Report on the Observance of

Standards and Codes (ROSC)

Corporate Governance

Corporate Governance
Country Assessment

Bulgaria
June 2008
 Overview of the Corporate Governance ROSC Program
WHAT IS CORPORATE GOVERNANCE?
Corporate governance refers to the structures
and processes for the direction and control of com-
panies. Corporate governance concerns the relation-
ships among the management, Board of Directors,
controlling shareholders, minority shareholders and
other stakeholders. Good corporate governance con-
tributes to sustainable economic development by
enhancing the performance of companies and
increasing their access to outside capital.
The OECD Principles of Corporate Governance
provide the framework for the work of the World
Bank Group in this area, identifying the key practical
issues: the rights and equitable treatment of share-
holders and other financial stakeholders, the role of
non-financial stakeholders, disclosure and trans-
parency, and the responsibilities of the Board of
Directors.
WHY IS CORPORATE GOVERNANCE IMPORTANT?
For emerging market countries, improving corpo-
rate governance can serve a number of important
public policy objectives. Good corporate governance
reduces emerging market vulnerability to financial
crises, reinforces property rights, reduces transaction
costs and the cost of capital, and leads to capital
market development. Weak corporate governance
frameworks reduce investor confidence, and can dis-
courage outside investment. Also, as pension funds
continue to invest more in equity markets, good cor-
porate governance is crucial for preserving retire-
ment savings. Over the past several years, the impor-
tance of corporate governance has been highlighted
by an increasing body of academic research.
Studies have shown that good corporate gover-
nance practices have led to significant increases in
economic value added (EVA) of firms, higher produc-
tivity, and lower risk of systemic financial failures for
countries.
THE CORPORATE GOVERNANCE ROSC
ASSESSMENTS
Corporate governance has been adopted as one
of twelve core best-practice standards by the inter-
national financial community. The World Bank is the
assessor for the application of the OECD Principles of
Corporate Governance. Its assessments are part of
the World Bank and International Monetary Fund
(IMF) program on Reports on the Observance of
Standards and Codes (ROSC).
The goal of the ROSC initiative is to identify
weaknesses that may contribute to a country’s eco-
nomic and financial vulnerability. Each Corporate
Governance ROSC assessment reviews the legal and
regulatory framework, as well as practices and com-
pliance of listed firms, and assesses the framework
relative to an internationally accepted benchmark.


Corporate governance frameworks are bench-
marked against the OECD Principles of Corporate
Governance.

Country participation in the assessment process,
and the publication of the final report, are volun-
tary.

The assessments focus on the corporate gover-
nance of companies listed on stock exchanges. At
the request of policymakers, the ROSCs can also
include special policy focuses on specific sectors
(for example, banks, other financial institutions,
or state-owned enterprises).


The assessments are standardized and systematic,
and include policy recommendations. In response,
many countries have initiated legal, regulatory
and institutional corporate governance reforms.

Assessments can be updated to measure progress
over time.
By the end of June 2005, 48 assessments had been
completed in 40 countries around the world.
REPORT ON THE OBSERVANCE OF STANDARDS AND CODES
(ROSC)
Corporate governance country assessment
Bulgaria
June 2008

Executive Summary
This report assesses Bulgaria’s corporate governance policy framework for publicly traded
companies. It highlights recent improvements to laws and regulation, makes policy
recommendations, and provides investors with a benchmark against which to measure
corporate governance in Bulgaria. This report updates the 2002 Corporate Governance ROSC
(CG ROSC).
Achievements: Since 2001, Bulgaria has undertaken substantial legal, regulatory, and
institutional reforms that have led to improvements to the corporate governance framework, in
particular in the areas of: (i) board practices; (ii) shareholder rights; and (iii) disclosure. To
establish a set of good practices that regulators, investors and the companies themselves can
benchmark corporate governance practices against, Bulgaria launched a national code of
corporate governance (NCGC) in late 2007. In doing so, it implemented one of the key
recommendations of the 2002 CG ROSC. Forty companies have agreed to implement the
NCGC, although only 19 are formally required to do so.
Key Obstacles: Substantial challenges, however, remain. While the legal framework,
including the NCGC, has a few remaining gaps, actual practices lag behind the “law on the
books”. Boards in particular do not fulfill their role of guiding and overseeing management,
ensuring for appropriate disclosure, and building robust control frameworks. The largest
obstacle to board reforms is ownership concentration, with majority owners dominating board
and governance processes. It is this group that ultimately wields the key to improved
corporate governance.
Key Opportunities: On the other hand, corporate governance is currently being brought to the
forefront of the reform debate, mainly due to: (i) improvements to the legal and regulatory
framework; (ii) the launch of the NCGC, which has led to increasing awareness of the business
case for corporate governance; and (iii) a nascent trend of ownership dispersion, which,
combined with the growth of institutional investors, is loosening the grip of majority owners
and encouraging stakeholders to engage in corporate governance reforms.
Next Steps: As Bulgaria continues its dynamic pace of reforms, all key stakeholders involved
in the reforms process may wish to focus on the following four reform priorities: First, the
Financial Supervision Commission (FSC) should continue to strictly enforce existing laws and
may wish to focus on how the following three groups ‘comply or explain’ with the recently
issued NCGC: (i) holding companies, in which governance practices are considered
insufficient; (ii) the largest ten issuers that make-up most of the trading and market
capitalization; and (iii) principal issuers on the Unofficial Market that are driving much of the
market’s growth. Second, the task force that launched the NCGC may wish to eventually
review the NCGC to offer more practical guidance on how to implement good practice. Third,
the government and regulators may wish to make minor amendments to the legal and
regulatory framework. Fourth and finally, the most important factor to improve corporate
governance will be to train and thus, over time, build a cadre of qualified, experienced, and
professional directors who are empowered to ensure that the “law on the books” translates into
actual practice.
Acknowledgements
This CG ROSC report reflects technical discussions with a number of
private and public sector institutions, as well as other relevant stakeholders, whom
the World Bank would like to thank for their time and invaluable insight into
corporate governance practices in Bulgaria. The World Bank would like to
expressly thank the: Financial Supervision Commission; Bulgarian Stock
Exchange-Sofia; Bulgarian National Bank; Bulgarian Privatization Agency;
Ministry of Finance; Registry Agency, Ministry of Justice; Central Depository;
Association of Bulgarian Investor Relations Directors; Bulgarian Investor
Relations Society; Bulgarian Industrial Capital Association; the Institute of
Certified Public Accountants in Bulgaria; in addition to a number of banks and
other financial institutions, publicly listed companies, law and accounting firms, as
well as investors and financial sector institutions. The information received on
current corporate governance practices and issues was indispensable for the
development of this corporate governance policy assessment, and for developing
the resulting conclusions and policy recommendations.

This Corporate Governance ROSC assessment of Bulgaria was carried out

by Sebastian Molineus, Senior Operations Officer, with the support of David
Robinett, Private Sector Development Specialist, both with the Global Capital
Markets Development Department. Orsalia Kalantzopoulos, Country Director,
Florian Fichtl, Country Manager, Stella Ilieva, Senior Economist, Evgeny
Evgeniev, Consultant, and Albena Samsonova, Program Assistant, all from the
World Bank Bulgaria Country Team; Marie-Laurence Guy, Senior Projects
Officer, IFC-Global Corporate Governance Forum; George R. Clarke, Senior
Private Sector Development Specialist; and Luc Cardinal, Senior Financial
Management Specialist, World Bank, readily offered their expertise and support to
help finalize this CG ROSC report.

The ROSC is based on a corporate governance template-questionnaire

completed by a team from the Institute of Economics at the Bulgarian Academy of
Sciences, under the coordination of Dr. Mitko Dimitrov and including Dr. Plamen
Tchipev, Dr. Spartak Keremidchiev, Dr. Valchin Daskalov, and Dr. Radostina
Bakurdjieva, with technical support from Diana Dimitrova.
 Table of Contents

Market Profile.......................................................................................................................................1

Key Findings ........................................................................................................................................3

Protecting the Rights of Investors ...................................................................................................3

Strengthening Information Disclosure and Transparency...............................................................5

Building Strong Board Practices and Control Structures ................................................................7

Enforcement..................................................................................................................................10

Recommendations ............................................................................................................................12

Status of Implementing the Recommendations Contained in the 2002 CG ROSC .....................16

Summary of Observance of OECD Corporate Governance Principles ........................................21

Corporate Governance Landscape..................................................................................................24

Principle-By-Principle Review of Corporate Governance .............................................................31

Section I: Ensuring the Basis for an Effective Corporate Governance Framework.........................31

Section II: The Rights of Shareholders and Key Ownership Functions............................................34

Section III: The Equitable treatment of Shareholders ......................................................................46

Section IV.: The Role of Stakeholders in Corporate Governance ....................................................51

Section V.: Disclosure and Transparency ........................................................................................56

Section VI.: The Responsibilities of the Board .................................................................................65

Corporate Governance ROSC Assessment Bulgaria

Country assessment: Bulgaria

This 2nd CG ROSC In November, 2007, the World Bank’s Corporate Governance Policy Practice was
aims to strengthen formally invited by the Bulgarian Financial Supervision Commission (FSC) to
corporate governance carry-out a Corporate Governance Report of the Observance of Standards and
in Bulgaria through an Codes (CG ROSC) in Bulgaria, the second such CG ROSC since 2002.
in-depth assessment Related recommendations in the area of disclosure and transparency are presented
and policy in the 2008 Accounting and Auditing ROSC for Bulgaria.
recommendations.

Market Profile
The results of the The privatization process in Bulgaria was launched in 1992 and largely
privatization process implemented from 1996 to 2004. Today, the share of the state ownership has
have impacted the been greatly reduced. Growth is led by the private sector, which now accounts
corporate governance for 75 percent of GDP with an equal share of total employment. The total amount
practices of a number of assets privatized amounts to 60.44 percent compared to the amount of all state-
of companies. owned assets and 91.53 percent compared to the assets subject to privatization.
Bulgaria’s mass privatization program impacted today’s corporate governance
framework and practices. More specifically:
1. Privatization funds collected over 80 percent of the vouchers and acquired 87
percent of the shares purchased in auctions. Of the original 81 privatization
funds, around 30 are still listed on the exchange as ‘holding companies’. First
and foremost, the governance of these holding structures remains an issue.
Moreover, the corporate governance of their subsidiaries, and governance
relationship between the holding structure and subsidiaries, is thought to be of
concern as well, for example, with respect to abusive related party
transactions and poor consolidated financial reporting.
2. Legal and regulatory changes in 2003 led to the broader use of the Bulgaria
Stock Exchange-Sofia (BSE) as a means to privatize. Prior to the enactment
of the Privatization and Post-Privatization Control Act in 2002, only 46 sales
were made through public offerings on the BSE; the total number of the sales
made thereafter is 1,743 (77.9 percent of all privatizations for the period).
While this has had a positive effect on the development of the market, not all
issuers had the necessary structures or culture in place to embrace good
corporate governance. The government reacted in 2004 and allowed a
number of smaller companies to de-list from the exchange, however, partially
reversed its decision in 2006 and required all companies with over 1,000
shareholders to re-list again. Today, of the nearly one thousand firms that
were initially listed on the BSE, approximately one-third remain listed and of
these, only a few are actively traded.
3. Following mass privatization Bulgaria, as its neighboring countries, witnessed
a wave of ownership concentration, largely by insiders who diluted minority
shares to gain control of companies. It was not until later that revisions to the
law were passed to try to protect minority shareholders from dilution. As a
result, ownership is highly concentrated. The minority stakes, in turn, are
often considered “abandoned” as they are held by individuals who are
unaware of their rights, e.g. to participate in the profits of the company.
The current market As of June 30, 2007, the market capitalization of the BSE was BGN 20,8 billion
conditions should be (USD 16,32 billion) and 41 percent as a percentage of GDP, up dramatically from

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viewed as an June 2002 (BGN 1,375 billion and 4.2 percent, respectively). The number of
opportunity to build on listed companies on the BSE reached 509 in December 2007, 46 issuers more
the legal and compared to the end of 2006. A substantial increase was registered on the
regulatory reforms to Unofficial Market, i.e. lowest and least regulated market segment, where the
now implement good number of listed securities rose by 10 percent over a one year period. Turnover
practice at the and trading volume, too, increased significantly. However, the market has
company level. recently experienced a sharp correction—due to, inter alia, the sub-prime
mortgage crisis in the United States—losing just under 30 percent of its value
over the past six months, with the main indices, SOFIX and BG-40, loosing 41.5
and 46.5 percent, respectively since the historical high in mid-October 2007. The
total market capitalization of the stock market has shrunk to BGN 22.9 billion on
May 12, 2008 down from over BGN 28 billion in October 2007.
Three key issues The government’s and regulators’ commitment to improve-upon the corporate
should, however, be governance framework, however, remains strong, despite (or precisely because) of
taken into account the current market downturn. Three key issues need to be taken into account by
during the next phase all stakeholders during the next phase of the reform process: (i) trading is
of the reform process: concentrated to the top 10 issuers, which account for 88 percent of trading volume
(i) trading is limited to and 47 percent of market capitalization; (ii) growth in terms of market
a few issuers; (ii) capitalization is mainly coming from the Unofficial Market, which is largely
growth stems from unregulated in terms of corporate governance; (iii) ownership is highly
issuers on the largely concentrated.
unregulated unofficial These three issues are a risk to capital market stability, yet at the same time pose a
market; and (iii) unique opportunity for the market in general and regulatory agencies in particular
ownership to focus their monitoring, respectively regulatory efforts on: (i) the top 10 to 20
concentration. issuers; (ii) bulk of companies listed on the official market, as well as growth
companies on the Unofficial Market; and (iii) leading shareholder groups.
In particular the fact Three distinct ownership groups can be distinguished from one another:
that ownership is ƒ Today, private ownership is highly concentrated in the hands of a few
concentrated in the domestic investors, estimated to number 130 to 150. The average size of the
hands of a few private largest equity stake was found to be equal to 60 percent of outstanding shares,
investor groups, the with the second and third biggest shareholders averaging 12.7 percent and 5.5
state and, increasingly, percent. The free float of publicly listed companies is, however, visibly
institutional investors, increasing, e.g., from 17. 9 percent in 2006 to 24.7 percent in 2007. These
should be viewed as a majority investors have not traditionally embraced corporate governance,
risk and an however, present a unique opportunity to effectuate reforms should they learn
opportunity. to appreciate the business case for good corporate governance. The fact that an
increasing number of minority shareholders are entering the market increases
the business case for the regulator to ensure that their minority rights are
protected from the very beginning, thus ensuring for trust and confidence in the
capital markets.
ƒ State-ownership has been greatly reduced due to privatization, but the size of
the public enterprise sector and the extent to which the state controls strategic
decisions of public enterprises is still significant. Moreover, the governance of
approximately 115 state-owned enterprises (SOEs) remains underdeveloped in
the absence of a clear legal framework, ownership policy, and corporate
governance improvement program by the state over its assets.
ƒ Institutional investors are relatively new to Bulgaria, however, today’s number
is close to 100, with some six pension funds, 40 mutual funds (12-15 mutual
funds alone were launched in the past two years) and 46 investment companies.

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Corporate Governance ROSC Assessment Bulgaria

It is estimated that institutional investors own approximately BGN 1 billion or

The legal and
regulatory framework
has seen important
improvements, most of
which were
implemented to meet
relevant EU Directives
but also in response to
the 2002 CG ROSC.
the launch of the new
NCGC sets-out good
practices and has
raised awareness of
good corporate
governance, even if it
could provide more
practical guidance.
5 percent of equity in terms of market capitalization and approximately 70-80
percent of equity that is floated, with the rest disbursed among retail investors.
This investor group can play an important role in engaging with their investee
companies, in particular in the area of corporate governance and should be
encouraged to vote their shares.
An impressive number of changes have been made to all principle laws and
regulations relating to corporate governance, in particular the Commerce Act
(CA) and Law on the Public Offering of Securities (LPOS), which have served to,
inter alia: (i) better protect shareholder rights, e.g. the right to elect and dismiss
directors; (ii) improve upon disclosure, e.g. to disclose a corporate governance
improvement plan in the annual report; and (iii) strengthen board practices, e.g.
by requiring at least one-third of the (supervisory) board to be composed of
independent directors. These changes have prompted a number of market
participants to cite improvement to market transparency and confidence.
The launch of the National Code of Corporate Governance (NCGC) in late 2007
implements one of the main recommendations of the 2002 CG ROSC. The
NCGC does set out good practice, however, could be revised in a number of areas
and provide for more practical guidance on implementing good corporate
governance. Due to the participatory process in developing the NCGC, Bulgaria’s
Corporate Governance Task Force managed to raise awareness of good corporate
governance. The NCGC is to be implemented on a “comply or explain” basis by
all issuers listed on the BSE’s most heavily regulated market segment, the Official
Market, Segments ‘A’ and ‘B’, but not the Unofficial Market (where most of the
growth comes from). Forty companies representing approximately BGN 7,065
billion of market capitalization have publicly announced that they intend to fully
apply the NCGC, and 22 of these 40 have already developed corporate
governance improvement plans, albeit of varying quality. Finally, a corporate
governance scorecard is currently being developed to better allow stakeholders to
assess a company’s governance against the NCGC.

Key Findings
The following key findings section summarizes the principle-by-principle
assessment of Bulgaria’s compliance with the OECD Principles of Corporate
Governance.

Protecting the Rights of Investors

The corporate Ownership registration is secured, shares of publicly listed companies are freely
governance framework transferable, and shareholders are generally able to obtain material information for
protects basic the general shareholder meeting (GSM) on a timely basis. Shareholders are able
shareholder rights to to participate and vote in the GSM, and elect or remove directors to the board.
participate and vote in Cumulative voting 1 is neither required nor recommended in the corporate
the GSM. governance framework and is not carried-out in practice, decreasing the

1
Cumulative voting allows minority shareholders to cast all their votes for one candidate. Suppose that a publicly traded company has
two shareholders, one holding 80 percent of the votes and another with 20 percent. Five directors need to be elected. Without a
cumulative voting rule, each shareholder must vote separately for each director. The majority shareholder will get all five seats, as s/he
will always outvote the minority shareholder by 80:20. Cumulative voting would allow the minority shareholder to cast all his/her votes
(five times 20 percent) for one board member, thereby allowing his/her chosen candidate to win that seat.

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Corporate Governance ROSC Assessment Bulgaria

opportunity for minority shareholders to elect directors to the board. Shareholders

may exercise their rights, including the right to participate in the GSM, by proxy,
however, in-line with detailed and cumbersome guidelines. Also, the CA allows
for different classes of shares with different voting rights, although virtually all
traded companies use “one-vote one-share” voting in practice. Preferred
shareholders are accorded an “advisory vote”. Finally, the law states that the
board must provide true, exhaustive, and to-the-point answers to questions posed
by shareholders during the GSM, in-line with good practice.
Take-over provisions Companies are required to disclose acquisition of shares in 5 percent increments
to protect shareholders and a shareholder who acquires 50 percent or more of the shares must provide a
are regulated tender offer to the remaining shareholders. Shareholders who acquire 95 percent
according to good of the shares are provided with a “squeeze-out” right 2 and minorities in turn with
practice. a “sell-out” right. Anti-takeover devices are not known to exist.

Special qualified
voting requirements
exist to further protect
shareholders and
shareholders are able
to file suits.
The concept of a
shadow director is
introduced in the law,
in-line with good
practice and most
relevant for Bulgaria’s
concentrated
ownership structure.
There are no major
obstacles to cross
border voting.
Shareholders are able
to effectively
participate in
decisions concerning
fundamental corporate
changes. However,
with respect to
Qualified (two-thirds) and super-majority (three-fourth) voting on key issues
exists, such as a qualified two-thirds voting majority for restricting or cancelling
preemptive rights; 3 a three-fourth voting majority for restricting the rights of
preferred shareholders; and unanimity, with a blocking quota of one share, exists
for placing additional items on the GSM agenda not previously announced.
The legal framework allows shareholders to seek redress before the courts, both
via direct and derivative suits.
Of note is that Art. 118a LPOS introduces the concept of the “shadow director”,
in-line with good practice, and specifies that any person who controls or exerts
influence over a public company’s directors or managers, and induces them to act
or to refrain from acting against the interest of the company, shall be held liable
for damages inflicted on the company. This rule is particularly relevant in
Bulgaria, with the high concentration of ownership. On the other hand, it does
not appear that this rule has been successfully used by minority shareholders.
There are only a few sectors that restrict foreign investors and, though not
desirable, these fall into the EU norm. Foreign shareholders may vote by proxy
or through their custodian, and electronic voting is encouraged by the NCGC,
albeit not carried-out in practice. The cumbersome requirements for the
notarization of proxies may limit foreign participation. There is little to no
practice of custodians voting shares on behalf of shareholders.
A three-fourth majority vote by the GSM is required for changes to the
company’s articles of association and when new shares are issued by, in-line with
good practice. Shareholders are accorded pre-emptive rights to prevent the
dilution of their equity stake. Finally, the legal and regulatory framework
requires the board to seek shareholder approval of extraordinary and related party
transactions above a certain monetary thresholds.

2
The squeeze-out right (sometimes called a “freeze-out”) is the right of a majority shareholder in a company to compel the minority
shareholders to sell their shares to him. The sell-out right is the mirror image of the squeeze-out right: a minority shareholder may
compel the majority shareholder to purchase his shares.
3
Pre-emptive rights give existing shareholders a chance to purchase shares of a new issue before it is offered to others. These rights
protect shareholders from dilution of value and control when new shares are issued.

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Corporate Governance ROSC Assessment Bulgaria

remuneration, the law
may ‘overshoot’ good
practice.
Corporate governance
concerns remain when
it comes to dividend
policies and payments,
… shareholders by the custodians.
and capital structures
and arrangements that
enable shareholders to
obtain a degree of
control
disproportionate to
their equity ownership.
Finally, the corporate
governance framework
does not require or
recommend for
institutional investors
to vote or disclose
their voting policies.
The rights of
stakeholders as
established by law are
respected.
Whistle-blowing
mechanisms and basic
information rights to
employees are,
however, not provided.
While the disclosure of
financial information
has improved …
The law even allows shareholders to determine, rather than expressly vote or
provide an advisory opinion on, board and executive remuneration. This may
actually run counter to good practice as it could politicize executive remuneration
and hinder the company’s ability to offer remuneration packages deemed
attractive enough for high-caliber managers.
The legal framework accords shareholders the right to participate in the profits of
the company. However, there are two issues with respect to the payment of
dividends. The first is that hardly a company has a dividend policy. The second
is that declared dividends do not appear to be paid-out to a number of minority
Beneficial ownership structures are still difficult to determine despite the best
efforts of the regulator, largely due to difficulties of obtaining information from
entities registered in off-shore jurisdictions. Golden shares arrangements do exist
in practice, if only in a limited number of cases, for example in Bulgaria Air,
Neftochim (now Lukoil), and Bulgaria Telecom, and good practice would call for
such arrangements, at a minimum, to be disclosed.
Institutional investors have played an important role in driving the market these
past years, however, have tended to play a passive role in exercising their voting
rights, largely due to the limited ability to effect change in the current
environment of concentrated ownership. There is little practice of disclosing
voting policies or engaging with boards and senior management to discuss issues
related to corporate strategy or governance.
The legal and regulatory framework accords important rights to the company’s
stakeholders, in particular employees and creditors. These basic rights are
thought to be respected. On the other hand, few companies have adopted specific
policies that go beyond basic requirements, for example, by including a “social
balance sheet” or similar discussions on “stakeholder relations” in their annual
report or company website. Most Bulgarian companies do not offer their
employees performance enhancing mechanisms. Moreover, Bulgaria has of yet to
introduce whistleblower protection in its corporate governance framework
Strengthening Information Disclosure and Transparency
Financial disclosure has improved dramatically since 2002, yet can still be
improved upon. 4 The law requires companies to provide shareholders with a
complete set of financial statements on an annual (audited) and quarterly basis,
prepared and disclosed according to Endorsed IFRS, both individually and on a
consolidated basis. 5 The legal framework also requires these financial statements
to remain publicly available for a period of at least five years, much in-line with

4
The Accounting and Auditing ROSC, which is being prepared and launched simultaneously to this CG ROSC, contains more detailed
analysis and recommendations on financial disclosure and audit issues. A copy is available under
www.worldbank.org/ifa/rosc_bgr.pdf.
5
It must be noted that because Bulgaria is an EU Member State, it has to comply with the acquis communautaire, which is the body of
law of the EU, and with the endorsed IFRS, which are the IFRS that the EU has endorsed. Since the EU was not in agreement with
three paragraphs of the IAS 39, the entire IFRS was carved out. It should also be noted that Bulgaria now obtains a timely translation
of the adopted changes to the endorsed IFRS by the European Commission.

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good practice.
the disclosure of non- The legal framework calls for the financial statements to be accompanied by an
financial information activity report, 6 however, the activity reports are generally thought to be
remains haphazard insufficient in practice. Companies are not required or encouraged to publicly
and generally under- disclosure their commercial and non-commercial objectives, and do not do so in
developed … practice. The same holds true for the disclosure of ownership, in particular
beneficial ownership, and voting rights; remuneration policy for directors and
senior executives, as well as the actual remuneration on an individual basis;
related party transactions; material foreseeable risk factors; and issues regarding
employees and other stakeholders. On the other hand, the legal framework
requires companies to disclose their corporate governance policies and
improvement plan, yet not all companies do so in practice, or do so in varying
quality; also, the law does not specifically refer to the NCGC, the new corporate
governance standard for Bulgaria.
and relevant While the legal framework calls for material information to be disseminated in an
information is rarely equal, timely, and cost-efficient manner, most companies do not have dedicated
found on company sections on corporate governance or investor relations (IR) on their website, in-
websites. line with good practice.
The EU’s acquis It should be noted that the EU in the acquis communautaire 7 has not approved
communautaire allows international standards on auditing, notably the International Standards on
its members to adopt Auditing (ISA) as prepared by the International Federation of Accountants
their own rules on (IFAC), and has allowed its member states to adopt more stringent rules.
auditing, and Bulgaria Bulgaria has chosen to move beyond the acquis communautaire and all annual
has chosen to follow financial statements have to be audited by a certified public accountant in
ISAs. compliance with IFAC’s ISA. The audit profession is also required to carry-out
its audits according to IFAC’s Professional Code of Ethics, in-line with good
practice. And while most of the larger audit firms generally do comply with ISA
and the Code of Ethics, few of the smaller firms are thought to do so in practice.
On the other hand, Specific provisions in the accounting and auditing framework fall short of good
auditor independence practice, for example, with respect to the definition of related parties (e.g., in-laws
remains an issue. are not included in the definition) and conflicts of interest (e.g. the case of the
chief accountant of the enterprise being a former employee of the audit firm is not
mentioned). Moreover, there are no restrictions or limitations on the provision of
tax and business advisory services, which for some of the accounting firms is
known to constitute an important element of their overall client fees and thus
likely to impede their independence. Similarly, audit partners are known to stay
with their clients for more than ten years, which could similarly impede their
independence.
Finally, while the GSM is required to elect the external auditor, the legal
framework and NCGC is silent on the nominating process.
The ICPAB, the SRO The Bulgarian Institute for Certified Public Accountants in Bulgaria (ICPAB), the
for the audit self-regulatory organization for the audit profession, carries out examinations,
profession, should registers auditors, and conducts quality reviews of its members via a peer review

6
The activity report is referred to as the ‘directors’ report’ or ‘management discussion and analyses in other jurisdiction, and generally
aims to provide qualitative information and analysis on the company’s financial statements.
7
The acquis communautaire is the body of legislation of the European Communities and Union. All applicant countries to the
European Union (EU) must accept the acquis before they can join the EU.

