Legal guide for company directors and CEOs in Bulgaria

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

Yes, directors (members of a board of directors or the management board of joint stock companies, and managers of limited liability companies) have certain obligations that could be categorised as ESG considerations. These obligations include inter alia:

• Environment – there are no specific obligations for directors regarding care for nature. Depending on the scope of a given company’s activity, such obligations may be imposed on a company but no general provisions on directors’ duties have been introduced in Bulgaria. However, compliance of the company must be secured by its directors, whether directly or through delegation to employees. In case of violation, environmental laws provide for financial sanctions on both the company and its director(s). It is arguable whether a company could provide indemnity to its directors against any such sanctions. In all likelihood, any such indemnity would be found invalid
• Social – the directors’ relationship with a company’s employees is subject to strict regulations of labour law. The law forbids any discrimination (for details please see question 2 of this section), mobbing and/or employee maltreatment etc. It also imposes certain rules with regard to working hours, holiday leave etc. With regard to third parties (i.e. suppliers, customers etc.), directors should act in the best interest of the company and with professional care. Directors in Bulgaria do not have any specific obligations towards the communities where they operate
• Governance – there are no ESG considerations with respect to the composition of boards of directors (e.g. no hard or soft targets for gender equality), and there is no employees’ participation in governance rights (i.e. no rights of employees to nominate, to veto or to have a representative on a board). The general rules of a company’s corporate governance are outlined in the provisions of law (please see the main part of this guide where these are summarised), supplemented by the articles of association and the board’s rules of procedure (if such are developed). In general, these include the division of duties between the directors, and the relations between them and the shareholders (supervisory board, if applicable), including the obligation to obtain shareholders’ consent for certain actions and the shareholders’ right of control over directors’ actions. Except for highly regulated industries such as banking, insurance, listed companies etc, there are generally no obligations regarding internal audit or internal control imposed on directors.

Yes, if a company employs employees, labour law imposes certain ESG considerations on the company regarding the health and safety conditions in the workplace, pay equalities, discrimination, information and consultation of employees etc. Similar to the note in the previous paragraph, compliance of the company with such ESG requirements must be secured by its directors, whether directly or through delegation to certain officers/employees. Labour law provides for financial sanctions on both the company itself and on director(s) in case of violation of such company’s obligations. The prevailing practice is that financial sanctions are initially levied on the company alone, and only in case of repeated violation are the directors also sanctioned.

It is worth noting that due to the COVID-19 outbreak, many businesses switched to a working from home regime. Occupational health and safety regulations require that employers carry out a risk assessment of a remote workplace. As with all of a company’s other health and safety obligations, directors are responsible for securing compliance and may be exposed to sanctions on a personal as well as corporate level. However as working from home was imposed by the pandemic and was not the free choice of businesses, the labour authorities have been tolerant and have not yet started monitoring compliance.

The law prohibits any discrimination of employees (both current and potential) on any grounds including gender, race, religion etc. As a result, no difference in salaries, career opportunities and progression, holiday entitlements, benefits etc can be made based on such grounds.

Following the introduction of the EU Corporate Sustainability Reporting Directive (EU) 2022/2464, and the obligation of the EU Member States to transpose the Directive into national law, the Ministry of Finance initiated a working group to tasked with preparation of the draft national legislation. At time of writing of this paper, it is expected that changes will be introduced to the Accounting Act, to the Public Offering of Securities Act and to the Independent Audit Act. These changes may include additional ESG obligations to the governing bodies of the companies required to comply with the new rules. Amendments to national law are expected to enter into force before the deadline for implementation of the directive – 6 July 2024.

Please see response to item 3 above.

Joint Stock Company (JSC)

A JSC is managed by the executive members of the board of directors in a one-tier system, or by the members of the management board in a two-tier system.

Limited Liability Company (LLC)

The management bodies of an LLC are: (i) the general meeting of the quotaholders and (ii) the manager(s). Often the quotaholders are closely involved in the management of an LLC.

Management board members (in JSCs) and managers (in LLCs) have equal rights and obligations, regardless of any internal allocation of responsibilities or management and representation powers amongst them. They perform their functions with the highest professional care and in the interests of the company and of all shareholders.

