The Bulgarian Variable Capital Company - key features and practical benefits.

The variable capital company (“VCC”) is the newest form of commercial company under Bulgarian law. Its legal framework was introduced through amendments to the Bulgarian Commerce Act adopted in 2023, and the registration of VCC became possible in practice by the end of 2024.

• What is a VCC and why was it introduced?

  
  

The VCC combines certain features of the limited liability company and the joint-stock company, adapting them to the needs of small and dynamically developing businesses.

It is a capital company, one of its defining characteristics being that the amount of its capital is not registered with the Commercial Register and the Register of Non-Profit Legal Entities (“Commercial Register”). The minimum capital required to establish a VCC is EUR 0,01 (one eurocent) - currently the lowest statutory minimum capital applicable to a commercial company under Bulgarian law. A variable capital company may be established by one or more natural or legal persons and may therefore operate either as a single-member company or as a company with two or more members. This corporate form is available only to enterprises with an average headcount of fewer than 50 employees and an annual turnover not exceeding BGN 4 000 000, equivalent to EUR 2 045 167,42, and/or an asset value not exceeding the same threshold.

These statutory requirements demonstrate that the VCC was designed primarily for small and start-up businesses whose structure and financing needs are expected to evolve rapidly.

• Why is a limited liability company not always suitable for a start-up^[1]?

  
  

The limited liability company, including its single-member form, is the most commonly used corporate form for small and medium-sized businesses in Bulgaria. However, its statutory framework presupposes a relatively stable ownership structure and is therefore not always well suited to business models in which new investors are regularly admitted and equity participation changes frequently. The transfer of an ownership interest in a limited liability company requires a written agreement with simultaneous verification of both the parties’ signatures and the content of the agreement. Where the transferee is not already a member of the company, that person must also be formally admitted as a new member. Accordingly, every change in the ownership structure requires the completion of a formal procedure and the registration of the relevant circumstances with the Commercial Register. For a company seeking to attract investors and expecting frequent changes in its ownership structure, these requirements may involve considerable time and additional expense.

• Why is a joint-stock company not always the appropriate solution?

  
  

Some of the limitations associated with a limited liability company can be avoided by establishing a joint-stock company. The shareholders of a joint-stock company are not individually registered with the Commercial Register. Instead, ownership and transfers of shares are recorded in the register of members in accordance with the applicable statutory rules. This facilitates changes in ownership and makes the joint-stock company more suitable for raising investment.

However, the joint-stock company has a significantly more complex organisational structure and is generally better suited to larger enterprises. Its establishment requires a substantial initial financial commitment, as the statutory minimum capital is EUR 25,000. In addition, the company must be managed through collective corporate bodies - either a board of directors under the one-tier system or a management board and a supervisory board under the two-tier system. Although this structure provides a clearer allocation of responsibilities and stronger internal controls, it may be disproportionately burdensome for a start-up business whose principal needs are flexibility, speed and lower administrative costs. The joint-stock company may therefore prove to be an excessively complex and costly structure for a business at an early stage of development that does not yet have substantial financial, administrative or human resources.

To address these limitations, the Bulgarian legislature introduced the VCC as a more flexible corporate form that combines elements of the existing company structures while avoiding some of their principal disadvantages.

• What problem does the VCC address?

  
  

The VCC was introduced in response to the need for a more flexible corporate structure that is capable of accommodating the specific requirements of start-up and growth-oriented businesses.

It combines the relatively straightforward organisation and limited liability characteristic of the limited liability company with the possibility of creating different classes of company shares, structuring management more flexibly and facilitating transfers of ownership interests - features traditionally associated primarily with the joint-stock company. Where expressly permitted by the articles of association, VCC’s shares may be transferred by means of an ordinary written agreement, without verification of a notary. This enables members to transfer their shares to third parties more quickly and with fewer formalities.

Neither the amount of the VCC’s capital nor the holders of its company shares are registered with the Commercial Register. Changes in ownership are instead recorded in a register of members maintained internally by the company. The law also permits the creation of different classes of company shares, the granting of special rights to individual members, the issuance of rights to acquire shares and the use of loans that may subsequently be converted into equity.

The VCC is therefore a corporate structure designed primarily for start-up and growth-oriented businesses for which attracting investors and adapting the ownership structure are central to their development strategy.

• What are the main practical benefits of a VCC?

1. Variable capital.

The defining feature of a VCC is that the amount of its capital is not registered with the Commercial Register. Instead, the capital is determined annually by a resolution of the regular annual general meeting, based on the number and nominal value of the company shares actually issued. This allows the company’s capital structure to change following the admission of new members or the issuance or cancellation of shares without each individual change in the capital having to be registered separately. As a result, the company’s ownership and capital structure can evolve more efficiently alongside the development of the business.

2. Flexibility in the management structure.

The variable capital company may be managed by one or more managers or by a management board. This enables the company’s management structure to be adapted to the particular stage of its development. During the initial stage of the business, the company may be managed by a single manager and maintain a relatively simple internal organisation. As the business grows or external investors are admitted, the company may transition to management by a collective body in which the interests of both the founders and the investors can be represented. The law therefore grants the founders considerable freedom to select and subsequently modify the management structure in accordance with the specific needs and stage of development of the business.