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better follow-up on its
quality review process.
Regardless of whether
companies follow a
one or two-tiered
board structure, good
practice calls for the
board to guide and
oversee management
in the interest of
shareholders. Yet the
Bulgarian corporate
governance framework
does not properly
define the role of the
board.
As a result, the role of
the board is not
understood and under-
developed in practice.
The responsibility for
implementing a robust
corporate governance
framework is assigned
to the IR officers;
however, the board is
not involved, contrary
process every three years, which could be strengthened. A disciplinary committee
follows-up on transgressions, although, to date only a few reprimands have been
issued and ICPAB has not issued a fine or suspended an auditor’s license in
practice, despite the weaknesses recognized by many in the profession.
Building Strong Boards and Control Structures
The Bulgarian corporate governance framework is unique as it allows for boards
to adopt a one or two-tiered board structure. Approximately 75 percent of listed
companies have adopted the one-tiered structure, with most citing the ability to
better hire and fire the chief executive officer (CEO) as the key reason for
choosing the one- over the two-tiered structure. The older, privatized companies
and holding companies typically have a two-tiered board structure, as do the
banks which are legally required to do so. And while important differences
between these two governance structures exists, 8 in the end, good practice calls
for directors under either board structure to adhere to the underlying principles of
good corporate governance, namely: responsibility, accountability, fairness and
transparency.
While the CA defines the competencies of the GSM and makes some references
to board duties, it does not explicitly define the competencies of the (supervisory)
board and management board (under the two-tiered model). The NCGC, on the
other hand, clearly addresses the key functions of the (supervisory) board,
however, there are a number of inconsistencies with good practice that may serve
to obfuscate the respective roles and responsibilities of the (supervisory) board
vis-à-vis management. More specifically, good practice calls for management to:
(i) develop and the board to approve strategy, yet the NCGC calls for the board to
determine strategy; and (ii) ensure for the company’s compliance with relevant
laws and regulations, and not the board as stated in the NCGC.
In practice, it appears that the majority of (supervisory) boards generally lack an
appropriate understanding of and do not effectively carry-out their roles and
responsibilities. Almost all market participants cited two key factors in this
respect: (i) most companies continue to be dominated by majority shareholders
who typically either serve as CEO or board chairman; and (ii) the absence of a
deep pool of professional directors with the necessary experience and expertise to
constructively guide and when necessary challenge management.
Another key (supervisory) board duty is to establish a robust corporate
governance framework, in the interest of the company and its shareholders.
However, in practice, it is the IR officer that has played the leading role in
developing the corporate governance framework, in particular in drafting the
above-mentioned corporate governance improvement plans. The IR officers in
effect take on most of the duties typically performed by the company secretary in
most other legal jurisdictions (e.g. taking minutes, helping to disclose
information, and serving as a liaison between the governing bodies). And while

8
Important differences between these two governance structures exist. More specifically, the management board under the two-tiered
system carries legal responsibility for its business decisions, whereas management under the one-tiered system has delegated
authority from the board, i.e. it is the board of directors that still carries the responsibility for the management of the company.
However, it should be noted that a great deal of convergence is currently taking place. For example, in the United States one-tiered
boards are increasingly acting as a supervisory organ, with the non-executive members of the board meeting on their own without
executive directors, in what are called “executive sessions” to discuss sensitive issues. Similarly, in Germany, supervisory boards are
increasingly strengthening their role within the strategic decision-making process, which was hitherto the sole responsibility of the
management board.

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to good practice. the IR function should report to management, good practice calls for the company
secretary to report to the board and its chairman, which the IR officers in Bulgaria
do not appear to do. As a consequence, corporate governance matters are
reported to the management (board) and not to the (supervisory) board. And so
boards have not led the development of the company’s governance framework,
contrary to good practice.
Succession planning, Ensuring for a robust policy on succession planning, a key (supervisory) board
too, is not considered a responsibility, is not recommended in the NCGC or carried-out in practice, which
board priority. is particularly worrisome given the concentration of ownership and prevalent role
majority owners play in the day-to-day management of the company.
The legal framework The legal and regulatory framework calls for directors to act with due care and
addresses the duties of loyalty, in the interest of the company and all shareholders, in-line with good
care and loyalty, and practice. The CA in turn calls for any director to be held harmless if it is
the business judgment established that s/he has no fault for the damage suffered by the company. On the
rule, yet the courts other hand, neither the laws, regulations or NCGC, nor the courts have defined
have not provided the terms “good faith”, “fully informed basis” and “due diligence” and have not
guidance as to what interpreted the business judgment rule to better and more effectively guide and
this means in practice. provide clarity to the (supervisory) board in fulfilling its duties to the company
and shareholders.
Conflicts of interest The legal framework with respect to related party transactions is strong.
appear to still be However, in practice, it appears that conflicts of interest and abusive related party
prevalent. transactions by directors are occurring in a number of Bulgarian companies, in
particular among holding companies, and that directors and managers do not
always take the necessary steps to prevent or disclose conflicts of interests.
Although the NCGC
The NCGC recommends that the (supervisory) board, as well as management
recommends for
board, adopt and follow a code of ethics or conduct. However, of the top 10
boards to adopt an
publicly listed companies by market capitalization, only a single company had
ethics code, few have
published their ethics code on their internet site.
done so in practice
Directors do not Good practice further calls for the (supervisory) board to assess, at least annually,
conduct board its performance, both as a whole, its committees, as well as its individual
evaluations to improve directors. Such board evaluations, which can serve as an effective tool to allow
efficient board the board to improve upon crucial governance structures and processes, and also
procedures play an important role in determining non-executive remuneration, are not
regulated or recommended in the corporate governance framework.
Board remuneration is The NCGC recommends that (supervisory) board remuneration be: (i) set to
sufficiently covered in attract and retain qualified board members; (ii) aligned with the long-term interest
the NCGC, however, of the company; and (iii) matched to their contributions and responsibilities to the
specific board in-line with good practice. On the other hand, the NCGC calls for director
recommendations remuneration to be linked to the company’s performance and results, which, while
should be clarified to appropriate for executive directors, is commonly thought to be inappropriate for
better differentiate non-executive directors as they are not involved in the day-to-day management
between executive and and are hence unable to directly affect the company’s performance. Moreover,
non-executive the NCGC recommends share options as part of the executive package, which
remuneration. should be treated with caution due to their ability to induce short-term behavior.
Finally, there is no mention of the role of independent directors in setting
executive pay. In practice, (supervisory) board salaries are thought to be low.

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And while the law calls The legal framework calls for at least one-third of the (supervisory) board to be
for one-third of the composed of independent directors. The NCGC recommends that the chairman
board to be composed of the board be an independent director, in-line with good practice; no such
of independent provision, however, exists for the chairman of the supervisory board. On the
directors … other hand, the definition of independence in the CA fails to cite key conflicts that
would impede a director from being independent, for example, when a director’s
remuneration constitutes a significant portion of his or her annual income or has
served on the (supervisory) board for more than seven years.
Finally, the corporate governance framework does not require companies to
identify which directors are independent or provide guidance on the role of
independent directors. In practice, independent directors are not thought to have
the necessary qualifications, skills, and personal characteristics to effectively
guide and control management. A number of market participants specifically
cited a lack of financial and accounting skills to effectively guide and control
managers in preparing and disclosing the financial statements.
the election criteria Any natural person possessing the legal capacity to act and who does not have a
fall short of good criminal record may become a director of a joint stock company. The CA,
practice and the however, states that a legal person may become a director, in which case the legal
nominations process is person designates a representative to perform its board duties. This runs counter
not considered fair and to good corporate governance practice, largely because it is difficult for
transparent. shareholders to determine the personal experience, qualifications, and
characteristics of a legal as opposed to a natural person.
The fit and proper For banks, new ‘fit and proper’ criteria issued by the Bulgarian National Bank
criteria for banks, too, (BNB) now call for, inter alia, management board members to have a masters-
fall short of good level university degree in economics or law; possess qualifications in banking,
practice. and demonstrate at least five years of professional experience in a senior banking
position. Supervisory board members, on the other hand, have to meet less
onerous ‘fit and proper’ criteria, which runs counter to good practice as the
supervisory board should arguably have more, not less, experience and
knowledge to properly oversee management.
The legal and regulatory framework is silent on how candidates to the
(supervisory) board are nominated, a key corporate governance issue. The
NCGC, in particular, should offer guidance on how to organize a transparent
nomination process, including the role of an independent nominations committee.
In practice, directors are formally appointed and approved by the majority
shareholder; at times, the exact numbers of board seats a majority owner may fill
are specified by a shareholder agreement.
As a consequence, Of particular concern is the apparent lack of oversight by the board over the
boards are not thought company’s control framework, notably in the areas of risk, internal controls,
to play a major role in internal audit, and external audit processes. And while the NCGC does indeed
effectively: (i) cover these control and audit issues, and generally recommends for the
overseeing extra- (supervisory) board to establish a corporate-wide risk management policy, control
ordinary and related procedures and compliance function, practical guidance as to how to structure and
party transactions, and implement these control structures and processes is not offered, as the U.K.’s
generally protecting national corporate governance code does for example in its annexes.
shareholder rights; (ii) It should be noted that banks, in turn, are required to submit to the BNB a
guiding and description of the risk management and internal control systems. However, the
controlling the legal and regulatory framework for banks deviates from good practice in a
preparation and number of important areas, in particular with respect to: (i) reporting structures,

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disclosure of financial e.g. the internal control function is accountable to shareholders, whereas it should
information; and (iii) be to management; (ii) internal audit function, where the head of internal audit
ensuring for a robust should have a direct reporting line to the board and its independent audit
and defensible control committee; (iii) compliance function, which is not required by law; and (iv) the
environment. lack of a requirement or recommendation for the board to establish an audit
committee.
Board effectiveness is The NCGC recommends for (supervisory) boards to establish committees, in
further hampered as particular an audit committee comprised of independent directors and experts, and
most companies have for these committees to be established according to formal terms of reference.
not established board- However, the NCGC does not offer any practical guidance on the role, structure,
level committees … composition, and working procedures of these committees, or mention other key
board committees, such as committees on remuneration, nomination and
corporate governance. In practice, it was thought that but a handful of listed
companies had established board-level committees.
and board working (Supervisory) boards were thought to meet on a regular basis, on average four
procedures were times per year, slightly short of what most would consider being the necessary
generally deemed minimum. Company secretaries, who according to good practices ensure for
sufficient, yet could be efficient board procedures and practices, do not exist, however, their role is
improved upon. currently being carried out—effectively at that—by the IR officer. With that said,
the duties and responsibilities of these two functions are distinct and, because the
IR officer reports to management and the company secretary to the (supervisory)
board, the board is unable to effectively ensure for efficient board practices.
While there is ad-hoc With respect to continuous professional education, the Association of
training offered, in Commercial Banks and Bulgarian International Banking Institute both train
particular for bank managers and directors on relevant banking issues (e.g. on credit and risk);
directors, there is no similarly, the BNB itself offers seminars and lectures on relevant topics.
comprehensive However, no similar institute appears to exist for companies in the real sector; and
director training while the Bulgarian Investor Relations Directors Association, Bulgarian Investors
program on corporate Association, and the Institute of Certified Public Accountants of Bulgaria are all
governance, either known to include corporate governance and related issues in their activities and
mandatory or training programs, these are geared to their respective members and do not
voluntary. include senior managers and (supervisory) board members. Similarly, board
induction programs are not known to exist.
Finally, management Finally, it should be noted that a number of interlocutors stated that some
boards appear to make management boards under the two-tiered system made use of outside (or non-
use of outside executive) management board members. These were commonly thought to be
members, against good individuals who had a full seat on the management board yet were not formally
practice employed by the company or retained as consultants. This clearly runs counter to
good practice in that lines of accountability and responsibility become blurred
when outsiders actively participate in the day-to-day management of the company
but are not formally responsible for their actions.

Enforcement
The institutional The institutional framework has been strengthened, in particular with respect to
framework has been the enforcement capacity of the FSC and BNB, both of which enjoy positive
strengthened to market reputations as tough yet fair regulators. The Central Depository AD
support enforcement (CDAD) and Registry Agency (RA) also play important roles, in particular with
… respect to information disclosure, and have traditionally enjoyed positive
reputations, though they have recently been struggling to implement relevant EU

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directives.
and the division of
Both the FSC and BNB are financially independent and both have sufficient
responsibilities
budgetary resources necessary to carry-out their respective roles and
between the FSC and
responsibilities, and do so in practice. The division of responsibilities between
BNB is clearly
these two regulators is captured in a memorandum of understanding, signed in
articulated.
2003, and both are thought to coordinate well with one another. Both, as
Regulatory
previously stated, have positive reputations among market participants as being
enforcement takes
tough, yet fair and consistent. Moreover, both are committed to improving
place, however,
corporate governance practices and have played key roles in promoting and
enforcement by the
furthering reforms in this important area. The commercial courts, on the other
courts remains an
hand, are considered to be time-consuming and cost ineffective.
issue.

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Recommendations
The following section details three policy recommendations to improve the corporate governance framework.
Recommendation 1: The private sector should lead and regulators encourage the
development and implementation of a comprehensive training course for directors on
corporate governance and related issues. Status: High priority (months 1 – 12)
The National CG Task ƒ The private sector, under the leadership of the various business associations
Force that developed and with the strong support from the FSC, BNB and BSE, should lead a
the NCGC, under the public-private sector initiative to launch a training program for directors and
leadership of and with senior managers on corporate governance and related issues.
support from the BSE, ƒ Such training could be organized by a new institute of directors or corporate
FSC and BNB, should governance institution for Bulgaria or, alternatively, be a part of current
launch a institution or university should such an institute prove unsustainable
comprehensive following a market study and business plan.
director training
program ƒ This program should focus on corporate governance issues, including the
above-mentioned duties of care and loyalty, but also focus on topics of
relevance to directors in carrying-out their responsibilities, such as on
finance and accounting, strategy, and risk. This institute would ideally be
established with the support of all key stakeholders, including the FSC and
BSE, all relevant associations, university institutions, and private sector.
ƒ The Task Force should seek guidance from the Global Corporate
Governance Forum (GCGF), which has developed toolkits on how to build
director training institutions and director training programs.
Recommendation 2: The regulatory institutions should ensure that the existing legal and
regulatory framework with respect to corporate governance, as well as NCGC, is strictly
enforced in practice. The role of the various regulators, in particular the FSC and BSE, but
also BNB, should be clarified in this respect. Status: High priority (months 1 – 18)
The FSC should: ƒ Informally yet firmly encourage all directors of listed companies to undergo a
minimum amount of training on corporate governance and related issues, with
the implicit understanding that this could be made mandatory should
companies not send their directors to attend. This can, for example, be done
by issuing a letter to the chairman of the (supervisory) board.
ƒ Be vigilant in monitoring compliance with the NCGC from the very
beginning to ensure that it is properly being implemented, together with
institutional investors and shareholders. Along with the BSE, the FSC may
consider developing a model corporate governance disclosure template, which
it can make available on its website to guide all companies in their corporate
governance disclosure, in particular those not actively traded.
ƒ Ensure that directors disclose any transactions in company shares.
ƒ Launch an awareness-raising campaign on the issue of abandoned shares.
Moreover, the FSC should require the CDAD or custodians to contact and
inform minority shareholders of the fact that they are entitled to dividends,
and ensure that they do in practice receive declared dividends.
ƒ Require or encourage institutional investors to develop and disclose their
voting policies, as well as to actually vote during GSM meetings.

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ƒ Launch a public awareness-raising campaign to inform shareholders dating

back to mass privatization of their basic rights, including to participate in the
profits of the company (by claiming the dividends) or selling their shares.
ƒ Consider strengthening the legal and regulatory framework with respect to
institutional investors, requiring them to develop and disclose their policies
on conflicts of interest.
ƒ Launch an investor education program with a particular focus on educating
minority shareholders of the rights accorded to them in the CA and LPOS.
(The NCGC could, in this respect, also recommend for companies themselves
to help educate their shareholders, for example, by issuing information sheets
describing their rights and “obligations”.)
ƒ Stringently enforce the disclosure of related party transactions, with a
particular focus on such transactions carried out by holding companies as well
as companies that are on the Unofficial Market or are not actively traded (and
hence considered to be the biggest group at risk).
ƒ Ensure that there is a single definition for related parties within the context of
related party transactions.
ƒ On a periodic basis, review its own salary structure to ensure that it is able to
attract, motivate, and retain quality staff.
ƒ Encourage the use of alternative dispute resolution (ADR) mechanisms, such
as mediation, in the area of corporate governance. The GCGF can provide
guidance on establishing such ADR mechanisms.
ƒ (Or relevant authority) should ensure that custodians vote on behalf and under
the instruction of the beneficial owner. The same should hold true for
depositor receipt holders.
ƒ (Or relevant authority) should ensure that the legal and regulatory framework
specifies who is entitled to control the exercise of voting rights attached to
shares held by foreign investors.
ƒ Consider implementing the 2002 CG ROSC recommendation to criminalize
insider trading and abusive self-dealing.
ƒ Ensure that the regulatory framework effectively covers conflicts of interests
by credit rating agencies in Bulgaria disclose conflicts of interests.
ƒ Ensure that the regulatory framework requires (and then enforce) both
companies and shareholders to disclose beneficial ownership structures.
The BNB should: ƒ Extend the NCGC to all banks, and not only those publicly listed.
The BSE should: ƒ Consider establishing a tier on the Unofficial Market which requires
companies to comply (or explain non compliance) with the corporate
governance code, allowing growth companies to differentiate themselves
from their peers.
ƒ Set a positive example to its members and clients by itself following and fully
complying with the NCGC, in particular with respect to independent directors
on the board.
ƒ Ensure that the regulatory framework effectively covers conflicts of interests
by sell-side securities analysts and other financial advisory firms.
The CDAD should: ƒ Implement the recommendations contained in its recent report on the
CDAD’s operations.

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ƒ Itself follow and fully complying with the NCGC.

The government ƒ Ensure that it develops a corporate governance and ownership policy towards
should: its SOEs, and should consider conducting an in-depth review and
improvement plan on corporate governance for its SOEs.
ƒ Guide, support and control the activities of the CDAD and RA to ensure that
these institutions properly fulfill their role in the market.
ICPAB should: ƒ Pay closer attention to audit partner rotation and the issue of auditor
independence in general.
ƒ Better enforce existing rules and regulations to ensure that audits are being
carried-out in a professional and independent manner.
Recommendation 3: A number of minor, but important amendments to the legal and
regulatory framework, as well as NCGC, should be made to ensure that the corporate
governance fully meets good practice. Status: Medium priority (months 18 – 36)
The CA should be ƒ Lower the maximum term of directors to three instead of five years.
amended to: ƒ Clarify the process of nominating candidates to the (supervisory) board,
including possible ownership thresholds.
ƒ Specify that the executive board members under the one-tier board system are
under the same obligation as management board members under the two-
tiered board system to furnish the non-executive board members with relevant
information in a timely manner (see Art. 244 CA).
ƒ Specify that non-executive remuneration should be approved, but not
determined by the GSM. The GSM may further be accorded a right to
approve—or provided with an advisory vote on—executive remuneration.
The LPOS should be ƒ Specifically recommend for listed companies to follow the NCGC in Art.
amended to: 100m (4) 3. LPOS, as well as Art. 54 RR-BSE.
ƒ Oblige board members and key executives to publicly disclose information
that could have a material effect on the share price of company or help
identify and avoid conflicts of interest.
ƒ Specify that it is the (supervisory) board that sets executive compensation and
not the GSM, which should have an advisory vote, however, only be able to
approve executive compensation when shares and options are offered as part
of the executive compensation package due to the risk of dilution (see Art.
116c LPOS).
ƒ Better define an “interested party” in Art. 114 (5) LPO.
ƒ Art. 115 (6) LPOS should be amended to ensure that the external auditor also
attends the GSM and provides answers to shareholder queries.
ƒ Require (or the NCGC recommend) for companies to declare who they regard
as independent and why. Good practice calls for the independent directors to
be clearly identified both on the company’s website and annual report.
ƒ Review the definition of an independent director, for example, clarifying that
if a director’s remuneration constitutes a significant portion of his or her
annual income, or the director has served on the (supervisory) board for more
than seven years, the director is no longer considered to be independent.
ƒ Specify that while the IR officer has a full reporting line to management s/he
should have unfettered access to the board, in particular when the IR officer

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carries-out the duties of the company secretary related to corporate

governance (see Art. 116 LPOS). Over time, the position of company
secretary should be developed and separated from that of the IR officer.
The Accountancy Act ƒ The definitions of what constitutes an audit should be made to correspond to
(AA) and/or Law on IFAC’s definition of an independent external audit.
the Independent ƒ Specify that the management letter should be issued to both management and
Financial Audit (LIFA) the board, ideally its audit committee See Art. 33 (3) LIFA.
should be amended to:
ƒ Strengthen the independence of the external audit process. For example, there
should be more specific restrictions or recommendation pertaining to the
provision of non-audit services to an audit client and the external auditor
should interact and report to the independent audit committee (while of
course keeping its accountability to shareholders).
The Law on Credit ƒ Specify that the supervisory board is responsible for establishing appropriate
Institutions (LCI) policies in the area of risk management, internal control, and internal audit
should be amended to: procedures, whereas management is responsible for developing specific
processes and generally implementing a robust risk management, control,
and audit framework.
ƒ Clarify the issue of internal audit independence, in particular with respect to
reporting structures.
ƒ Require banks to establish an audit committee, which oversees the internal
control, compliance, internal audit, and external audit processes, and
encourage supervisory boards to establish a board-level risk committee that
focuses on establishing the bank’s risk appetite and policies.
ƒ Ensure its fit and proper criteria, in particular with respect to supervisory
board members, are up-to-date with respect to international good practice.
The NCGC should be ƒ The Bulgarian Corporate Governance Code Task Force (BCGTF) should
amended. reconstitute on the agreed-upon date (18-months following the publication of
the NCGC) to amend the NCGC. A set of detailed recommendations can be
found in Table 1 below. In this respect, it might be useful to institutionalize
the BCGTF and to provide it with a clear mandate.

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Table 1: Detailed recommendation on amending the NCGC

ƒ The role of the board vis-à-vis management should be modified to clearly specify that the board is responsible for guiding and overseeing management,
and setting the relevant policies in this respect, while the management manages the company on a day-to-day basis, implementing the company’s
strategy as approved by the board and operating under the board’s polices.

ƒ Detailed guidance on the duty of care should be offered, and the terms “good faith”, “fully informed basis”, and “due diligence” defined.

ƒ A provision should be added, assigning the responsibility of approving the company’s governance framework to the (supervisory) board.

ƒ Companies should establish corporate governance committees. The corporate governance committee could take on the role of advising the board on
nomination and remuneration issues as well, duties that are typically assigned to separate committees yet could be initially combined so as not to
overwhelm the board with too many committees (in addition to the audit committee).

ƒ The chairman of the supervisory board should also be independent.

ƒ Companies should establish a remuneration committee to better allow the board to set executive compensation. For smaller companies, the duties of
this committee could be rolled into the above-mentioned corporate governance committee.
Chapter One: Board Practices

ƒ The number of board seats a director can hold should be limited to a number that will not impede his or her ability to effectively carry-out his or her
board duties.

ƒ Information on each board member, including membership on board committees, attendance record, and other board positions held, should be made
publicly available in the annual report’s corporate governance section and company website.

ƒ A provision should be included in which boards and their committees are able to retain advisors on the company’s expense.

ƒ The role of independent directors should be discussed in providing assurance to shareholders that (real or perceived) conflicts of interest are being
handled in an appropriate manner, including: (i) overseeing the integrity of financial and non- financial reporting, including the external audit; (ii)
reviewing and managing related party transactions and self-dealing; (iii) nominating board members and key executives; and (iv) determining non-
executive and executive remuneration.

ƒ The role of the board vis-à-vis management bodies in building robust control policies and practices should be clarified. The NCGC may also wish to
highlight the role of the audit committee in this respect.

ƒ Loans to directors or managers should not be allowed, or only be allowed under market conditions.

ƒ The role of the IR officer, or ideally company secretary, as well as internal auditor in developing, respectively monitoring related party transactions,
should be properly defined.

ƒ The difference between executive and non-executive compensation structures should be explained and clearly laid out.

ƒ The nominations process should be structured in a transparent and fair manner, including a discussion on the role of an independent nominations
committee.

ƒ A list of model attributes and mix-of-skills should be compiled, which a director, respectively the board, should be able to demonstrate.

June 2008
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ƒ Boards should develop a succession policy and oversee the development of a succession plan by management.

ƒ Boards should conduct self-evaluations to improve upon their efficiency and effectiveness.

ƒ Companies should introduce whistle-blowing procedures.

and Internal Control
Chapter Two: Audit

ƒ A model policy and terms of reference (ToRs) on risk management and internal controls should be annexed to the NCGC.

ƒ A model policy and ToRs on compliance procedures should be annexed to the NCGC.

ƒ A model policy and ToRs on the internal audit function should be annexed to the NCGC.

ƒ A model policy and ToRs on the external audit function should be annexed to the NCGC.

ƒ The NCGC should recommend for companies to introduce the concept of a “sliding quorum” when the GSM decides on whether to forgo pre-emptive
rights or when changes are made to the company’s articles of association.
Chapters Three to Five on Shareholder Rights, Disclosure and

ƒ The NCGC should recommend for institutional investors to disclose their voting policies and vote.

ƒ Companies should adopt cumulative voting when electing (supervisory) board members.

ƒ Companies should develop dividend policies.

ƒ Over time, the position of corporate secretary should be introduced and distinguished from that of the IR officer.

ƒ Boards should develop an effective information disclosure policy on non-financial disclosure.

Stakeholders

ƒ The NCGC should recommend that companies only be allowed to institute anti takeover defenses with shareholder approval.

ƒ A brief discussion should be added to the NCGC on the advantages and disadvantages of performance-enhancing mechanisms for employees, such as
shares.

ƒ The company should provide shareholders with withdrawal rights, i.e. the right to sell back their shares to the company when certain fundamental
changes take place.

ƒ The NCGC should encourage shareholders to consult with one another, in particular when electing directors to the board under cumulative voting.

ƒ The NCGC should provide guidance on how best to carry-out voting.

ƒ Further, the NCGC should contain a set of annexes, which contain practical guidance on how to implement a number of good practices, in particular in
the area of how to implement a code of ethics, including an actual model code of ethics.

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Status of Implementing the Recommendations Contained in the 2002 CG ROSC

Key 2002 CG ROSC recommendations Status as of June Comments
2008

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

1. Not applicable, as this Section was added to the OECD Principles in 2004. n/a n/a

Section II: The Rights of Shareholders.

2. The CA should require cumulative voting for companies with a large number of Not implemented Cumulative should be added to the NCGC.
shareholders.