Joint Stock Company

A board member can be an individual or a legal entity, where the articles of association of the company so provide. Where the board member is a legal entity it must designate a representative for the performance of its duties on the board of the JSC. However, Bulgarian law stipulates that a person may not be a director if he or she:

• has been a board member of a company which has been dissolved on the grounds of insolvency within the 2 years preceding the date of his/her appointment and the claims of its creditors were not fully satisfied
• has been a manager or a board member of a company which has breached its obligations in respect of reaching and maintaining set levels of stocks under the Oil and Oil Products Stocks Act, or
• does not meet other requirements provided for in the articles of association of the company.

Limited Liability Company

The manager of an LLC does not necessarily have to be a quotaholder but must be an individual rather than a legal entity. An LLC may have more than one manager who can represent the company jointly or severally, depending on the provisions of the company’s articles of association. The same restrictions as those for board members of a JSC apply to the managers of an LLC.

Joint Stock Company

The members of the board of directors (one-tier system) or of the supervisory board (two-tier system) are elected and removed from office by the general meeting of shareholders.

The general meeting also determines the remuneration of the supervisory board members, including their right  to receive part of the company’s profits or to acquire shares and debentures of the company.

Board members are elected for a term of office not exceeding 5 years. However, the term of office for the members of the first board upon incorporation of the company cannot be longer than 3 years. Board members may be re-elected without limitation. The general meeting of shareholders can remove board members from office at any time.

• Two-tier system
  • The company is managed by a management board which is controlled by the supervisory board. Members of the management board are appointed by the supervisory board, which also determines their remuneration and may remove them from office at any time. One person cannot serve on both the management board and the supervisory board simultaneously.
  • The number of members of the management board ranges between three and nine and is determined by the articles of association. The rules of procedure for the management board are approved by the supervisory board.
  • The supervisory board may not take part in the management of the company. The supervisory board represents the company only in its relationship with the management board. Members of the supervisory board are appointed by the general meeting of shareholders. There may be between three and seven members.
  • The supervisory board adopts its own rules of procedure and appoints a chairperson and vice-chairperson from among its members. The supervisory board meets regularly and at least quarterly. The chairperson calls meetings of the supervisory board on his/her own initiative, as well as upon requests of members of the supervisory board or members of the management board.
• One-tier system
  • The company is managed and represented by a board of directors, consisting of a minimum of three and a maximum of nine directors. The board of directors adopts its own rules of procedure and elects  a chairperson and vice-chairperson from among its members. The board of directors meets at least on a quarterly basis to discuss the company’s state of affairs and prospects for development. 
  • The board of directors assigns management of the company to executive members, elected from among its numbers, and determines their remuneration. The number of executive members must be lower than the number of the remaining (non-executive) board members. Each executive board member must immediately inform the chairperson of the board of directors of any circumstances which are material to the company. Each board member may request that the chairperson call a meeting to discuss particular matters.

A person nominated as a board member must, prior to his/her election, give notice to the general meeting of shareholders (or the supervisory board, if a member of the management board) of: (i) his/her participation in any companies as an unlimited partner, (ii) his/her holding of over 25% of the equity in any other company, and (iii) his/her participation in the management of other companies or co-operatives as a procurator, manager or board member. If a serving board member acquires or is appointed to any of the above, he/she must issue a written notice of the acquisition or appointment to the shareholders or to the supervisory board. 

Limited Liability Company

The manager is appointed by the general meeting of the quotaholders of the company, which also determines the manager’s remuneration and may release him or her from liability.

Board members of JSCs and managers of LLCs must be registered in the Commercial Register of the Bulgarian Registry Agency (the “Commercial Register”) by filing a notarised consent and a statement certifying that there are no obstacles to occupy the respective position.

Joint Stock Company

A board member may be removed from office at any time by the general meeting of shareholders or by the supervisory board. A board member may request his/her removal from office by serving a written notice addressed to the company. The company must apply for de-registration of the board member from the Commercial Register within 6 months of the receipt of such notice. If the company fails to do so, the board member may notify the Commercial Register directly and personally file the notice for the removal from office. The board member will then be de-registered from the Commercial Register regardless of whether another person has been elected to replace him/her on the board.

Limited Liability Company

The manager may be removed from office by the general meeting of quotaholders at any time. The manager may request his/her removal by serving a written notice addressed to the company. The company must apply for the registration of the discharge with the Commercial Register within 1 month of receiving such notice. If the company fails to do so, the manager may notify the Commercial Register directly and personally file the notice for the removal from office. The manager will then be de-registered from the Commercial Register regardless of whether another person has been elected to replace him/her as manager.

