According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "laws on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. Major weaknesses were found in the rights and equitable treatment of shareholders. The Bulgarian law does not impose restrictions on transactions involving shareholders in conflict of interest situations, and there are no checks to guarantee that the price paid for the transaction is fair. With reference to the effectiveness of corporate governance legislation, in 2005, the EBRD completed a Legal Indicator Survey to test how corporate governance legislation works in practice. Bulgaria was found to have a relatively effective system with reference to the possibility of a minority shareholder to obtain disclosure, but with some shortcomings in the possibility of obtaining redress, due to the limited actions available to obtain a successful outcome.

General Overview

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "laws on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. Major weaknesses were found in the rights and equitable treatment of shareholders. The Bulgarian law does not impose restrictions on transactions involving shareholders in conflict of interest situations, and there are no checks to guarantee that the price paid for the transaction is fair. With reference to the effectiveness of corporate governance legislation, in 2005, the EBRD completed a Legal Indicator Survey to test how corporate governance legislation works in practice. Bulgaria was found to have a relatively effective system with reference to the possibility of a minority shareholder to obtain disclosure, but with some shortcomings in the possibility of obtaining redress, due to the limited actions available to obtain a successful outcome. (EBRD 2005, pp. 10, 11)

The primary legislation governing corporate governance issues in Bulgaria includes the Commercial Code and the Law on Public Offering of Securities. According to the Commercial Code, five types of commercial entities can be set up, including the limited liability company and joint-stock company (JSC). Newly created companies must register with a commercial register held by the relevant district court. In the case of a JSC, a shareholders' register must be maintained by the company. In May 2005, the Government approved a strategy for reform of the existing commercial registration regimes and it is planned that responsibility for company registration will be removed from the court authorities. (EBRD 2005, p. 9)

According to Petranov and Tchompalov 2004, since 2003 the Financial Supervision Commission (FSC) has been requiring all public companies to draw up corporate governance programs brought into line with the OECD Principles and to report annually on their implementation. This is an important step forward to instituting the best international practices of corporate governance in the private sector. (Petranov and Tchompalov 2004, p. 3)

The World Bank in a 2002 Report on the Observance of Standards and Codes (ROSC) assessment of Bulgaria's corporate governance principles proposed strengthening the practices of the board of directors through the development of a corporate governance code, developed under the leadership of the corporate sector in collaboration with the Bulgarian stock Exchange (BSE). The ROSC also recommended amendments to the legislative framework dealing with corporate governance - that will provide greater clarity, responsibility, accountability, and transparency for traded companies. (WB 2002, p. 15)

Part of the Bulgarian stock market's weakness was, in the past, due to an insufficiently developed legal and regulatory framework. However, substantial corporate governance improvements have been seen in the Law on Public Offering of Securities (LPOS 1999) as amended in 2001 and adopted in 2002 and the 2000 Commercial Code (CC 1991). The LPOS 1999 substantially strengthened shareholder rights for "public" companies, i.e. corporations whose shares may be publicly traded. In addition, amendments ensure pre-emptive rights of existing shareholders and will require legal entities to disclose both direct and indirect ownership interests in Bulgarian companies, where such interests are at five percent or more of the company. Further strengthening of the corporate governance framework is envisaged under additional changes to the CC 1991. (WB 2002, p. 1; Petranov and Tchompalov 2004, p. 9)

The Bulgarian National Securities Commission (BNSC) was established in 1996 as an independent state body. Its functions are to regulate and control the public offering of and trade in securities, regulated securities markets, the Central Depository (CD), investment intermediaries, investment companies and management companies all with a view of protecting investors and enhancing the development of a transparent and efficient securities market. (WB 2002, p. 2)

All organized trading of corporate securities occurs on the Bulgarian Stock Exchange (BSE), for which corporate equities are divided into two categories, the Official Market and the Free Market. About 30 companies are listed on the Official Market and another 470 on the Free Market. Companies on the Official Market must follow strict listing rules, which include publication of annual audited financial statements prepared in accordance with International Accounting Standards (IAS). Most, but not all, of the companies traded on the Free Market were former state enterprises, privatized through the voucher and other privatization processes of the mid-1990s. (WB 2002, p. 1)

In 1996, the Securities and Stock Exchanges Commission (SSEC) introduced the requirement that all listed stocks should have their prospectuses approved by the SSEC in order to be traded on the BSE. (BSE website)