3. The commercial register should be computerized and information made available Implemented None
through the internet.

4. The CA should establish a minimum quorum for all joint stock companies. In
transition countries, the first quorum is generally set at 40 or 50 percent of capital
and the second quorum at 30 percent of shareholder capital.
Partially implemented In principle, the quorum is determined by the company in its
articles of association. Art. 227 CA states that certain key
decisions as per Art. 221, e.g. changing the articles of
association, require a 50 percent quorum. In the absence of
such quorum during the first GSM, there are no quorum
requirements for the second meeting. Given the current level of
ownership concentration and that abusive actions by company
insiders generally no longer take place, we recommend to leave
the CA as is.

5. Shareholders representing five percent of capital or more should be able to propose Implemented See Art. 223a CA
resolutions for the agenda.

6. Shareholders should be allowed to ask questions, and each shareholders meeting Implemented See 116 (6) LPOS
should include a question and answer session in the agenda.

7. The legislation should require the disclosure of disproportionate voting rights in an Implemented Art. 181 CA calls for “one share, one vote” voting, and so
annual report to shareholders. disproportionate voting rights are not allowed. Art. 111a LPOS
further calls for any changes to rights of a specific class of
shares to be disclosed.

8. The corporate governance framework should also allow shareholders to identify Partially Implemented While there is no direct requirement for shareholders or the
cross-shareholdings and any possible pyramid holding structures affecting voting company to disclosure such structures in the law or NCGC, Art.
rights. 145 and 146 LPOS indirectly require shareholders to disclose
such structures when they reach, exceed or fall under 5 percent
(or increments of 5 percent) of ownership.

9. Shareholder approval should be required for anti-takeover devices. Not implemented This should either be required by law or recommended by the
NCGC.

10. Once institutional investors have become more prevalent, they should be Not implemented If implemented by law, then there should be a requirement for
encouraged to evaluate the costs and benefits of participating in shareholders’ the institutional investor to disclose its voting policy.
June 2008
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Corporate Governance ROSC Assessment Bulgaria

Key 2002 CG ROSC recommendations Status as of June Comments

2008
meetings. Alternatively, this could be made part of the NCGC.

Section III: The Equitable Treatment of Shareholders

11. The LPOS should regulate voting by nominees and custodians to ensure that Not implemented The corporate governance framework does not appear to require
ultimate beneficial owners can, if they so wish, provide their custodians or or recommend this good practice.
nominees with voting instructions.

12. As a first step, consideration should be given to strengthening the authority and Implemented The FSC appears to have the authority to effectively investigate
capability of the FSC to investigate possible cases of insider trading. cases of insider trading and has done so in the past.

13. Once the market becomes more active, consideration might also be given to Not implemented Criminal sanctions against insider trading do not appear to be
establishing insider trading and abusive self-dealing as criminal (as well as civil) regulated.
offenses.

Section IV: Role of Stakeholders in Corporate Governance

14. Modernize labor legislation in line with practices in the region and with the view Implemented It appears that many of the EU requirements have been
to comply with European standards. implemented in the Labor Code.

15. It would be helpful if the use of performance-enhancing mechanisms for company Partially Implemented Ordinance No. 2 discusses the disclosure of ESOPs and the
employees could be encouraged. It may also be useful to conduct a study of the NCGC contains a number of recommendation in this respect
costs and benefits of various performance-enhancing mechanisms including stock that could, however, be strengthened.
options for managers and employees.

16. It may also be helpful for the BSE to encourage public companies to include Implemented While this has not been made a requirement under the RR-BSE,
disclosure of relationships with stakeholders in the companies’ annual reports and, the NCGC specifically recommends for companies to make
where available, websites. disclosure on stakeholder relations.

Section V: Disclosure and Transparency

17. The FSC should implement measures to ensure compliance with disclosure of Not implemented It is still not possible to determine beneficial ownership
indirect ownership interests. structures in Bulgaria.

18. In their annual report companies should be: (i) required to provide disclosure of Implemented Art. 100m (4) b) LPOS and Ordinance No. 2 require companies
material financial and non-financial factors, including the main risks faced by to disclose materials risks, and Art. 100n (4) 3. LPOS requires
the company and (ii) encouraged to discuss governance structures and policies. companies to discuss their compliance (or reasons for non-
compliance) with good corporate governance practices.

19. Use FSC website for online access to company information. Implemented We understand that such information is available in Bulgarian
on the FSC website, however, not in English.

20. See A&A ROSC Partially Implemented The 2008 Accounting and Auditing ROSC (A&A ROSC)
contains a table describing in detail the degree to which the
recommendations in the 2002 A&A ROSC were followed.

June 2008
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Corporate Governance ROSC Assessment Bulgaria

Key 2002 CG ROSC recommendations Status as of June Comments

2008

Section VI: Responsibilities of the Board

21. Strengthening (supervisory) boards of directors will require amending the CA to Implemented Art. 237 (2) CA, although the NCGC may wish to expand upon
clearly define the duties of due care and diligence for board members these duties.

22. Strengthening (supervisory) boards of directors will require developing a Implemented As previously mentioned, the NCGC should eventually be
voluntary code of best practice in corporate governance providing updated to better provide guidance to companies in
recommendations on the operation, structure and functioning of (supervisory) implementing good practice.
boards of directors.

23. Consideration should be given to establishing an institute of directors to provide Not implemented The regulatory authorities may wish to make director training a
training and disseminate best practice approaches. high-priority moving forward.

24. Amend the CA to further define the roles and responsibilities of boards of Partially implemented The CA has been updated. The NCGC discusses the role and
directors. Establish a corporate governance code to provide guidance on the responsibilities of the board, however, could be updated to
operation, structure and functioning of boards of directors. provide for practical guidance.

25. The board should have broad access to company information, records, Partially implemented While this has been made explicit under the two-tiered structure
documents and property where needed to make informed decisions on matters (see Art. 243 (1) CA, Art. 247 (2) and (3) CA) it has not been
within the authority of the supervisory board. Directors should also be able to made so under the one-tiered structure.
obtain independent professional advice at the company’s expense.

June 2008
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 Corporate Governance Policy Assessment Bulgaria – June 2008

Summary of Observance of OECD Corporate Governance Principles9

2008 2002

No. Principle FI BI PI NI NA

I. ENSURING THE BASIS FOR AN EFFECTIVE CORPORATE GOVERNANCE FRAMEWORK

IA Overall corporate governance framework x NA --

IB Legal framework enforceable /transparent x NA --

IC Clear division of regulatory responsibilities x NA --

ID Regulatory authority, integrity, resources x NA --

II. THE RIGHTS OF SHAREHOLDERS AND KEY OWNERSHIP FUNCTIONS

IIA Basic shareholder rights BI

IIA 1 Secure methods of ownership registration x --

IIA 2 Convey or transfer shares x --

IIA 3 Obtain relevant and material company information x --

IIA 4 Participate and vote in the GSM x --

IIA 5 Elect and remove board members of the board x --

IIA 6 Share in profits of the corporation x --

IIB Rights to part in fundamental decisions NI

IIB I Amendments to statutes, or articles of incorporation x --

IIB 2 Authorization of additional shares x --

IIB 3 Extraordinary transactions, including sales of major corporate assets x --

IIC Shareholders GSM rights PI

IIC 1 Sufficient and timely information at the general meeting x --

IIC 2 Opportunity to ask the board questions at the general meeting x --

IIC 3 Effective shareholder participation in key governance decisions x --

IIC 4 Availability to vote both in person or in absentia x --

IID Disproportionate control disclosure x PI

IIE Control arrangements allowed to function BI

IIE 1 Transparent and fair rules governing acquisition of corporate control x --

IIE 2 Anti-take-over devices x --

IIF Exercise of ownership rights facilitated x NI

IIF 1 Disclosure of corporate governance and voting policies by inst. investors x --

IIF 2 Disclosure of management of material conflicts of interest by inst. investors x --

9
Note: FI=Fully Implemented; BI=Broadly Implemented; PI=Partially Implemented; NI=Not Implemented; NA=Not Applicable. Note that
the arrows on the right of the table denote whether the OECD Principle in question has improved (green) or remained the same
(yellow) since 2002.

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 Corporate Governance Policy Assessment Bulgaria – June 2008

2008 2002

No. Principle FI BI PI NI NA

IIG Shareholders allowed to consult each other x NA --

III. EQUITABLE TREATMENT OF SHAREHOLDERS

IIIA All shareholders should be treated equally BI

IIIA 1 Equality, fairness and disclosure of rights within and between share classes x --

IIIA 2 Minority protection from controlling shareholder abuse; minority redress x --

IIIA 3 Custodian voting by instruction from beneficial owners x --

IIIA 4 Obstacles to cross border voting should be eliminated x --

IIIA 5 Equitable treatment of all shareholders at the GSM x --

IIIB Prohibit insider trading x BI

IIIC Board/Mgrs. disclose interests x NI

IV. ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE

IVA Legal rights of stakeholders respected x PI

IVB Redress for violation of rights x PI

IVC Performance-enhancing mechanisms x PI

IVD Access to information x BI

IVE “Whistleblower” protection x NA --

IVF Creditor rights law and enforcement x NA --

V. DISCLOSURE AND TRANSPARENCY

VA Disclosure standards PI

VA 1 Financial and operating results of the company x --

VA 2 Company objectives x --

VA 3 Major share ownership and voting rights x --

VA 4 Remuneration policy for board and key executives x --

VA 5 Related party transactions x --

VA 6 Foreseeable risk factors x --

VA 7 Issues regarding employees and other stakeholders x --

VA 8 Governance structures and policies x --

VB Standards of accounting & audit x PI

VC Independent audit annually x PI

VD External auditors should be accountable x NA --

VE Fair & timely dissemination x PI

VF Research conflicts of interests x NA --

VI. RESPONSIBILITIES OF THE BOARD

VIA Acts with due diligence, care x NI

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 Corporate Governance Policy Assessment Bulgaria – June 2008

2008 2002

No. Principle FI BI PI NI NA

VIB Treat all shareholders fairly x NI

VIC Apply high ethical standards x NI

VID The board should fulfill certain key functions NI

VID 1 Board oversight of general corporate strategy and major decisions x --

VID 2 Monitoring effectiveness of company governance practices x --

VID 3 Selecting/compensating/monitoring/replacing key executives x --

VID 4 Aligning executive and board pay x --

VID 5 Transparent board nomination/election process x --

VID 6 Oversight of insider conflicts of interest x --

VID 7 Oversight of accounting and financial reporting systems x --

VID 8 Overseeing disclosure and communications processes x --

VIE Exercise objective judgment NI

VIE 1 Independent judgment x --

VIE 2 Clear and transparent rules on board committees x --

VIE 3 Board commitment to responsibilities x --

VIF Access to information x NI

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Corporate Governance Policy Assessment Bulgaria – June 2008

Corporate Governance Landscape

I. Capital Markets and its Effects on Corporate Governance
As of June 2007, the market capitalization of the BSE was BGN 20,8 billion (USD 16,32 billion) and 41.1 percent as a
percentage of GDP, up dramatically from June 2002 (see Figures 1 and 2). Turnover and transactions have also witnessed
significant increases (see Figures 3 and 4). Similarly, the number of new issuers has steadily increased, from 51 in 2005,
76 in 2006 to 81 in 2007, and a number of IPOs were massively over-subscribed. This growth is largely explained to the
many market reforms undertaken by the Bulgarian government, EU accession, and rising influence of institutional investors
in Bulgaria, which have led to an increase in private investment.

Figure 1: Market capitalization (in billions of BGN)

Figure 2: Market capitalization to GDP (in %)
25,000 50%
20,000 40%
15,000 30%
10,000 20%
5,000 10%
- 0%
2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007

Source: Report of the BSE-Sofia for 1997 Source: Report of the BSE-Sofia for 1997

Figure 3: Turnover (in millions of BGN) Figure 4: Avg. monthly number of transactions

35000
3000
30000
2500
25000
2000
20000
1500
15000
1000
10000
500
5000
0 0
2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007

Source: Report of the BSE-Sofia for 1997 Source: Report of the BSE-Sofia for 1997

However, as can be seen from Figures 5 and 6, the market has recently experienced a sharp decline losing just under 30
percent of its value over the past six months, with some companies losing up to 60 percent of shareholder value. The total
market capitalization of the stock market shrunk to BGN 22.9 billion by May 12, 2008 down from over BGN 29 billion in
December of 2007.
Figure 5: The Bulgarian Stock Market – June 2002 to June 2008 
A number of factors have been cited in
connection with this downturn, first and
foremost the turmoil in the international
financial markets due to the sub-prime
mortgage crisis in the United States,
which has led to an abrupt contraction in
global liquidity and hence a negative
impact on investors’ appetite for emerging
market risk; and second, the risk of the EU
suspending structural fund allocations for
Bulgaria and the potential funding
implications for specific sectors, in
particular agriculture and infrastructure.

 
Source: BSE website

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Corporate Governance Policy Assessment Bulgaria – June 2008

Figure 6: The Bulgarian Stock Market (SOFIX) – December 2007 to June 2008

Source: BSE website

It is precisely during such market downturns that corporate governance reforms come to the forefront of the reform agenda.
Indeed, the current market conditions should be viewed as an opportunity for all stakeholders to build on the notable legal
and regulatory reforms already introduced in the area of corporate governance and to introduce good corporate governance
practices at the (supervisory) board and management (board) levels. However, three key issues need to be taken into
account by all stakeholders.

1. Trading is concentrated in the top-10

Figure 7: Market Capitalization, 2001-2006 issuers, which account for 88 percent
of trading volume and 47 percent of
18,000 лв market capitalization. In late June
16,000 лв 2007 the share of the 20 largest
Bulgarian leva (in thousands)

14,000 лв companies in market capitalization

12,000 лв
was 71.4 percent.
10,000 лв 2. Growth in terms of market
8,000 лв
capitalization is not from the Official
but Unofficial Market, which is less
6,000 лв
regulated, in particular in the field of
4,000 лв corporate governance (see Figure 7).
2,000 лв
3. Ownership is highly concentrated.
0 лв
2001 2002 2003 2004 2005 2006 These three factors pose a risk to capital
Official Market Segment 17.65 31.02 28 53.42 122.1 319.26 market stability yet at the same time a
“A” unique opportunity for the market in
Official Market Segment 44.43 94.87 283.47 423.33 688.46 3,239.13 general and regulatory agencies in
“B” particular in terms of focusing their
Official Market Segment 132.9 126.98 674.51 898.12 1,337.70 2,084.15 monitoring, respectively regulatory efforts
“C” on: (i) the top-10 to 20 issuers; (ii) growth
Unofficial Market 908.85 1,122.31 1,736.02 2,658.32 6,285.70 9,671.47 companies listed on the Unofficial
Total: 1,103.83 1,375.18 2,722.00 4,033.19 8,433.96 15,314.01 Market; and (iii) leading investors and
10
Year shareholder groups.

10
In the late 1990s there were over 1,400 issuers listed on the stock exchange. A wave of de-listings occurred around 2002, largely due
to a recognition by the government that the great majority of companies listed on the exchange were simply too small for a listing. A
number were required to re-list in 2006, when the government required all companies with 1,000 plus shareholders to re-list on an
exchange. The government is now encouraging shareholders to sell their shares, which would allow a great number of companies to
de-list again. Today there are approximately 1,700 issuers, however, as of December 2007, only 509 were publicly listed on the BSE,
and only 40 are considered to be actively traded.

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Corporate Governance Policy Assessment Bulgaria – June 2008

II. The Ownership Framework and its Effects on Corporate Governance

1. Ownership by Individual Investors and Investor Groups
As a result of privatization in the 1990s, hundreds of thousands of small shareholders acquired shares through vouchers
and employee share purchase programs. In many cases company insiders either initially secured or eventually
accumulated a significant portion of the shares. Today, ownership is highly concentrated in the hands of a few, individual
shareholders and private investor groups, estimated to number 130 to 150. For example, a recent study found that of a
sample of 104 enterprises, consisting almost exclusively of the large Bulgarian public holding companies, more than 50
11
percent only had two different shareholders, and 95 percent no more than four shareholders. The average size of the
largest equity stake was found to be equal to 60 percent of outstanding shares, with the second and third biggest
shareholders averaging 12.7 percent and 5.5 percent. In banking, foreign institutions hold the largest stakes while local
entrepreneurs own most companies in the non-banking financial sector and real sector. Most of these individual owners
and investor groups have not traditionally embraced good corporate governance and are now only beginning to implement
corporate governance. If properly engaged, this investor group might seek to preempt further regulatory action and
implement good corporate governance, and the government might thus wish to target this group with an awareness-raising
campaign to build the business case for good corporate governance, followed by increased regulatory oversight should
action not be taken.
The free float of the top-10 listed companies is 14 percent and the overall free-float on the BSE was 24.7 percent in 2007,
up from 17.9 percent in 2006. A visible, if nascent trend towards an increasing dispersion of ownership can thus be
confirmed. However, overall, ownership remains concentrated in the hands of one or two individual shareholders or
shareholder groups. Of note is that the free float of the public companies in the BG40 portfolio was higher than the average
for the Exchange and reached 36.3 percent. Figure 8 shows that the ownership of most issuers on the Official Market is
largely limited to a single majority shareholder.

Figure 8: Ownership structure of issuers on the Official Market
100%
Companies with a single
% of companies

80% shareholder
60% Companies with two
40% shareholders

20% Companies with three or
more shareholders
0%
0%

0%

0%

0%

%
00
 2

‐4

‐6

‐8

‐1
an

20

40

60

80
 t h
ss
Le

% of equity stake by  number of shareholders

Source: Mintchev, V. et al, Corporate Governance in Bulgaria, IE-BAS, Sofia, 2007.

Market liquidity remains low with a turnover ratio of 20 percent in 2006. Low turnover is largely explained by the large
number of companies with low free-float in the Unofficial Market segment that were listed in the early stage of mass
privatization, and the low share and trading activity of foreign investors, in particular institutional investors, who are usually
the most active traders in more advanced countries in the EU. The latter is due to the BSE’s “frontier market” status, thus
its miniscule weight in emerging market portfolios.
It should further be noted in this respect that foreign investors largely pulled-out of Bulgaria in early 2008, along with the
market downturn, and so today ownership is mostly in the hands of domestic owners, save for the banking industry which
largely remains foreign-owned. This has further exacerbated the already low trading activity. On the other hand, foreigners
still constitute the single largest investor class in terms of market capitalization, as Bulgaria’s largest company, Bulgaria
Telecom, is 90 percent foreign-owned.

11
Mintchev, V., R. Petkova, P. Tchipev. Public Companies and Stock Exchanges Development in Bulgaria: Contraversial Trajectories of
Bulgarian Corporate Model, Sofia, 2007, p. 133.

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Corporate Governance Policy Assessment Bulgaria – June 2008

2. The State as an Owner

The privatization process in Bulgaria has been dynamic. The share of state-owned enterprises (SOEs) among the largest
companies has seen a significant decrease. Whereas almost one-third of the largest 100 companies were owned by the
state or municipality not five years ago, this number was reduced to 13 in 2006. Overall, the number of privatizations now
exceeds 5,000 and has served to generated revenues of BGN 11,067 million. Today, the privatization process has largely
been completed. For 2008, an estimated 20 companies are to be privatized, for example, in the power sector. Once these
companies have been privatized, the privatization agency will have sold 98 percent of its portfolio and only a small number
of companies (approximately ten) will not have been sold. The privatization agency will thus soon be disbanded.
However, state control over the economy is still significant. The size of the public enterprise sector and the extent to which
the state controls strategic decisions of public enterprises are still somewhat higher than among comparator countries. The
state will retain a stake in 204 SOEs (of which it has a stake of more than 10 percent in only 66 companies); however, the
state sill has golden shares in a number of companies, the exact number of which was not disclosed. The state plans on
retaining the majority of 115 companies it has designated as “strategic” and in which full state ownership will be retained.
These SOEs are managed by line ministries, who nominate government officials to serve on the boards. A number of
market participants cited that these directors are thought to not necessarily have the private sector experience and
qualifications to effectively serve as directors on companies that are competing in the private sector.
Overall, the governance of these SOEs was repeatedly deemed a major issue by an important number of interlocutors and
the government should consider taking action to improve upon the corporate governance of its SOEs, in-line with the OECD
Guidelines on Corporate Governance for State-Owned Enterprises. Particular areas of concern include, but are not limited
to, underdeveloped: (i) board nomination processes and oversight; (ii) disclosure practices; and (iii) control structures.

3. Institutional Investors and Ownership

Pension funds, mutual funds, and other institutional investors are relatively new to Bulgaria, however, are playing an
increasingly important role. This investor group has had to overcome old suspicions, given that pension funds were known
to be dominated by criminal elements and the pyramid schemes 12 of the 1990s that had left many deeply suspicious of
entrusting their savings to the capital markets, respectively to third parties. Only in 2006 did the pension funds
professionalize, and today, there are three million contributors to the mandatory pillar, and even the voluntary pillar is
increasingly growing, with 200,000 new subscribers per year. Today, it is estimated that institutional investors own
approximately BGN 1 billion or 5 percent of equity in terms of market capitalization. 12-15 mutual funds alone were
launched in the past two years.
Similar to many other institutional investors, Bulgaria’s institutional investors are passive investors. In comparison with
some of the institutional investors in a number of OECD countries, which actively engage with companies in the area of
corporate governance, Bulgarian institutional investors do not generally engage with their investee companies due to the
current level of ownership concentration and low levels of free float. The extent of “engagement” is typically limited to
sending analysts to participate in the GSM, however, not so much to vote but to gain information and talk to directors and
managers. On the other hand, the Association of Fund Managers, which has the status of a self-regulatory organization
(SRO), as well as the Bulgarian Industrial Capital Association, have both signed-up to promote good corporate governance
amongst their members. While these initiatives are nascent and have yet to produce demonstrable results, they should
nevertheless be encouraged and supported where practical.
Of note is that the share of institutional investors is relatively large vis-à-vis retail investors; approximately 70-80 percent of
equity that is floated is held by institutional investors, with the rest dispersed among retail investors, 5,500 of which have
signed-up to the BSE’s online COBUS trading system. Overall, it is estimated that there are just under 100 institutional
investors or investor groups operating in Bulgaria.

III. The Legal, Regulatory, and Good Practice Framework for Corporate Governance
The following list of laws and regulations, as well as the NCGC, constitutes the legal and regulatory framework that forms
the basis of this CG ROSC.
1. The Legal Framework
ƒ Commerce Act (Promulgated on 18.06.1991 and amended and/or supplemented 27 times between 1992 and 2006).
A number of key changes have been made to the Commerce Act (CA), in particular with a view towards harmonizing
the Bulgarian legal framework with the First, Second, Third, Sixth, Twelfth EU Company Law Directives. The Fourth
and Seventh EU Company Law Directives are currently being implemented, and amendments to the CA and other laws

12
Pyramid structures are structures of holdings and sub holdings by which ownership and control are built up in layers. They enable
certain shareholders to maintain control through multiple layers of ownership, while at the same time sharing the investment and the
risk with other shareholders at each intermediate ownership tier.

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Corporate Governance Policy Assessment Bulgaria – June 2008

and regulations could not be reviewed as part of this CG ROSC. One of the main thrusts of this reform process was
the improvement of the norms relating to corporate governance. In this respect, the relevant EU Directives, OECD
Principles of Corporate Governance, and the World Bank’s 2002 CG ROSC were used as a basis for reforms. Key
changes made include, inter alia:
(i) Strengthening shareholder rights, for example, the right of shareholders to elect and dismiss (supervisory) board
members, as well as to determine their remuneration (Art. 221 (4) and (5) CA); or the ability for shareholders with
5 percent of equity to place items on the agenda for discussion during the GSM.
(ii) Defining the rights and obligations of (supervisory) board members, in particular with respect to the duty of care
and loyalty (Art. 237 CA).
(iii) Improving upon disclosure, for example, by requiring the annual reports to contain an activity report, as well as
notes to the financial statements (Art. 247 (1) CA).
ƒ Law on the Offering of Public Securities (LPOS) (Promulgated 30.12.1999 and amended and/or supplemented 16
times between 2002 and 2006). The amendment to the Law on the Offering of Public Securities (LPOS) in 2002
constituted a major step in improving the legal framework with respect to corporate governance, in particular with
respect to improvements in information disclosure and the protection of minority shareholders rights. Key amendments
and supplements to the LPOS include, inter alia, requirements for issuers to improve their governance practices in the
areas of:
(i) Improving information disclosure, for example, with issuers now being required to disclose a corporate
governance improvement plan in their annual report (Art. 100m (4) LPOS).
(ii) Enhancing board practices, for example, with issuers now being required to ensure that at least one-third of the
(supervisory) board is composed of independent directors (Art. 116a (2) LPOS).
(iii) Protecting minority shareholder rights, for example, with issuers now being required to have extra-ordinary
transactions approved by a three-fourth majority vote at the GSM (Art. 114a (2) LPOS); and interested
shareholders not being allowed to vote on related party transactions that are subject to a vote by the GSM and to
which they are an interested party.
ƒ Law on Credit Institutions (Promulgated on 21.07.2006 and amended and/or supplemented three times between
2006 and 2007). The new Law on Credit Institutions (LCI), which only recently replaced the Banking Law from 1997,
has detailed provisions that serve to strengthen the control environment, in particular with respect to risk management
and internal controls.
ƒ Accountancy Act (Promulgated 16.11.2001 and amended and/or supplemented four times between 2002 and 2007).
The Accountancy Act (AA) has been substantially revised in light of EU regulations, notably specifying that Bulgarian
enterprises are to prepare and present their annual financial statements on the basis of Endorsed IFRS and thus the
full set of financial statements, including: the balance sheet, a profit and loss account, a statement of cash flows, an
owner's equity account, and notes (Art. 22a (1), 23 (1) AA).
ƒ Law for the Independent Financial Audit (Promulgated on 23.11.2001 and amended eight times between 2002 and
2006). The Law for the Independent Financial Audit (LIFA) has in turn witnessed amendments to, inter alia,
competency requirements for certified public accounts (Art. 16 LIFA).
ƒ Labor Code (Promulgated on 1.04.1986 and amended and/or supplemented 24 times between 1998 and 2004). As
with the other laws, the Labor Code (LC) has been updated to accommodate the acquis communautaire and contains a
number of important corporate governance issues related to the role of stakeholders in corporate governance, in
particular with respect to the role of employees.

2. The Regulatory Framework

The key regulations relating to corporate governance include:
ƒ Ordinance No. 2 for the Prospectuses at Public Offering of Securities and for Revealing of Information by the
Public Companies and the Other Issuers of Securities (Promulgated on 10.10.2003) has introduced key provisions
for ongoing disclosure by issuers, in particular with respect to disclosure in the annual report (see Art. 31, 32 of
Ordinance No. 2). Additional ordinances include Ordinance No. 8 for the Central Depositary of Securities; Ordinance
No. 13 of December 22, 2003 on a Tender Offer for Buying and Exchange of Shares; and the BNB’s Ordinance No. 10
on Internal Controls.
ƒ The Rules and Regulations of Bulgarian Stock Exchange–Sofia (promulgated on and amended 41 times between
2000 and 2007) have introduced the concept of “comply or explain” to the national corporate governance code (NCGC)
for issuers that are listed on the Official Market, Segments ‘A’ and ‘B’.

