Corporate / M&A

Bulgaria: Highest Court Opens Doors for Management Self-Dealing

Absent adequate protection by law, the company’s corporate documents must provide additional comfort and prevent abusive self-dealing.

“Self-dealing” is the signing of an agreement by an individual who acts as a representative (agent) of one of the parties and at the same time acts in his/her own name or as a representative (agent) of the other party. Self-dealing is admissible under the Bulgarian law if the represented party consents to it (Article 38 paragraph 1 of the Bulgarian Obligations and Contracts Act).

The general understanding among practitioners is that the above principle applies to the conduct and representation of individuals. Its impact on legal entities and their representation is disputed.

Self-dealing in the business

In practice, self-dealing exists not only where an individual enters into an agreement with a company that he/she represents but also where two (or more) companies enter into an agreement represented by one and the same signatory. The latter would happen where the legal representative (managing director) of one of the companies is also the legal representative (managing director) of the other company. In such case, the contracting parties are different persons: two or more companies, but the same signatory is acting on behalf of each party.

This multiple representation is most common where the companies that are parties to the transaction are related parties. We often see managing directors of a foreign parent company appointed as managing directors of the subsidiaries in Bulgaria, and potentially also other CEE markets. Whenever affiliates enter into agreements (eg, intra-group distribution, supply, loan, licensing agreements, etc.), the representatives on all sides are often identical so that the same person(s) sign the agreement in the name and on behalf of all parties to the agreement.

Lack of legal regulation for commercial transactions

The Bulgarian corporate and commercial laws do not explicitly regulate self-dealing where at least one of the parties is a legal entity (a company), except for a few provisions with a limited scope of application:

  • agreements between the sole shareholder and the company must be concluded in writing;
  • transactions between a board member of a joint stock company and the company that are outside the ordinary course of business must be approved by the board in advance;
  • certain transactions of listed or other public companies with affiliates or related individuals require prior shareholder consent; and
  • managing directors of limited liability companies need the company’s consent to enter into commercial transactions for a competing activity or to become representatives of the company’s competitors.

The law leaves major questions open: (i) do the transactions between a company and its representative and transactions between companies represented by the same individual(s) qualify as self-dealing within the meaning of the law; (ii) if so – are such transactions subject to prior approval by the company; (iii) if so – which corporate body is competent to grant such approval; and (iv) what are the consequences of self-dealing without prior corporate approval; is the transaction null and void or may a post factum approval remedy a pending nullity.

Inconsistent view of the courts

The jurisprudence of the Bulgarian courts on self-dealing is contradictory and inconsistent. The Bulgarian High Court of Cassation (BgHCC), which is competent to render binding interpretations of legal questions, has ruled that transactions between companies do not qualify as self-dealing because the legal representatives only express the company’s will (but do not form it). It remains, however, unclear which corporate body, if not the management, forms the company’s will. Later, the BgHCC held that transactions between companies might well qualify as self-dealing, and such transactions were not even capable of being approved and would be, in any case, null and void. This opinion was last restated in a ruling in 2012. The matter was again on the agenda of the BgHCC in 2013.

New binding interpretation

In its decision of November 20131 the BgHCC returned to its initial opinion that transactions between companies represented by the same individual(s) do not qualify as self-dealing. The BgHCC held that the parties to the agreement are the companies and not the individuals that represent them. The legal representatives expressed the company’s will, and the company’s will was the will of its legal representatives.

The BgHCC believes that the Bulgarian law contains sufficient protection to prevent conflicts of interest in the event of self-dealing. Accordingly, a company’s legal representative(s) may, in the company’s name, enter into transactions with other companies represented by the same individuals without the need for any corporate approval.

Recommended approach

We do not fully agree with the BgHCC’s understanding that the Bulgarian laws provide sufficient protection to prevent conflicts of interest in the event of self-dealing (see the few exceptions to the self-dealing rule above). Further, the BgHCC discussed only the representation of different companies by the same individual(s) but did not touch on whether this management’s freedom to act was valid also for transactions between the company and its managers.

Therefore, to prevent self-dealing to the company’s disadvantage, the company’s articles of association and the relevant management agreements should set clear boundaries of the representation powers of the management. Such limitations would not affect the validity of transactions entered in breach of the limitations and would be valid only in the internal relationship between the company and its management.

Explicit limitations would provide more comfort and protection than the Bulgarian corporate and commercial laws as currently interpreted.

The management expresses the company’s will, and the company’s will is the will of its management.

1
Bulgarian Highest Cassation Court, interpretative judgment on case No. 3/2013 of 15 November 2013.