In March 2003, the National State Securities Commission was replaced by a new supervisory body - the Financial Supervision Commission (FSC). The move pulled together the regulation of a number of financial (non-banking) sectors under one body. The newly established FSC is now responsible for issues as diverse as protecting investor interests, promoting market development, regulating the issue of securities, monitoring transactions, as well as supervising investment companies - including private pension funds and insurance companies. The regulatory changes during the year directly improved conditions for investors and issuers, as well as underlined the government's commitment to encourage wider overall development of the capital markets. (BSE website)

The first quarter of 2003 also saw the requirement for International Accounting Standards (IAS) to be observed by all institutions in the banking sector and other financial companies traded on the BSE. The move represents a first step with all companies required to adhere to the system from 2005, moving closer to international standard regulations on transparency. (BSE website)

Despite the progress made over the last few years, certain aspects of the reform agenda are in an advanced phase, whereas others are still at a too early stage of development. Some of the significant changes in the legislation (with respect to the on-going disclosure of information, corporate governance programs, transition to the international accounting standards, improved protection of minority shareholders) have been adopted in 2002 and 2003. Therefore, the implementation practices are, at present, incipient and still somewhat underdeveloped. The effectiveness of enforcing the novel legal rules remains a major challenge. More time and educational efforts are needed for the boards of directors to realize better their strategic role, the essence of their duties, the concept of independence and loyalty toward all shareholders. At the same time, there are in place some signs that the capital market has responded to the development of the corporate governance reform rather positively, improving its performance over the last two years. And yet, the above trend is still too fragile, and hence it is too early to rush to any conclusions whether or not it will persist over time. (Petranov and Tchompalov 2004, p. 5)

In its 2004 paper on the modernization of corporate governance in Bulgaria, Keremidchiev claims a lack of vision for the development of the country corporate governance as well as structures that would deal with its reformation. Particularly, there is a poor development of the (a) financial market; (b) production factor market; (c) capital market; (d) corporate control market; and (e) manager market. Moreover, the rating agencies for the assessment of the corporate governance level are not functioning. (Keremidchiev 2004, p. 12)

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

EN

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "law on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. Major weaknesses were found in the rights and equitable treatment of shareholders. The Bulgarian law does not impose restrictions on transactions involving shareholders in conflict of interest situations, and there are no checks to guarantee that the price paid for the transaction is fair. With reference to the effectiveness of corporate governance legislation, in 2005, the EBRD completed a Legal Indicator Survey to test how corporate governance legislation works in practice. Bulgaria was found to have a relatively effective system with reference to the possibility of a minority shareholder to obtain disclosure, but with some shortcomings in the possibility of obtaining redress, due to the limited actions available to obtain a successful outcome. (EBRD 2005, pp. 10, 11)

The primary legislation governing corporate governance issues in Bulgaria includes the Commercial Code and the Law on Public Offering of Securities. According to the Commercial Code, five types of commercial entities can be set up, including the limited liability company and joint-stock company (JSC). Newly created companies must register with a commercial register held by the relevant district court. In the case of a JSC, a shareholders' register must be maintained by the company. In May 2005, the Government approved a strategy for reform of the existing commercial registration regimes and it is planned that responsibility for company registration will be removed from the court authorities. (EBRD 2005, p. 9)

According to Petranov and Tchompalov, the legal framework in place in Bulgaria follows closely international standards and practices and has been largely brought into line with the relevant EU acquis. The institutions required have been in place for some time now and are effectively functioning. Furthermore, capital market infrastructure can be said to be effectively performing given the size and stage of development of the local market. Registration of ownership and transactions with public companies' securities are fast and reliable. Free transferability of shares is required by law for all public companies. There is a wide network of brokerage services including Internet based online trading for final customers. (Petranov and Tchompalov 2004, p. 3)

The Bulgarian National Securities Commission (BNSC) was established in 1996 and subsequent amendments to both the commercial and securities legislation strengthened the corporate governance framework. In particular, the 2001 revisions and amendments adopted in June 2002 to the Law on Public Offering of Securities (LPOS 1999) substantially strengthened shareholder rights for "public" companies, i.e. corporations whose shares may be publicly traded. In addition, proposed additional amendments will ensure pre-emptive rights of existing shareholders and will require legal entities to disclose both direct and indirect ownership interests in Bulgarian companies, where such interests are at five percent or more of the company. (WB 2002, p. 1)