3. Different classes of company shares.

The articles of association may provide for different classes of company shares carrying different economic and governance rights. Similarly to the joint-stock company, the VCC may divide its company shares into separate classes, each carrying rights that differ from those attached to the other classes. For example, the founders may hold shares carrying multiple voting rights, while investors may be granted a guaranteed or additional dividend, a liquidation preference, a redemption right or a veto over certain categories of corporate decisions. The law also permits the issuance of preferred shares without voting rights. This flexibility allows the differing interests of founders, investors and employees to be accommodated within a single corporate structure without requiring all members to hold identical rights.

The relevant rights and distinctions must be regulated in detail in the company’s articles of association.

4. Convertible loans.

Article 260i, paragraph 7 of the Bulgarian Commerce Act expressly permits a VCC to enter into loan agreements under which the loan may be converted into company shares. This is the first time that Bulgarian commercial law has expressly provided a statutory basis for convertible financing.

Under this mechanism, an investor initially provides financing to the VCC in the form of a loan. Upon the occurrence of a predetermined event, the investor may acquire company shares instead of receiving repayment of all or part of the amount advanced.

The conversion may be linked to various events specified in the articles of association and the loan agreement, such as the maturity date, the fulfilment of a particular condition, the failure to repay the loan or another circumstance agreed between the parties.

This instrument is particularly useful for start-up businesses requiring additional financing for the development of their commercial projects. A convertible loan allows the company to obtain the necessary funding while giving the investor an opportunity to acquire an ownership interest in the business at a later stage. Conversion does not, however, occur automatically. The articles of association and the loan agreement must clearly and comprehensively regulate the conditions, conversion price and procedure for acquiring the relevant shares.

5. Vesting arrangements.

The articles of association of a VCC may establish mechanisms under which employees acquire the right to obtain company shares once certain conditions have been fulfilled. Such conditions may include the expiry of an agreed period, the achievement of specified performance targets or the employee’s continued employment with the company. These mechanisms are widely used in international corporate and start-up practice and are commonly referred to as “vesting arrangements.”

The Bulgarian Commerce Act expressly permits employees to be granted rights to acquire the company’s own shares. This allows key employees to be incentivised to remain with the company and contribute to its long-term development. Depending on the rights attached to the shares, employees may also be given the opportunity to participate in the company’s management and to benefit from its future economic value and profits. The total number of shares that may be acquired by employees under such arrangements may not exceed 15% of all company shares.

6. Restrictions and special arrangements concerning transfers of shares.

The articles of association may impose a prohibition on the transfer of shares for a specified period and may provide for various other restrictions and special rights relating to their disposal. These may include a right of first refusal, a member’s right to participate in a sale on the same terms as another member, an obligation to transfer shares upon the occurrence of specified circumstances and the temporary suspension or restriction of voting rights. These possibilities allow the articles of association to incorporate mechanisms commonly used in investment transactions, including lock-up^[2], tag-along^[3], drag-along^[4], good-leaver^[5] and bad-leaver^[6] provisions. Such mechanisms may protect the company and its remaining members in circumstances including the departure of a founder, the sale of a controlling interest, a change of control over a member or the failure to perform a material obligation.

As a general rule, a transfer carried out in breach of the agreed restrictions is not enforceable against the company or third parties. The combination of these features distinguishes the VCC from the traditional limited liability company and joint-stock company structures. The balance achieved by the legislature between organisational stability, management flexibility and the ability to support innovative business ideas creates new opportunities for the Bulgarian market and economy.

In addition to the exceptionally low minimum capital requirement, one of the VCC’s most significant advantages is the ability to use the articles of association as a detailed instrument for regulating ownership, management, financing and the relationships among founders, investors and employees. This level of contractual and organisational flexibility is considerably more difficult to achieve through the traditional forms of commercial company. When carefully drafted, the articles of association of a VCC can provide stability for the founders, meaningful protection for investors and genuine incentives for key employees. This makes the VCC particularly suitable for businesses planning rapid development and seeking to attract external financing.

Should your business requires a flexible corporate structure or innovative management, financing and employee-incentive mechanisms, “Peshkovski & Partners” Law Firm can provide comprehensive legal assistance and prepare an individual corporate strategy tailored to your commercial objectives and the specific needs of your business.

^[1] Start-up - a newly established company that develops an innovative product, service, technology, or business model with the potential for rapid growth and scaling, typically amid significant market and technological uncertainty;

^[2] Lock-up - a restriction preventing a partner from transferring their shares for a specified period;

^[3] Tag-along - the right of a minority partner to sell their shares alongside the majority partner and under the same terms;

^[4] Drag-along - the right of the majority partner to compel the other partners to also sell their shares to the buyer under the same terms;

^[5] Good leaver - a partner or employee who leaves under valid circumstances and typically retains the shares acquired or sells them under fair terms;

^[6] Bad leaver - a partner or employee who leaves through fault or breaches their obligations, and may therefore be required to transfer their shares at a less favorable price.