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Corporate Governance Policy Assessment Bulgaria – June 2008

3. Good Practice Framework

ƒ The National Code of Corporate Governance (launched on October 10, 2007). The launch of the NCGC implements
one of the main recommendations of the 2002 CG ROSC. The NCGC is to be implemented on a “comply or explain”
basis by all issuers listed on the BSE’s Official Market, Segments ‘A’ and ‘B’, i.e. while the issuers are not required to
follow the NCGC, they must publicly disclose which provisions they do not follow and why. This allows companies to
tailor the recommendations contained in the NCGC, many of which are aspirational in nature, to their own unique
circumstances, e.g. size (a large company may wish to create three board committees, while one may suffice for a
smaller company) and industry (most banks have a risk committee, while companies in the real sector do not). The
NCGC focuses on (supervisory) board practices (Chapter One), audit and internal controls (Chapter Two), the
protection of shareholder rights (Chapter Three), information disclosure (Chapter Four), and stakeholder relations
(Chapter Five). The code follows the OECD Principles and targets publicly listed companies, and those with plans to
list.
Forty companies representing BGN 7,065 billion of market capitalization have publicly announced that they intend to
fully apply the NCGC, and 22 of these 40 have already developed corporate governance improvement plans. Keeping
in mind that the NCGC was launched just over six months ago in October 2007, only two have to date published the
result of their compliance with the code, although some do disclose their actual improvement plans. Of note is that the
Corporate Governance Task Force, with support from the Global Corporate Governance Forum, 13 is in the process of
developing a scorecard that would allow all concerned stakeholders, in particular investors and the companies
themselves, to better benchmark a company’s governance practices against the NCGC.

IV. Institutional Framework

ƒ The Financial Supervision Commission. The Financial Supervision Commission (FSC) was established on March 1,
2003 under the Financial Supervision Commission Act (FSCA) to unify the regulatory functions that used to be carried
out by the former State Securities Commission, the State Insurance Supervision Agency and the Insurance Supervision
Agency. The Commission sets out to regulate and control the financial system, and maintain the stability and
transparency on the securities, insurance, and social insurance markets.
The FSC is independent from the Bulgarian government and reports to Bulgaria’s National Assembly. It has
approximately 250 staff and an annual budget of BGN 9.5 million (~USD 7.5 million), derived from state budget and
brokerage fees, and is thus generally thought to have sufficient resources to carry-out its main functions.
The FSC is able to impose sanctions and fines, and refers criminal behavior to either the criminal or special
administrative courts. An effective tool frequently used by the FSC is to issue warning letters, which are typically
adhered to. For example, while in 2003 hardly a company issued quarterly financial statements, today, after issuing a
number of warning letters, the practice is widespread. The FSC has, moreover, focused its efforts on protecting the
rights of minority shareholders, in particular as regards the tunneling of assets and insider dealing, which the FSC still
considers major issues. The FSC enjoys a positive and ever improving reputation among market participants as tough,
but fair. As previously stated, the FSC is highly committed to improve corporate governance practices, and has played
a leadership role in amending existing laws and promoting the NCGC.
ƒ Bulgarian National Bank. The Bulgarian National Bank (BNB), too, enjoys a positive reputation in the financial markets
as a tough, yet fair regulator. Founded in 1879, its primary objective is to maintain price stability through ensuring the
stability of the national currency and conducting monetary policy adequate to that purpose. The BNB has a currency
board arrangement, which has provided financial stability since mid-1997. The BNB regulates and supervises the
activities of banks in Bulgaria for the purpose of ensuring the stability of the banking system and protecting depositors’
interests. As such, corporate governance is seen as a key issue for the BNB, in particular following Basel II and the
Corporate Governance Guidelines issued by the Basel Committee for Banking Supervision.
ƒ Bulgaria Stock Exchange-Sofia. The BSE was originally founded in 1914 through a tsar's decree, ceased to operate
following the Second World War, and was re-established in late 1991. The BSE is itself a joint stock company, majority
owned by the government (44 percent), with the remaining 56 percent dispersed among its members, in particular
investment banks and brokers. The BSE has a one-tiered board structure with seven members, representing its
shareholders. The BSE has some regulatory powers, in particular with respect to brokers. They may generally carry-
out inspections, issue sanctions and even suspend its members. Of note is that the BSE organizes an annual
corporate governance competition, alongside the Association of Investors. The BSE publishes four indices, in
particular the SOFIX that consists of the leading domestic stocks, as well as BG40, BGT30 and BGREIT. All shares

13
The Global Corporate Governance Forum is an International Finance Corporation (IFC) multi-donor trust fund facility located in the
IFC/World Bank Corporate Governance and Capital Markets Department. The Forum was co-founded by the World Bank and the
Organization for Economic Co-operation and Development (OECD) in 1999 and focuses on practical, targeted corporate governance
initiatives at the local, regional and global level. See also http://www.gcgf.org/

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traded on the market are dematerialized, and settlements are effectuated T+2.
ƒ Central Depository. The Central Depository AD (CDAD), established as a joint-stock company in 1997 is owned by the
Ministry of Finance (29 percent), BNB (20 percent), with the remaining owners (51 percent) dispersed among a number
of banks and financial intermediaries, none of which owns more than 5 percent. The CDAD’s board composition
reflects its ownership structure and hence does not have a voice of the users of the depository services. FSC, BNB,
and Ministry of Finance effectively control the CDAD’s operations.
The CDAD is a direct holding system, with 6.5 million accounts, the bulk of which are in Register ‘A’, consisting of
individuals who participated in mass privatization. Shares in Register ‘A’ cannot be traded. Shares in Register ‘B’
consist of actively traded shares, which as previously mentioned are all dematerialized.
ƒ Registry Agency. The Registry Agency (RA) is formed under the Ministry of Justice and covers the registration of all
companies, estimated at approximately 1.4 million, operating in Bulgaria. The RA has a centralized data system, which
is open and accessible at all times, including via the internet. The RA is currently witnessing important delays in
registering companies, due to difficulties adjusting to the recently passed Commercial Registry Act, which came into
force in January 2008, as well as specific legal issues (most of which revolve around how to register companies with
the same name, i.e. approximately 30 percent of all companies in Bulgaria, as well as the fact that companies are not
able to provide a power of attorney for a proxy to register the company for them). The RA further complains of
underfunding and chronic failures in the IT system in its 27 regional offices. Accordingly, its reputation in the market
could be improved upon. The World Bank recently completed an Investment Climate Assessment for Bulgaria, in
which the Section “Regulation & Taxation” discusses the issue of the RA.

V. Summary and Conclusions

In summary, Bulgarian has undertaken important efforts to improve upon its legal, regulatory and institutional framework, in
particular with bringing these in-line with good corporate governance as promulgated by the OECD Principles, EU
Directives, and the World Bank’s 2002 CG ROSC. With the many amendments and supplements to the provisions of the
Bulgarian legal and regulatory framework, an important step towards the harmonization with relevant EU Directives has
been achieved. As will be seen from the ensuing Principle-by-Principle review of the OECD Principles, a number of minor,
if important, amendments and supplements can help bring the legal and regulatory framework to the forefront of good
practice in the area of corporate governance.
The launch of the NCGC constitutes another important milestone in establishing a good practice benchmark specific to
Bulgaria, thus allowing companies to strive towards, and investors and regulators to monitor the implementation of good
corporate governance. Here again, as will be seen, the task force that helped draft and launch the code should reconstitute
itself following the agreed-upon 18-month period to make a number of adjustments to better complement the legal and
regulatory framework, in particular by not only specifying good practice but also offering guidance on how to implement
corporate governance reforms in practice.
Finally, the strengthening of the two principal regulatory institutions over the past years, has led the FSC and BNB to both
maintain and build upon their already positive reputations in the capital and financial markets, and constitutes yet another
milestone in improving the corporate governance framework, this time with respect to enforcement issues. Both the BNB
and FSC may wish to pay specific attention as to how the listed banks and companies are applying the NCGC in practice, in
focusing on the largest issuers and companies effecting the growth on the Unofficial Market. The CDAD and RA on the
other hand require support in implementing relevant EU Directives, although most interlocutors indicated that the difficulties
both institutions were experiencing were temporary in nature.
For corporate governance to now take hold, the private sector must do its part to ensure that good corporate governance
finds its way from the “law on the books” into the boardroom. Due to the high concentration of ownership—and lack of a
separation between ownership and control in many companies—corporate governance is often treated as a secondary
issue. However, a number of factors, in particular the improvements to the legal and regulatory framework, growing
awareness of the business case for good corporate governance, a nascent, if visible trend of ownership diffusion, and
increasing role of institutional investors and professionalization of the markets, are rightfully bringing corporate to the
forefront of the debate.
It is now up to the private sector to demonstrate its commitment to follow good corporate governance, in practice and not on
paper.

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Principle-By-Principle Review of Corporate Governance

14
This section assesses compliance with each of the OECD Principles of Corporate Governance. Principles are Fully
Implemented if the OECD Principle is fully implemented in all material respects with respect to all of the applicable
Essential Criteria. Where the Essential Criteria refer to standards (i.e. practices that should be required, encouraged or,
conversely, prohibited or discouraged), all material aspects of the standards are present. Where the Essential Criteria refer
to corporate governance practices, the relevant practices are widespread. Where the Essential Criteria refer to
enforcement mechanisms, there are adequate, effective enforcement mechanisms. Where the Essential Criteria refer to
remedies, there are adequate, effective and accessible remedies. A Broadly Implemented assessment is likely
appropriate where one or more of the applicable Essential Criteria are less than fully implemented in all material respects.
A Partly Implemented assessment is appropriate when (1) one or more core elements of the standards described in a
minority of the applicable Essential Criteria are missing, but the other applicable Essential Criteria are fully or broadly
implemented in all material respects (including those aspects of the Essential Criteria relating to corporate governance
practices, enforcement mechanisms and remedies); and (2) the core elements of the standards described in all of the
applicable Essential Criteria are present, but incentives and/or disciplinary forces are not operating effectively to encourage
at least a significant minority of market participants to adopt the recommended practices; or the core elements of the
standards described in all of the applicable Essential Criteria are present, but implementation levels are low because some
or all of the standards are new, it is too early to expect high levels of implementation and it appears that the reason for low
implementation levels is the newness of the standards (rather than other factors, such as low incentives to adopt the
standards). A Not Implemented assessment likely is appropriate where there are major shortcomings. A Not Applicable
assessment is appropriate where an OECD Principle (or one of the Essential Criteria) does not apply due to structural, legal
or institutional features (e.g. institutional investors acting in a fiduciary capacity may not exist).

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

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule
of law and clearly articulate the division of responsibilities among different supervisory, regulatory and
enforcement authorities.

Principle I.A.: The corporate governance framework should be developed with a view to its impact on overall
economic performance, market integrity and the incentives it creates for market participants and the promotion of
transparent and efficient markets.

Assessment: Broadly Implemented

The legal and regulatory framework requires or recommends:

ƒ The operation of the capital market is viewed by participants on both sides of the market as reasonably transparent.
Investors regard company disclosures, the way in which they are made, and the operation of relevant regulations, as
comprising the basis for an acceptable level of market integrity associated with no abnormal country/jurisdictional risk.
Recent amendments to the CA and LPOS, as well as regulatory action by the market regulator to increasingly enforce
existing laws and regulations, have prompted a number of market participants to cite important improvement to market
transparency and confidence. In particular some of the newer issuers on the BSE, as well as some of the larger
companies and banks, are generally seen as applying good corporate governance, even if there remains room for
improvement. As previously mentioned, 40 companies have already signed-up to voluntarily implement the recently
issued NCGC. On the other hand, some companies, in particular a group of holding companies that emerged from
mass privatization, as well as most companies that are not actively traded, were generally thought to follow
underdeveloped corporate governance practices, in particular with respect to issues of asset tunneling and related party
transactions, as well as information disclosure. There was consensus that SOEs, even those that are partially listed or
competing with the private sector, were also thought to follow underdeveloped corporate governance. Research
conducted by financial intermediaries was considered relatively weak.
Market manipulations, while vastly improved over the past ten years, were cited by some as still existent, if not prevalent
today. Beneficial ownership remains opaque in a number of companies and the dominance of a group of 130-150
individuals and investor groups, who have majority stakes in most of the key assets, further raises the potential for
conflicts of interest and market manipulation that the current regulatory and institutional framework may not be able to
fully address.
ƒ The authorities and legislatures in a jurisdiction develop policy, laws, and regulations for the corporate governance

14
Please see Methodology for Assessing the Implementation of the OECD Principles on Corporate Governance for full details.

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framework on the basis of effective and ongoing consultation with the public, corporations and shareholders including
their representative organizations, and other stakeholders. In Bulgaria there is no tradition for public discussions on
legal reforms. However, the FSC and BNB have both set important precedents and have issued draft laws and
regulations for public commentary, and have consulted with key stakeholder groups when developing new or amending
existing laws and regulations. Feedback and comments made by stakeholders, on the other hand, are not published,
and the same holds true for commentary provided by the government on stakeholder feedback. One noteworthy and
positive example is the monthly meeting organized by the FSC with key market participants on the last Thursday of
every month to discuss key issues relevant to the market. The FSC, BNB, key private sector associations, market
participants, and other key stakeholders attend this meeting to exchange ideas, tackle common problems, and generally
discuss upcoming policies. These meetings have been greatly appreciated by the private sector. A second noteworthy
example is the constitution of the task force to draft the NCGC, which consisted of representatives of key stakeholder
groups involved or interested in corporate governance. This contributed greatly to generally raise awareness among all
market participants as to the definition of and business case for good corporate governance.

Recommendations:
--

Principle I.B: The legal and regulatory requirements that affect corporate governance practices in a jurisdiction
should be consistent with the rule of law, transparent and enforceable.

Assessment: Broadly Implemented

The legal and regulatory framework:

ƒ Is generally well understood by economic participants. The FSC and BNB have regularly supplemented and/or amended
the relevant laws and regulations with respect to corporate governance to provide more clarity to the corporate
governance framework. However, as shall be seen below, there are a few remaining provisions that remain unclear, for
example with respect to defining interested parties. Moreover, not all market participants may have had the ability to
follow and understand, let alone implement the large number of changes that have been brought about to the legal,
regulatory, and institutional framework these past ten years, largely due to Bulgaria’s accession to the EU.
ƒ Is reasonably foreseeable and not subject to important temporary decrees and back-dated amendments. The
participatory process adopted by the FSC, BNB and other governmental bodies charged with passing laws and
regulations has had a positive effect in terms of allowing market participants to properly foresee and prepare for
legislative and regulatory changes.
ƒ Has been sufficiently enforced in an efficient, consistent, and even handed manner so as to constitute a transparent
system. As previously mentioned, both the FSC and BNB enjoy positive reputations in the market as tough and
consistent, yet fair. The commercial courts, on the other hand, are considered to be time-consuming and cost
ineffective.
ƒ Is not used in an arbitrary or grossly inconsistent manner incompatible with general norms about what constitutes the
rule of law by the government authorities. While corruption in the public sector has been cited as an issue by a number
of interlocutors, not a single interlocutor cited the arbitrary rules or judgments in the domain of corporate governance
that would be inconsistent with the rule of law.

Recommendations:
--

Principle I.C. The division of responsibilities among different authorities in a jurisdiction should be clearly
articulated and ensure that the public interest is served.

Assessment: Broadly Implemented

The legal and regulatory framework ensures for:

ƒ Clear division of responsibilities between different regulatory authorities. The FSC and BNB have clear and distinct
areas of authority under their founding acts.
ƒ An effective system of cooperation between the main regulatory authorities. Overall, it was thought that the FSC and
BNB cooperated well with one another, with the BNB passing relevant information on to the FSC with respect to listed
companies, and vice versa. In October 2003 the FSC and BNB signed a memorandum of understanding (MoU), which
outlines areas of cooperation, clarifies roles and responsibilities, and generally aims to support the efficiency and
effectiveness of the supervisory regime for banks and non-bank financial institutions. Of note is that the FSC also
instigated the creation of the National Council of Financial Stability, whose members are the heads of the FSC, the
BNB, and the Ministry of Finance, and this Council meets every three months to coordinate and discuss matters relating
to the financial stability of Bulgaria. Also, the FSC has signed separate MoUs with the Financial Intelligence Agency of
the Ministry of Finance with respect to anti-money laundering and other suspicious financial transactions, the Ministry of

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the Interior to coordinate efforts in combating financial crimes and carrying-out joint inspections, as well as with the
Competition Commission.
ƒ No significant inconsistencies between key laws and regulations. The legal and regulatory framework appears to be
consistent. And while a number of inconsistencies existed in the past, for example, with respect to the definition of what
constitutes an independent financial audit as per the old Accountancy Act (AA) and Law on the Independent Financial
Audit (LIFA), these inconsistencies have since been corrected. Of note is that while the Civil Law and CA come from a
continental European legal tradition, the LPOS was inspired form an Anglo-Saxon legal tradition. However, none of the
market participants cited overlap or inconsistency of legal principles and approaches.
ƒ The cost of compliance not to be regarded as excessive. None of the interlocutors cited compliance with the legal and
regulatory framework as being too onerous or excessive for larger issuers, however, most agreed that it was too
resource and cost intensive for the majority of companies that were listed on the market against their will, and were not
publicly traded.
ƒ Non-public bodies, which have been delegated responsibilities for parts of the corporate governance framework, to be
effective, transparent, and encompass the public interest. The Bulgarian Institute of Certified Public Accountants
(ICPAB), which has been granted self-regulatory responsibility, plays an important role in certifying and monitoring the
accounting profession. ICPAB’s role is described in more detail under Section V., Principle V.D.

Recommendations:
--

Principle I.D: Supervisory, regulatory and enforcement authorities should have the authority, integrity and
resources to fulfill their duties in a professional and objective manner. Moreover, their rulings should be timely,
transparent and fully explained.

Assessment: Partially Implemented

The legal and regulatory framework ensures that the regulatory authorities have:
ƒ Authority and integrity to be effective and not subject to commercial and political influence. As previously mentioned,
both the FSC and BNB are independent from political influence and interference from the executive government,
reporting directly to the National Assembly.
ƒ Sufficient resources to fulfill their objectives and on conditions that will not compromise their integrity and authority.
Moreover, both the FSC and BNB are financially independent and both have sufficient budgetary resources necessary
to carry-out their respective roles and responsibilities. The FSC, for example, obtains its budget from the National
Assembly and from brokerage fees. While both are able to offer salaries that are competitive in comparison to other
public sector institutions, they are unable to compete for talent with the private sector. As mentioned in the previous
section, both the CDAD and RA should be strengthened as they implement important, if stringent EU Directives, so as
to allow them to provide ongoing quality services to the market.
ƒ Established in the view of market participants a reputation for being transparent and consistent. Both the FSC and BNB
enjoy excellent reputations for integrity and fairness among market participants.
The implementation and enforcement of the corporate governance framework: Corporate governance related cases
are heard in the district courts. However, most market participants feel that the competence of the courts to judiciate in a
timely and cost-effective manner remains uneven. Indicators developed by the World Bank imply that the procedures and
cost of recovery to enforce a standard contract in Bulgaria is lower than the regional and OECD average, as shown in Table
2 below.

Table 2: World Bank Indicators on Enforcing Contracts

Enforcing Contracts
Economy Ease of Doing Business Rank
Procedures Cost ( percent of
Rank Time (days)
(number) debt)

Albania 136 74 39 390 31.8

Bulgaria 46 90 40 564 22.2

Croatia 97 45 38 561 13.8

Czech Republic 56 97 27 820 33

Hungary 45 12 33 335 13

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Macedonia,
FYR 75 84 39 385 33.1

Moldova 92 17 31 365 16.6

Montenegro 81 131 49 545 25.7

Poland 74 68 38 830 10

Romania 48 37 32 537 19.9

Serbia 86 101 36 635 28.4

Slovakia 32 50 30 565 25.7

Slovenia 55 79 32 1,350 18.6

CEE and SEE

Average 35.7 606.3 22.4

OECD Average 31.3 443.3 17.7

Source: Doing Business 2008 at www.doingbusiness.org)
It should be noted that more detailed information is contained in the World Bank’s recently published “Justice Public Expenditure and
Institutional Review”.

Recommendations:
1. The FSC and BNB should on a periodic basis, review their salary structure to ensure that they are able to
attract, motivate and retain staff.

Section II: The Rights of Shareholders and Key Ownership Functions

The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

Principle II.A: The corporate governance framework should protect shareholders’ rights. Basic shareholder rights
include the right to:

Principle II.A.1: Secure methods of ownership registration

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle II.A. was deemed as largely
observed by the 2002 CG ROSC. More specifically, the 2002 CG ROSC cited that the corporate governance framework
provides a largely reliable form of securing methods of ownership, and of conveying and transferring shares. The CA
required that joint stock companies maintain a shareholders' register and, for publicly listed companies, the LPOS required
that the companies register their shares with the CDAD, which maintained a registry of dematerialized shares. Except for
the clients of foreign broker-dealers, the names of the ultimate shareholders were to be registered with the CDAD. One key
policy recommendation was for the commercial register to be computerized so as to better provide information to
shareholders, in particular through the internet.
The legal and regulatory framework requires:
ƒ Companies to maintain, either by themselves or through an agent, a register of record shareholders and any
shareholder or a party acting on the shareholder’s behalf can inspect the list of shareholders to verify their holdings.
Every joint stock company is obliged to create and keep a shareholder register, containing the names and addresses of
its owners, as well as the type of share, their nominal value and issue price, quantity, and serial number (see Art. 179
CA); for bearer shares, Art. 185 regulates that all transactions must also be recorded into the shareholder register to
bind the company (Art. 185(2) CA). Shares of publicly listed companies have to be registered and dematerialized by the
CDAD (see Art. 111 (3) and Art. 136 (2) LPOS). Art. 38 (1) of Ordinance No. 8 for the Central Depositary of Securities
(Ordinance No. 8) stipulates that payments of dividends, interests, and principal on dematerialized shares, and also debt
securities shall only be executed through the CDAD, providing assurance to shareholders and allowing the FSC to better
supervise payments.
Upon request of a shareholder, the CDAD must issue a certificate of ownership (Art. 137 (1) and (2) LPOS).
Shareholders also have a general right to obtain information relevant to participate in the GSM (See Art. 224 CA), which
is thought to subsume the shareholder list, and Art. 133 (1) LPOS explicitly states that investors shall have the right of

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access to the CDAD’s registers pertaining to their securities.

ƒ Custodians to safeguard customers’ assets and sufficiently protect the rights of shareholders in such shares (if shares
are held on behalf of shareholders by custodians). It is common for shareholders to hold shares through custodians,
which is the only form of nominee ownership recognized in the law. Custodians are normally banks. Art. 5 (3) 1. MFIA
allows custodians to provide ancillary services, including the safekeeping and administration of financial instruments for
their clients. Their services are regulated in details with the aim of protecting shareholder rights. For example, an
investment intermediary must segregate its own financial instruments and cash from that of its clients, and, in the case
of the custodian’s bankruptcy, a client’s assets will not serve or constitute as part of the insolvency mass (Art. 34 MFIA).
ƒ Companies or their agents to be liable for maintaining an accurate register of shareholders and, where securities can be
dematerialized and transferred by book entry, registrars/transfer agents to follow minimum performance standards, such
as recordkeeping rules, as well as the possibility of inspection and examination of registrars/transfer agents by the
authorities. Shareholders are able to notify the FSC and request their assistance in obtaining their information rights.
The CDAD itself is responsible for damages caused to issuers and holders of securities as a result of negligence or
omissions on the part of its employees, as well as for damages caused as a result of a loss of data with regard to
dematerialized securities (see Art. 44 (2) of Ordinance No. 8). A guarantee fund has been established to indemnify the
CDAD.
The implementation and enforcement of the corporate governance framework: The laws and regulations ensuring for a
secure method and process to ownership registration were thought to be followed and properly enforced in practice.

Recommendations:
--

Principle II.A.2: Convey or transfer shares

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: --

The legal and regulatory framework requires:
ƒ Public companies not to restrict the transfer or conveyance of shares, either as a consequence of laws, listing
requirements, and/or market discipline. (Restrictions widely regarded as legitimate in the international community (see
above) may be imposed by the authorities subject to transparent rule making and workable appeals procedures.) The
CA allows limitations or additional requirements for the transfer of shares to be implemented, if only when regulated in
the company’s articles of association. However, for publicly listed companies, the implementation of such limitations
and additional requirements is prohibited by Art.111 (3) LPOS, and so the conveyance or transferability of shares is free.
ƒ The security depositaries to be adequately staffed and funded, independent of special interests, and accepted by market
participants. The CDAD has procedures that have been developed in-line with the international standards The CDAD
has a special permission from the BNB issued in October 1997, which allows the CDAD to use the integrated interbank
system for transfers and payments to ensure the payment of each transaction. To this end, the CDAD works with
Bankservice AD, which is the operator of the interbank settlement system. Of note is that the CDAD has adopted and
follows the European Code of Conduct on Clearing and Settlement of the European Central Securities Depositories
Association (ECSDA). Transactions are settled on a "delivery versus payment" basis and the settlement-cycle amounts
to two days (T+2). The CDAD is not a member of the International Securities Services Association (ISSA).
The implementation and enforcement of the corporate governance framework: The laws and regulations ensuring the
free transfer and conveyance of shares are thought to be followed and properly enforced in practice.

Recommendations:
--

Principle II.A.3: Obtain relevant and material company information on a timely and regular basis

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Information regarding companies was generally
publicly available, including copies of the articles of association, the list of founders, and minutes of decisions by the GSM
regarding changes in charter capital. However, to obtain copies of a company’s statutes, one had to visit the regional court
registrar in person, or obtain unofficial copies from Information Services, a private sector company Provision for centralized
computer access were being discussed as part of the EU support for reform of the court administration. Financial
information under the old AA was limited to the balance sheet, income statement and annexes, but not the statement of cash
flows, changes in equity, and notes to the financial statements.
The legal and regulatory framework requires or encourages companies to:

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ƒ Not use internal procedural or legal mechanisms to impede shareholders or their representatives from obtaining relevant
and material company information without undue delay and cost. The acquisition of such information is guaranteed by
the legal and regulatory framework. For joint stock companies, information rights are accorded in the run-up to the
GSM, and the CA specifies that the assembly agenda, all papers relative to the agenda, including background
information on directors nominated to the (supervisory) board, including their qualifications, must be placed at the
disposal of the shareholders not later than the date of announcement or mailing of the notice (Art. 224 CA). Similarly,
issuers are required to ensure that all conditions and information necessary to enable shareholders to exercise their
rights are available to them and issuers are also required to guarantee the integrity of information provided to
shareholders (Art. 110c LPOS).
ƒ Ensure that relevant company information is readily available, including articles of association, by-laws, financial
statements, minutes of the GSM and the capital structure of the company. The notice, agenda, and materials for the
GSM are sent to the FSC, CDAD and BSE at least 45 days before the holding of the GSM, and the FSC and BSE are
required to publicly announce the materials they received (Art. 115 (4) LPOS) and such information is thus available free
of charge to shareholders (see also Art. 224 (3) CA). Chapter Six “A” LPOS (Art. 100j – 100aa LPOS) furthermore
contains detailed provisions on information disclosure that are mandatory for issuers, in particular regarding the contents
of the annual report (Art. 100m). The NCGC recommends for companies to maintain a special section on its website
describing the rights of shareholders and the rules and procedures for their participation in the GSM, however, does not
specify additional materials that could be made available to shareholders for the GSM meeting, or to place all relevant
materials on their company websites.
The implementation and enforcement of the corporate governance framework: In practice, companies do follow the
relevant laws and regulations and the FSC does publish the requisite information on its website, if only in Bulgarian.
Unfortunately, few (if any) companies use their own websites to provide for disclosure. There is no single source where
shareholders can obtain comprehensive and relevant information regarding their participation in the GSM, including the
agenda and the annual report with the full set of financial statements, as well as other material information on the company.