The BNSC was established as an independent state body. Its functions are to regulate and control the public offering of and trade in securities, regulated securities markets, the Central Depository (CD), investment intermediaries, investment companies and management companies all with a view of protecting investors and enhancing the development of a transparent and efficient securities market. The BNSC has wide powers of surveillance investigation and enforcement, and it has used these powers to render fines and other sanctions. The detail of the regulations has been drafted to comply with international standards of good securities regulation. The Bulgarian Stock Exchange (BSE) also has wide powers of investigation and discipline under its rules. (WB 2002, p. 2)

Further, there is active involvement of non-government organizations and shareholder associations in raising corporate governance issues and developing a consensus for corporate governance reform in Bulgaria. (WB 2002, p. 2)

Principle II: The Rights of Shareholders and Key Ownership Function

NC

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "law on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. Major weaknesses were found in the rights and equitable treatment of shareholders. The Bulgarian law does not impose restrictions on transactions involving shareholders in conflict of interest situations, and there are no checks to guarantee that the price paid for the transaction is fair. With reference to the effectiveness of corporate governance legislation, in 2005, the EBRD completed a Legal Indicator Survey to test how corporate governance legislation works in practice. Bulgaria was found to have a relatively effective system with reference to the possibility of a minority shareholder to obtain disclosure, but with some shortcomings in the possibility of obtaining redress, due to the limited actions available to obtain a successful outcome. (EBRD 2005, pp. 10, 11)

Following the World Bank's assessment of Bulgaria's Corporate Governance Principles in 2002, the country: 'largely observes' the requirements as to basic shareholder rights; 'materially does not observe' the right of shareholders to participate in decisions on fundamental corporate changes; 'partially observes' the right of shareholders to be adequately informed about, participate and vote in general shareholder meetings; 'partially observes' disclosure of capital structures and arrangements enabling control disproportionate to equity ownership; 'largely observes' the requirements for efficient and transparent functioning of market for corporate control; and 'does not observe' the requirement to weigh costs/benefits of exercising voting rights. (WB 2002, Annex B p. 1)

In terms of protecting shareholders' rights, measures provided for by the Commercial Code (CC 1991) include that each shareholder in a joint stock company (JSC) is entitled to acquire a part of the newly issued shares in proportion to its original shareholding in the company. Shareholders holding at least 10% of the total issued and outstanding shares are entitled to request that a general meeting be convened. Shareholders of 5% of the company's stock may also request the general meeting or the district court to appoint a comptroller to audit the annual financial statements and to submit a report on his findings. (EBRD 2005, p. 9)

Art. 179 CC 1991, requires the maintenance of a central or company share register where the shareholding of investors is recorded. The register must be maintained by an external and independent organization. Registration constitutes proof of ownership. Pursuant to Art. 186 CC 1991 the transferor of the registered shares which are not fully paid up or from which other obligations towards the company arises shall be liable jointly and severally with the transferee. The transferor's liability shall lapse after two years from the date the transfer was recorded in the share register. (EBRD 2004, p. 3)

In one-tier system, the meeting of shareholders appoints the board of directors; in two-tier system the meeting of shareholders appoints the supervisory board and the latter appoints the administrative board. Only public limited companies have the options of having a one-tier system of board of directors or a two-tier system of both administrative and supervisory boards. Private limited companies only have a manager or managers. In two-tier system, the supervisory board dismisses the administrative board. (EBRD 2004, p. 3)

Bulgaria offers only one course of legal redress in the unlisted companies scenario, the derivative suit; in addition, procedures are not particularly smooth and can lead to enforcement difficulties. (Cigna 2006, p. 9; Cigna and Enriques 2005, p. 30)

In its 2004 paper on the modernization of corporate governance in Bulgaria, Keremidchiev lists the following weaknesses in the protection of shareholders' rights. There is no obligation for written notification of the shareholders of personal shares for the convention of the general assembly of shareholders (GAS). The board is not obliged to inform the shareholders about important decisions affecting their interests. The minority shareholders do not have the opportunity to include questions in the GAS agenda. The GAS agenda may be changed only if all shareholders are present. There is no minimum quorum for adopting important GAS decisions. The authorization procedure is complicated which makes it practically unusable by the shareholders. (Keremidchiev 2004, p. 9)

There is no specific simplified procedure and established organization for the authorization of banks to represent the interests of the petty shareholders. There is no reliable legal protection for the compensation of the petty shareholders in the event of violating their rights. Complex procedures impede the registration of all public companies with the stock exchange most substantially affecting the interests of the petty shareholders. There are no established and institutionally strengthened associations of petty shareholders. There is no legal opportunity for the staff of the corporations to be represented at the GAS. (Keremidchiev 2004, p. 10)

