Competition Authority when being requested to do so. It seems that the provision also entails information contained in concentration notification. It remains to be seen whether Speedy AD is going to file an appeal against the sanction and whether such an appeal would be successful.

This article was co-authored by Rosen Manchev.

By Galina Petkova, Attorney at Law Schoenherr