Could the Bulgarian Variable Capital Company become the preferred corporate form for startups?

The Variable Capital Company (дружество с променлив капитал or VCC) is still a relatively new corporate form under Bulgarian law. Its legal framework, however, offers considerable flexibility for startups, founders and investors.

Unlike the traditional Bulgarian limited liability company (OOD), the VCC provides significant flexibility in structuring its capital and the rights attached to company shares.

Different classes of shares may be created and may carry different rights, including multiple voting rights, non-voting rights, preferential dividends, liquidation preferences and redemption rights. Certain classes of shareholders, or even individually specified shareholders, may also be granted special voting rights, including veto rights on particular matters.

The articles of association may also incorporate mechanisms commonly used in startup and venture capital structures, such as:

ROFR • Lock-up • Tag-along • Drag-along • Call/Put Options • Compulsory Transfer • Company Buyback • Vesting • Good Leaver / Bad Leaver

A particularly important feature of the VCC regime is that the Bulgarian Commerce Act expressly regulates the consequences of breaching transfer restrictions incorporated in the articles of association. A transfer of shares made in breach of arrangements contained in the articles of association is not enforceable against the company and third parties, unless the general meeting resolves otherwise.

This provides express statutory backing to mechanisms such as ROFRs, lock-ups and other transfer restrictions commonly used in startup and venture capital structures.

Another distinctive feature is the relative privacy of the ownership structure. The shareholders of a VCC are not registered as such in the Bulgarian Commercial Register. Instead, the company maintains its own shareholder’s register.

The VCC is, of course, not suitable for every business. It is available only to companies meeting the statutory size thresholds, and the flexibility it offers also means that particular attention needs to be paid to the drafting of the articles of association.

For founders and investors who wish to build more sophisticated governance, economic and transfer arrangements into the corporate structure itself, the VCC is certainly worth considering. It will be interesting to see whether the VCC will gradually establish itself as a preferred corporate vehicle for Bulgarian startups and venture capital investments.