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01 February 2015

The Nature of the SPA under Bulgarian Law: Endorsement of Registered Shares an Obligation under the SPA

Share sale and purchase agreements were considered to qualify under Bulgarian law as “preliminary agreements” for the future transfer of shares. According to the Bulgarian High Court decision of 16 January 2014, however, the sale of registered shares may not be subject to a preliminary agreement. The SPA that governs the share sale is a final agreement.

Selling registered shares in a joint-stock company under Bulgarian law

Although not required by law, the main document that governs the sale of shares in a joint-stock company is a share sale and purchase agreement (SPA). The SPA typically includes a general sale and purchase clause providing that the seller transfers and sells the shares to the buyer and the buyer purchases the shares from the seller.

But an SPA is not enough to effectively transfer the shares. So the parties to the SPA further agree to do all necessary actions to complete the transfer of the shares. Among these actions are (i) in case of registered materialised shares, the endorsement of the shares, delivery of possession of the printed shares or interim share certificates, and registration of the endorsement in the company’s shareholders’ book; and (ii) in case of registered dematerialised shares, the registration of the share transfer with the Central Depository.

What is a preliminary agreement?

Since the transfer of shares occurs not at the execution of the SPA but at completion of certain other actions, does this make the SPA for the sale of the shares a preliminary or a final agreement, and can the sale of shares be the subject of a preliminary agreement? The doctrine is contradictory.

The Bulgarian Obligations and Contracts Act (Art. 19) introduces the concept of a preliminary agreement for transfer of title. The main difference between the preliminary and final agreement is that the main obligation a preliminary agreement creates is to enter into a final agreement with a certain minimum content while the final agreement lays down the obligation, among others, to transfer certain rights. The preliminary agreement aims to put the relationship between the parties into an initial frame and to mark its parameters, which are to be developed more precisely by a final agreement.

Each party to the preliminary agreement may bring an action before the court to declare the preliminary agreement a final agreement and enforce it. In such case the final agreement is replaced by the court judgment. So, it is the judgment that effectively transfers the title and, if public registration of the title is required, the judgment triggers such registration.

The nature of the SPA – Preliminary agreement or not?

A recent High Court decision holds against the possibility to sell registered shares under a preliminary agreement. Since the SPA creates a contractual obligation to transfer shares on the condition that the endorser (transferor) endorses the shares, the SPA may not be treated as a preliminary agreement. Once the parties have agreed on a share transfer, they have actually entered into a final agreement. As such, the court may only enforce the obligation on the seller to transfer the shares; that is, to endorse the shares to the buyer.

But a court judgment cannot replace the endorsement itself. If the seller refuses to endorse the shares to the buyer, the buyer may (i) keep to the SPA and ask the court to impose penalties on the seller until the seller endorses the shares to the buyer or (ii) request rescission of the SPA. In either case, the buyer may claim damages for breach.

The difference between the SPA and the endorsement

The endorsement is not an element required for the validity or enforceability of the SPA but a special means of share title conveyance. It is a separate unilateral transaction. As such, the endorsement is executable only by the endorser (transferor) without requiring the endorsee’s (transferee’s) consent.

The SPA, on the contrary, is a bilateral agreement that creates the endorsement obligation on the seller. So, shares can be validly transferred by endorsement only without the underlying contractual obligation to endorse shares laid down in an SPA.

The SPA creates a valid contractual obligation to transfer shares, but it is not enough to effectively transfer the shares. The transfer of shares occurs at completion of certain additional actions, such as endorsement of registered materialised shares and delivery of possession of the printed or interim share certificates by the seller to the buyer.

author: Silvia Ribanchova


Attorney at Law