As legal advisers of foreign investors, we sometimes, more often than we would have liked to, sense our current and prospective clients’ frustrations at certain inadequacies of the Bulgarian legal system and business environment. Negative experiences occasionally lead reputable and successful foreign companies that are market leaders in their and other foreign jurisdictions to the decision to exit Bulgarian market and divest of their investments in Bulgaria. To avoid the risks and costs related to terminating a (bad) investment, a foreign investor may want some 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 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 region, CEE.
In the context of a M&A transaction, here are a few take aways from some of the recent transactions 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.
– Contract negotiations with local vendors can be prolonged and meetings 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 five weeks, absent serious competition concerns. However, the law does not stipulate for a 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, even for relatively simple transactions that would not result in any changes in the parties’ market positions in the relevant market there is no a fast-track or a simplified procedure. Thus, if the consummation of a transaction requires a regulatory approval, the effect on timing must be factored in.
– 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 of 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 preparing the paperwork and obtaining the required construction permits and the associated costs may be critical. The inexperience or 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.
Unfair competition and unfair commercial practices. A significant percent of the complaints filed and cases resolved by the Bulgarian competition authority relate to unfair competition in various forms: misleading or prohibited comparative advertising, unauthorized use or disclosure of trade secrets, etc.
Companies holders of intellectual property rights and with valuable 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 must include, among others, tailored provisions relating to ownership and right to use of intellectual property rights, such as copyright to software and patent rights, and confidentiality obligations.
Enforcement of contracts. For most commercial contracts specific performance is not 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 transfer of quotas 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.
Another important aspect is the proper care before entry into a contract of a significant value with a party unknown or a recently established entity without a sufficient due diligence or know your client check. Among many other things, the concept of piercing the corporate veil is not recognized by the Bulgarian legal system and, thus, unless in exceptional circumstances, a group or parent company of an insolvent party to a contract would not be liable for the debts of such a group company or a subsidiary.
All the above notes are open to discussion and we invite your comments.We promise we will respond to all emails.