Bulgaria: A Corporate/Commercial Overview

Violation of Inheritance Rights over Shares in Limited Liability Companies

It is a well-known fact that the limited liability company (LLC) was “invented” by German legislators more than 110 years ago as a harmonious combination of an intuitu perosnae and a shared capital company. As a legal form of incorporation, the LLC best serves the interests of small and medium-sized enterprises (SMEs) and, owing to its flexible model, has become the most common form preferred by natural persons who have come together to pursue a common economic activity.

The Bulgarian Commerce Act (CA) was drafted under the strong influence of relevant Spanish law and German LLC Law, both of which are important for properly interpreting its content and for understanding how it settles various legal issues.

One such issue is the inheritance of shares.

Legal framework

CA Article 129 (1) clearly states that a company share ‘may be transferred or inherited’. The same paragraph clearly and exhaustively defines the various scenarios in which a share is transferred from one partner to another, or to a third party, while paragraph 2 provides that such a transfer is effected by a contract with notarised signatures. Transfers between partners are free of restrictions, whereas transfers to a third party are subject to the other partners’ approval. This is a clear-cut fact with no room for dispute.

Nowhere in the law has the legislator provided any special procedure for the acquisition of shares through inheritance, which may indicate a lacuna in the law that deserves to be filled. There is no doubt, however, that at the same time the legislator has clearly determined that a share can be inherited; therefore, no omissions of the law may serve as an excuse for interpreting a legal provision against the grain of the law, towards denying the right to inheritance, as unfortunately the Supreme Court of Cassation (SCC) has been doing in this country for the past years.

Each heir is given a free choice, in accordance with the specific rules of inheritance that also apply to the inheritance of a company share, whether or not he or she accepts the inheritance of the share in question. Such a right of an heir may be exercised either by:

• joining the company directly as a partner, which must follow a due process; or
• addressing an explicit statement to that effect to the company, including at a general meeting especially convened for that purpose.

It is, however, unacceptable for the other partners to simply embezzle the shares of the deceased partner, without first convening a general meeting or otherwise ascertaining what the heirs’ intentions are. It is the company’s duty to pay out to the heirs, should they so wish, the equivalent of the value of the relevant share towards the end of the month in which the death occurred, which amount must then be deducted from the assets of the LLC and a new balance sheet must be drawn up to reflect such deduction. In this case, the heirs do not join the company as partners.

Any acts on the part of the surviving partners in violation of the law, such as failure to convene a general meeting, to invite the heirs, to honour their will, or failure to abide by imperative provisions of the law with respect to the rights of partners in relation to the share being inherited, are null and void.

SCC Decision of 15 July 1997

SCC Decision No Ф-129/15.07.1997 follows that same logic, stating that “the acquisition of a company share, respectively membership in an LLC may be effected in two ways: primary or through direct legal succession; while membership through legal succession on the other hand could be acquired in one of two forms: by transfer or inheritance of a company share – CA Article 129(1)”. Moreover, in its decision referred to above, SCC states correctly in no uncertain legal terms that an LLC cannot deny the heir the right to succeed the grantor in his/her membership rights and obligations in relation to the company through any of its bodies, unless there is a legal obstacle preventing the heir from becoming a partner or the articles of association provide otherwise.

For greater accuracy, it should also be noted that the articles of association cannot, by definition, rule out inheritance of property rights arising out of the ownership of a company share; all it can do is prevent the heirs from taking over the position of the grantor, ie, to acquire membership rights and obligations in relation to the company. The absence of an explicit provision to that effect in the articles of association means that the general principle of inheritance as provided under CA Article 129 (1) applies, whereby membership in the LLC is acquired with the death of the grantor. The heir’s incapacity would be the only possible obstacle to it.

The general meeting has no legal power to deprive the heirs of their inheritance rights. The heir is fully entitled to decide whether he/she wishes to be a partner; ie, this is an option granted exclusively to him/her: it is solely at their discretion whether they will become a partner or receive the cash equivalent of the inherited company share.

Spanish law is quite explicit in recognising the right of heirs, whether by law or by bequest, to acquire the status of partners in a company. The assumption is that the level of trust which the partners once enjoyed among themselves also applies to their heirs.

Even if we proceed from the restrictive interpretation of Article 129 (1) by the SCC, when an heir is denied the right to join the LLC as a partner, then said heir shall be automatically entitled to receive the cash equivalent of the inherited company share.

The SCC’s interpretation and its practice of recent years resulting in an artificial distinction between the share owned by a partner in an LLC and his/her membership in it, are baffling to say the least from both a legal and a purely human perspective, as it is the share itself that substantiates and serves as the basis for said membership rights and obligations, which constitute an intrinsic and integral element of the ownership of a company share.

Current practices

According to current court practice, while the heirs are, on the one hand, entitled to dispose of the share they have inherited by transferring it to one of the surviving partners, at the same time, without such a scenario playing out in practical terms, the courts in some cases allow unilateral acts amounting to a “takeover” (ie, plain embezzlement) of the deceased partner’s share by the surviving partner, who “assumes” the rights and entitlements of the heirs to inherit the property rights over the company share as recognized even in the most restrictive interpretation of the above mentioned CA Article 129 (1). The heirs do not even suspect that such acts have been undertaken and are faced with a fait accompli, finding themselves in a legal cul-de-sac. They are then forced to engage in legal disputes and wage court battles for years on end, and even if they eventually win, they may end up in possession of an LLC that is plundered, decapitalised and dysfunctional.

The logical continuation of such judicial malpractice is that neither the surviving partners nor the company as a whole can be “forced” to pay the cash equivalent of the inherited share to the heirs – another legal obligation explicitly prescribed in the CA, because the courts are less concerned with the rights of the weaker party.

Pursuant to the explicit provisions of CA Article 129 (1), unless legal or other obstacles arise, the heirs are fully entitled to inherit the company share and that right of inheritance is in no way dependent on the will of the general meeting or of any other partner; therefore, if the heirs have been prevented by any surviving partners from joining the LLC as full partners, they must have the legal option of filing a claim under CA Article 71. The membership rights themselves arise automatically upon the death of the grantor who was a partner in the company, irrespective of when they were registered.

The court’s assertion that the heirs have no right to file a claim under CA Article 71 as they were never, not even for a moment, partners in the company just goes to show how dangerous the restrictive interpretation of CA Article 129 (1) really is, as it deprives the heirs of the possibility to defend their rights and entitlements, even if they are in a position to prove that no legal obstacles exist for their inheritance of the share and despite having legally opted to join the LLC as partners.

Conclusion

The adoption of the relevant amendments to the CA and CRA, which would contribute significantly to the establishment of the LLC as the preferred form of incorporation of SMEs, will give the necessary confidence and a sense of security to natural persons who have pooled their efforts for pursuing joint economic activity, while their heirs will be in a position to inherit the company share in accordance with the original intention of the founders of the company, if the articles of association do not provide otherwise.

For more detailed overview, see detailed analysis by Mr Vladimir Penkov.