Банкеръ Weekly

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NON-PUBLIC COMPANIES WILL ALSO PAMPER SMALL SHAREHOLDERS

PARTICIPATION OF ONE PERSON IN SEVERAL BOARDS WILL BE POSSIBLE ONLY UPON EXPLICIT PERMISSIONDrafted amendments to the Commercial Code, due to be conclusively approved by Parliament in the beginning of June, have borrowed quite a number of provisions from the Securities Act. Practically, the requirements to public and non-public companies have been rendered almost equal, concerning the holding of general meetings and distribution of dividend. However, considerable differences remain between the two kinds of companies regarding the increase of capital. A large part of the amendments to the Commercial Code concern the managemnt of joint-stock companies (the other substantial amendment to the legislative document is the entirely new chapter for the transformation and insolvency procedures). In the future the general meetings of shareholders should be in the company's head office (the statutes might envision another premise, but only in Bulgaria). The meeting should be held within six months after the end of the current year (i.e. by June 30 of the following year). When a decision is made for distribution of dividend, its payment should begin within three months. Similar terms have been stipulated for public companies. Other changes have been introduced in order to protect the interests of small shareholders and restrict manipulations on the part of companies' directors. Among them are: the reduction of the minimum share of the capital which entitles a shareholder to call a general meeting on a certain issue. Currently, this may be done by those holding more than a 10% stake, and 5% will be sufficient in future. Moreover, a shareholder of such a stake will be entitled to propose additional items in the agenda by filing his proposals at court. Presently, this extra is allowed only if all the shareholders are present. It is quite possible for that change to cause much trouble to the small owners. Hardly a shareholder from some of the former privatisation funds (which have been written off the public register) will attend a meeting, whose agenda is Approval of the 2002 Report. But there will be no restrictions as to the approval of decisions at such a meeting, which could injure his interests (for example, capital increase under condition). However, the drafters of the bill have projected some protective measures against attempts to vote against the interests of hundreds of shareholders. One of them stipulates that a member of a management body may not be entitled to vote on behalf of the small shareholders. The requirement for a falling quorum, widely used by the former privatisation funds (independly if public or not) has been changed, too. In case there is no quorum, the currently effective Commercial Code provides an opportunity for holding a meeting within a month and consider it regular no matter what part of the capital is represented in it. Thus the bigger companies often used to schedule the next meeting a few hours later and made the decisions with the votes of just several percent of the shares. The new provision stipulates that the second meeting (for which no quorum shall be demanded) cannot be held earlier before 14 days. Of course, that does not guarantee the presence of more shareholders, but the company's expenses shall go up. According to another amendment, only shareholders with over 10% stakes shall be entitled to file claims against directors who have inflicted losses to the company. Currenlt owners of at least 5% stakes are entitled to do that. Quite a number of the new stipulations regulate the conflict of interests when the managers effect deals with close companies or head rival firms. But the good plans may result in quite a mess. The intentions are that the members of the BoD (respectively the management board) should not have the right to carry out trade deals on their own behalf, to be unlimited liability partners (in limited and general partnerships), or to participate in the management of rival companies. Due to the practice in Bulgaria to register companies with a broad subject of activities, this restriction will affect most of the active businessmen who usually have several firms. It is stipulated that the restriction may be eliminated by an amendment to the company's statute or by a decision of the general meeting of shareholders, but the status quo has been treated nowhere in the transitional and final provisions. Thus, hundreds of BoD members will become violators of the law as soon as the amendments are enforced. In order to correct that violation a general meeting should be called and at least a 45-day term is needed for that. The managers are required to notify the company when they acquire more than 25% in another firm (there are similar regulations in the Securities Act). Important deals such as: transference of the enterprise, disposition with assets worth more than 50% of the company's balance sheet value, or undertaking of liabilities above that threshhold, shall be closed only upon a decision of the general meeting of shareholders. This will not be obligatory if the statute explicitly stipulates that the above-mentioned deals shall be approved by the BoD. But is that case they should be voted unanimously. One of the draft's positive sides is that it regulates the bonuses in shares, paid to the managers. The options for acquiring stocks are popular incentives to employees in the western countires, as it is presumed that as co-owners of the company they would be more ambitious in their work. Such a practice was not forbidden in Bulgaria, but no cases of using it had become known so far. The amendments to the conditions for winding up companies can be hardly said to be praiseworthy. Under the drafted new provision to article 252 of the Commercial Code, the court will wind up a company on the demand of a prosecutor if in the course of a year the net value of its property drops below the registered capital. (Net value of property means the net value of assets, or the equity capital, including the profit and reserves). Such a thing may happen when the company accrues losses, exceeding its reserves. Then its should either decrease its capital (if possible) or it should be wound up. But a great number of the state-owned enterprises in dire straits have a negative net value of assets. And it would be more logical to declare them insolvent rather than wind them up according to a procedure that is not clear.

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