Shareholders’ Rights Directive II and the Bulgarian law on related party transactions
The revised EU Shareholders’ Rights Directive (2017/828/EU) (“SRD II”) was due to be implemented into national law by 10 June 2019, but most EU member states missed this deadline. The Bulgarian legislative proposal implementing SRD II was submitted to the parliament in November 2019 and is expected to be approved and come into effect soon.
Below we outline certain aspects of the current and proposed new Bulgarian related parties’ transactions (“RPTs”) rules, applicable to listed companies (adopted far back in 2002), in the context of the SRD II’s RPTs provisions.
Definition and approval of RPTs
Bulgarian law requires prior approval of the general meeting of shareholders (“GMS”) for the following transactions:
(i) acquisition/disposal of assets: the listed company acquires, transfers, grants for use or creates a security interest over its assets;
(ii) debt incurrence: the listed company incurs obligation towards a person or a group of related persons; or
(iii) receivable origination: receivables arise in favor of the listed company from a person or a group of related persons,
in each case, where the value of the transaction exceeds:
(a) one-third of company's assets value (“Major Transactions”); or
(b) 2% of company's assets value (with respect to receivables – 1%) - in case of certain RPTs of the listed company (“Interested Parties’ Transactions”).
“Assets value” equals the lower value of the public company's assets in its two most recent balance sheets, at least one of which was audited and which were publicly disseminated.
In the case of a transaction involving the acquisition or disposal of assets (see paragraph (i) above), a majority of three quarters or more of the votes cast at the GMS is required and, in all other cases, a simple majority suffices. Any shareholders that qualify as “interested parties” (see the next section Who is a related party) are not permitted to participate in the vote for approval at the GMS.
Interested Parties’ Transactions, which do not require the prior approval of the GMS, are subject to the prior approval of the listed company's board of directors or management board (as applicable), with any interested board members restricted from the vote.
Thus, Bulgarian law is a priori in compliance with the requirements for defining RPTs and approval of RPTs, as set out in Article 9c (1) and (4) (first and third paragraphs) of the SRD II; moreover, Bulgarian law provides for enhanced protection of shareholders in listed companies, since it contains a number of gold-plated RPTs provisions and, also, Major Transactions without participation of related parties are also subject to prior shareholders’ approval.
Who is a related party
For the purposes of the RPTs regulation, the following persons are considered to be related parties (named “interested parties” in Bulgarian law) with respect to the listed company:
(i) members of the company’s board of directors or, in case of a two-tier management structure, members of the company’s management board and supervisory board (“Board Members”) as well as individuals who represent Board Members that are legal entities,
(ii) procurators and commercial proxies of the company; and
(iii) any person who directly or indirectly holds at least 25% of the votes of the listed company at the GMS or who otherwise controls that company,
when (A) such person or (B) a person related to such a person, is simultaneously:
(a) a party or a representative of a party, or an intermediary to the transaction, or the transaction is carried out for its benefit; or
(b) a direct or indirect shareholder controlling at least 25% of the votes at the GMS or who otherwise exercises control over a legal person who is a counter party, its representative or an intermediary to the transaction, or the transaction is carried out to that legal person’s benefit; or
is a Board Member, procurator or a commercial proxy of a legal person referred to in paragraphs (a) or (b) above.
The Bulgarian SRD II implementing proposal leaves unchanged this “interested parties” definition.
Current Bulgarian law provides for stringent aggregation rule that what is required in Article 9c (8) of the SRD II, which will also stay unamended. Transactions of the listed company with one and the same person, or a related group of persons, which individually are below the respective threshold, respectively, are aggregated for a 3 calendar years period. The GMS needs to approve the transaction (from the set of the aggregated transactions), by which the relevant threshold is exceeded.
If a Major Transaction or an Interested Parties’ Transaction requires the prior approval of the shareholders, the listed company's board of directors or management board, respectively, is required to provide a report to the shareholders on the expediency and conditions of the contemplated transaction. The report must include description of the proposed transaction, including its subject, value, parties, as well as the listed company’s benefit. This report is part of the disclosure package for the GMS and should be made available to the shareholders at least 30 days prior to the GMS date.
These Bulgarian provisions are generally in compliance with the requirements in Article 9c (2) and (3) of the SRD II. However, the Bulgarian SRD II implementing proposal supplements the current transparency rules with a new provision which reflects Article 9c (7) of the SRD II regarding public announcement of material transactions between a related party of the listed company and that company’s subsidiary.
Pursuant to the current law, certain transactions are exempt from the shareholders’ prior approval requirement, including, among others, the following transactions:
(a) entry of a listed company into bank loan transactions as a borrower and/or granting collateral with respect to these bank loans, provided that an interested party is not involved in these transactions in any capacity (neither as a party, representative or other intermediary, nor are the transactions for the benefit of an interested party);
(b) transactions effected in the ordinary course of the listed company's business, without involvement of an interested party in any capacity (please see the immediately preceding paragraph (a)). The law defines “ordinary course of business” to comprise transactions and other actions that are carried out within the listed company’s scope of activity and according to the customary commercial practice; extraordinary transactions and actions do not qualify as ordinary course of business;
(c) loans extended by a listed company to its subsidiary and deposits made by a subsidiary listed company to its parent, provided that the terms of these loans/deposits are not less favorable for the listed company than those available in the domestic market;
(d) transactions executed in compliance with imperative sector specific regulations applicable to the listed company.
The Bulgarian SRD II implementing proposal expands these derogations with new provisions that reflect Article 9c (6) (c) and (d) of the SRD II regarding exemption of RPTs related to variable remuneration of Board Members, on one hand, and, on the other, RPTs entered into credit institutions, aiming at safeguarding their stability, pursuant to supervisory measures prescribed by the Bulgarian National Bank. However, the SRD II implementing proposal has not availed of the discretions under Article 9c (6) (a) and (e) of the SRD II to exempt, first, RPTs between the listed companies and its subsidiary in case the latter is wholly owned or with no related party’s interest in it and, second, transactions offered to all shareholders on the same terms where equal treatment of all shareholders and protection of the interests of the company is ensured.