The removal from office has effect in relation to third parties acting on good faith as of registration at the Commercial Register.

Joint Stock Company

The members of the board of directors or the management board represent the company collectively, unless otherwise provided by the articles of association. The board of directors or the management board (subject to approval by the supervisory board) may delegate the authority to represent the company to one or more of its members. Authority so delegated may be revoked at any time.

The names and specimen signatures of the authorised representatives of the company are registered in the Commercial Register.

Company’s articles of association may provide that certain transactions can be entered into only with the prior approval of the supervisory board, or upon the unanimous decision of the board of directors. Such restrictions may also be imposed by the supervisory board or the board of directors. By law, the following transactions require a resolution of the shareholders at a general meeting:

•  transfer or right to use the entire business
• disposal of assets (the total value of which for the current year exceeds half of the value of the total assets of the company as per its latest audited annual financial statements)
• assumption of liabilities or the provision of collateral to one person or to related parties, the amount of which in the current year exceeds half of the value of assets of the company as per its latest audited annual financial statements.

The company’s articles of association may expressly provide that the above transactions will be within the powers of the board of directors or the management board, in which case a unanimous resolution of the board of directors or consent from the supervisory board given in advance will be required.

Any transaction concluded in breach of those requirements will be valid with respect to third parties, but the person who concluded it on behalf of the company will be liable for any damages incurred by the company. 

Limited Liability Company

The manager organises and directs the activities of the company in accordance with the resolutions of the general meeting of quotaholders. Without the consent of the company, the manager may not: (i) effect commercial transactions which are similar to those of the company on his/her own behalf or on a third party’s behalf; (ii) participate in partnerships, partnerships limited by shares, or in limited liability companies; or (iii) hold management positions in other companies. The manager is required to indemnify the company for any damage caused to the company from a breach of his/her obligations.

Joint Stock Company

The executive members of the board of directors, or the members of the managing board, jointly manage the company’s operations. The shareholders may modify this requirement and allocate certain tasks to one or more board members. Furthermore, the board’s internal rules of procedure may provide for a more specific allocation of the tasks between the board members. Nevertheless, such distribution of responsibilities cannot override the joint responsibility of the board members for the operations of the company. 

Limited Liability Company

Even if an LLC has more than one manager, the managers of the company do not constitute a collective body. Rather, each of them is responsible for the management of the company’s operations. The articles of association determine whether the managers can represent the company severally or jointly.

Joint Stock Company

• Two-tier system
  • The relationship between the company and the members of the management board is governed by a management agreement. The agreement is executed in writing on behalf of the company by the chairperson of the supervisory board or another board member authorised by the chairperson.
  • The relationship between the company and the members of the supervisory board is governed by a services agreement. The agreement is executed on behalf of the company by a person authorised by the general meeting of the shareholders or by the sole owner.
• One-tier system
  • The relationship between the company and the executive members of the board of directors is governed by a management agreement. The agreement is executed in writing on behalf of the company by the chairperson of the board of directors.
  • The relationship between the company and the non-executive members of the board is governed by a services agreement executed on behalf of the company through a person authorised by the general meeting of shareholders or by the sole owner.

Limited Liability Company

The relations between the company and the manager are governed by a management agreement. The agreement is executed in writing on behalf of the company by a person authorised by the general meeting of quotaholders or by the sole owner.

Unless the company consents, a board member or a manager in a JSC or LLC may not: (i) enter into commercial transactions on his/her own behalf or on a third party’s behalf; (ii) participate in partnerships and partnerships limited by shares or in limited liability companies; or (iii) hold managing positions in other companies when the activities carried out are similar to those of the company.

Where a board member or a party related to a board member is to enter into an agreement or transact with the company on terms deviating from arm’s length terms, the relevant board member is obliged to notify in writing the board of directors. The agreement can be signed, transaction consummated only after a board approval.

Members of a board of directors and the management board may not, whether on their own behalf or on behalf of others, execute business transactions or serve as procurators, managers or board members of other companies or co-operatives, if these compete with the company. This restriction does not apply where the articles of association expressly allow such competing activities or where the body which elects the board member has given its express consent. 

Board members may not disclose any confidential information which has come to their knowledge in relation to the performance of their duties if such disclosure could affect the activities or the interest of the company. The confidentiality obligation survives the board member’s removal or resignation from office.

