Variable Capital Company (VCC) was first introduced in 2023 in the Bulgarian Commercial Code to respond to the need for a new type of flexible company in an ever-evolving world. Some of the legislator’s motives for creating this new type of commercial company are that the specific nature of start-up IT companies in the field of computer and software activities and other modern businesses requires a new type of capital company to provide a simplified procedure for their establishment and operation, as well as greater freedom and autonomy for the founders.
Advantages
Some of the advantages of VCC are:
- Variable capital – the capital of the company can be increased or decreased without the need of prior approval by the Commercial Registry. The changes are reflected once a year with the adoption of the annual financial statement.
- The capital can be easily increased or decreased according to the needs of the business.
- Transfer of shares – ease of shares transfers without the need of notary signatures.
- Attracting new investors – easier to attract new investors through express issuance of new shares.
- Attracting employees as partners – employees of the company have the opportunity to acquire shares of the company, which strongly motivates them.
- No opening of a fundraising bank account – since there isn’t a capital deposit requirement, the company does not have to open a bank account before it starts. This simplifies the overall registration process, particularly for foreign investors. There is no need to travel to Bulgaria to set up a bank account or deposit funds.
- Remote meetings – there is a possibility to hold remote meetings (video conferences, emails, Viber, WhatsApp, etc. Messengers), which makes management and decision making extremely easy, especially in the technology industry and IT startups.
Requirements
A Variable Capital Company has similarities to both an LLC and a JSC, as the liability of the shareholders to the creditors of the corporation is limited to the amount of the contribution, being liable to creditors for damages caused intentionally by acts detrimental to them. According to the legal definition, a variable capital company may be established by one or more natural or legal persons, with the following restrictions:
- Up to 49 employees may be employed and
- Its annual turnover must be up to BGN 4 million and/or the value of its assets up to BGN 4 million
Specifics
- Variable Capital
One of the distinguishing features of a VCC, as stated in its name, is the variable capital, which is divided into shares of equal nominal value (not less than 1 euro cent) and is not registered in Bulgarian Commercial Register or fixed in the articles of association. However, at the close of the financial year, the amount of the capital shall be fixed by a resolution of the ordinary annual general meeting (AGM). Shares with identical rights form a separate class, and the shares may vary in size for different classes. For example, the memorandum of association may provide that a certain class of shareholders or named shareholders shall have privileges in the exercise of voting rights and/or veto rights in the passing of resolutions by the general meeting.
- Shareholder Register
Similarly to the joint stock company, a register of partners is kept where the following information is recorded: name, address, personal identification number or UIC of all partners, date of acquisition of the shares, number of shares, value and type of contributions, and class of the shares.
- Transfer of shares
Another feature of a VCC that brings it closer to a PLC is the free transferability of the interest in the company to third parties, unless otherwise agreed in the memorandum or articles of association. The transfer itself is not subject to registration in the Commercial Register, but only to registration in the Shareholders register.
On the other hand, the contract for the transfer of a share shall be concluded in writing with notarial certification of signatures, unless the articles of association provide for ordinary writing (i.e. without notarial certification).
Company shares may also be inherited, pledged and acquired by the company itself (up to 50% of the capital).
- Employee Shares
Another distinctive feature is the opportunity for employees to acquire shares. This characteristic brings it closer to technology start-ups typical in the US and EU countries, where this option is a widespread practice. However, persons employed by the company cannot acquire more than 15% of the shares.
Risks
Taking into account the specifics and novelty of Bulgarian law, it is advisable to be very careful in the drafting of the memorandum of association or articles of incorporation of the company with variable capital. First of all because the VCC incorporates very liberal and flexible relations in order to avoid unnecessary paperwork and bureaucracy as much as possible. However, this is an extremely fertile ground for unscrupulous partners and third parties who can damage the operation of the VVC or even take over (hostile takeover) the same. And secondly – what is described in the previous sentence can happen exactly when a start-up, started from scratch, raises capital, develops and accumulates considerable financial and other resources.
Conversion
In the event that it is established at the regular annual general meeting that at the end of the previous financial year Bulgarian variable capital company no longer meets the requirements – namely: the number of employees has increased above 50 or the annual turnover is more than BGN 4 million and/or the value of the assets has exceeded BGN 4 million, then the VVC must be converted into another type of capital company, e.g. an LLC or an JSC.