Since June 2002, detailed provisions in the Law on Public Offering of Securities (LPOS 1999) were adopted, requiring shareholders' approval of major transactions and related party transactions over certain threshold. Public companies' shareholders were entitled with redemption rights if they vote against company's reorganization. The right of the shareholders to question the Board at the general meeting, even out of the agenda, was expressly stated in the Law. Each public company was required to appoint an investor relations officer. (Petranov and Tchompalov 2004, p. 4)

The corporate governance framework provides a largely reliable form of securing methods of ownership and of conveying and transferring shares. The Commercial Code (CC 1991) requires that joint stock companies maintain a shareholders' register. For public companies, the Law on Public Offering of Securities (LPOS 1999) requires that the companies register their shares with the Central Depository (CD), which maintains a registry of dematerialized shares. According to market participants, the Central Depository operates efficiently and accurately and provides a reliable form of ownership registration of shares. Except for shares issued (or sold) to employees, which may or may not be tradable, all shares of public companies are freely transferable. (WB 2002, p. 3)

With regard to voting rights, the CC 1991 allows for different classes of shares with different voting rights although virtually all traded companies use one-vote one-share voting. Proposed changes to the LPOS 1999 would require all traded companies to adhere to the one-share one-vote rule. Under the LPOS 1999 all shares must be fully paid up in order to receive voting rights. Under the CC 1991, provisions for any alternative voting rights (i.e. different from one-share one-vote) are laid out in the company by-laws, and these appear to be easily accessible to shareholders. However there is no requirement for disproportionate voting rights to be disclosed in an annual report to shareholders. (WB 2002, p. 4)

Members of the supervisory board are elected by the shareholders' meeting and members of the management board by the supervisory board. Members of both boards may be elected for a term of no more than five years, unless a shorter term is provided in the company by-laws. Directors may be re-elected for any number of terms and they may be dismissed from their duties before the end of the mandate. There is no requirement for cumulative voting to be used in the election of board members, although there are no provisions that would prohibit companies from adopting cumulative voting for board members. (WB 2002, p. 4)

Under the CC 1991, the shareholders' meeting has sole authority to approve: (1) amendments to the company by-laws; (2) increase or decrease the company's capital stock; and (3) transform or wind-up the company. The CC 1991 establishes no requirement for a minimum percentage of capital to be represented (quorum) in order to represent a valid meeting, leaving the issue to be determined by each company's by-laws. In addition, the CC 1991 allows for a "diminishing quorum" or "collapsing quorum," whereby if the first level of a quorum is initially not met, a second meeting can be held one or two hours later for which the quorum requirement is still lower. The World Bank recommends that the CC 1991 should establish a minimum quorum for all joint stock companies. (WB 2002, p. 4)

Under the CC 1991, companies are required to convene a general shareholders' meeting at least once a year. Extraordinary shareholders' meetings may be held at the request of ten percent of shareholders or more of company capital and shareholders may request that the District Court call the meeting or appoint a representative to call the meeting. Under the LPOS 1999, the shareholders' meeting and its agenda must be announced 30 days in advance and published in two central daily newspapers. Under the CC 1991, the papers concerning the agenda of the shareholders' meeting must be made available to shareholders no later than the mailing of the agenda. During the meeting, shareholders may also add items to the agenda, providing that all shareholders are present at the meeting and all agree to the additional item. The 2002 amendments to the LPOS 1999 bestowed upon shareholders the right to ask management questions during shareholders' meetings. (WB 2002, p. 5)

The CC 1991 allows for the use of proxies at shareholders' meetings and the LPOS 1999 provides specific provisions for the use of proxies, including the requirement that a proxy be notarized and that it is given for a specific meeting and for voting in favor or against a particular decision. The LPOS 1999 also requires that any person representing shareholders with more than five percent of the voting shares must notify the company at least ten days before the meeting, and the company must notify the Bulgarian National Securities Commission (BNSC). Neither the CC 1991 nor the LPOS 1999 envisages voting by mail or electronically. The notarization requirement for proxy voting is thought to discourage some investors from using proxy voting, where for some shareholders the costs of notarization may exceed the expected dividends. (WB 2002, p. 6)

Under the CC 1991, provisions for any alternative voting rights (i.e. different from one-share one-vote) are laid out in the company by-laws, and these appear to be easily accessible to shareholders. However there is no requirement for disproportionate voting rights to be disclosed in an annual report to shareholders. The World Bank recommends that the legislation should require the disclosure of disproportionate voting rights in an annual report to shareholders. The corporate governance framework should also allow shareholders to identify cross-shareholdings and any possible pyramid holding structures affecting voting rights. (WB 2002, p. 6)