Recommendations:
1. The NCGC should be amended to specify which additional materials should be made available to shareholders
in the run-up to the GSM by the company on the internet.

Principle II.A.4: Participate and vote in the GSM

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: With regard to voting rights, the CA allows for
different classes of shares with different voting rights, although virtually all traded companies use “one-vote one-share
voting”. Under the LPOS all shares must be fully paid up in order to receive voting rights. (See also section below on
conduct of the GSM.)
The legal and regulatory framework requires companies to:
ƒ Not impede entitled shareholders from participating and voting in a GSM. Shareholders have the basic right to
participate in the GSM (Art. 220 (1) CA). The CA now follows the principle of “one share, one vote” (Art. 181 (1) CA),
which follows good practice and goes beyond the requirements of the acquis communautaire. Companies are allowed
to issue shares with special rights, so long as they are indicated in the articles of association (Art. 181 (2) CA) and the
shareholders of the same class are treated equally within that class (Art. 181 (3) CA). Preferred shareholders are
accorded an “advisory vote”, which they can use to effectuate a speech before the assembly and make proposals, but
not to vote.
Procedural and/or legal mechanisms that would allow a company to impede shareholders from participating and voting
in a general assembly do not exist. Of note is that in publicly listed companies, the right to vote can be exercised by
shareholders listed on the register of the CDAD 14 days before the date of the GSM (Art. 115b (1) LPOS).
The NCGC, finally, adds that all shareholders must be able to participate in the GSM and that those who have the right
to vote should have the opportunity to exercise their voting rights; the (supervisory) board should, in this respect, take
action to encourage the participation of all shareholders at the assembly (Chapter Three, 2. NCGC).
Shareholders are able to take legal action if they are not allowed to vote in the GSM. More specifically, the affected
shareholder can seek redress before the court in accordance with Art. 74 CA.
The implementation and enforcement of the corporate governance framework: Following the well-documented abuses
following mass privatization, where some of the privatization funds organized their GSMs in difficult-to-reach places, for
example Simeonovgrad (a border town), today, shareholders are able and some, if not most of the minorities, do participate
in GSMs.

Recommendations:
--

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Principle II.A.5: Elect and remove board members of the board

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Members of the (supervisory) board were
elected by the GSM and members of the management board in turn by the supervisory board. Members of both boards
were elected for a term of no more than five years, unless a shorter term was provided for in the company’s by-laws.
Directors were allowed to be re-elected for any number of terms and they could be dismissed from their duties before the
end of the mandate. There was no requirement for cumulative voting to be used in the election of board members, although
there were no provisions that would prohibit companies from adopting cumulative voting.
The legal and regulatory framework requires or encourages companies to:
Not permit or impede entitled shareholders from electing and removing members of the (supervisory) board. Shareholders
are accorded the right to elect and remove (supervisory) board members (Art. 221 (4) CA). The legal and regulatory
framework does not foresee any impediments that would hinder shareholders from electing and/or removing (supervisory)
board members. On the other hand, the CA is silent on how candidates to the (supervisory) board are nominated, which is a
crucial process to strengthen shareholder rights (for a detailed discussion on good practice in this area, please see Section
VI.B.). This could, however, be interpreted to mean that any shareholder, regardless of the ownership percentage, has the
right to nominate an individual to be considered for a (supervisory) board seat.
“Cumulative voting” is not specifically addressed in the legal and regulatory framework, although as already noted in the
2002 CG ROSC, there is no legal or regulatory obstacle for companies to implement this practice.
The implementation and enforcement of the corporate governance framework: In practice, (supervisory) board
members are in effect both nominated and elected by the majority owner. Minorities have little to no say in this process.

Recommendations:
2. The NCGC should clarify and provide practical advice on how to structure an effective nominations process for
(supervisory) board members.
3. The NCGC, if not the CA, should be amended to recommend that companies adopt cumulative voting when
electing (supervisory) board members. Cumulative voting can be a particularly powerful tool in jurisdictions with
concentrated ownership with strong investor associations, as it provides dispersed minority shareholders, when voting in
unison, the opportunity to elect directors.

Principle II.A.6: Share in profits of the corporation

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Shareholders had the right to receive dividends.
Under the LPOS the GSM decided on the distribution on the company’s profit. The company was required to disburse
payment of the dividend within three months of the GSM and payment was to be made through a bank transfer through the
CDAD. However, generally unreliable financial reporting reduced the ability of shareholders to verify that they were fully
participating in the company’s profits.
The legal and regulatory framework requires or encourages companies to:
ƒ Treat Shareholders of the same class equally and in accordance with the rights of the respective share classes with
respect to the distribution of profits. A share entitles its owner to a dividend and to a share in the assets in case of
liquidation in proportion to the nominal value of the share (Art. 181 (1) CA); shareholders are able to vote on the
distribution of profits (See Art. 221 (7) CA); and the company is obliged to pay to the shareholders the dividend
approved by the GSM within three months (Art.115c (5) LPOS), in-line with good practice.
ƒ There is a transparent and enforceable legal framework defining how decisions are made about distributing profits. The
legal rules that define how decisions are made about dividends and the distribution of profits are considered transparent
and enforceable. The management board (or executive directors) presents its (their) proposal for distributing profits to
the (supervisory) board, which then endorses (or modifies) this proposal and submits it to the GSM for approval.
The implementation and enforcement of the corporate governance framework: Shareholders, regardless of the shares
they own, are not able to single-handedly instruct the management (board) or (supervisory) board to declare a certain
percentage of dividends. However, given the current ownership structure, some market participants reported that this was
likely to be the case in a number of companies. In addition, there is one important issue with respect to the right to allow
shareholders to participate in the profits of the organization. In practice, once the GSM approves the decision to payout
dividends, the company transfers the appropriate amount to the CDAD, which in turn distributes the dividends to the various
custodians pro rata, depending on the number of shareholders they have as their clients and their respective shareholdings.
However, neither the company, nor the CDAD or custodians are required to inform shareholders that their dividends are due,
and they do not do so in practice. And so a large portion of the dividends are typically returned to the company, largely due
to the fact that minority shareholders were unaware of the fact that they were entitled to dividends.

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Recommendations:
4. Either the company, CDAD or custodians should be required to contact and inform minority shareholders of the
fact that they are entitled to dividends.

Principle II.B: Shareholders should have the right to participate in, and to be sufficiently informed on, decisions
concerning fundamental corporate changes such as:

Principle II.B.1: Amendments to statutes, or articles of incorporation or similar governing company documents

Assessment: Fully implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle II.B. was materially not observed
in 2002, largely due to the fact that while the CA provided the GSM with the sole authority to approve: (i) amendments to the
company by-laws, (ii) increase or decrease the company’s capital, and (iii) transform or wind-up the company, it did not
establish requirements for a minimum percentage of capital to be represented in order to represent a valid meeting, leaving
the issue to be determined by each company’s by-laws. In addition the CA provided for a “diminishing quorum” or
“collapsing quorum.” This allowed shareholders with as little as five percent of capital to constitute a quorum—a common
occurrence according to market participants back in 2002.
The legal and regulatory framework:
ƒ Provides either exclusive power to the GSM or requires the (supervisory) board to seek shareholder approval of
changes to the basic governing documents of the company. The company’s articles of association and by-laws can only
be modified by resolution of the GSM (Art. 221 1. CA). This authority is exclusive to the GSM and cannot be delegated
to another governing body. The GSM itself is only able to modify the company’s articles of association if: (i) at least half
of the capital is represented at the GSM (unless the articles provide for a larger quorum); and (ii) the majority of at least
two-thirds of the shares that are represented at the GSM vote for the resolution (see Art. 227, respectively 230 CA).
Companies may not adopt procedural rules to frustrate the exercise of these rights. Proposals to change the articles of
association must be presented to shareholders under the standard timeframe, i.e. at least 30 days before the GSM (Art.
223 CA). For public companies the information materials must be sent to the FSC, the CDAD, and BSE at least 45 days
before the conducting of the meeting (Art.115 (4) LPOS), where they are made publicly available. And so while
diminishing or collapsing quorums are still possible, they are no longer thought to be an issue, first due to the lengthy
notification period, which is enforced in practice, as well as the improvements to the external environment, which is no
longer marred by abusive actions taken by majority shareholders.
ƒ Allows shareholders to challenge actions concerning fundamental corporate changes either if: (a) the action required
shareholder authorization and such authorization was either not obtained or shareholders were improperly denied the
opportunity to participate in the decision; or (b) shareholders did not receive sufficient and timely information about the
proposed action. Should a change to the articles be adopted in violation of the law or the company’s articles of
association, then legal redress can be sought by a shareholder before the district court (Art.74 CA).
The implementation and enforcement of the corporate governance framework: Practice does not appear to diverge
from the legal and regulatory framework.

Recommendations:
5. The NCGC should recommend for companies to introduce the concept of a sliding quorum for changes to the
company’s articles of association.

Principle II.B.2: Authorization of additional shares

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: In 2002, share dilution was identified as a major
corporate governance issue. There were several means by which shareholders were able to dilute equity interests, in
particular by ensuring that the GSM forfeit its legal right to participate pro rata, which majority shareholders were able to do
despite the two-thirds majority vote due to the lack of a defining quorum. Of note is that the CA also allowed for capital to be
increased by means of private placement to designated persons at an agreed upon price, i.e. without allowing existing
shareholders to participate in the new share issue, and thus provided a means to by-pass pre-emptive rights of
shareholders. The policy recommendations of the 2002 CG ROSC focused on establishing a minimum quorum for all joint
stock companies, e.g. for the first quorum to be set at 40 or 50 percent of capital and the second quorum at 30 percent.
The legal and regulatory framework:
ƒ Provides either exclusive power to the GSM (delegation of this authority for a limited period to the board could be
permitted) or requires the board to seek shareholder approval of changes to the authorized capital of the company. The
authorized capital may be increased by issuing new shares, by increasing the nominal value of shares already issued,
or by converting bonds into shares. The GSM is exclusively authorized to take such decisions (Art. 221 2. CA), which

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have to be adopted by a two-thirds majority of the votes of the shares represented at the meeting according to Art. 230
(2) CA (the statutes may provide for a larger, but not lower, majority, as well as for additional conditions). Moreover, a
quorum of 50 percent is required for the first meeting. Of note is that for publicly listed companies the articles of
association may empower the managing board or board of directors to increase the authorized capital up to a certain
nominal amount in the course of five years from the date of incorporation (Art. 196 CA), without the approval by
shareholders. However, the (managing) board is not allowed to restrict pre-emptive rights of shareholders when the
company in question is publicly listed (Art. 112 LPOS).
ƒ Provides shareholders with a pre-emptive right. Each shareholder is entitled to acquire a part of the new shares in
proportion to its share in the capital prior to the increase (Art. 194 (1) CA). For shares of different classes this right is
valid for the shareholders of the respective class (Art. 194 (2) CA).
Of note is that the right of the shareholders to acquire new shares pro rata can be restricted or dropped by a two-thirds
majority decision of the GSM of the represented shares of a joint stock company; the management board, respectively
the board of directors, shall in this case present a report regarding the reasons for revoking or restricting these pre-
emptive rights (Art. 194 (4) CA). Of further note is that the increase of the capital may be made conditional upon the
buying of the shares by certain persons at a certain price, or against bonds issued by the company (Art. 195 CA).
However, if the authorized capital is increased by resolution of the (supervisory) board on the grounds of explicit
delegation by the GSM, the managing board, respectively the board of directors, can only exclude or restrict the right of
shareholders to acquire new shares if it has been authorized to do so by the articles of association or by a decision of
the GSM taken by a majority of two-thirds of the votes present at the assembly.
These exceptions only apply for joint stock companies as such; public companies, in turn, are expressly forbidden to
restrict the pre-emptive rights of shareholders as per Art. 194 (4) CA, but not Art. 195 CA (see Art. 112 (1) LPOS).
The implementation and enforcement of the corporate governance framework: While pre-emptive rights, or lack
thereof, were known to be an important corporate governance concern in the past, today, companies are thought to
generally follow the existing legal and regulatory framework. The dilution of minority shareholder stakes is no longer thought
to be an issue. And as mentioned under the previous Principle II.B.1., the issue of a collapsing quorum is no longer thought
to be a relevant corporate governance issue.

Recommendations:
6. The NCGC should recommend for companies to introduce the concept of a sliding quorum when the GSM
decides on whether to forgo pre-emptive rights.

Principle II.B.3: Extraordinary transactions, including sales of major corporate assets

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Under the LPOS, when the GSM reviews the
transfer of assets exceeding 50 percent of the company’s book value of total assets, three-quarters of the capital had to be
represented. With regard to the other decisions which had to be made by the GSM, two-thirds of the capital participating in
the meeting had to approve the change, however, the LPOS allowed the company by-laws to set the quorum requirements.
A review in 2002 found that the by-laws of over 95 percent of public companies had a simple majority, i.e. 50 percent of the
capital plus one share, against good practice.
The legal and regulatory framework:
ƒ Provides either exclusive power to the GSM or requires the board to seek shareholder approval for extraordinary
transactions, including the transfer of all or substantially all assets, which in effect result in the sale of the company.
Joint stock companies may only undertake the following transactions with approval by the GSM: (i) transfer or ceding
the administering of the whole trade company; (ii) administering assets whose total value, during the current year,
exceeds half of the value of the assets of the company according to the latest certified annual financial report; and (iii)
undertaking obligations or submitting securities to one person or to related persons, whose size during the current year
exceeds half of the value of the assets of the company according to the latest certified annual financial report. The
company’s articles of association may explicitly provide for the transactions under paragraph (ii) to be carried out by a
decision of the board of directors, respectively of the managing board, however, requires an unanimous decision of the
(management) board, with prior permission of the supervisory board under the two-tiered board structure (Art. 236 (2)
and (3) CA). However, as per Art. 114 LPOS, the (supervisory) board or management board of a publicly traded
company, without being explicitly authorized by the GSM, cannot carry out transactions as a result of which:
(i) The company acquires, transfers, receives, or surrenders for use or furnishes as security in any form
whatsoever any fixed assets to a value exceeding: (a) one third of the lower of the value of the assets
according to the balance sheet of the said company as last audited or as last prepared; (b) two per cent of the
lower of the value of the assets according to the balance sheet of the said company as last audited or as last
prepared, where interested parties participate in the transactions;
(ii) The company incurs obligations to a single person or to connected persons to an aggregate value exceeding
the value referred to in Littera (a) of Item 1. or, where the said obligations are incurred to interested parties or

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in favor of interested parties, to an aggregate value exceeding the value referred to in Littera (b) of Item 1.;
(iii) The receivables of the company from a single person or from connected persons exceed the value referred to
in Littera (a) of Item 1. or, where interested parties are debtors of the company, the value referred to in Littera
(b) of Item 1.
Of note is that transactions, which separately are under the thresholds described above under (i), but jointly exceed the
thresholds, shall be considered as one business transaction if they have been carried-out within a three year period for
one person or related persons, shall also be subject to approval by the GSM (Art. 114 (4) LPOS).
ƒ Mandates that material information about the proposed transaction must be provided sufficiently in advance of the
meeting to permit considered decisions. In public companies the management (board) is required to present the GSM
with a detailed report about the expedience and conditions of the extraordinary transactions, which is to be submitted to
shareholders along the same timeline as with other information (i.e. a 45 day notification period for the FSC and BSE,
and 30 day period to shareholders). The report is to include the essential conditions of the transaction, including
parties, subject, and value, as well as in whose favor the transaction is made. Shareholders that are interested parties
to the transactions cannot exercise their right to vote (Art. 114a (3) LPOS). Finally, of note is that for these
extraordinary transactions which simultaneously constitute a related party transaction, the transaction can only be
carried out at market price. The valuation shall be implemented by the management (board), and when the interested
persons are board members, by an independent expert with the necessary qualification and experience.
The implementation and enforcement of the corporate governance framework: Overall, the legal and regulatory
framework appears to be robust and defensible, as well as enforced and followed in practice. Transactions that are
implemented in violation of these rules are null and void (see Art. 114 (10) LPOS).

Recommendations:
--

Principle II.C: Shareholders should have the opportunity to participate effectively and vote in the GSM and should
be informed of the rules, including voting procedures, that govern the GSM

Principle II.C.1.: Sufficient and timely information on date, location, agenda and issues to be decided at the general
meeting

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Principle II.C. was deemed to be partially
observed by the 2002 CG ROSC. Under the CA, companies were required to convene a GSM at least once a year and
extraordinary assemblies could be held at the request of shareholders with 10 percent of the company’s capital. The
agenda and accompanying papers were to be announced and distributed 30 days in advance of the assembly and published
in two central daily newspapers. The CA allowed shareholders to add items to the meeting agenda prior to its publication
and, moreover, during the assembly provided that all shareholders present unanimously agree to the additional item. The
CA did not define the location of the GSM, and some meetings had been known to be held outside of Bulgaria, however, in
2000, amendments to the LPOS addresses the issue by requiring the assembly to be held in the urban areas where the
company is registered. There was no requirement that trading in shares was to be blocked prior to the GSM. The main
policy recommendation focused on allowing shareholders representing 5 percent of capital or more to propose resolutions
for the agenda, and that the agenda should be distributed to all shareholders at company costs.
The legal and regulatory framework requires or encourages companies to:
ƒ Provide sufficient advance notice of GSM. The ordinary and extraordinary GSM is held once per year and is convened
by the (supervisory) board, managing board, as well as on the request of the shareholders with 5 percent of the capital
(Art. 222 (1) CA). The GSM of a publicly listed company is convened by the end of the first half of the year upon
conclusion of the financial year (Art. 115 (1) LPOS), i.e. June 30, unless losses exceed one-half of the capital, in which
case the GSM is held not later than three months from establishing the losses (Art. 222 (3) CA). A publicly listed
company is obliged to announce the invitation in the commercial register and to publish it in one daily newspaper at least
30 days before opening the GSM (Art. 115 (3) LPOS). The GSM is to be held at the seat of the company, unless the
articles of association stipulate another place in the territory of the Republic of Bulgaria (Art. 222 (1) CA). In addition,
publicly listed companies may only conduct their GSMs in populated area at the seat of the company (Art. 115 (2)
LPOS).
The invitation to and supporting materials for the GSM are to be sent to the FSC, to the CDAD, and BSE at least 45
days before the assembly is held. The FSC and BSE are required to then publish the materials (Art. 115 (4) LPOS).
ƒ Deliver meeting material covering the issues to be decided that is adequate for shareholders to make informed
decisions. As a minimum, the notice announcing the GSM shall state: (i) the trade name and seat of the company; (ii)
the place, date and hour of the meeting; (iii) the type of GSM; (iv) the formalities, if provided for in the articles, to be
satisfied for attendance and exercise of the right to vote; and (v) the agenda and business to be transacted, and the
concrete proposals. Of note is that today, shareholders representing 5 percent are able to propose resolutions for the

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agenda (see Art. 223a (1) CA). In addition, the notice for the GSM of a publicly listed company must further contain
information about the total number of shares and voting rights in the GSM, as well as the rights of the shareholders to
participate in the general meeting (Art. 115 (2) LPOS).
The implementation and enforcement of the corporate governance framework: While corporate governance
transgressions were commonplace following mass privatization, today, public companies are thought to strictly comply with
these rules, largely due to their strict enforcement by the FSC. At times, minor discretions are noted, which are promptly
followed-up with by administrative penalties varying between BNG 2,000 and 5,000, as per Art. 221 (1) 3. LPOS.

Recommendations:
--

Principle II.C.2: Opportunity to ask the board questions at the general meeting

Assessment: Fully implemented

Summary of findings and recommendations from the 2002 CG ROSC: Shareholders had the right to ask management
questions during the GSM, as per Art. 115 (4) LPOS, in-line with good practice.
The legal and regulatory framework requires or encourages companies to:
ƒ Facilitate shareholders asking questions of the board. Art. 115 (6) LPOS explicitly states that the members of the
(supervisory) board and management (board) of the company are required to provide true, exhaustive, and to-the-point
answers to questions posed by the shareholders during the GSM regarding the state of economic affairs, the financial
position, and the business activities of the company, save for circumstances that constitute inside information. On the
other hand, there is no requirement for the external auditor to participate in the GSM meeting and to answer questions
from shareholders.
ƒ Permit shareholders to propose items for discussion on the agenda or to submit proposals/resolutions for consideration
at the meeting of shareholders regarding matters viewed as appropriate for shareholder action by applicable law. As
previously mentioned, shareholders with 5 percent of capital are able to submit agenda items for the GSM. Chapter
Three, 2., 2.1.3. NCGC recommends for the (supervisory) board to establish rules for the organization and conduct of
regular and extraordinary GSMs, and that these rules must guarantee the equitable treatment of all shareholders and
the right of each shareholder to express his/her opinion about the items on the agenda of the GSM.
The implementation and enforcement of the corporate governance framework: In practice, shareholders do ask
questions at the GSM.

Recommendations:
7. Art. 115 (6) LPOS should be amended to ensure that the external auditor also attends the GSM and provide
answers to shareholder queries.

Principle II.C.3: Effective shareholder participation in key governance decisions including board and key executive
remuneration policy

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: n/a

The legal and regulatory framework requires or encourages companies to:
ƒ Facilitate the effective participation of shareholders in nominating and electing board members. As previously
mentioned, shareholders are able to elect directors to the (supervisory) board. And while shareholders are generally
thought to be legally able to nominate candidates to the (supervisory) board, this is not specifically set-out in the CA.
The NCGC, moreover, does not make any recommendations on how to structure and organize the nominations process.
ƒ Formalize nomination and election procedures in company charters and by-laws. Chapter One, 3.7 NCGC recommends
for the election of (supervisory) board members to be done through a transparent procedure, which should ensure timely
and complete information regarding the personal and professional qualities of the candidates. The NCGC, however,
falls short of calling for this procedure to be formalized in the company’s articles of association or by-laws.
ƒ Present the opportunity for shareholders to make their views known either at the GSM or by equivalent means about the
compensation policy for board members and key executives; there are provisions for shareholders to explicitly approve
equity-based compensation schemes and this power is not delegated to the board. The legal and regulatory framework
goes beyond what is considered good practice and provides the GSM with the authority to determine the remuneration
of the members of the (supervisory) board (except for executive directors on the board of directors), including their right
to receive a part of the profit of the company, as well as to acquire shares and bonds of the company (Art. 221(5) CA).
As will be expanded on further below, in Section VI.D.4, allowing shareholders to determine, rather than expressly vote
or provide an advisory opinion on, non-executive director remuneration, may actually run counter to good practice as it

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could politicize remuneration and hinder the company’s ability to offer competitive remuneration packages deemed
attractive enough for high-caliber directors.
The implementation and enforcement of the corporate governance framework: Given the current level of ownership
concentration in Bulgaria, the process of determining and approving executive remuneration is followed as prescribed in the
law, however, in practice, will in effect be established by the majority owner outside of the GSM.

Recommendations:
8. The CA should be amended to specify that non-executive remuneration should be approved, but not determined
by the GSM. The legal and regulatory framework should require or recommend that the independent directors on the
board determine executive and non-executive remuneration, free from any influence from the other directors, and then
submit the remuneration plan for shareholder approval. Shareholder approval should also be extended to executive
remuneration when part of the remuneration package consists of shares or options.
9. The NCGC should be amended to better guide companies on how to properly organize the nominations process
for directors to the (supervisory) board. Guidance should include a discussion on the role of the nominations
committee and independent directors in the nominations process.

Principle II.C.4: Availability to vote both in person or in absentia

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The CA allowed for the use of proxies at the
GSM and the LPOS provided specific provisions for the use of proxies, including the requirement that a proxy be notarized
and that the proxy be assigned for a specific meeting and for voting in favor or against a particular decision. The LPOS also
required that any person representing shareholders with more than 5 percent of the voting shares would have to notify the
company at least ten days before the assembly. Neither the CA nor LPOS envisaged voting by mail or electronic voting.
The notarization requirement for proxy voting was thought to discourage some investors from voting, where for some
shareholders the costs of notarization exceeded the expected dividends. However, in the past, the cheaper alternative of
voting without notarization of proxies allowed violations in shareholding voting.
The legal and regulatory framework:
ƒ Permits shareholders to vote in absentia (including postal voting and other procedures) and that this vote can be for or
against a resolution, and fully equivalent to the possibilities allowed to those shareholders present. Shareholders may
exercise their rights, including the right to participate in the GSM, by proxies (Art. 220 (1) CA) that have been duly
authorized in writing (Art. 226 CA). The rules and regulations governing the proxy process for publicly listed companies
are strictly regulated in Art. 116 LPOS and a special Ordinance (Ordinance on the minimal requirements of the letter of
attorney for representing a shareholder in the general meeting of a public corporation – promulgated SG issue 124 from
23.12.1997), which, inter alia, requires a written power of attorney that must be issued for a specific GSM meeting with
specific instructions to vote on agenda items and generally follow the formal requirements as determined by the
Ordinance. More generally, Chapter Three, 2.1 NCGC sets out that all shareholders must be able to participate in the
GSM and be allowed to express their opinion, including through the use of a proxy. The NCGC further recommends
that the (supervisory) board should exercise effective oversight and ensure that the necessary arrangements are made
for the voting by authorized proxies in accordance with the instructions of the shareholders and in accordance with the
law. The use of postal and electronic voting is not expressly regulated, however, is generally thought to be legally
permissible if regulated in the company’s articles of association. Chapter Three, 2.1.5. NCGC specifically recommends
for the (supervisory) board to take action to encourage the participation of all shareholders at the GSM, including those
who cannot make it physically, by allowing the use of information technology (including the internet) whenever possible
and necessary.
The implementation and enforcement of the corporate governance framework: In practice, proxy voting appears to
work in an efficient and effective manner. In the future and as the market develops, companies should be encouraged to
make use of electronic voting.

