As legal advisers of foreign investors, we sometimes deal with clients’ unfulfilled expectations or negative experiences which occasionally have made reputable foreign companies exit the Bulgarian market or divest of their investments in Bulgaria. To avoid the risks and costs related to terminating a (bad) investment, a foreign investor may want to consider some of our observations as a heads up.
As a start, Bulgaria is a EU Member State and its legislation is in line with the EU laws and EU institutions practice. Most Bulgarian domestic business laws are based on the analogous laws applicable in Germany, Austria, France, etc. Bulgaria has one of the lowest corporate and personal income taxes within the EU – 10 per cent flat rate.
But Bulgaria’s investment climate is not better and more rewarding in most material aspects, if compared with the prevailing conditions for doing business in other locations in Europe and in our wider region, CEE.
In the context of a M&A transaction, these are a few take aways from some of the recent acquisitions and divestments in which we have been involved:
Delays are possible, for various reasons:
– Due diligence and legal due diligence in particular would be often time-consuming and inefficient; vendors’ would rarely invest in preparing a vendor’s due diligence report or in organizing an electronic or e-data room with documentation properly reviewed, ordered and filed in a reader friendly fashion; due diligence documents in various areas may be missing, sometimes due to poor bookkeeping or because the vendors would not recognize the importance of due diligence and proper disclosure of relevant facts and information to potential purchasers; a professional data room manager is hired only exceptionally, ideally the vendor’s law firm would offer to organize and manage a data room, if physical – at its offices. Vendors are cost-sensitive and may not be advised by professional advisers, legal or financial; if they recognize the need of a professional advice, they may want to bring in such adviser in a later stage of the process and ask for additional time to bring them up to speed.
– Transaction contract negotiations with local vendors can be prolonged; meetings can be cancelled or postponed on a short notice; larger transactions would normally require several meetings.
– Regulatory approvals, if required, may delay the closing. For example, obtaining a merger clearance from the national competition authority would normally take four to six weeks (but only after the commission decides that the merger notification is complete and no further information is needed from the parties to proceed with its review), absent serious competition concerns. However, the law does not stipulate for a strict deadline within which the authority must issue its decision and there is no tacit approval rule (i.e. the notified transaction would be considered approved, if the authority did not issue a decision within the statutory term). Furthermore, there is no a fast-track or a simplified procedure, even for relatively simple transactions that would not result in any changes in the parties’ market positions in the relevant market. Thus, if the consummation of a transaction requires a regulatory approval, the effect on timing must be factored in. Finally, the Bulgarian competition commission has recently opened in-depth, 2nd stage investigations in cases where top-line preliminary analysis would have indicated that they should have been cleared in an ordinary, one-stage proceedings. As a result, such transactions may be delayed by additional 4 to 5 months, until the commission adopts a final decision.
– In case of a transfer of a business or a part of a business as a going concern regulatory approvals may also be required, such as a merger clearance, or restrictive mandatory rules may apply, such as the rules on protection of employees in the event of a transfer of an undertaking, the so called TUPE.
The location of the acquired business matters in various aspects. The local municipal taxes and fees are different in the different municipalities; the administration of some municipalities may be substantially more efficient and investor-friendly and administrative services with better quality and faster: as an illustration, in an investment project for a production plant, funded by external, say EU funds, the time necessary for obtaining the required construction permits and the associated costs may be critical and the lack of support from the local authorities may cause delays and ultimately a failure to comply with the financing terms.
In the context of the day-to-day business operations, consider that:
– The national labour legislation, effective since the late eighties of the last century, is often viewed by foreign investors as restrictive and formalistic. Although employees’ statutory rights catalogue may appear extensive, in practice such rights are sometimes disregarded and hard to enforce. The enforcement authorities lack the necessary resources to effectively enforce the laws and ensure compliance. Trade unions are not present in all businesses and are underrepresented in some industries like tourism or IT.
Unfair competition and unfair commercial practices. A significant percent of the complaints submitted and cases resolved by the Bulgarian competition authority relate to unfair competition in its various forms: misleading or prohibited comparative advertising, unauthorized use or disclosure of trade secrets by former employees, etc.
Companies holding copyrights, trade marks and other intellectual property rights and with valuable know how and proprietary commercial and business information must implement at least basic rules, policies and procedures for protection of confidential information and trade secrets against unauthorized disclosure to third parties, for example, from former employees to existing or potential competitors. The employment agreements with relevant key employees must include, among others, tailored contractual restrictions and provisions relating to the ownership and right to use of intellectual property rights, such as copyright to software and patent rights, and adequate confidentiality obligations.
Enforcement of contracts may sometimes be difficult. For most commercial contracts specific performance would not be enforceable. For example, where the law requires specific form to effect a transfer, like the requirement for a certification by a notary public of the signatures of the parties to a share transfer agreement for a share transfer in a Bulgarian limited liability company. In the above example, generally a breach of the contract by the seller would entitle the buyer to bring a court claim for (monetary) compensation for the damages suffered and loss of profit (or liquidated damages, if relevant).
Another important aspect is the exercise of a proper standard of care before entry into a contract of a significant value with a party unknown or a recently established entity without conducting a due diligence or with an insufficient due diligence or know your client check. Among many other risks a foreign contractor should be aware that the concept of piercing the corporate veil is not recognized by the Bulgarian legal system and, thus, unless in exceptional circumstances, a group of companies or a parent (holding) company of an insolvent party to a contract would not be liable for the debts of such a group company or a subsidiary.
Needless to say, the thoughts and tips shared here are non-exhaustive and non-specific and do not relate to a particular matter or type of a transaction.
This is not a handbook (or even the first chapter of it) or guidelines and it is not comprehensive or exhaustive in any aspect. The information contained in this post is not intended to and does not constitute a legal advice under Bulgarian law or under the laws of any other jurisdiction. It is provided for informational purposes only. No actions should be taken or not taken based on any contents of this post.