Financial Assistance – Traps and Gaps in Bulgarian Law

The concept of financial assistance under Bulgarian law

Article 187^e para 3 of the Bulgarian Commercial Act (Търговски закон) (“BCA”), prohibits joint stock companies from providing loans or security for the acquisition of their own shares by third parties. This prohibition does not apply to transactions entered into by banks or financial institutions in the ordinary course of business, provided that following the completion of the transaction their net asset value continues to be within the thresholds specified by the law. Furthermore, the BCA prohibits any type of financial assistance whether public or private, from providing financial assistance. Limited liability companies, as well other types of companies, do not fall under the prohibition on financial assistance.

The gaps in the regulation of financial assistance under the BCA

The generally worded prohibition on financial assistance under the BCA leaves room for various interpretations. The BCA says nothing about whether forms of financial assistance other than loans or grants of security from the target company, such as (i) payment of acquisition related costs or (ii) granting security by a subsidiary of the target company over its assets in respect of a loan taken by the buyer of the shares are acceptable. In addition, the law does not clarify whether the exception relating to the banks and financial institutions applies each time a bank or financial institution participates in a transaction, or only when the target company is a bank or a financial institution.

Traps for investors acquiring shares in Bulgarian joint stock companies

Loans or securities granted in breach of the financial assistance prohibition may be voided by a court, although, neither case law, nor the law itself explicitly states that the transaction is ipso facto null and void. However, the transaction may be challenged as invalid on the grounds of circumvention of the law, ie, the parties pursued an unlawful goal through lawful means and they are aware that the sought-after goal was prohibited by the law. Currently case law on this topic is scarce. The gaps in the law and the lack of case law in regard to financial assistance create some uncertainty for investors intending to purchase shares in Bulgarian joint stock companies.

Some “light at the end of the tunnel”

Regulation No. 711 of 20 August 2014 of the Bulgarian Supreme Court of Cassation clarifies the prohibition on financial assistance in some aspects. The case heard by the court involved a mortgage over real estate of the target company established in favour of a bank to secure a bank loan granted to the buyer of shares in the target company. The court concluded that the mortgage constituted indirect financial assistance and declared the mortgage null and void. Further, the court held that the statutory exception on the prohibition of financial assistance for banks and financial institutions applies only in cases where the target company is also a bank or a financial institution. Finally the court rules that not only parties to the deal could seek to have it invalidated, but interested third parties were entitled to do so, too. The question of the validity of the main transaction, ie, purchase of shares, was not addressed by the court because this was not the subject of the claim.

The prohibition on financial assistance under Bulgarian law encompasses only limited cases of financial assistance and creates gaps that should be filled by case law. In the last few years, courts have chosen to take a broader approach in interpreting "financial assistance" and to extend its application to cases which are not explicitly provided for by the BCA but which are regulated by Directive 2012/30/EU.

author: Silvia Ribanchova