Learning from the General Principles of Company Law for Transition Economies: The Case of Bulgaria

Abstract

This Article examines the development of company law in Bulgaria. Like Russia and other Eastern European nations such as Czechoslovakia and Poland, Bulgaria engaged in mass privatization. The Bulgarian Big Bang was in 1998 and over a thousand firms were listed on the Bulgarian Stock Exchange. Similar to several other Eastern European transition economies, the Bulgarian market suffered after its opening from mass expropriation of minority shareholder wealth. Two-thirds of all Bulgarian firms were de-listed within three years (1999-2001) of their first trading on the Bulgarian Stock Exchange. Since 2002, however, the Bulgarian market has made a strong recovery.

The focus of this Article is on changes in two particular areas of the company law - preemptive and appraisal rights, and their linkage to the turnaround in the Bulgarian market. The old (1999) Bulgarian company law did contain both provisions, but despite these legal protections, more than 80% of the de-listed firms went private without any compensation given to their minority shareholders. The remaining firms were de-listed via tender offers for minority stakes, which occurred at about 25% of fair value, on average. Company law changes that became effective in 2002 kept preemptive and appraisal rights in place, but changed their nature as well as the required regulatory approvals.

After company law changes became effective in 2002, the health of the Bulgarian stock market improved dramatically. Tender offers for minority shares decreased in number. Those that did occur began to be at premiums to market value similar to those observed in developed markets. The concentration of ownership in Bulgarian firms began to decrease and liquidity, as measured by the amount of shares traded, began to increase. The valuation of shares also increased markedly.

The changes in company law reflect guidance in the Principles of Company Law for Transition Economies. As the authors of the Principles argued, laws must fit the institutional environment of the transition economy. Those laws directly imported from developed markets may fail in transition markets. Consistent with the Principle V, the changes in the Bulgarian law effective in 2002 placed primary emphasis on the protection of minority shareholders. Changes shifted the reliance away from market prices, judges, and required actions by minority shareholders. They increased reliance on bright line rules, and on the automatic creation of transactional options such as veto power and share purchase.

Keywords: freeze-out, preemptive rights, appraisal rights, company law

JEL Classification: K22