Further, board members and managers are responsible for the performance of certain obligations, set out in the Anti-Money Laundering Measures Act (the “AMLMA”). For instance, the AMLMA requires local companies to provide the Bulgarian Commercial Register with information and documents evidencing the identity of their ultimate beneficial owner(s) (UBO) and details regarding the legal entities/formations, through which the UBO(s) exercise direct or indirect control over the company.

Board members and managers must declare (and update, in case of changes) these circumstances before the Commercial Register. Further key responsibilities under the AMLMA include:

• adoption of internal risk assessment procedures and company rules for the prevention of money laundering and terrorism financing
• supervision and control of the performance of internal company rules
• organising introductory and ongoing company training for compliance with the AMLMA and other related legislation
• ensuring the collection and safekeeping of AMLMA-related documentation/information providing AMLMA-related information and documentation to state authorities upon request.

The performance of such duties can be of crucial importance to the company’s business, as the AMLMA envisages various sanctions for non-compliance. Depending on the offence, a company may be subjected to fines ranging from EUR 2,500 up to EUR 5,000,000 or in the amount of 10% of the annual turnover. If state authorities provide deadlines for the performance of specific obligations and a company fails to meet them, the respective penalty is applied for every month of non-compliance. Moreover, companies that operate in accordance with a registration regime or under a licence/permit, which commit a second offence or a serious breach of obligations, may be deleted from the respective register or may have their respective licence/permit revoked.

Company directors and managers owe their duties to the respective company.

Specific obligations for managers and board members arise where the company becomes insolvent. The manager or the executive director of the relevant company must file for insolvency within 30 days. If the manager/executive director fails to fulfil this obligation, he/she will be liable towards the creditors for the damages incurred. In addition, the defaulting manager/executive director may be subject to criminal liability.

The manager of an LLC must schedule a general meeting of the shareholders immediately if the losses of the company are more than one quarter of the capital of the company and the value of the LLC’s assets falls below the value of the LLC’s registered capital. 

The directors are jointly and severally liable to the company for any damage caused as a result of their actions. Any director may be released from liability if it is established that he/she has no fault for the damage suffered by the company. Shareholders holding at least 10% of the company’s equity may file a claim demanding that board members be held liable for damage caused to the company.

Board members of JSCs must notify the board of directors in writing when they or parties related to them enter into agreements with the company out of the ordinary scope of activities of the company or outside normal market conditions. Such agreements may only be executed following the approval of the transaction by the board of directors. However, if executed without the board’s approval, such a transaction is valid but the person who has knowingly executed it is liable for damages to the company. Much stricter rules concerning related party transactions apply to public companies. A member of a management board or board of directors or a manager may be liable for the amount of uncollected taxes due from the company if such member or manager conceals facts and circumstances which under law he/she is obliged to reveal to the relevant revenue body and as a result the outstanding taxes or social security liabilities cannot be collected.

A member of the management board or a manager who: (i) unscrupulously disposes of assets of the company or makes cash payments which constitute hidden profit distribution or payment of dividends; or (ii) disposes of assets of the company without remuneration or for a price much lower than the market value, which results in a decrease of the company’s assets and inability to pay taxes and social securities, is liable up to the amount of the relevant payment or up to the amount of the decreased value of the assets.

The liability of a legal entity, acting as a board member, arising from the actions of its representative on the board is unlimited and is joint and several with the other board members.

Further, members of the management board or managers are personally liable for any breach of their obligations under the AMLMA, which may result in penalties ranging from EUR 500 to EUR 25,000 (depending on the offence). If state authorities provide specific deadlines which are not met by the board members or managers, the respective penalties are applied on a monthly basis until the respective obligations are performed. Also, in cases of serious or systematic breach of obligations, management board members or managers may temporarily be forbidden to occupy high managerial positions (3 months or 1 year, depending on the offence).

Management contracts between the company and the respective director/manager can set out limitations to the liability incurred by the respective director/manager, including specific indemnities for third party liabilities.

In addition to the above, the company also has the option to purchase directors’ and officers’ insurance with the company itself as a beneficiary.

Finally, the general meeting of shareholders may release the board members of the JSC from liability. In the case of LLCs, the manager is released from liability by the general meeting of quotaholders. Normally, such releases from liability are made yearly at the time of approval of the annual financial statements and the annual management report by the general meeting.