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01 February 2024

To buy or not to buy a going concern? Alternative M&A transaction structuring in Bulgaria

Unsurprisingly, the most common M&A transaction structures in Bulgaria are share deals, in which the target company is acquired with all its assets and liabilities, and asset deals, in which individual assets are acquired. But these structures may not always serve the parties' commercial needs. A share deal may not be possible if the buyer's due diligence revealed a title issue with the shares, a minority shareholder does not consent to a 100 % sale, or the company may have a separate line of business that the seller wishes to retain. A pure asset deal may be impractical if the buyer aims to acquire a business (e.g. a shopping mall as an operational asset) and not an individual asset (e.g. the shopping mall as a building), or where the transfer of contracts and certain relevant liabilities that form part of the business requires third-party consents.

A practical alternative

The transfer of a going concern is an alternative solution. The going concern is deemed an asset deal (as opposed to a share deal) that allows for the transfer of an operational business as a unit without transferring the company owning that business. Bulgarian law specifically defines the going concern and regulates its transfer. It is a pool of assets, liabilities and "factual relations". This includes assets, receivables, obligations (including financial debt and tax liabilities), employees (including unpaid salaries or social security contributions), contracts and "factual relations" such as customer base and project references. The buyer thus acquires an operating business with all the benefits and risks. Also, a separately and independently functioning part of the business may be subject to a going concern transfer. There is no need to formally separate it into a division ahead of the transfer. The transferred assets and liabilities are usually listed in a schedule to the SPA, but even if an item that clearly belongs to the going concern is omitted it would still be transferred by law.

Seller not off the hook

Under Bulgarian law, shareholders are not liable for the company's obligations (no piercing of the corporate veil). In share deals there is no post-closing liability of the shareholder-seller vis-à-vis the company's creditors for pre-closing matters. In a going concern transfer, the seller is the company whose going concern is being sold. By law, it remains jointly liable with the buyer for pre-closing liabilities, generally limited to the purchase price but also possibly exceeding it. There is no specific limitation period regarding the joint liability. It exists as long as the obligation exists.

Special creditors' rights

Within the six-month post-closing period, any existing unsecured creditor of the seller and the buyer may require performance of any pre-closing liabilities or the granting of security. If such a request is not satisfied, the creditors may have any potential claims satisfied with privilege from the rights that used to be owned by their debtor. Appropriate indemnities can be negotiated in the SPA to address any pre-closing liabilities of the seller-company.

Cherry picking

Like a traditional asset deal (but unlike a share deal), the buyer can do some cherry picking of assets and liabilities. The parties may agree to transfer an independently operating part of the going concern while the seller-company retains certain items in its ownership.

VAT considerations

The transfer of a going concern is VAT exempted. The retention of assets and/or liabilities by the seller must not result in the disqualification of the transferred business as a going concern. Otherwise, the tax authorities may qualify the transfer as an asset sale that is subject to VAT. So cherry pick with caution.

Notification formalities

Unlike in a share or a pure asset deal, the tax authorities must be notified of the intended transaction in advance, typically a CP to closing. Although it is not possible to waive this requirement, the process is mostly a formality. Nevertheless, it may take up to 60 days and must be done in a timely manner, can delay closing and, potentially, trigger a tax audit of the company-seller.

In addition, the seller and the buyer must notify their respective employees of the intended going concern transfer at least two months in advance. A breach of the notification obligation does not invalidate the transaction but triggers potential fines for the company and its management. The time gap and the pre-closing publicity may increase the risk of employee attrition.

To sum up, there are many factors affecting the deal structure decision as set out above. It is crucial to understand the parties' commercial rationale to select the most suitable acquisition method. While the transfer of a going concern as an alternative transaction structure has gained in popularity in recent years, we expect legal practice, including the courts, to further refine the process to meet the changing and more complex needs of businesses.

authors: Alexandra Doytchinova, Stela Pavlova-Kaneva


Office Managing Partner