Recommendations:
--

Principle II.D: Capital structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership should be disclosed.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle II.D. was partially observed in
2002. Under the CA, provisions for any alternative voting rights, i.e. different from the ‘one-share, one-vote’, were to be laid
out in the company articles of association, and these appeared to be easily accessible to shareholders. However, there was
no requirement for disproportionate voting rights to be disclosed in the annual report to shareholders. A second, general

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recommendation was for the corporate governance framework to allow shareholders to identify cross-shareholdings and any
possible pyramid holding structures affecting voting rights.
The legal and regulatory framework requires or encourages companies to:
ƒ Disclose on a continuing basis to shareholders of all capital structures that allow certain shareholders to exercise a
degree of control disproportionate to their cash flow rights. These would include, inter alia, voting caps, multiple voting
rights, golden shares, pyramid structures and any associated cross shareholdings. Two kinds of shares are used,
common shares, each of which has one vote, and preferred shares, which may not have voting rights (preferred shares
are, however, rarely used in practice). Company law prohibits more than half of a company’s shares to be non-voting.
Public companies may not issue preferred shares with multiple voting rights (Art. 111 (4) LPOS). “Golden shares” do
exist, even if or because they are not expressly regulated by the legal and regulatory framework. Art. 148a (1) LPOS
requires that shareholders, who reach, exceed, or fall under 5 percent of ownership, to also disclose any cross
shareholding arrangements they may have that would indirectly allow them to cross the above-mentioned threshold.
ƒ Disclose the structure of company groups and the nature of material intra-group relations. Art. 148b LPOS determines
that any public company shall disclose publicly under the terms of Article 100r LPOS the information provided with the
notifications by the persons under Article 145 and Article 146 LPOS within three working days from notification thereof.
ƒ Disclose shareholder agreements 15 by either the company or the shareholders concerned covering, inter alia, lock-ins,
selection of the chairman and board members, block voting and right of first refusal. This is not expressly regulated in
the legal and regulatory framework.
ƒ Ensure that disclosures are made in an easy to access manner and easy to use format so that interested persons can
obtain a clear picture of the relevant capital structures and other arrangements. Information is updated on a timely basis
if there is any change. Beneficial ownership structures, as will be discussed in more detail in Section V.A.3, is still
difficult to determine despite the best efforts of the regulator, largely due to difficulties of obtaining information from
entities registered in offshore jurisdictions.
The implementation and enforcement of the corporate governance framework: Golden shares do exist in practice, if
only in a limited number of cases, for example in Bulgaria Air, Neftochim and Bulgaria Telecom.

Recommendations:
10. The LPOS should require or, at a minimum, the NCGC should encourage the disclosure of shareholder
agreements and similar structures.
11. The governance framework should require or encourage both companies and the shareholders in question to
disclose beneficial ownership structures.

Principle II.E: Markets for corporate control should be allowed to function in an efficient and transparent manner.

Principle II.E.1: Transparent and fair rules and procedures governing acquisition of corporate control

Assessment: Fully implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle II.E. was largely observed in 2002.
In summary, changes in control of a public company were regulated by the LPOS, which required that a person who had
directly or indirectly acquired more than 50 percent of votes to register with the regulator and, within 14 days, make a tender
offer for the outstanding shares or reduce the holding to less than 50 percent. The price of the tender offer was not to be
lower than the average share price over the prior three months, or in the absence of any trading, the highest price offered by
the offeror over the prior six months. The LPOS also required that the offeror treat all shareholders equally. The offeror thus
had to provide sufficient time and information to shareholders allowing them to evaluate the offer and make a reasonable
decision as to whether or not to accept. The company’s management had to, within three days of receiving the offer,
express an opinion to the regulator and offeror, with the interests of the company, its shareholders, and employees at the
forefront. The key policy recommendation focused on providing shareholder with an approval right for anti-takeover devices.
The legal and regulatory framework requires:
ƒ Timely disclosure to shareholders and the regulator of a substantial acquisition of shares in order to prevent creeping
acquisition of corporate control, often in the form of thresholds. According to Art. 145 (1) LPOS, any shareholder, who
acquires or disposes of voting rights in the GSM of a public company, directly or indirectly (as previously discussed, Art.
146 LPOS covers the case of indirect control through common agreement or through joint exercise of the voting rights
between several parties), is obliged to notify the FSC and the public company when: (i) as a result of the acquisition or
the disposal his voting rights reach, exceed, or fall below 5 percent (or a number divisible by 5 percent) of the voting

15
An agreement between shareholders on the administration of the company. Shareholder agreements typically cover rights of first
refusal and other restrictions on share transfers, approval of related-party transactions, and director nominations.

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rights in the GSM; and (ii) his voting rights reach, exceed, or fall below the thresholds provided for in (i), as a result of
events changing the breakdown of voting rights. This effectively allows for the company and FSC to detect creeping
changes of control.
The legal and regulatory framework also protects shareholders during takeovers through mandatory bids. More
specifically, Art. 149 LPOS requires for a person, who acquires directly or through related parties more than 50 percent
of the votes in the GSM, to, within 14 days from the acquisition: (i) register with the FSC a tender offer to the remaining
shareholders to purchase their shares; or (ii) transfer the necessary number of shares so that he can hold directly or
through related parties less than 50 percent of the votes in the GSM. Of note is that these rules also apply to separate
persons who, inter alia, hold more than 50 percent of the voting shares and have concluded an agreement to control the
management of the company through joint exercise of their voting rights.
The legal and regulatory framework has set a number of additional rights and responsibilities during takeovers. More
specifically:
‐ Shareholders who acquire more than one-third of the votes of the GSM are allowed to offer to buy-out the
remaining shareholders (Art. 149b LPOS), who are free to accept this offer or to keep their shares;
‐ Shareholders who acquire more than two-thirds of the votes of the GSM are again required to submit a mandatory
bid for the remaining shares (Art. 149 (6) LPOS).
‐ Shareholders who acquire more than 90 percent of the votes of the GSM are provided the right to register a tender
offer for purchase of the shares held by the rest of the shareholders.
‐ Shareholders who acquire more than 95 percent of the votes of the GSM are provided a “squeeze-out” right, i.e.
are allowed to force the remaining shareholders out (Art. 157a LPOS); Article 157b LPOS in turn provides
shareholders with a “sell-out” right, allowing any shareholder to require from the person who has acquired directly,
through related parties or indirectly at least 95 percent of the votes in the GSM as a result of tender offer to
repurchase his or her voting shares within three months from the deadline of the tender offer—in-line with good
practice.
ƒ That the plans and financing of the transaction are clearly known to both the shareholders of the offering enterprise
when it is a public company as well as to those of the target company, underpinning price transparency and fair
conditions in the market for corporate control. There is sufficient time and information for shareholders to make an
informed decision. The LPOS provides detailed rules on determining the price of tender offers. In summary, the price
cannot be lower than the highest value among: (i) the fair price of the shares as calculated on the basis of generally
accepted valuation methods and as set out in Ordinance No. 13 of December 22, 2003 on a Tender Offer for Buying and
Exchange of Shares (Ordinance No. 13); (ii) the average weighted market price of the stocks for the last three months;
or (iii) the highest price for one share, paid by the offerer, by the persons related to him or by related parties during the
last six months before the registration of the tender offer.
Of note is that if, before expiration of the term for the tender offering, the tender offeror acquires directly, through related
parties, or indirectly shares with voting rights attached to them in the GSM that were subject to the tender offering for a
price higher than the one offered in the tender offering, the offeror shall be obliged to increase the offered price to the
higher one.
The rules of Chapter 11, Section II LPOS (Art. 148g – 157e LPOS) and Ordinance No. 13 furthermore ensure that
shareholders of a particular class are treated equally (see Art. 151 (1) 1. LPOS) in the same manner as controlling
shareholders in terms of the price they receive for their shares, and that the market in corporate control, as well as the
procedures to be followed in the event of de-listing, are well articulated and fair.
The implementation and enforcement of the corporate governance framework: The rules and procedures governing
acquisition of corporate control appear to be followed in practice, although the market for corporate control is generally
thought to be under-developed.

Recommendations:
--

Principle II.E.2: Anti-take-over devices

Assessment: Fully implemented

Summary of findings and recommendations from the 2002 CG ROSC: The LPOS stipulated that during the offer period,
the company was not to issue securities that could be converted into voting shares, to redeem shares, make agreements
that would make significant changes to the company’s property, or otherwise attempt to frustrate the acceptance of the offer
or create significant obstacles or additional costs to the offeror. The 2002 CG ROSC noted that the market for corporate
control in Bulgaria was also substantially inhibited by the low levels of liquidity on the BSE.
The legal and regulatory framework:
ƒ Ensures for a well defined concept of the duty of loyalty owed by the company’s board members and officers to the

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company and shareholders generally, which in the case law or jurisprudence of the jurisdiction extends to the
consideration of a take-over proposal received by the company. The legal and regulatory framework defines the
concept of the duty of loyalty by directors and managers to the company and all of its shareholders (see Art. 237 CA)
and, specific to takeover bids, calls for the management bodies to act in the best interest of the company as a whole,
without preventing the shareholders from the possibility to take decision on the substance of the tender offer. Further,
the CA mandates that shareholders be provided with sufficient time and information to allow them to make an informed
assessment of the offer and a reasoned decision regarding acceptance of said offer.
The implementation and enforcement of the corporate governance framework: Anti-takeover devices, such as “poison
pills” or “golden parachutes”, are not known to the Bulgarian market.
Recommendations:
12. The NCGC should recommend that companies only be allowed to institute anti takeover defenses with
shareholder approval.

Principle II.F: The exercise of ownership rights by all shareholders, including institutional investors, should be
facilitated.

Principle II.F.1: Disclosure of corporate governance and voting policies by institutional investors

Assessment: Not Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle II.F. was deemed to be not
observed in 2002, largely because of the absence of institutional investors in Bulgaria and because on the whole
shareholders did not systematically evaluate the costs or benefits of exercising their voting rights.
The legal and regulatory framework:
ƒ Requires or encourages companies to adopt procedures to determine voting rights that are not considered by investors,
both domestic and foreign, to constitute a disincentive to the exercise of ownership rights. Companies are not required
or encouraged to ensure that institutional investors participate in the GSM by encouraging them to vote or, at a
minimum, not to adopt any procedures that would be viewed as a disincentive for them to exercise their vote.
ƒ The legal and regulatory system, including court rulings, clearly recognize the duty of institutional investors acting in a
fiduciary capacity to consider whether and under what conditions they should exercise the voting rights attaching to the
shares held on behalf of their clients. Institutional investors have no general obligation to vote by law, nor are they
encouraged to do so by the NCGC or regulators.
ƒ The corporate governance framework requires or encourages the disclosure of voting policies and of the procedures in
place to decide on the use of these rights. The legal and regulatory framework does not require institutional investors to
vote, or to disclosure their voting policies or actual voting.
The implementation and enforcement of the corporate governance framework: As mentioned in the introductory
section, institutional investors tend to play a passive role in exercising the voting rights, largely due to the costs vs. benefits
of voting in the current environment of concentrated ownership.

Recommendations:
13. The FSC should consider mandating or encouraging institutional investors to develop and disclose their voting
policies, as well as to actually vote during GSM meetings.

Principle II.F.2: Disclosure of management of material conflicts of interest by institutional investors

Assessment: Partially implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle II.F. was deemed to be not
observed in 2002, largely because of the absence of institutional investors in Bulgaria.
The legal and regulatory framework requires or encourages institutional investors to:
ƒ Develop a policy for dealing with conflicts of interest that may affect their decisions regarding the exercise of key
ownership rights. Institutional investors are not required to develop a policy for dealing with conflicts of interest.
ƒ Disclose the policy to their clients together with the nature of the actions taken to implement the policy. While
institutional investors are not required to develop and then disclose their policy for dealing with conflicts of interest, they
are required to disclose (potential) conflicts of interest as per Art. 20 Law Against Market Frauds with Financial
Instruments (LAMFFI).
The implementation and enforcement of the corporate governance framework: Given that institutional investors are
relatively new to Bulgaria, there is little practice that can be referred to.

Recommendations:

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14. The FSC should consider strengthening the legal and regulatory framework with respect to institutional
investors, requiring them to develop and disclose their policies on conflicts of interest.

Principle II.G: Shareholders, including institutional shareholders, should be allowed to consult with each other on
issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent
abuse.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Because this Principle II.G. was added in 2004,
it was not part of the 2002 CG ROSC assessment.
The legal and regulatory framework requires or encourages companies to:
ƒ The corporate governance framework establishes clear rules for proxy solicitation which are not so encompassing as to
prevent shareholders consulting with each other over the use of their basic rights, for example, to elect and remove
board members. The legal and regulatory framework with respect to proxy solicitation is clear and does not appear to
obstruct the ability of shareholders to consult with each other on the execution of their basic shareholder rights.
ƒ Market trading rules should prevent market manipulation but still be flexible enough to permit and encourage
consultations between shareholders. The BSE’s listing rules do not appear to obstruct the ability of shareholders to
consult with each other on the execution of their basic shareholder rights.
The implementation and enforcement of the corporate governance framework: Given the ownership concentration in
Bulgaria, there does not appear to be much demand for institutional or other shareholders to consult with one another,
although this will likely occur over time as the market continues its trend of dispersed ownership.

Recommendation:
15. The NCGC should encourage shareholders to consult with one another, in particular when electing directors to
the board under cumulative voting.

Section III: The Equitable treatment of Shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority
and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of
their rights.

Principle III.A: All shareholders of the same series of a class should be treated equally.

Principle III.A.1: Equality, fairness and disclosure of rights within and between share classes

Assessment: Fully Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle III.A. was described as largely
observed in the 2002 CG ROSC. Indeed, both the CA and LPOS required that shareholders of the same class be treated
equally. The CA further regulated that the company’s articles of association specify the rights of shareholders of each class,
thus requiring that information regarding the rights of the class be available to all shareholders. Under the CA, any changes
to the voting rights of a shareholder class had to require an amendment to the company’s articles, thus requiring a two-thirds
majority vote of the GSM.
The legal and regulatory framework requires or encourages:
ƒ That proposals to change the voting rights of different series and classes of shares should be submitted for approval at a
GSM by a specified majority of voting shares in the affected categories. Art. 181 (3) CA regulates that the shares
providing equal rights form a separate class, and that restriction of the rights of individual shareholders of one class shall
not be allowed. Where a proposed resolution at the GSM affects the rights of a class of shareholders, the voting shall
be in classes, whereas the requirements for quorum shall apply for each class individually. For example, for a GSM to
adopt a resolution concerning the rights of preferred shareholders, it shall be necessary to obtain the consent of the
preferred shareholders first, which shall convene separately (Art. 182 (5) CA).
ƒ Companies to disclose sufficient, relevant information about the material attributes of all of the company’s classes and
series of shares on a timely basis to prospective investors so that they can make an informed decision about whether or
not to purchase shares. Companies, when issuing shares with special rights, must disclose this in their articles of
association (Art. 181 (3) CA). The same is the case for publicly listed companies, which are required to disclose
material information regarding the company’s different classes of shares to prospective investors when these classes of
shares are to be admitted to trading for the first time (Art. 92a (6) LPOS). Art. 111a LPOS further specifies that any
public company shall disclose any changes in the rights of separate classes of shares.

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More broadly, there are only limited restrictions on foreigners holding shares in “strategic” sectors. Indeed, while Bulgaria
does not compare well with some other EU countries in terms of legal restrictions on foreign equity participation of firms in
the telecommunications and airline sectors (Figure 9), these barriers are in-line with those in the EU—for example the 49
percent foreign ownership ceiling in the airlines sector is standard across EU countries. Overall, Bulgaria does not
discriminate against foreign firms (Figure 10). The rights of foreign firms in Bulgaria to appeal and redress through
competition agencies, regulatory bodies, trade policy bodies, or private rights of action is equal to those of domestic firms.

Figure 9 Foreign ownership barriers Figure 10. Discriminatory Procedures against

foreign firms

Source: Policy Research Working Paper 4393 on Product Market

Source: Policy Research Working Paper 4393 on Product Market
Regulation in Bulgaria: A Comparison with OECD Countries; Fay,
Regulation in Bulgaria: A Comparison with OECD Countries; Fay,
De Rosa, Ilieva, Nov. 2007.
De Rosa, Ilieva, Nov. 2007.

The implementation and enforcement of the corporate governance framework: Practice does not appear to diverge
from the legal and regulatory framework on this matter.

Recommendations:
--

Principle III.A.2: Minority protection from controlling shareholder abuse; minority redress

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Derivative legal actions were permitted in 2002,
as shareholders with 5 percent of the company’s share capital could take action against the company’s directors to obtain
compensation for losses suffered by the company. Shareholders also had the right to sue under the commercial court for
violations of their rights, including for decisions taken by the company’s management board. In addition under the Law on
Obligations and Contracts, shareholders were allowed to sue a director for losses causes by the director, if the losses were
the direct result of the director’s actions. On the other hand, there were no provisions for class actions lawsuits.
The courts were generally considered slow in rendering a decision and the lack of accepted industry practices made such
cases difficult to adjudicate. Arbitration was not commonly used in 2002, however, the regulator could initiate investigation
of its own accord or upon the request of third parties. In cases of non-compliance or violation of the LPOS by market
participants, the regulator could issue warnings, halt trading, publicize cases of abusive practices, and apply fines.
The legal and regulatory framework:
ƒ Provides ex-ante mechanisms for minority shareholders to protect their rights. The legal and regulatory framework
provides for a series of ex ante protective measures, not least the aforementioned preemptive rights and ability for
shareholders with 5 percent of capital to call a GSM. Moreover, qualified and super-majority voting on key issues, in
particular:
‐ A qualified, two-thirds voting majority is required for resolutions on, inter alia: (i) share buy-backs (Art.187 (2) CA);
(ii) the restriction or cancellation of preemptive rights (Art. 194 (4) and 196 (3) CA); (iii) amendments to the articles
of association; (iv) increasing and decreasing of the capital stock; and (v) dissolution of the company.
‐ A qualified, three-fourth voting majority is required for resolutions on, inter alia: (i) restrictions of the rights of
preferred shareholders (Art. 182 (5) CA); (ii) explicitly authorizing the managing organs of a public company to
conduct extraordinary transactions (Art. 114a (2) LPOS); and (iii) the transformation of the company (Art. 262n (3)
CA).
‐ Unanimity, with a blocking quota of one share, exists only when: (i) additional items are to be placed on the
agenda of the GSM which were not previously announced (Art. 231 (1) CA); and (ii) the decision of the company’s
founders to constitute the company and pass the articles of association.
ƒ Provides ex-post sanctions against controlling shareholders for abusive action taken against them. Shareholders are
able to take legal action if they are not allowed to vote in a GSM; the affected shareholder can seek redress before the
court in accordance with Art. 74 CA. Art. 240a CA states that shareholders holding at least 10 percent of the company's

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equity may file a claim against directors (and managers) for damages caused to the company. Art. 118 (2) 1. LPOS in
turn allows any shareholder(s) holding at least 5 percent to bring before the district court the actions of the company for
indemnification of any detriment inflicted on the company, willfully or by gross negligence, through acts or omissions by
directors or managers.
16
Shareholders have no special rights to sell back their shares to their company (so-called withdrawal rights) , save for
the above-mentioned “sell-out” right.
The implementation and enforcement of the corporate governance framework: While minority shareholder abuses
were commonplace not ten years ago, today, the implementation and enforcement of the above mentioned corporate
governance provisions to protect minority shareholders are in place and enforced. However, because many minority
shareholders are unaware of their rights, or are so dispersed vis-à-vis a single controlling shareholder, action is seldom
taken in practice.

Recommendations:
16. The FSC should launch an investor education program with a particular focus on educating minority
shareholders of the rights accorded to them in the CA and LPOS. The NCGC could, in this respect, also
recommend for companies themselves to help educate their shareholders, for example, by issuing information
sheets describing their rights and “obligations”.
17. The NCGC should recommend that companies adopt withdrawal right, i.e. allowing shareholders to sell back
their shares to the company when certain fundamental changes take place in the company.

Principle III.A.3: Custodian voting by instruction from beneficial owners

Assessment: Not implemented

Summary of findings and recommendations from the 2002 CG ROSC: In 2002, ownership through nominees or
custodians was rarely the case in Bulgaria. Unsurprisingly, there were no specific requirements to ensure that votes by
custodians or nominees were cast in a manner agreed upon with the beneficial owner of the shares and there were no
requirements for broker-dealers (acting as nominees and custodians of their customers’ shares) to request that the
beneficial shareholders send voting instructions.
The legal and regulatory framework:
ƒ (Or private contracts) establish that the relationship between custodians and nominees, and their clients makes clear:
(a) the rights of beneficial shareholders to direct the custodian or nominee as to how the shareholder’s vote should be
cast; (b) that votes will be cast in accordance with any instructions provided by the beneficial shareholder; and (c) the
custodian or nominee will disclose to the shareholder how they would vote shares for which no instructions were given.
A number of investors dating back to mass privatization continue to have their shares held directly by the CDAD, which
means that they are unable to provide voting instructions or receive dividends. On the other hand, those that do have
their shares with custodians do not have clearly defined relationship as to how they vote their shares.
ƒ Requires that depositary receipt holders can issue binding voting instructions on all issues with respect to their shares to
depositaries, trust offices or equivalent bodies. Holders of depository receipts have the same rights as other
shareholders whose shares are held by a custodian or other financial institution.
The implementation and enforcement of the corporate governance framework: There is little to no practice of
custodians voting shares on behalf of shareholders.

Recommendations:
18. The FSC, or relevant authority, should ensure that custodians vote on behalf and under the instruction of the
beneficial owner. The same should hold true for depositor receipt holders.

Principle III.A.4: Obstacles to cross border voting should be eliminated

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The 2002 CG ROSC did not make reference to
Principle III.A.4.
The legal and regulatory framework:
ƒ Clearly specifies who is entitled to control the exercise of voting rights attaching to shares held by foreign investors

16
Withdrawal rights (referred to in some jurisdictions as the “dissenters”, “oppressed minority,” “appraisal” or “buy-out” remedy) give
shareholders the right to have the company buy their shares upon the occurrence of certain fundamental changes in the company.

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through a chain of intermediaries and, if necessary, simplify the effect of the chain in the jurisdiction. The legal and
regulatory framework in Bulgaria does not currently specify who is entitled to control the exercise of voting rights
attached to shares held by foreign investors through a chain of intermediaries.
ƒ Requires or encourages companies to provide sufficient notice of meetings to enable foreign investors to have
opportunities similar to those of domestic investors to exercise their voting rights. As previously mentioned, the notice
periods are well in-line with good practice and thus provide ample time for foreign investors to vote their shares. Of note
is that custodians are not required to inform shareholders, including foreign shareholders, of the GSM.
ƒ Companies are required or encouraged to make use of secure and effective processes and technologies that facilitate
voting by foreign investors. Foreign shareholders may vote by proxy or through their custodian in the same manner as
domestic shareholders. And as previously mentioned, the NCGC recommends for companies to use electronic voting.
The implementation and enforcement of the corporate governance framework: There is little evidence to suggest that
practice grossly diverts from the legal and regulatory framework. However, the lack of electronic voting in practice and the
requirements by some companies for notarization of proxies may limit foreign participation, although this should not be seen
as an impediment given the lengthy notification period.

Recommendations:
19. The FSC should ensure that the legal and regulatory framework specifies who is entitled to control the exercise
of voting rights attached to shares held by foreign investors.

Principle III.A.5: Equitable treatment of all shareholders at the GSM

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The 2002 CG ROSC did not make reference to
Principle III.A.5.
The legal and regulatory framework requires or encourages companies to:
ƒ Facilitate voting by minimizing the costs involved to shareholder. Neither postal nor electronic voting is currently
regulated. However, Chapter Three, 2.1.5. NCGC recommends for the (supervisory) board to take action to encourage
the participation of all shareholders at the GSM, including those who cannot make it physically, by allowing the use of
information technology (including the internet) whenever possible and necessary.
ƒ Use voting methods at the GSM that ensure the equitable treatment of shareholders. As previously discussed, voting
methods at the GSM do ensure for the equitable treatment of shareholders, in particular with respect to placing items on
the agenda, participating in the discussion, and in counting votes. On the other hand, how voting is conducted, i.e. by
show of hands or by an independent counting commission appointed by the GSM, is not regulated in the law, but left for
the companies to regulate in their articles of association.
ƒ Make voting results available to shareholders on a timely basis. Results of the decisions made at the GSM are
recorded in the minutes (Art. 232 (1) 5. CA), notarized if so wished, and made available to shareholders upon demand
for up to five years.
The implementation and enforcement of the corporate governance framework: The practice does not appear to
diverge in a material manner from the above-mentioned legal and regulatory framework, save for the fact that companies do
not facilitate electronic voting, although this arguably comes at too high of a cost for most Bulgarian companies at their
current stage of development.

Recommendations:
20. The NCGC should provide guidance on how best to carry-out voting.

Principle III.B: Insider trading and abusive self-dealing should be prohibited.

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle III.B. was considered largely
observed by the 2002 CG ROSC. The legal and regulatory framework, in particular the LPOS and RR-BSE, provided 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 a false perception of the prices or volume of
traded securities. An insider was defined and included members of management (board) and (supervisory) boards, persons
holding 10 percent of the shares of a company (directly or through related parties) or persons who due to their profession,
activities, duties, or relations of connection with a traded company had access to privileged information. Insider trading and
market manipulation were only subject to civil sanctions and did not carry criminal liability. In 2002, a number of market
participants complained that information regarding tender offers was distributed slowly, allowing for insider trading.
Because investigations could only be initiated by the BSE, which only had the authority to control its members, i.e. broker-

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dealers and other market participants, the 2002 CG ROSC recommended that investigations would be more effective if
initiated by the regulator as well. A second policy recommendation was to consider criminalizing insider trading and abusive
self-dealing.
The legal and regulatory framework:
ƒ Prohibits improper insider trading and similar abusive conduct by insiders such as market manipulation. Chapter VII
LAMFFI regulates that an insider shall be prohibited from: (i) transferring for his own account or for the account of a third
party the securities to which the inside information possessed by him relates; (ii) transmitting the inside information
possessed by him to a third party not having the capacity of an insider without the consent of the GSMto which such
inside information relates; and (iii) recommending that a third party, on the basis of the inside information possessed by
him, acquire or transfer for that party’s own account or for the account of someone else the securities to which the
inside information possessed by the insider relates (Art. 8 LAMFFI) The prohibition also applies to any person who, not
being an insider, with full knowledge of the facts, possesses inside information stemming directly or indirectly from an
insider. Any person entering into transactions in securities traded on the BSE must declare before the investment
intermediary whether s/he possesses inside information. The system for disclosure of information should guarantee
equal access to information to shareholders, investors, and other stakeholders, and should not allow for any abuse of
internal information or insider trading.
ƒ Defines insider trading in a manner that is not so narrow as to be easily evaded. The legal and regulatory framework
defines an insider as any person who possesses inside information by virtue of his membership in the management
(board) or (supervisory) board of the issuer, or by virtue of his holding in the capital or the votes in the GSM of the
issuer, by virtue of his having access to the information through the exercise of such person's employment, profession,
or duties, or by virtue of his criminal activities, or in any illegal way (Art. 8 (1) LAMFFI).
ƒ Provides for continuous collection and analysis of trading data (e.g. by the stock exchange, the regulator) and timely
reporting by insiders (including board members, senior officers and significant shareholders) of transactions (either
direct or indirect) in listed companies’ securities. Today, both the FSC and BSE collect and analyze trading data and
reporting by insiders with a view towards detecting suspicious trades.
ƒ Provides effective protection for investors against abusive self-dealing by insiders. LAMFFI penalizes the misuse of
internal information, and insider trading is subject to an administrative sanction ranging from BGN 2,000 to 15,000. The
penalty imposed on legal persons ranges from 10,000 to 50,000 BGN. The FSC institutes and conducts an
administrative proceeding concerning the insider trading irrespective of an offender. Of note is that the FSC as an
ordinary member of IOSCO and as such is required to follow IOSCO’s recommendations about insider trading. Insider
trading is not a criminal offence.
The implementation and enforcement of the corporate governance framework: The legal and regulatory framework for
insider trading is relative new and there are only few cases in which the FSC has taken action against insiders. In 2007, for
example, the FSC fined employees and managers of approximately 20 investment intermediaries and public companies for
insider trading abuses.

Recommendations:
21. The FSC may consider implementing the 2002 CG ROSC recommendation to criminalize insider trading and
abusive self-dealing.