Principle III: The Equitable Treatment of Shareholders

EN

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "law on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. Major weaknesses were found in the rights and equitable treatment of shareholders. The Bulgarian law does not impose restrictions on transactions involving shareholders in conflict of interest situations, and there are no checks to guarantee that the price paid for the transaction is fair. With reference to the effectiveness of corporate governance legislation, in 2005, the EBRD completed a Legal Indicator Survey to test how corporate governance legislation works in practice. Bulgaria was found to have a relatively effective system with reference to the possibility of a minority shareholder to obtain disclosure, but with some shortcomings in the possibility of obtaining redress, due to the limited actions available to obtain a successful outcome. (EBRD 2005, pp. 10, 11)

In their 2006 assessment of the effectiveness of the corporate governance legislation in Bulgaria, Cigna and Enriques state that regarding legal actions of minority shareholders, procedures are not particularly smooth, and this can lead to enforcement difficulties. The time required to reach an executable judgment can be up to two years and the defendant can easily delay the process further. Actions available to minority shareholders in the unlisted company scenario are limited to the derivative suit. (Cigna and Enriques 2006, pp. 46, 51)

According to the 2005 EBRD Transition report, generally, the various remedies available to minority shareholders whose rights have been breached can be divided into actions before the civil or commercial court, arbitration proceedings and criminal prosecution. Of the possible actions before the commercial court, filing a suit to challenge the validity of a transaction (render the transaction void) is one of the most common. However this is not available in Bulgaria, where only actions for damages are allowed. Another remedy is a liability suit against the company's management. This can be initiated by the shareholder (as a direct liability suit) or on behalf of the company (a derivative suit). In the former case, the plaintiff seeks redress for individual damages while the latter action targets damages suffered by the company. However, a direct liability suit may not be brought in Bulgaria. Bulgaria also has no comprehensive definition of related-party transactions in its legislation. (Cigna and Enriques 2005, p. 25)

The 2005 EBRD report concludes that overall, Bulgaria - besides Bosnia and Herzegovina - appears to have the most limited legal frameworks for protecting minority shareholder rights. (Cigna and Enriques 2005, p. 27)

In the World Bank assessment of Bulgaria's Corporate Governance Principles in 2002, the country: 'largely observes' the requirements for equal treatment of shareholders within same class; 'largely observes' the prohibition of insider-trading and self-dealing; and 'does not observe' the requirements for disclosure by directors and managers of material interests in transactions or matters affecting the company. (WB 2002, Annex B pp. 1-2)

The principle of minority rights protection and equitable treatment of all shareholders is provided thoroughly in the Law on Public Offering of Securities (LPOS 1999) from its initial adoption. However, since June 2002 there is an overall improvement of the securities regulation with respect to the protection of minority shareholders. Insider trading is forbidden in Bulgaria since 1995 and market manipulation since 2000. (Petranov and Tchompalov 2004, p. 4)

Both the Commercial Code (CC 1991) and the LPOS 1999 require that shareholders of the same class be treated equally with information available on voting rights and changes subject to a shareholder vote. The CC 1991 states that the company charter should specify the rights of the shareholders of each class, thus requiring that information regarding the rights of the class be available to all shareholders. Under the CC 1991, any changes to the voting rights of a shareholder class would require an amendment to the company charter, thus requiring a vote at the shareholders' meeting. (WB 2002, p. 7)

Although ownership by nominees or custodians is rarely used in Bulgaria, there are no specific requirements to ensure that votes by custodians or nominees are cast in a manner agreed upon with the beneficial owner of the shares and there are no requirements for broker-dealers (acting as nominees and custodians of their customers' shares) to request that the beneficial shareholders send voting instructions. (WB 2002, p. 8)

The LPOS 1999 provides for extensive prohibitions of insider trading and market manipulation, including prohibition against entering into transactions, spreading false rumors and forecasts or other acts with the intent of creating of false perception of the prices or volume of traded securities. An insider is defined to include members of management and boards of directors, persons holding ten percent of the shares of a company (directly or through related parties) or someone who due to his profession, activities, duties or relations of connection with a traded company has access to privileged information. Insider trading and market manipulation are subject only to civil sanctions and do not carry criminal liability. However market participants complain that information regarding tender offers is distributed very slowly, allowing for the potential for insider trading. (WB 2002, p. 8)

