The challenges of inheriting shares in a limited liability company in Bulgaria

Murgova & Partners Attorneys at Law | View firm profile

75 % of the small to mid-size companies in
Bulgaria are owned by families and their development has a significant role in
defining the economy of the country. In the EU, family owned businesses
represent more than 60% of all registered companies and ensure over 40% of the
overall employment.

Despite all this and although a key issue in this type of business
structure, the process behind transfer of ownership and inheritance of a family
business is
frequently overlooked and underestimated. Taking into
account that the limited liability company is in effect the most common
business structure, the present article aims to discuss some of the more
important practical issues related to the inheritance of shares in a limited
liability company (Ltd), which should be considered as early as possible when
planning to organize a business in this manner.

Although, that strictly speaking the limited liability company belongs
to the so called "capital" business structures, it has many of the
characteristics of a "personal" business or partnership due to the personal
involvement and contribution of each of the shareholders.

According to the Bulgarian Commerce Act, the shares in
a Ltd company can be inherited. However, this poses the question: Do the heirs
actually become full right shareholders in the business and what are the main
challenges when inheriting company shares?

This article will focus on and discuss the following

does the "membership relation" of the heirs arise and do they directly become
shareholders in the company;

counter measures may be expected from the other shareholders;

are the challenges which should be considered when inheriting company shares,

to ensure maximum protection of your interests in case of the demise of a

The company share represents part of the assets of the
limited liability company (art. 127 of the BCA) and the "membership rights" are
defined as the right to participate in the management of the company and the
profit distribution, the right to be informed about the company's activities,
the right to review company documentation and the right to a liquidation quota.
Basically, this means that the law establishes a distinction between ownership of a
company share and the rights of the shareholder in a Ltd. – his membership

The right of inheritance arises upon the occurrence of an actual fact – the
demise of a shareholder. The right of inheritance is a right which always
carries pecuniary characteristics, since the personal and non-pecuniary rights оf the deceased do not pass to his heirs.

In case of the demise of a shareholder in a Ltd.
company, his pecuniary rights – ownership over the company shares are inherited,
but his membership relation is not. The heir has in effect acquired the shares but has the position of
a third party vis-à-vis the company itself and therefore has to be accepted in
the company in order to acquire membership rights. In this case the heir does
not substitute the deceased shareholder and does not step into his membership
relation but can only acquire membership rights on his own account and subject
to approval by the General Assembly (GA).

The acceptance of a new shareholder is within the
competence of the General Assembly and therefore if such approval is not
granted, the heir does not acquire the non-pecuniary rights under art. 123 of
the Bulgarian Commerce Act. The inherited shares determine the heir's right to
receive the equivalent of the shares' value in accordance with art. 125 (3) of
the Commerce Act if he does not wish be accepted as a shareholder in the
company or if such acceptance is refused by the GA.

Therefore, as a general
position under Bulgarian law, the inheritance of shares in a Ltd. company is
not equivalent with becoming a full right shareholder in the company.

According to the purely doctrinal legal view which is
shared by most legal experts in Bulgaria, in case the company's Articles of Association expressly
provide that the heirs of a
deceased shareholder automatically become full right shareholders in the
company, further approval by the GA is unnecessary. In this case it is presumed
that the approval of the GA has been granted on the grounds of the Articles of
Association. However, the court practice does not share this view.

In the past years Bulgarian courts, including the
Supreme court of cassation have been consistent in their now unified position
that in order to accept heirs as full right shareholders in the company, a GA
needs to be convened and carried out under the rules of the Commercial Act.

In the sake of completeness, it should be noted that
in order to be accepted as a shareholder in the company, the heir needs to meet
the general requirements for a shareholder under law, namely to be sui juris
local or foreign individual or legal entity.

If all above conditions are met, in order for the heir
to become a full-right shareholder in the company, the following steps need to

  • The
    heir must have accepted the inheritance and must have filed an explicit request
    with the company which expresses his desire to become a full right shareholder
    and accept the Articles of Association;
  • The
    GA needs to be convened and must approve the heir's acceptance as a full right
    shareholder in the company;
  • The
    Articles of Association must be amended accordingly to reflect the changes in
    the shareholding structure and must be published in the company's file with the
    Commercial register.

It should be noted that the heirs cannot dispose of
(i.e. sell) the inherited shares since they do not have the capacity of
shareholders in the company before they have been accepted by the GA. However,
in this case the existing shareholder(s) can acquire the shares from the heirs
against payment of their equivalent.

Unfortunately, there is no unified court practice on
the issue of calculation of the equivalent of the inherited company shares.
Therefore, it is important tо have the rules for evaluation set out in the Articles
of Association in order to avoid complications.

A number of district courts in Bulgaria have adopted
the position that the evaluation of the inherited company share should be based
on the fair market value of the assets of the company and not on their balance
value. To support this position the courts have run a parallel with the
scenario of liquidation of the company where the assets are disposed of at
their market value based on which the shareholders receive their liquidation

This court practice accepts that the logical
interpretation of the law leads to the conclusion that the market value of the
company's assets should be the basis for evaluation of the shares. According to
art. 127 of the Commerce Act each shareholder owns a share of the company's
assets, which is defined on the basis of his participation in the company
capital, if not agreed otherwise. Art. 125 (3) regulates the right of the
leaving shareholder to receive the monetary equivalent of his company share.
The interconnective interpretation of the above provisions leads to the
conclusion that the value of the company shares which the leaving shareholder
is entitled to under art. 125 (3) of the Commercial Act can not be different
than the value of the share he owns in the company's assets. To accept the
contrary, namely to base the evaluation of the shares on the value of
acquisition, would mean that the leaving shareholder would receive an amount
which is different than the actual value of the share, be it higher or lower.
In order to guarantee the right of the leaving shareholder to receive the
market value of his share in the company, the law provides for the preparation
of an explicit accounting balance which evaluates the assets of the company
based on their current market value.

Other courts, including the Supreme court, adopt the
position that the property of a functioning company is an aggregation of right
obligations and factual relations and not purely ownership rights. This is why
these courts support the view that the evaluation which should serve as the
basis for calculation of the share of the deceased shareholder should be the
balance value of the company's assets and liabilities and not the market value.

In order to avoid long court disputes and in order to
minimize the risk of embezzlement of the shares of the deceased shareholder by
the remaining shareholder(s) and in order to clearly define the rights and
obligations in the case of inheritance of shares, we suggest that before
starting a business or accepting new shareholders in an existing business,
expert legal advice should be sought. Our legal team has strong experience on
the issues related to the inheritance of shares and have always aimed to
provide a preliminary in-depth analysis of the connected potential risks. As a
leading corporate law firm we are in the position to provide a professional
legal opinion on the specific scenario and will be able to identify and
minimize the risks by tailoring the company's Articles of Association to meet
the client's needs.

Taking into account the existing gap in the
regulations and the issues raised above, we advise the client to adopt Articles
of Association which put forward clear and comprehensive procedures to be followed
in the case of a deceased shareholder, convening of a GA in such circumstances
and evaluation of the inherited share in the company.

Many of our clients chose to organize their businesses
under the form of a joint stock company (JSC) as an alternative to the Ltd.
since this legal form provides for a more secure protection of inheritance
rights. Nevertheless, the small to mid-sized business is predominantly
organized under the legal form of a limited liability company and shareholders
should take due care when dealing with the issues raised above.

Due to historical,
social, political and other reasons a significant part of the family business
in Bulgarian is at the stage of being transferred from first to second
generation, which makes the topic of inheritance of company shares extremely
important and the issues it raises – more and more interesting.

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