Principle III.C: Members of the board and key executives should be required to disclose to the board whether they,
directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly
affecting the corporation.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle III.C. was thought to be not
observed by the 2002 CG ROSC. Neither the CA nor the LPOS required that company management or members of the
(supervisory) board to disclose any material interests they had in transactions or matters affecting the corporation.
Anecdotal evidence suggested that it was not uncommon for members of the (supervisory) board to hold the position of
executive manager of the company’s suppliers. The key policy recommendation proposed changes to the LPOS to provide
that all transactions between the company and “interested persons” should be executed at “fair” prices and that such
transactions should be approved by the (supervisory) board, with shareholder approval required for transactions that were
also considered to be extraordinary.
The legal and regulatory framework requires or encourages:
ƒ Board members and key executives to disclose on a timely basis to the board that they, directly or indirectly, have a
material interest in a contract or other matter affecting the company. A person nominated to become a (supervisory)
board or management board member is required to, prior to his election, notify the GSM, or the supervisory board, as
the case may be, of his participation in any companies as an unlimited liability partner, or holding over 25 percent of the
equity in any other company, and of his participation in the management of other companies or cooperatives as a

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procurator, manager, or board member. Moreover, these same disclosure obligations are obligatory once the same
person has been formally elected (see Art. 237 (3) CA). Article 116b LPOS further regulates that the members of the
management and (supervisory) board of any public company are required to avoid direct or indirect conflicts between
their own interest and the interest of the company or, should any such conflicts arise, disclose said conflicts promptly
and fully in writing to the competent body and not participate or exert influence on the rest of the board members in their
decision-making, in-line with good practice.
The implementation and enforcement of the corporate governance framework: A number of interlocutors cited that
transactions between conflicted or related parties were still prevalent, despite a relatively robust legal and regulatory
framework in this respect.

Recommendations:
22. The FSC will wish to stringently enforce related party transactions, in particular with respect to the disclosure
of interests by (supervisory) board members and managers, and to focus on such transactions carried out by
holding companies as well as companies that are on the Unofficial Market.

Section IV.: The Role of Stakeholders in Corporate Governance

The corporate governance framework should recognize the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.

Principle IV.A: The rights of stakeholders that are established by law or through mutual agreements are to be
respected.

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle IV.A. was rated as “partially
observed” in 2002. On the one hand employees under the 2002 legislation had rights with regard to protection against
unfair dismissals, and disclosure of information regarding unlawful or irregular conduct. On the other, there were no legal
requirements that employees or their representatives be consulted prior to a corporate merger or restructuring. The policy
recommendation focused on modernizing labor legislation in-line with EU standards.
The legal and regulatory framework requires or encourages companies to:
ƒ Protect the rights and interests of employees as determined by law. For companies with more than 50 employees, Art.
220 (3) CA states that employees are to be represented in the GSM by an individual with a consultative vote. The GSM
is further only allowed to adopt resolutions on labor and social issues after hearing the position of the designated
employee representative. Art 7 (1) LC further calls for employees to participate in discussing and resolving enterprise
management issues through a designated representative—when provided for by law. The Law on Informing and
Consulting Workers and Employees in Multinational Enterprises, Groups of Enterprises, and European companies,
implemented in response to the Council Directive 94/45/EC on the establishment of European Works Councils, provides
for such interaction and aims to ensure for the right of employees and workers to participate in the management of
companies.
Further, Art. 607 CA states that bankruptcy proceedings shall take into consideration the interests of, inter alia,
employees; and Art. 687 provides for the claims of a worker or employee arising from a labor relationship with the
debtor to be entered proprio motu (“on their own accord") by the trustee in bankruptcy in the list of accepted claims.
Finally, Art. 722 CA calls for claims by employees to be satisfied as a fourth priority
Art. 5 LC generally accords workers the right to unionize, and these unions are mandated to represent and protect the
interests of employees through collective bargaining agreements and before the courts (see also Art. 45 LC), as well as
participate in the National Council of Tri-Partite Cooperation (a national body composed of representatives from the
state, employers’ and employees’ associations to discuss and decide on issues of common interest). The Labor Code
(LC) further provides employees with a number of specific rights, for example in the area of:
(i) Health, safety and environment, for example, with Art. 127 (1) LC and Art. 275 LC mandating the employer to
provide safe and healthy working conditions; Art. 136 LC limiting the duration of the working week to five work
days per week totaling 40 hours and not more than eight hours per day; and Art. 140 LC regulating night work,
e.g. prohibiting night work for employers under 18 or pregnant female employees. The Bulgarian National
Assembly further passed the Law for Health and Safe Labor Conditions, which contains a number of additional
provisions on the issue of health, safety, and environmental issues for employees.
(ii) Women’s rights, inter alia, granting 135 days of leave for pregnancy and birth (see Art. 163 LC); providing for
two years of leave for woman to raise their children (see Art. 164 LC); and providing woman with a right to
equal remuneration for same or equivalent labor (see Art. 243 LC);
(iii) Children’s rights, in particular forbidding child labor under 16 years of age (see Art. 301 LC) and regulating the

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employment of persons aged between 16 and 18 (Art. 303).

Chapter Eighteen of the LC regulates labor disputes, providing for proceedings in labor cases that are free of charge for
employees (Art. 359 LC) and Section II LC provides for various administrative penalties for violations against labor
legislation, for example, Art. 413 LC, which penalizes employers or officials who fail to perform their obligations to
provide for a safe and healthy work environment.
ƒ Protect the interests of other stakeholders. The NCGC has an entire Chapter dedicated to stakeholders. Chapter Five,
1. NCGC generally calls for the company to identify its key stakeholders and to ensure for effective interaction with
these stakeholders. Chapter Five, 3. NCGC calls for the (supervisory) board to establish specific rules for addressing
the interests of stakeholders and ensuring for appropriate stakeholder engagement when they take decisions that are
likely to affect their interests. Finally, Chapter Five, 4. calls on the (supervisory) board to support effective stakeholder
participation in accordance with the law and international good practices in matters of non-financial information
disclosure and reporting, in particular with respect to economic, social, and environmental issues of concern to
stakeholders.
The implementation and enforcement of the corporate governance framework: The unions for the most part are
thought to actively solve labor disputes. The Confederation of Independent Trade Unions in Bulgaria and the Confederation
of Labor “Podkrepa”, for example both share common goals–delivering economic growth, improving competitiveness, and
protecting the rights of workers–and play an active role in protecting the rights and interests of their members, in particular
with respect to signing collective labor agreements.
Companies themselves are also becoming increasingly active, and a number of companies have voluntarily carried-out
initiatives to demonstrate corporate social responsible behavior, directed towards: (i) the company’s personnel, specifically
with respect to improving worker qualifications; (ii) the protection of human rights, in particular with respect to forced and
child labor; and (iii) protecting the environment. Larger companies have furthermore established special Work Conditions
Committees and Work Medicine Offices to improve work conditions and protect their employees. It appears that some of
the larger companies have even adopted voluntary codes for corporate social responsibility. And even smaller firms, with
less than 100 employers, are known to offer training and qualification courses for their workers and employees. However,
while management generally addresses questions evolving around stakeholder issues, it is not evident that (supervisory)
boards proactively address risks in relation to stakeholder issues. In summary, the legal and regulatory framework with
respect to stakeholder rights, at least with respect to employees, appears to be in-line with good practice.

Recommendations
1. The FSC will wish to carefully monitor disclosure with respect to the implementation of Chapter Five, 3. NCGC,
which calls for the (supervisory) board to establish rules on how it plans on addressing stakeholder interests.

Principle IV.B: Where stakeholder interests are protected by law, stakeholders should have the opportunity to
obtain effective redress for violation of their rights.

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Principle III.B. was partially observed in 2002.
Stakeholder whose constitutional rights were violated were able to appeal to the court for redress; however, the judiciary
system was generally considered to be slow in resolving disputes between employees and employers, as well as other
disputes between the company and its stakeholders. The policy recommendation in 2002 was to modernize labor
legislation in line with practices in the region and with a view towards complying with EU standards.
The legal and regulatory framework requires or encourages the public sector to:
ƒ Develop effective mechanisms for enforcing the legal rights of stakeholders. As previously noted, a number of
important changes have been made to Bulgaria’s LC to bring it in-line with EU standards. With respect to providing
effective legal redress, the legal and regulatory framework does provide for the enforcement of established legal rights
for various stakeholders, in particular employees. For example, Art. 45 LC calls for unions to protect the interests of
employees by representing them before courts. Chapter Ten, Section III of the LC provides for financial penalties for
different violations of employees’ rights and employees are able to file a claim before a court should the employer fail to
meet their obligations towards them, e.g. with respect to compensation (see Art. 213, 214, 219, 220, 221, 222, 225, and
226 LC); the same holds true for unlawful dismissals as per Art. 344 LC.
The implementation and enforcement of the corporate governance framework: As previously mentioned, the rights of
employees are generally protected by the trade unions, and these unions do effectively protect the interests of its members
through collective bargaining agreements. Arbitration for labor issues is offered to the unions representing employees and
employers through the National Council of Tri-Partite Cooperation, but not for individual employees. Employees are known
to file suits against companies, yet such cases are commonly limited to disputes regarding employment termination, in which
employees demand from the court to repeal their dismissal or to award compensation for damages, as provided for by the
LC. Today, labor disputes are thought to be settled rather efficiently, typically within eight to ten months.

Recommendations

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--

Principle IV.C: Performance-enhancing mechanisms for employee participation should be permitted to develop.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle III.C. was deemed to be partially
observed in 2002. Although the practice of performance enhancing mechanisms, including employee stock option plans
(ESOPs), was as such not forbidden under Bulgarian legislation in 2002, few Bulgarian companies provided performance
enhancing mechanisms to their employees. The policy recommendation formulated in the 2002 CG ROSC was to
encourage companies to use performance-enhancing mechanisms for their employees, and to conduct a study of the costs
and benefits of various performance-enhancing mechanisms, including stock options, for managers and employees.
The legal and regulatory framework requires or encourages companies to:
ƒ Develop different forms of employee participation, including financial participation. The legal and regulatory framework
remains silent on allowing performance enhancing mechanisms for employees. This is, however, not unusual, and
most company or security laws limit regulation in this area to the public disclosure of or tax breaks for such incentive
schemes (e.g., should a company decide to offer its management and employees an ESOP). Of note is that Ordinance
No. 2 does repeatedly refer to the disclosure of ESOPs, for example, in Annex 2 to Art. 3, (3)1. B. 5. 5.3 c) bb).
Moreover, the NCGC (see Chapter One, 4.3.) recommends that, in addition to a fixed compensation, the company may
also offer shares, options on shares, and other appropriate financial instruments, and that these be set-out in the
company by-laws.
ƒ Companies to establish funds. In Bulgaria, there is no legal or regulatory provision that either requires or encourages
companies to establish funds on a participatory basis with employees. Good practice would call for these funds to be
overseen by trustees capable of exercising judgment independent of the company and charged with the task of
managing the fund in the interest of all beneficiaries.
The implementation and enforcement of the corporate governance framework: It is still uncommon for companies in
Bulgaria to offer performance enhancing mechanisms, although a few of the larger companies, in particular with foreign
ownership, have introduced ESOPs, for example, Hewlett Packard and Bulgaria Avtomotor Corporation in 2007. Because
the legal and regulatory framework does not allow for salaries to be reduced without the agreement from employees and
their unions, a number of companies have decline to increase wages and, instead, have introduced a bonus system tied to
employee or management, as well as corporate performance. However, such employee incentive systems, not to mention
ESOPs, are still in its infancy.

Recommendations:
2. The NCGC should be amended to include a brief discussion on the advantages and disadvantages of ESOPs
and other performance-enhancing mechanisms for employees. In this context, the NCGC may wish to recommend
that any ESOPs are restricted and that such incentive schemes are formed to induce long-term behavior.

Principle IV.D: Where stakeholders participate in the corporate governance process, they should have access to
relevant, sufficient and reliable information on a timely and regular basis.

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle IV.D. was broadly observed in
2002. Indeed, stakeholders were generally thought to 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 FSC. The policy
recommendation was for the BSE to encourage public companies to include disclosure of relationships with stakeholders in
the companies’ activity reports and, where available, websites.
The legal and regulatory framework requires or encourages companies to:
ƒ Provide stakeholders with sufficient and reliable information to facilitate their participation in the corporate governance
process. Employees are allowed to be represented in the GSM with a consultative vote in companies with more than
50 employees (see Art. 220 (3) CA) and have the same information rights accorded to shareholders (see Art. 224 CA).
Moreover, Art 130 (1) LC states that the company’s employees shall be entitled to timely, authentic, and
understandable information about the economic and financial position of the company, such as may be important for
their employment rights and obligations, and that the company is bound to provide to the employees the necessary
information in writing, on each occurrence of change in the employment relationship. Art. 52 (1) 2.b) LC further states
that the employer shall make available to the employees' representatives timely, authentic, and understandable
information on the company’s economic and financial position of significance for the conclusion of the collective
agreement, unless the disclosure of such information could cause damages to the company. Finally, the LC has a
number of additional provisions, obligating the employer to provide information to an employee representative when: (i)
the employer intends to undertake collective redundancy (see Art. 130a LC); (ii) the employer is changed, for example
due to a merger or change in the ownership structure (see Art.130b LC); or (iii) the main activity or economic conditions

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Corporate Governance Policy Assessment Bulgaria – June 2008

change (see Art. 130c LC). Companies that do not provide the above-mentioned information to their employees are
subject to fines (BGN 1,500 to 5,000, see Art. 414 (4) LC) and the unions have the right to notify the Labor Inspection (a
special executive agency) for violation of the LC (see Art. 130d (4) LC).
Chapter Five, 4. NCGC recommends that the (supervisory) board support effective stakeholder participation in
accordance with the law and international good practices in matters of non-financial information disclosure and
reporting. Companies are called to disclose information about economic, social, and environmental issues, for
example: anti-corruption policies; labor policies, policies regulating supplier and client relations; the company’s
corporate social responsibility policies; and environmental protection and nature preservation policies.
The implementation and enforcement of the corporate governance framework: Most companies appear to follow the
above-mentioned laws and do provide the relevant information to their employees. In practice, the quality of information will
depend on the ability of the local union representative to extract and disseminate information to the company’s employees.
However, few companies have adopted specific policies that go beyond these requirements, for example, by including a
“social balance sheet” or similar discussions on “stakeholder relations” in their annual report or company website.

Recommendations:
--

Principle IV.E: Stakeholders, including individual employees and their representative bodies, should be able to
freely communicate their concerns about illegal or unethical practices to the board and their rights should not be
compromised for doing this.

Assessment: Not Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Because this Principle was newly introduced in
2004, there is no previous assessment.
The legal and regulatory framework requires or encourages companies to:
ƒ Adopt a mechanism that permits individual employees and their representative bodies to communicate confidentially
their concerns about illegal or unethical practices to the board or its representative. Bulgaria has of yet to introduce
whistleblower protection in its legal and regulatory framework.
ƒ Adopt a mechanism that protects those who use the mechanism in good faith from any adverse responses that might
be taken by the company. As mentioned, Bulgaria has of yet to introduce whistleblower protection mechanisms. Of
further note is that Bulgaria has not adopted a comprehensive witness protection program. Art 97a of the Criminal
Procedure Code provides measures that may be used in corruption cases: keeping the identity of a witness secret, or
providing physical protection to the witness and their family or close personal contacts; however, it is thought that the
current program poses risks for witnesses, in particular in a relatively small country as Bulgaria.
The implementation and enforcement of the corporate governance framework: Few market participants were aware of
17
any whistleblower protection mechanisms that were implemented by companies in practice. A 2003 OECD report cites
representatives of the trade unions who declare the lack of whistleblower protection as the main obstacle to the reporting of
bribery by employees, particularly in companies where unions are weak; employees most often fear retaliation in the form of
dismissal. The unions indicated that collective labor agreements, too, do not provide for whistleblower protection.

Recommendations:
3. The FSC or relevant government body should include whistleblower protection mechanisms in its legal and
regulatory framework; at a minimum, the NCGC should be amended to include whistleblower protection
mechanisms, including a model policy on whistleblowers in an annex.

Principle IV.F: The corporate governance framework should be complemented by an effective, efficient insolvency
framework and by effective enforcement of creditor rights.

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Because this Principle was newly introduced in
2004, there is no previous assessment.
The legal and regulatory framework:
ƒ Protects the interests of creditors. The CA provides creditors with specific rights, namely to hold general meeting of

17
OECD Report on the Application of the Convention on Combating Bribery of Foreign Public Officials in international Business
Transactions and the 1997 Recommendation on Combating Bribery in international Business Transactions, June 2003.

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Corporate Governance Policy Assessment Bulgaria – June 2008

creditors (Art. 208 CA) and to be represented by three trustees in the GSM, however, without the right to vote, but with
a consultative voice when matters concerning credit are being discussed during the GSM. Art. 247a (1) CA bars the
company from paying dividends during bankruptcy proceedings, thus further protecting creditors; and Art. 646 (1) CA
voids transactions made ex ante to the bankruptcy proceedings. The CA allows creditors to file claims against
(directors), for example, when: (i) the company’s capital is reduced against the express consent of creditors if they have
not received payment (see Art 202 and 152 (1) CA). Figures 9-12 demonstrate that legal rights for creditors are fairly
extensive compared to other countries in the region, however, are generally below the OECD average (See also Doing
Business 2008 at www.doingbusiness.org).

Figure 9: Legal Rights Index Figure 10: Credit Information Index

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Figure 11: Public registry coverage (% adults) Figure 12: Private bureau coverage (% adults)

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ƒ Defines the rights of different classes of creditors. Art. 616 CA calls for the bankruptcy estate to be used to satisfy the
claims of all creditors on a first priority basis. Art. 722 (1) CA then specifically defines 12 different classes of creditors
and their order of claims, with the fourth order covering claims from employees for contractual obligations on an ex ante
basis.
ƒ Provides creditors with a constructive role in restructuring decisions to be taken by the insolvent company. Art. 696 and
Art. 700 CA provide key stakeholders, including creditors, with the opportunity to agree on a reorganization plan and
hence play a constructive role in restructuring the business, including the appointment of a supervisory body to exercise
control over the debtor's activity for the period when the reorganization plan is in effect (see Art. 700a CA).
The implementation and enforcement of the corporate governance framework: While the legal and regulatory
framework appears to be in-line with good practice, a number of interlocutors cited long delays in enforcement, largely due
to lengthy court and administrative procedures that effectively reduce the recovery value for creditors.

Recommendations:
4. Court proceedings must be streamlined and made more effective to ensure that creditor rights are
enforceable in a timely and cost-efficient manner.

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Corporate Governance Policy Assessment Bulgaria – June 2008

Section V.: Disclosure and Transparency 18

The corporate governance framework should ensure that timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial situation, performance, ownership, and governance of the
company.

Principle V.A: Disclosure should include, but not be limited to, material information on:

Summary of findings and recommendations from the 2002 CG ROSC: This Principle IV.A.1-8 was, overall, deemed to
be partially observed in 2002. The 2002 ROSC commended the extent of disclosure requirements in the LPOS, however,
noted that while disclosure practices were fairly robust in some of the larger companies, most of the disclosure practiced by
companies that were not actively traded was generally thought to be haphazard, with room for development. The policy
recommendations of the 2002 CG ROSC recommended that the FSC implement measures to ensure compliance with
disclosure of beneficial ownership, and for companies to: (i) disclose financial and non-financial information, including the
main risks faced by the company; and (ii) discuss their governance structures and policies.

Principle V.A.1: Financial and operating results of the company

Assessment: Broadly Implemented

The legal and regulatory framework requires or encourages companies to:

ƒ Provide shareholders with a complete set of annual audited financial statements. Art. 100m (1) LPOS and Art. 31 (1)
Ordinance No. 2 require issuers to present to the FSC and general public the following: (i) annual financial statements
within 90 days of the financial year; as well as (ii) quarterly financial statements not later than 30 days following the end
of each quarter (see also Art. 100n (1) LPOS). Art. 100m (3) and Art. 100n (3) LPOS require that the annual and
quarterly financial statements to remain publicly available for a period of at least five years, in-line with good practice.
Art. 22a AA states that Bulgarian enterprises are to prepare and present their annual financial statements on the basis
19
of endorsed IFRS and thus the full set of financial statements, including: the balance sheet, a profit and loss account,
a statement of cash flows, an owner's equity account and notes (see also Art. 26 (1) AA). Of importance is that
Appendix No 10. to Art. 32 Ordinance 2 states that information on off-balance sheet transactions, including nature and
purpose of such transaction, as well as the financial impact and risks of the transaction on the issuer’s activity, must be
disclosed in the annual report, much in-line with good practice.
ƒ Provide shareholders with consolidated accounts in holding or group structures. Art. 100m (2) LPOS and Art. 32 (2)
Ordinance No. 2 require those issuers that are obliged to prepare consolidated financial reports to present to the FSC
and general public: (i) annual consolidated financial statements not later than 120 days after the completion of financial
year; as well as (ii) quarterly consolidated financial statements not later than 60 days after the end of the relevant
quarter. These consolidated accounts are to be prepared in accordance with endorsed IFRS (see Art. 100m (5) LPOS).
ƒ Include a forward-looking management discussion and analysis (MD&A) and/or board discussion of operations and
financial results, in addition to financial information. Art. 100m (4) b) LPOS states that the annual report shall contain an
activity report, containing, inter alia, a truthful review of the development and results from the activity of the issuer, as
well as the condition of the issuer and the companies included in the consolidation, together with a description of major
risks and uncertainties faced thereby. Appendix No 10. to Art. 32 Ordinance No. 2 further states that the activity report
should include comments on and provide an analysis of the financial statements and other material information on the
company’s financial state and results, including trends or the risks, which have had or will have a favorable or
unfavorable impact on the company’s revenues.
The implementation and enforcement of the corporate governance framework: Financial disclosure is thought to have
dramatically improved since 2002, however, is still not at the level of reporting in other EU countries. The disclosure of
consolidated accounts among holding companies appears to be a particularly challenging issue, which have not
implemented uniform accounting policies across their subsidiaries. The financial information prepared and disclosed by
financial institutions, in particular banks, is on the other hand generally thought to be of high quality. Financial information
prepared by insurance companies and companies in the real sector, in particular those not actively traded and/or on the
Unofficial Market, is considered weaker. For example, some companies still produce financial statements with items marked
as “other”, without an explanation in the notes. To highlight the vast improvements made over the past few years, it should

18
Much of the analysis and recommendations contained in this Section V. on Disclosure and Transparency overlap with the Report on
the Observance of Standards and Codes for Accounting and Auditing (A&A ROSC), which is due to be published alongside this CG
ROSC (see http://www.worldbank.org/ifa/rosc_aa.html). Much of the analysis and ensuing recommendations pertaining to accounting,
financial reporting, standard setting, the external audit process and organizing/supervising the audit profession, is thus to be found in
the A&A ROSC and, to avoid duplication, only the key issues have been highlighted in this CG ROSC report.
19
It must be noted that because Bulgaria is an EU Member State, it has to comply with the acquis communautaire and not with IAS/IFRS
as such, which is relevant as the EU has endorsed the IAS/IFRS less IAS 39, which was carved out.

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Corporate Governance Policy Assessment Bulgaria – June 2008

be noted that in 2003, not a single company issued quarterly financial statements (despite existing legislation to this extent);
and today, virtually all companies produce quarterly financial statements, largely due to repeated follow-up actions, in
particular stern warning letters, by the FSC against companies. On the other hand, this improved financial information is
generally not complemented by a qualitative analysis by management on the trends, developments, and future outlook of the
company in the form of the activity report.
As a consequence to the above and in implementing relevant EU legislation, the Bulgarian government is in the process of
creating an oversight body to better regulate the accounting and auditing profession.

Recommendations:
1. The regulators will wish to continue their enforcement efforts to ensure for high-quality financial disclosure.

Principle V.A.2: Company objectives

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Companies were required to disclose material
risk factors in their prospectus, which would include material issues regarding employees and other stakeholders, however,
not the company’s corporate objectives.
The legal and regulatory framework requires or encourages companies to.
ƒ Disclose commercial and non-commercial objectives. Companies are not required or encouraged to publicly disclosure
their commercial and non-commercial objectives.
ƒ Disclose material information on their commercial and non-commercial objectives. Companies are not required or
encouraged to publicly disclosure material information relating to their commercial and non-commercial objectives.
The implementation and enforcement of the corporate governance framework: While companies do state their
objectives in their articles of association, these generally do not go beyond the most generic form of “pursuing commercial
opportunities”. A focused presentation on company objectives, for example on the company’s website or as part of the
activity report, is not typically disclosed by companies.

Recommendations
2. Ordinance No. 2 or, at a minimum, the NCGC should be amended to recommend the disclosure of the
companies commercial and non-commercial objectives, as well as any material information relating to these.

Principle V.A.3: Major share ownership and voting rights

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The 2002 CG ROSC noted that despite
extensive disclosure requirements and pre-emptive rights, information on beneficial ownership was difficult to obtain. An
estimated half of the annual USD 900 million in foreign investment was made by companies incorporated in Cyprus, for
which the regulatory authorities provided little information on shareholders. The 2002 CG ROSC recommended that the
LPOS be amended to require the legal entity (including off-shore companies), which owned 5 percent or more (or a multiple
of 5 percent) of the company’s shares, to disclose the persons that control it and the ways in which such control is exercised.
The legal and regulatory framework requires or encourages companies to:
ƒ Disclose ownership data once certain thresholds of ownership are passed. Art. 145 (1) LPOS requires any shareholder
20
who acquires or transfers directly and/or indirectly voting right in the GSM to notify the FSC and the public company
where: (i) following the acquisition or transfer his voting right reaches, exceeds or falls below 5 percent (or a multiple of
5 percent) of the number of voting rights in the GSM; or (ii) his voting right reaches, exceeds, or falls below the
thresholds of 5 percent as a result of events leading to a change of the total number of voting rights. § 1of the

20
Art 146 (1) LPOS further clarifies that the obligation to disclose ownership data over 5 percent under Art 145 (1) LPOS extends to a
person who has the right to acquire, transfer or exercise the voting rights in the general shareholder meeting of a public company in one
or more of the following cases: 1. voting rights held by a third party with whom the person has entered into agreement on pursuit of a
long-term common policy on the management of the company through joint exercise of the voting rights held by them; 2. voting rights
held by a third party with whom the person has entered into agreement on a temporary transfer of the voting rights; 3. voting rights
attached to shares provided as security to the person, provided that the latter may control the voting rights and has expressly stated its
intention to exercise them; 4. voting rights attached to shares provided for use by the person; 5. voting rights held or which may be
exercised under items 1 - 4 by a company controlled by the person; 6. voting rights attaching to shares deposited with the person, which
rights the person may exercise at its discretion without special instructions by the shareholders; 7. voting rights held by third parties on
their behalf but on the account of the person; and 8. voting rights that the person may exercise in its capacity as proxy where the person
may exercise them at his discretion, without special instructions by the shareholders

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Additional Provisions of Ordinance No. 2 further states that (supervisory) board members and members of the
management board are required to disclose their ownership stake in the company, as well as information on share
options (such as purchasing price and terms of the options).
ƒ Provide sufficient, timely disclosure about company group structures, significant cross-shareholdings, and intra-group
relations to enable shareholders to understand the control mechanisms in company groups and holding structures. The
disclosure of such control mechanisms in company groups and holding structures is not regulated or recommended.
ƒ Disclosure to expand to beneficial ownership. This is particularly relevant in cases where major shareholdings are held
through intermediary structures or arrangements, to identify potential conflicts of interest, related party transactions, and
insider trading, when information about the beneficial owners should be obtainable at least by regulatory and
enforcement agencies and/or through the judicial process. In Bulgaria, it is our understanding that the regulatory
system does not ensure that information about the beneficial owners is obtained by the FSC.
The implementation and enforcement of the corporate governance framework: In practice, the level of ultimate
ownership is not disclosed. The CDAD passes ownership information on to the FSC, however, is itself only able to detect
the second level of ownership and thus not the beneficial owners. Similarly, while companies are themselves obliged to
disclose their ownership structure to the FSC and public, they, too, are only able to disclose the second level of ownership.
In practice, investors do not have ownership information and it remains easy for the beneficial owners to hide behind a
series of off-shore vehicles or custodian accounts.