The rules of the Bulgarian Stock Exchange (BSE) include prohibitions of insider trading. In 2000, the BSE investigated three cases of potential insider trading and market manipulation, of which one was referred to the Bulgarian National Securities Commission (BNSC) and fines were imposed. While the LPOS 1999 provides for clear prohibition of insider trading and abusive self-dealing, the absence of decisions on a large number of cases makes it difficult to determine if the BNSC will prove successful in enforcing the provisions of the LPOS 1999. In addition, investigations are generally initiated only by the BSE, which has authority to control only its member broker-dealers and market participants suggest that investigations would be more effective if initiated by the BNSC. (WB 2002, pp. 8-9)

Neither the CC 1991 nor the LPOS 1999 requires that company management or members of the supervisory board disclose any material interests they have in transactions or matters affecting the corporation. Anecdotal evidence suggests that it is not uncommon for members of the board of directors to hold the position of executive management of the company's suppliers. (WB 2002, p. 9)

New detailed provisions in the LPOS 1999 were adopted, requiring shareholders' approval of major transactions and related party transactions over certain threshold. Public companies' shareholders were entitled with redemption rights if they vote against company's reorganization. The right of the shareholders to question the Board at the general meeting, even out of the agenda, was expressly stated in the Law. Each public company was required to appoint an investor relations officer. The tender offers regulation was significantly developed and it expressly provided for paying the fair shares price in case of mandatory offers and going-private tender offers. With respect to new issues shareholders were entitled to tradable pre-emptive rights; in case the shareholders do not exercise or sell these rights in a pre-determined period the company ex officio offers them for sale and if successful, it transfers the proceeds to the shareholders. (Petranov and Tchompalov 2004, p. 4)

Elaborated legal rules regarding boards' duties of care and loyalty toward all shareholders were adopted in 2002 in the LPOS 1999 and one year later in the CC 1991. One third of the members of a public company board are required to be independent directors and the criteria for independence were set forth in the Securities Law in conformity with the international practice. (Petranov and Tchompalov 2004, p. 4)

Principle IV: The Role of Stakeholders in Corporate Governance

EN

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "law on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. (EBRD 2005, pp. 10, 11)

In the World Bank assessment of Bulgaria's Corporate Governance Principles in 2002, the country: 'partially observes' the requirements for respect of legal stakeholder rights as established by law; 'partially observes' the requirements for redress for violation of rights; 'partially observes' the requirements for performance-enhancing mechanisms for stakeholder participation and 'largely observes' the requirements for access to relevant information. (WB 2002, Annex B, p. 2)

Bulgarian legal framework recognizes the rights of various groups of stakeholders and is gradually improving in this respect. Bulgarian Labor Law and Social Insurance Law are traditionally well developed in protecting rights and of employees. The 2003 amendments to the Commercial Code (CC 1991) provided that if the number of employees in a joint stock company is over fifty, they have a representative at the general meeting who has the same access to information as any shareholder. During the last few years the insolvency legal framework has been revised several times and amendments to other enforcements laws, including the Civil Procedure Code and the Registered Pledges Law, have been enhanced in order to increase the effectiveness of procedures for exercising creditors' claims. (Petranov and Tchompalov 2004, p. 5)

Under the legislation, trade unions have a limited role in Bulgaria, and employees have limited rights with regard to protection against unfair dismissals, disclosure of information regarding unlawful or irregular conduct. Nor are there legal requirements that employees or their representatives be consulted prior to a corporate merger or restructuring. However, the CC 1991 requires that members of the board of directors perform their functions in the interest of the company, including the interests of stakeholders, thus requiring that the company recognize any stakeholder interests established by law. (WB 2002, p. 9)

Any stakeholder whose constitutional rights have been violated may appeal to the court for redress. However, the labor legislation provides for limited rights for employees and the judiciary system is generally considered to be slow in resolving commercial disputes. (WB 2002, p. 9)

Bulgarian companies seldom provide share option or other performance enhancing mechanisms, and stakeholders generally have access to the same company information as shareholders, for example, access to the information in the commercial court register and in the register of the Bulgarian National Securities Commission (BNSC). (WB 2002, p. 10)

Principle V: Disclosure and Transparency

EN

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "law on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. Major weaknesses were found in the rights and equitable treatment of shareholders. The Bulgarian law does not impose restrictions on transactions involving shareholders in conflict of interest situations, and there are no checks to guarantee that the price paid for the transaction is fair. With reference to the effectiveness of corporate governance legislation, in 2005, the EBRD completed a Legal Indicator Survey to test how corporate governance legislation works in practice. Bulgaria was found to have a relatively effective system with reference to the possibility of a minority shareholder to obtain disclosure, but with some shortcomings in the possibility of obtaining redress, due to the limited actions available to obtain a successful outcome. (EBRD 2005, pp. 10, 11)

