Financing transactions often involve lenders taking security over the assets of a borrower’s group of companies. The typical security package in Bulgaria includes security over the borrower’s and other relevant group companies’ shares and the receivables deriving from such shares.
This article focuses on shareholder distributions arising by operation of law rather than payments to shareholders that are contractually agreed (e.g., under shareholder loans or service agreements). In general, shareholders in Bulgaria are entitled to a distribution of profits and dividends, liquidation quotas, proceeds from the repurchase or redemption of shares and capital decreases, and any payments in the course of any type of corporate transformation or conversion of the legal form. As these are, by their nature, contingent receivables of the shareholder against the company, they may be subject to security.
Generally, security over receivables in Bulgaria may be established by way of a contractual pledge, a registered pledge pursuant to the Bulgarian Law on Registered Pledges, or, in specific cases, a financial collateral arrangement pursuant to the Bulgarian Law on Financial Collateral Arrangements. However, there are certain specifics and recent developments in relation to registered pledges over shareholder distributions that should be considered when financing deals in Bulgaria.
Firstly, the nature of the respective shareholder should be considered. While a contractual pledge over shareholder distributions may be provided by both natural persons and legal entities, a registered pledge over receivables deriving from shares may only be established by traders, i.e., companies, and if they act as shareholders, individual entrepreneurs. Natural persons may establish a registered pledge over their shares in certain types of companies but not over the receivables from such shares.
Secondly, the perfection requirements of the security over shareholder distributions from certain types of shares should be addressed. To date, the most common way of taking security over shareholder distributions deriving from any kind of shares has been the registered pledge due to its ease of establishment, relatively low cost, and the option of out-of-court enforcement. The perfection of such a pledge includes its registration with the Central Pledges Registry. In recent months, however, the registry has refused to register some pledges over shareholder receivables, particularly those deriving from shares in joint-stock companies.
The arguments for the refusals maintained by the Central Pledges Registry are that the receivables deriving from physical shares, such as registered shares, are inseparable from the shares and can only be pledged by way of pledging and physically delivering the share certificate in the possession of the pledgee. Therefore, in the registry’s view, a registered pledge that does not require the delivery of documents or assets does not apply to any physical shares nor to distributions deriving from such shares. When challenged before the relevant courts, some of the refusals have been upheld, while others have been revoked.
Both the refusals and the court decisions that confirm them seem to disregard the distinction between the rights of the shareholder to participate in the distribution of profit and to receive dividends on the one hand and the receivables against the company for such dividends once the right has materialized on the other.
The recent examples of refusals of the Central Pledges Registry and court decisions create inconsistency and uncertainty. In certain cases, pledges over receivables deriving from shares in joint-stock companies are being registered, while in others, registration is refused. This is important for lending transactions, as often perfection of the security, including over shareholders distributions, is a condition for disbursement of the funds. Refusals and potential re-filings and/or objections before courts, until the matter is resolved, may delay utilizations. Further, refusals concerning shareholder distributions specifically deriving from shares in joint-stock companies lead to unequal treatment of companies.
Lenders still have the option to resort to a contractual pledge or, where available, a financial collateral arrangement instead of a registered pledge over shareholder distributions, but that would deprive them of the advantages provided by the registered pledge. Alternatively, for the time being, financing institutions may insist on having a registered pledge over shareholder distributions deriving from shares in joint-stock companies. In such cases, however, they should factor in the possible delays or risk of having to waive the requirement altogether in case of a prolonged registration process or refusals that are appealed but eventually confirmed by the court.
By Svilen Issaev, Counsel, Head of Banking, Finance & Capital Markets, Kinstellar Bulgaria
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
