The term M&A denotes a variety of transactions involving the sale and purchase of the ownership of a company or of its underlying business. Broadly, there are two main types of transactions to this effect, which are both largely practiced in Bulgaria – a share acquisition and an asset acquisition. M&A also stands for other legal operations, such as mergers by absorption or mergers by formation whereby all assets, liabilities and the entire business of the target are transferred to an existing or new corporate entity and the shares in the remaining corporate shell are cancelled. Mergers as forms of corporate reorganization are extensively regulated in the Bulgarian Commercial Act ("CA"), which implements the respective EU legislation on the subject.

Share Acquisition

In a share deal, it is the ownership of shares that is transferred to the purchaser, whereas the status of the target company remains unaffected – it retains its assets, liabilities, trade contracts, etc. If 100% of the shares in the target company are transferred, it will become a wholly-owned subsidiary of the purchaser. Control over the target company may be acquired through the purchase of a smaller stake, provided however that the purchaser effectively controls more than half of the voting rights in the company or controls a majority of the voting rights. The main advantage of a share deal from the seller’s point of view is the clean break – the seller loses its connection with the company and the business. The purchaser will inherit all actual and hidden liabilities of the company, including its tax position. Since Bulgarian law does not provide for statutory warranties in case of “defects” of the transferred shares, the purchaser should carefully negotiate in the contractual documentation its rights of comeback against the seller.

Asset Acquisition

In an asset acquisition, the purchaser may acquire individual assets and liabilities that made up the business, such as real estate, plant, machinery, intellectual property, good will, etc. Generally, each asset or liability should be transferred in accordance with the form required for such type of transfer.

For example, transactions involving real estate (e.g. a purchase, exchange, etc.) should be executed with a notary deed before a registered notary. Upon execution of the deed the notary is required to register the transaction in the Land Registry in order to make the ownership title of the acquirer protected with respect to third parties. A notary deed, however is not required for the sale of state or municipal property, or in privatization transactions, where the simple written form is sufficient for a valid title transfer. There are also special rules and procedures governing the acquisition of real estate upon enforcement, insolvency and similar procedures, and for in-kind contributions involving real estate.

Where the subject of the sale is a business enterprise (a combination of rights, obligations and operational relationships), the parties may benefit from a special legal regime allowing the transfer to be executed with a single sale of business contract. The creditors’ consent with the deal would not be needed; however the seller would assume joint liability with the purchaser for the liabilities of the transferred business, unless otherwise agreed with the creditors. The execution of the contract is subject to certain formal requirements (notary certified signatures of the parties, detailed description of the assets to transferred). In such deals, whether intended or not, the purchaser would assume also responsibility for the business’ employees, who enjoy protection against dismissal based on change of the employer under the Labour Code.

Taxes as well as securing finance (financial assistance restrictions) are other significant factors to be considered when choosing an acquisition strategy.

The Acquisition Process and Documentation

Under Bulgarian legislation no regulated procedure with respect to the acquisition process and the necessary steps to be undertaken exists and investors usually follow the common international practices which encompass the following stages:

• Signing of Heads of Terms (or Memorandum of Understanding) and Confidentiality Agreements. It is possible for legal issues related to pre-contractual liability to arise at this stage;
• Undertaking due diligence of the target by the purchaser's advisors and based on their findings, drafting and negotiating a Sale/Purchase Agreement("SPA");
• Signing of the SPA, which should contain at least description of the subject of the deal and the agreed consideration (whether fixed or determinable). In practice, each SPA provides for: (1) a set of conditions precedent for the transfer of ownership, for example obtaining of merger control clearance as set forth in the Protection of Competition Act; (2) representations and warranties, as the seller may seek to make disclosures that qualify the warranties and respectively limit its liability. The practice of extensive representations and warranties is typical for the common law jurisdictions but has become customary in Bulgaria as well, despite the available implied protection of the purchaser by way of statutory warranties;
• Closing of the deal occurs after the conditions precedent have been fulfilled and the seller subsequently transfers the ownership, which should be carried out in compliance with any formal requirements (such as notary certification in the case of a transfer of quotas in a limited liability company or a sale of a going concern). Other formalities, such as filings in the trade and other public registers should also be complied with.