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Editorial

Legal Significance of Entries into the Book of Shareholders

The Book of Shareholders is one of the most important documents in a shareholding company, of great significance for the lawful conduct of business and for protecting shareholders' rights. Despite that fact, the provisions of the Bulgarian Commerce Act governing such an important document for any company are rather scant and utterly insufficient and for more than 20 years since the adoption of CA continue to prompt disputes that on occasion even result in controversial decisions of the Supreme Court (of Cassation).

 

The text in the Commerce Act dealing with the Book of Shareholders is limited to just a few passages identifying the kinds of facts that are subject to entry in it, in terms of registered shares and interim certificates, to the effect that ‘persons representing the company' are obligated to ‘cause' the entry of all such facts and that the transfer of registered shares and interim certificates, as well as all pledges of registered shares, ‘take effect for the company' from the moment of entry into the Book of Shareholders. We leave without comment the fact that in the mere total of 5 Commerce Act provisions governing legal relationships involving the document in question, three different designations are being used: ‘Book for Shareholders' (CA Art. 179), ‘Book of Registered Shareholders (CA Art. 185) and ‘Book of Shareholders' (CA Arts. 186, 261г & 262ш).

 

The absence of an exhaustive legal framework and clear-cut requirements for the procedure and method of keeping the Book of Shareholders, on the one hand, and the ambiguity regarding the legal effect of entering a fact in it, on the other, give rise to all sorts of problems and disputes in corporate practice, starting with negligently kept or non-existent, or multiple and mutually contradictory books of shareholders in the same company, all the way to fraudulent entries made by management bodies or individual shareholders.

 

Furthermore, case law interpretations of the legal effect of making an entry have prompted diametrically opposed rulings by the Supreme Court of Cassation.

 

Thus, some SCC panels of judges believe that unless a transfer of registered shares is entered into the book of shareholders, the transferor who is entered in the book rather than the acquirer is still in possession of the shares, therefore the acquirer is not only barred from exercising their voting and other rights as a shareholder, but also has no legitimacy to demand the annulment of a decision adopted by the shareholders' General Meeting. Others, however, claim that the entry of the endorsement effecting the transfer of registered shares into the book has only declarative value vis-à-vis the company, as the translative effect with respect to the acquirer occurs from the moment of such endorsement, therefore their rights as a shareholder may be opposed to the company by way of notification of the latter of the endorsement thus made.

 

While the issue regarding the scope and nature of the act of making an entry vis-à-vis the company may sooner or later be resolved through a ruling of the Supreme Court of Cassation, the absence of a procedure and guarantees for the storage and keeping of the book of shareholders will continue to breed problems, on the one hand, because of the diverse practices of businesses in keeping the book, and on the other, no less importantly, because of the absence of a mechanism to ensure the accuracy and veracity of the entries made. Such ambiguity and absence of rules can be eliminated through a measured and rational supplement of the legal framework contained in today's Commerce Act.

 

Of great significance for the practical elimination of problems would be the provision of legal guarantees as to who will be in charge of keeping the book and how, and who will be responsible for making the entries; the law should explicitly prescribe that the book of shareholders is to be kept by two members of the board of directors or, respectively, the managing board of the company, appointed by a board decision, in accordance with a procedure determined by the rules for keeping the book of shareholders, while said rules are to be adopted by the board of directors or, respectively, the managing board of the company.

 

Also, to avoid any confusion with respect to the type and form of such books and, most importantly, the risk of creating and keeping concurrently more than one book for the same company, the law may prescribe a standard form for those books, which every company, upon its incorporation, should receive from the Commercial Register, duly registered therewith, in tamper-proof binding and with numbered pages. At the same time a procedure for restoration or continuation of the book in case of loss or destruction, or when it becomes filled up should also be implemented.

 

Last but not least, the law could provide for books of shareholders to be deposited with a notary public for safekeeping, subject to a service contract between the notary and the company, said contract also being entered into the Commercial Register and providing that all entries made in the book by the authorized persons are to be authenticated by the same notary responsible for safekeeping the book.

 

The introduction of such measures, by themselves not particularly complicated or burdensome, would to a great extent eliminate the problems encountered in corporate practice, irrespective of the ultimate interpretation that the SCC, or the legislator for that matter, would give regarding the legal effect of making such entries in the book vis-à-vis the company.

 

 

Svetlin Adrianov

 

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