The EBRD 2005 Transition report states that in south-eastern Europe (SEE) a relatively effective framework for disclosure was reported in Bulgaria, Romania and Serbia and Montenegro. The average time needed to obtain a court order varies from a few months in Bulgaria and Romania to three or more years in Bosnia and Herzegovina. The institutional environment is considered especially weak in Albania but relatively sound in Bulgaria and Croatia. (Cigna and Enriques 2005, p. 28)

In the World Bank assessment of Bulgaria's Corporate Governance Principles in 2002, the country: 'partially observes' the requirements for timely and accurate disclosure of material information; 'partially observes' the requirements for preparation of information, audit, and disclosure in accordance with high standards of accounting, disclosure and audit; 'partially observes' the requirements for annual audit by an independent auditor; and 'partially observes' the requirements that state that the channels for disseminating information allow for fair, timely, and cost-efficient access to information by users. (WB 2002, Annex B pp. 2-3)

In the 2004 paper on the modernization of corporate governance in Bulgaria, Keremidchiev lists several weaknesses in the corporate governance legislation. For example, there is a lack of public information on (i) total remuneration received during the year by the members of the management bodies of the corporations; (ii) acquired, possessed and transferred company shares and bonds by the members of the committees during the year; (iii) the committee members' rights to acquire company shares and bonds; and (iv) the committee members' participation in trade companies as unlimited liability partners, the possession of more than 25 per cent of the capital of another company, as well as their participation in the management of other organizations as prosecutors, managers and board members. (Keremidchiev 2004, p. 11)

In the end of 2003 a notable far-reaching upgrade in the disclosure legal framework was enacted. The prospectuses' and periodic disclosure reports' content and publication rules have been harmonized with the best international standards and practices. With respect to disclosure requirements of significant events Bulgaria has improved the modified general obligation approach: a broad definition of price-sensitive information was adopted plus a non-exclusive list of events, which are typically considered material. (Petranov and Tchompalov 2004, p. 5)

The basic legal framework for disclosure of major ownership and control structure of public companies was introduced by the first Bulgarian Securities Law as of 1995. Gradually, the regulation of this matter became more detailed with respect to the terms and procedures of such disclosure, without altering the basic principles of its regulation. However, with respect to the private widely held companies, as a rule, information about their major ownership and control structure is not publicly available. (Petranov and Tchompalov 2004, p. 16)

The Law on Public Offering of Securities (LPOS 1999) sets out the disclosure requirements for public companies. Public companies must provide to the Bulgarian National Securities Commission (BNSC) and the Chamber of Commerce audited financial statements within 90 days from the end of the year. In addition, companies must file with the BNSC any material changes and companies must present its semi-annual report within 30 days of the end of the period. Bulgarian accounting standards require that in their annual reports, companies disclose their current activities and future prospects. In practice, large corporations (and particularly those with foreign shareholders) make such disclosures but most public companies do not. (WB 2002, p. 10)

For traded securities on the Official Market, the LPOS 1999 requires that all shareholders with five percent or more of the voting shares must notify the company, the BNSC and the Bulgarian Stock Exchange (BSE). The LPOS 1999 provides a comprehensive list of criteria for determining indirect and beneficial ownership. Despite such requirements, information on indirect shareholding is often difficult to obtain. (WB 2002, p. 10)

Under the Securities Law as of 2000 every shareholder has the right of access to the entire information from the book of shareholders kept by the Central Depository. The law prohibits the Central Depository to refuse such a request, in case the shareholder declares legitimate purpose for using the information. (Petranov and Tchompalov 2004, p. 17)

Under the Ordinance on the Prospectuses for Public Offering of Securities and Disclosure by Public Companies and other Issuers of Securities, the names of the members of the board, their professional qualifications and individual remuneration have to be disclosed in the prospectus. Under the Ordinance, the company must disclose material risk factors in the prospectus, which would include material issues regarding employees and other stakeholders but not the company's corporate objectives. In addition the prospectus must disclose the remuneration of board members (both in aggregate and individually), the shares held by each board member, and the professional qualifications of the board members and their activities outside the company for the prior three years. (WB 2002, p. 11)

The new securities legislation in effect as of December 2003 provides that each manager and board member shall disclose in the annual report of the public company information about the type and number of shares he/she owns in the company and the percentage these shares represent of the respective class of shares, as well as the options owned for acquisition of securities issued by the company. The annual report is disseminated to the public in the same way as the major ownership information. (Petranov and Tchompalov 2004, p. 18)

Under the LPOS 1999, public companies must submit their annual financial statements to the BNSC within 90 days of year-end and 30 days of the close of the semi-annual period. The information is available to shareholders and other stakeholders from the BNSC. However, the information is not available online from the BNSC, and most companies do not maintain websites. Also, companies are not required to update information originally provided in the prospectus. (WB 2002, p. 12)

The Law on Audit requires that an independent audit be prepared for all medium and large enterprises, i.e., companies with over 50 employees and revenues and net assets over certain limits. Under the Commercial Code (CC 1991), the shareholders' meeting may not approve the company's financial statements unless it has been audited by a certified public accountant. Under the Law on Accountancy, a specialized auditing company or a certified accountant may not, directly or indirectly through related persons perform an audit and verification, if the company performs the accounting of those enterprises. "Independence" is not specifically defined, although the Audit Law specifies that an audit firm is not allowed to perform an audit of a company with whom it is related in terms of capital. For publicly traded companies, the BNSC monitors the annual and semi-annual financial statements with regard to their compliance with the Law on Accounting. (WB 2002, p. 12)

The Institute of Certified Public Accountants (ICPA) is responsible for auditing standards and practices and has the authority to impose fines or other economic sanctions. There is no statutory limit to the liability of auditors. According to the LPOS 1999, the company's chief accountant is jointly liable with company management, board of directors and the investment intermediary for damages caused by false, incomplete or inaccurate information in the prospectus. Also, the chartered accountant or specialized audit firm is responsible for damages caused by the accounting statements audited by them. The Institute of Certified Public Accountants (ICPA) supervises auditors' activities. Every year, certified public accountants must report to the ICPA: the number of companies audited and the number of companies for which the certified public accountant has refused to certify. (WB 2002, p. 12)

Principle VI: The Responsibilities of the Board

NC

According to the 2004 European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, Bulgaria is a country whose corporate governance related laws (i.e., "law on the books") when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance were rated as "medium compliance", meaning that the legal framework is generally in line with international standards, but with a number of shortcomings. (EBRD 2005, pp. 10, 11)

In its 2002 assessment of Bulgaria's Corporate Governance Principles in 2002, the World Bank states that the country 'materially does not observe' all of the six subprinciples. (WB 2002, Annex B p. 3)

One of the major weaknesses in the corporate governance framework in Bulgaria is the minimally defined level of responsibility for members of the supervisory body. Under the Commercial Code (CC 1991), companies may choose to have either a two-tiered or a unitary board of directors; under a two-tiered structure, all (supervisory) board members are chosen from outside company management. However, under both a two-tiered and a single-tiered structure, Bulgarian companies tend to be run by company management with little supervisory review by the board of directors. (WB 2002, p. 13)

The accountability of the (supervisory) board of directors is limited. The CC 1991 states that directors are obliged to perform their functions in the interest of the company and not disclose confidential information after they leave their positions as directors. The Law on Public Offering of Securities (LPOS 1999) also stipulates that it is the duty of each director to treat all shareholders in a fair and equitable manner. However, under the current securities and commercial legislation, there is no requirement that the actions of the directors be conducted with due care and diligence. Some companies require provisions as part of director contracts that the directors must set aside as collateral funds equal to three months' salary. However, according to market participants, directors are generally (though not always) absolved of further liability by the decision of the shareholders' meeting. (WB 2002, p. 13)

The requirements of the LPOS 1999 to act in the interest of the company would encourage (supervisory) boards of directors to treat fairly all shareholder groups and to act in the interests of the company and to ensure that the company complies with applicable laws. However, in Bulgaria's case practice may not always follow. (WB 2002, p. 14)

The definition of the roles and responsibilities of boards of directors is limited. While it covers monitoring mergers and acquisition and selecting company management it does not provide for boards to monitor and manage potential conflicts of interest, oversee disclosure and communications or ensure the integrity of the company's accounting and financial reporting systems or governance practices. (WB 2002, p. 14)

Under two-tiered boards, all the members of the supervisory board would be independent of the management board but for unitary boards, there are no are requirements (or guidelines) on the nomination of non-executive board members. In addition, there are no effective mechanisms to ensure that boards exercise objective judgment independent of company management. Boards generally meet regularly but there are no guidelines on the amount of time devoted to board responsibilities. Furthermore, directors have no specific right to inspect the accounting records of the company and may have limited access to company information. (WB 2002, p. 14)