Recommendations:
3. The FSC should ensure that the regulatory framework requires both companies and shareholders to disclose
beneficial ownership, and that these rules are enforced in practice.

Principle V.A.4: Remuneration policy for board and key executives, and information about directors

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Under a special Ordinance the names of the
members of the board, their professional qualifications, and individual remuneration were disclosed in the prospectus.
The legal and regulatory framework requires or encourages companies to:
ƒ Disclose information on board members to shareholders in a comprehensive and timely manner: The legal and
regulatory framework does not require, and the NCGC only partially recommends that information regarding board
members and key executives is to be made available to investors. Such information would include, for example, their
name, age, compensation, career history, qualifications, current and previous board memberships, details on their
nomination, and whether they are considered as independent by the board. It is only during the election process that,
according to Art. 224 (2) CA, the name, address, and professional qualification of candidates to the (supervisory) board
is to be disclosed to shareholders.
ƒ Oblige their board members and key executives to publicly disclose information that could have a material effect on the
share price of company or help identify and avoid conflicts of interest. Art. 247 (2) and (3) CA requires the following
information to be included in the annual report: (i) the shares acquired, held, and transferred by members of the boards
during the year; as well as (ii) rights of members of the boards to acquire shares in the company. Art. 145 LPOS further
requires all shareholders—thus not specific to board members and key executives—to disclose when they acquire or
sell equity stakes to reach or fall below 5 percent (or multiples of 5 percent). Of note is that there are no specific
provisions requiring directors and key executives to publicly disclose any transactions in the company’s securities by
them (and their close family members or associates if they have an economic interest in the transactions).
ƒ Facilitate full and timely disclosure on executive and non-executive remuneration. Art. 247 (2) 1. CA requires the
company in its annual report to disclose the total sum of remunerations paid out to individual members of the
(supervisory) board during the year, This is not the case for the company’s overall remuneration policy; indeed,
although the NCGC recommends executive remuneration to be linked to performance, the NCGC is silent on the
disclosure of the company’s remuneration policy.
The implementation and enforcement of the corporate governance framework: In practice, almost every single
company website discloses the names of the (supervisory) board members, as well as management board members and
key executives, however, of the ten largest companies by market capitalization, not a single one had disclosed any
biographical data, curriculum vitae or other relevant information to allow shareholders and investors to gauge their
professional qualifications and skills. The same is true of remuneration, either on an individual or collective basis.

Recommendations:
4. The LPOS should require or the NCGC should recommend that information regarding board members and key
executives is to be made available to investors, including at a minimum their name, age, compensation, career
history, qualifications, current and previous board memberships, details on their nomination, and whether they
are considered as independent by the board.

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5. The LPOS or other relevant regulation should be amended to oblige board members and key executives to
publicly disclose information that could have a material effect on the share price of the company or help
identify and avoid conflicts of interest.

Principle V.A.5: Related party transactions

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The disclosure of related party transactions was
thought to be an issue in 2002.
The legal and regulatory framework requires or encourages companies to:
ƒ Disclose related party transactions to shareholders in a timely and comprehensive manner. Art. 114a LPOS requires
management to present to the GSM a report on the expediency, terms, and conditions of related party transactions, and
that this report be part of the materials provided to shareholders in preparation of the GSM. Art. 46 (1) of Ordinance No.
2, moreover, states that the following information regarding related party transactions should be disclosed to
shareholders: (i) the description of the offered transaction; (ii) the parties in the transaction, as well as reasons as to
why they are interested parties, and the nature of their interest in the transaction; (iii) the market price of the transaction
under Art. 114a (4) LPOS; and (iv) description of the economic benefit from the offered transaction.
ƒ Provide a definition of a “related party” that is sufficiently broad to capture the kinds of transactions that present a real
risk of potential abuse (when left unregulated by law or regulation). Art 114 (5) LPOS defines "interested parties" as the
members of the management (or agents) and (supervisory) boards, as well as shareholders holding, directly or
indirectly, 25 percent of votes (or lower if they are able to effectively control the company). § 1 (1) of the Supplementary
Provisions to the CA add that "related persons" are also the: (i) spouse, relative up to and including the fourth degree,
as well as in-laws, up to and including the third degree; (ii) employers and employees; (iii) individuals who are involved
in the management of the other one's company; (iv) partners; (v) a company and a person who owns more than 5
percent of the company's voting shares; (vi) person whose activities are under the direct or indirect control of a third
party; (vii) person who exercise joint direct or indirect control over a third party; (viii) persons one of whom is a
commercial agent of the other; and (ix) persons one of whom has made a donation in favor of the other. § 1 (2) of the
Supplementary Provisions to the CA further defines "related persons" as persons who either directly or indirectly
participate in the management, control, or capital of another person, which may enable them to agree on terms and
conditions which differ from the standard practice. However, not included in these definitions are, inter alia: (i) board
members of the parent, affiliate or sister companies or associates, wholly or partially owned; and (ii) person (other than
a tenant or employee) sharing the household of the above-mentioned natural persons. It is not immediately clear how
these definitions relate with IAS 24.1., which also has its own definition of related parties.
Either one of these interested parties is party to the transaction according to Art. 114 (5) LPOS if they: (i) are a direct
party (or representative/intermediary) to the transaction; or (ii) hold, directly or indirectly, a 25 percent equity stake (or
otherwise control) the legal party that is conducting the transaction; or (iii) are a director or management board member
of the legal person that is conducting the transactions.
The implementation and enforcement of the corporate governance framework: It was generally thought that abusive
related party transactions do still take place, in particular among the holding companies, and that disclosure was not always
in-line with the legal and regulatory framework.

Recommendations:
6. The legal and regulatory framework should agree on a single definition on related parties within the context of
related party transactions, and disclosure should be strictly enforced by the FSC.

Principle V.A.6: Foreseeable risk factors

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Under the 2002 legal and regulatory framework,
companies were required to disclose material risk factors in the prospectus, which would include material issues regarding
employees and other stakeholders.
The legal and regulatory framework requires or encourages companies to:
ƒ Disclose reasonably foreseeable material risks and the procedures that have been established to manage such risks.
Art. 100m (4) b) LPOS states that the annual report shall contain, inter alia, a description of major risks for the company
and uncertainties faced thereby. This provision is complemented by Art. 32 (1) of Ordinance 2 and its Annex 10, which
requires that an indication of the trends or the risks, which have had or, according to the expectations of the
management bodies, will have favorable or an unfavorable impact on the company’s revenues, to be disclosed in the
annual report.
The implementation and enforcement of the corporate governance framework: In-depth discussions on foreseeable

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material risk factors, as well as the risk management policies are procedures that have been established within the
company, are not typically disclosed and, if so, not to the standard seen in OECD countries.

Recommendations:
7. The FSC will wish to check for compliance with existing disclosure standards on risk factors.

Principle V.A.7: Issues regarding employees and other stakeholders

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages companies to:

ƒ Publicly disclose information on key issues relevant to employees and other stakeholders that may materially affect the
performance of the company. The legal and regulatory framework does not require the company to disclose employee
and stakeholder relations issues. Exceptions exist for specific issues. For example, the employer is obliged to submit
to the unions the termination and compensation agreements between the company and its employees during a takeover
(see Art. 130 (1), 130a – 130c LC). Moreover, the disclosure of information on human resource management—for
example the ratio between workers and employees, size of the governing bodies, and participation in qualification
courses—is presented to the trade unions. Chapter Five, 4. NCGC, in turn, recommends that companies disclose
information about economic, social, and environmental issues of concern to stakeholders, as previously discussed
under Principle IV.D.
The implementation and enforcement of the corporate governance framework: Given that the NCGC was only recently
developed, most companies are still in the process of implementing the NCGC’s provisions, including on the disclosure of
stakeholder relations.

Recommendations:
8. The FSC will wish to monitor compliance with existing disclosure requirements under the NCGC on the
company’s stakeholder relations.

Principle V.A.8: Governance structures and policies

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The 2002 CG ROSC found that there was little
to no disclosure on the company’s corporate governance policies and structures.
The legal and regulatory framework requires or encourages companies to:
ƒ Publish an annual corporate governance report. Art. 100n (4) 3. LPOS requires that the annual report of the company
contain a program for implementing internationally recognized standards for good corporate governance. And while the
OECD Principles have to date been defined as the recognized standard, the FCS has clarified, if only informally, that
companies are now free to choose whether to follow the OECD Principles or the new NCGC, which is based on the
OECD Principles. Art. 100m (7) LPOS further clarifies that this disclosure be made on a “comply or explain” basis, i.e.
that when the company deviates from the internationally recognized practice, it must explain the reasons for non-
compliance and discuss measures to be taken to eliminate any barriers that hinder the company from implementing
good practice. Finally, the company is required to disclose revisions to the corporate governance implementation plan
over time. This provision is complemented by Art. 32 (1) of Ordinance 2 and its Annex 10, as well as Art. 54 (10) RR-
BSE, which requires issuers on the Official Market, Segments ‘A’ and ‘B’ to follow good corporate governance on a
“comply or explain” basis. Such disclosure is not required for companies listed on the Unofficial Market. Chapter Four,
7. NCGC finally also recommends that companies regularly disclose information about their corporate governance, in
particular the company’s level of compliance with the NCGC Code on a “comply or explain” basis.
The implementation and enforcement of the corporate governance framework: While most, if not all companies do
appear to comply with the law and do have a section in their annual report describing their corporate governance
improvement program, it appears that most disclosure is incomplete and does not in fact follow the OECD Principles or
NCGC, and that key issues of particular relevance to Bulgarian companies, for example, how to strengthen the role of the
board, are not or not properly discussed.

Recommendations:
9. The FSC and, indeed, market participants, should be vigilant in monitoring compliance with the NCGC from the
very beginning to ensure that it is properly being implemented.
10. The BSE may wish to consider establishing a new tier on the Unofficial Market, which requires companies to
comply (or explain non compliance) with the corporate governance code, allowing growth companies to
differentiate themselves from their peers.

Principle V.B: Information should be prepared and disclosed in accordance with high quality standards of

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accounting and financial and non-financial disclosure.

Assessment: Broadly Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle V.B. was deemed to be partially
observed in 2002. The main reason cited was that all enterprises were obliged to prepare their financial statements in
accordance with Bulgarian National Accounting Standards, which were considered to be close to International Accounting
Standards (IAS). Bulgarian National Accounting Standards, however, had no requirements for segment reporting,
accounting for inflation or disclosure of contingent liabilities.
The legal and regulatory framework requires or encourages:
ƒ An organization to development and interpret accounting standards. As previously mentioned, publicly listed companies
are to prepare and disclose their financial statements in accordance with endorsed IFRS (see Art. 22a (1) AA).
Similarly, Art. 100m (2) LPOS and Art. 32 (2) Ordinance No. 2 requires those issuers obliged to prepare consolidated
financial reports to present their annual consolidated financial statements in accordance with endorsed IFRS, in-line
with EU regulations and good practice (see Art. 100m (5) LPOS).
ƒ The development of non-financial disclosure standards. There is no national body that is responsible for developing
non-financial disclosure standards. Such body could be a public-sector entity, such as a securities regulator, or private
SRO, such as ICPAB, which acts in the public interest, is controlled by a higher public-sector body and has adequate
funding and control structures to carry-out its activities.
The implementation and enforcement of the corporate governance framework: As previously mentioned, financial
disclosure is much improved since 2002. A number of issuers listed on the BSE are having difficulty implementing endorsed
IFRS, in particular the medium-sized companies. 21 With respect to non-financial information, disclosure is generally thought
to be of medium to poor quality, in particular with respect to the disclosure of corporate governance structures and policies.

Recommendations:
11. The ICPAB and FSC should continue to monitor the quality of disclosure of financial information and non-
financial information in particular.

Principle V.C: An annual audit should be conducted by an independent, competent and qualified, auditor in order to
provide an external and objective assurance to the board and shareholders that the financial statements fairly
represent the financial position and performance of the company in all material respects.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle V.C. was deemed to be partially
observed in 2002. The 2002 CG ROSC positively cited that the legal and regulatory framework required all medium and
large companies, i.e. those with over 50 employees and revenues and net assets over certain limits, to conduct an
independent external audit. And while "independence" was defined in the legal and regulatory framework, it was thought
that this definition might not be robust enough to truly ensure for an independent audit. Despite the move towards the
introduction of international standards on both accounting and auditing, auditing practices in 2002 were generally considered
weak and audited opinions less than fully reliable. In addition, most companies did not have an internal audit function.
The legal and regulatory framework requires:
ƒ Companies to have their annual financial statements audited by an external auditor in accordance with a
comprehensive body of auditing standards that are consistent with, or faithfully reflect, high quality internationally
accepted standards. Art. 248 (1) CA sets out that the annual financial statements have to be audited by a certified
public accountant, and the AA specifies that this accountant be of Bulgarian nationality (see Art. 38 (1) AA). According
to the Art. 2 LIFA, an audit is understood to mean a multitude of necessary and inter-related procedures, determined by
international audit standards, on the basis of which an independent opinion shall be expressed about the authenticity in
all the aspects of the financial audits, prepared in compliance of the Bulgarian financial legislation. This definition differs
from the internationally recognized definition issued by the International Federation of Accountants (IFAC). Art. 2 and
Art. 5 (3) LIFA further states that the external audit is to be conducted in compliance with international audit standards—
although the International Standards on Auditing (ISA) as developed by IFAC are not specifically cited—including the
Professional Code of Ethics as developed by IFAC (see Art. 39 (2) LIFA). It should be noted that the EU in the acquis
communautaire has not approved ISA and have allowed its member states to adopt more stringent rules, which Bulgaria

21
In this respect, the Financial Reporting Council (FRC) is in the process of drafting local accounting standards for SMEs, which will be
based on IFRS as of 2000 and EU Fourth Company Law Directive. The FRC intends to apply all the exemption options for smaller
companies available in the acquis communautaire regarding the preparation, presentation, publication, and audit of financial
statements.

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has done by effectively following ISA.

ƒ The external auditor to be independent of management, board members, and controlling shareholders. The legal and
regulatory framework has a number of provisions to ensure that the audit process is conducted in an independent
manner. Art. 28 (1) LIFA bars auditors (or their partners) from conducting audits when they are parties, either directly or
indirectly, to transactions with the enterprise (see Art. 28 (1) 3. LIFA); or they have rendered accounting or valuation
services for the audited company (see Art. 28 (1) 4. LIFA). However, these provisions falls short of good practice, not
only with respect to the definition of relatives or related parties (e.g., in-laws are not included, nor are interests in major
suppliers to the company), but also with respect to potential conflicts of interest (e.g. if the lead auditor has been
auditing the same client for an extended period of time, or the chief accountant of the enterprise was a former employee
of the audit firm). Also, there are no restrictions on the provision of tax and business advisory services, which, if they
constitute an important element of the audit firms overall fees with the client, may well impede their independence.
Finally, the rotation of audit partners is not regulated in the legal and regulatory framework, or recommended in the
NCGC, although ICPAB in its internal regulations mandates a seven year audit partner rotation. And while most of the
international accounting firms have their own internal rules requiring audit partner rotation, if not audit firm, most local
firms do not.
ƒ Or encourages the process of selecting the external auditor to be overseen by a body such as the shareholders or a
group of independent board members (e.g. an audit committee or equivalent), that is independent of management. Art.
221 (6) CA determines that the GSM appoint and dismiss the external auditor, however, is silent on the process of
nominating the external auditor. Art. 9 LIFA further specifies that the audit should be conducted within the framework of
a contract between the company and auditor, yet does not specify that this contract be concluded by the (supervisory)
board and its audit committee, in-line with good practice. Chapter Two, 1. NCGC does, on the other hand, recommend
that the (supervisory) board, assisted by an independent audit committee, formally present to the GSM a motivated
proposal for the selection of an external auditor, in-line with good practice.
ƒ Auditors to be licensed. As previously mentioned, ICPAB is the recognized SRO for the auditing profession in Bulgaria.
ICPAB is a full member of IFAC since 1996 and FEE as of 2005. To date, there are approximately 600 chartered
accountants in Bulgaria, of which most were grandfathered into ICPAB.
All certified public accountants must be a member of ICPAB, which is mandated to generally ensure that audits are
carried out in the public interest. Art. 37 (2) LIFA further specifies that ICPAB is responsible for, inter alia, organizing
and conducting exams, registering auditors, organizing training event, approving internal quality control systems, and
controlling the quality of audits and the professional conduct of its members.
To be admitted as a certified public accountant, candidates must:
‐ Demonstrate qualifications as specified in Art. 16 LIFA and summarized in Table 3:

Table 3: Qualifications

Level and type of education Years of practical experience

Masters-level degree in accounting or and four years of practical experience

economy …

Bachelor-level degree in accounting or and five years of practical experience

economy …

Related masters-level economic and seven years of practical

degree … experience

Any other masters-level degree … and ten years of practical experience

‐ Pass an examination, which is administered by ICPAB (see Art. 17 LIFA). Until recently, exams were oral and
hence the selection process was criticized by some as politicized (and 18 LIFA states that exams can be in writing
and/or oral). However, ICPAB recently amended its internal rules, switching to a written examination process. In
2007, eight candidates were formally recognized as chartered accountants and generally there are about eight to
ten candidates that typically graduate on any given year, out of 50 applicants.
‐ Take 40 hours of continuous professional education on an annual basis.
Art. 15. LIFA further specifies that individuals with previous criminal convictions are unable to become auditors.
Finally, of note is that foreign chartered accountants may be admitted to conduct audits in Bulgaria should they pass
exams on Bulgarian commercial and tax law.
ƒ For an organization to enforce audit standards. ICPAB is currently the designated organization that ensures for and
regulates the external audit process (see Art. 37 (1) LIFA), including: (i) licensing and registering certified public
accountants (Art. 37 (2) 2. LIFA); (ii) conducting quality controls of audits; (iii) ensuring for the professional conduct of its

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members (Art. 37 (2) 8. LIFA); and (iv) appointing councils for professional ethics, quality control, and disciplinary
matters (Art. 39 (2), (5), (6), (7) LIFA). ICPAB conducts quality reviews of its members via a peer review process every
three years. A disciplining committee follows-up on transgressions. It should be noted that LIFA is currently being
th
amended to implement the 8 EU Directive, including the establishment of an independent accounting oversight body,
however, that these changes had not been finalized at the time of drafting this report.
ƒ For an organization that is responsible for developing and interpreting audit standards, as well as standards for the
ethical behavior of auditors. The audit profession in Bulgaria follows IFAC’s ISA (Art. 2 LIFA). As previously mentioned,
certified public accountants in Bulgaria are required to adhere to IFAC’s Code of Ethics (see Art. 39 (2) LIFA).
ƒ The board, audit committee or equivalent body to report to shareholders that is has assured itself of the auditor’s
independence. The legal and regulatory framework does not require the board or its audit committee to determine that
the external auditor: (i) is independent and qualified; (ii) has acted with due professional care; and (iii) has not
undertaken non-audit work, the value of which may jeopardize his or her independence.
ƒ Ensuring for effective enforcement. Art. 46 and 47 AA state that certified public accounts are to be penalized for failing
to fulfill the obligations arising from the AA, ranging from BGN 300 to 30,000. Fines are issued by the Ministry of
Finance (Art. 47 (2) AA).
The implementation and enforcement of the corporate governance framework: While the external auditor is formally
elected by the GSM, most are in practice chosen by the company’s management and/or majority owner, but not by the entire
board, let alone an independent audit committee (as shall be seen in later sections, most companies do not have an audit
committee, let alone one composed of independent directors).
Approximately 50 percent of listed companies appear to be audited by the Big4; small-to-medium sized listed companies
that are not actively traded typically choose local audit firms. And while a number of local audit firms have improved since
2002, a number of interlocutors stated that not all of these firms adhered to IFAC’s ISA and its professional Code of Ethics.
Auditor independence has improved dramatically over the past years. For example, in 2002, the Big4 and local accounting
firms were known to frequently prepare or provide direct support to the company’s accounting staff in preparing the financial
statements so that they could be audited. However, the know-how of company accountants has increased over the past few
years so that the external auditors are now increasingly focusing on conducting proper audits, rather than helping prepare
the accounts themselves. Yet, while most external auditors do not provide accounting or valuation services, some have
established successful tax and business advisory services, which may impede their independence, in particular when these
non-audit fees constitute a significant percentage of their overall audit fees with a particular client. Further, ICPAB’s rule
mandating a seven year audit partner rotation does not appear to be followed in practice by a number of audit firms.
Finally, while ICPAB does conduct quality reviews of its members via a peer review process every three years, and the
disciplining committee follows-up on transgressions, to date, only a few reprimands have been issued and ICPAB has not
issued a fine or suspended an auditor’s license to practice.
On-going problems with training, education and enforcement were cited as some of the key focus areas to further improve-
upon the quality of the independent external audit.

Recommendations:
12. The definitions of what constitutes an audit should be made to correspond to IFAC’s definition on an
independent external audit.
13. Art. 33 (3) LIFA should be amended to specify that the management letter should be issued to both
management and the board, ideally its independent audit committee (when established).
14. The independence of the external audit process should be strengthened. For example, there should be more
specific restrictions pertaining to the provision of non-audit services to an audit client, and that the external auditor
should interact and report to the audit committee (while of course keeping its accountability to shareholders).
15. Further recommendations are to be found in the Accounting and Auditing ROSC.

Principle V.D: External auditors should be accountable to the shareholders and owe a duty to the company to
exercise due professional care in the conduct of the audit.

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages:

ƒ The external auditors to be accountable to the company’s shareholders in respect to the performance of their audit
functions. Art. 221 (6) CA and Art. 248 (1) both call for the GSM to appoint and dismiss the external auditor. The
auditors submit their report to the management (board), which in turn submits it to the (supervisory) board for
verification and approval before it is passed on to the GSM for final approval (see Art. 250, 251 CA). Of note is that
shareholders possessing at least 10 percent of the capital may request the GSM to appoint an external auditor to
inspect the annual report (see Art. 251a CA). Only the company (and not shareholders) has the right to sue the external
auditors. However, shareholders with 5 percent or more of the capital may file a claim on behalf of the company against

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third persons in court (see Art. (1) LPOS), which may be interpreted to cover suits against the auditors.
ƒ For proportionate, effective and dissuasive sanctions, penalties, and/or liabilities for external auditors who fail to perform
their audit functions to the company with due professional care. Art. 41 and 42 LIFA regulate the penalties to be
effectuated by the external auditor upon breach of their responsibilities. Fines range from BGN 300 to BGN 15,000,
which may not be materials for some of the larger auditing firms. Moreover, ICPAB’s disciplinary commission may
suspend an auditor’s license for a limited duration. In the end, the damage to an external auditor’s reputational is likely
to be the greatest deterrent. Of note is that there is no restriction on the liability of the external auditor, which may serve
to dissuade individuals from establishing audit firms.
The implementation and enforcement of the corporate governance framework: As previously determined, fines, let
alone suspensions, are hardly issued. Shareholders, moreover, have not filed suits against the external auditor in practice.

Recommendations:
16. The ICPAB should better enforce existing rules and regulations to ensure that audits are being carried-out in a
professional and independent manner.
17. Further recommendations, in particular relating to the financial liability of the external auditor, are to be found
in the Accounting and Auditing ROSC.

Principle V.E: Channels for disseminating information should provide for equal, timely and cost-efficient access to
relevant information by users.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle V.E was partially observed in
2002. The reasons cited in the 2002 CG ROSC report was that issuers were only required to submit their annual financial
statements to the FSC, and that this information was not subsequently made available online. The policy recommendation
of the 2002 CG ROSC focused on updating the FSC website for easy on-line access to information.
The legal and regulatory framework requires or encourages companies to:
ƒ Define selective disclosure of material non-public information except for clearly defined exceptions. Art. 27 2.
Ordinance No. 2 states that the issuer is obliged to notify the FSC and market about important information that may
influence the price of the securities. Art. 28 (1) of Ordinance 2 clarifies that important information that may influence the
price of securities shall be any information, connected with the activity of the issuer, which is not publicly announced,
which if made public might have significant effect on the price of the securities of the issuer due to its effect over the
rights, liabilities, financial status, or generally over the activity of the issuer.
ƒ Comply with an ongoing disclosure obligation to make timely disclosure on a non-selective basis of all information that
would be material to an investor’s investment decision. Art. 100r (1) LPOS specifies that the issuer is to disclose
mandatory disclosure items to the FSC and public simultaneously. Chapter Four, 3. NCGC, recommends that
disclosure should guarantee equal access to information to shareholders, investors, and other stakeholders, and should
not allow for any abuse of internal information or insider trading.
ƒ Make all information identified by the Principles easily accessible by investors and potential investors at no more than a
minimal cost. Art. 100r (3) LPOS requires that information is to be disclosed in such a manner as to cover
simultaneously as wide a circle of people as possible and in a non-discriminating manner. The issuer is to use a news
agency or other media. Art. 100s LPOS states that the FSC is to create and keep a centralized database of the
regulated information received from the issuers, and to maintain it free of charge for the public. Chapter Four, 6. NCGC
calls for companies to set-up and maintain a company website.
The implementation and enforcement of the corporate governance framework: An initiative by the FSC to develop a
database and portal with company information for investors was initially met with resistance by the private sector. At the
time of writing this report, the site was up-and-running and general company information was accessible in Bulgarian. On
the other hand, a survey conducted by the Association of Investment Relations Officers Survey in 2008 shows that only 38
percent of respondents have developed websites with investor relations (IR) sections. Forty-five percent had developed
websites, however, the info on IR was either not present or difficult to find. Seventeen and a half percent did not have a
website at all. Not a single company provided any information on their independent directors by either identifying these or
providing background information.

Recommendations:
18. Companies should collectively upgrade their websites and specifically focus on developing their IR and
corporate governance sections.

Principle V.F: The corporate governance framework should be complemented by an effective approach that
addresses and promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that
is relevant to decisions by investors, free from material conflicts of interest that might compromise the integrity of

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their analysis or advice.

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages:

ƒ An effective approach, either market-based or regulatory, addressing the conflicts of interest of credit rating agencies.
There is no legal, regulatory, or market-based approach to having credit rating agencies in Bulgaria disclose conflicts of
interests, as highlighted in IOSCO Statement of Principles Regarding the Activities of Credit Rating Agencies. It is not
known whether credit rating agencies generally incorporate the IOSCO Code of Conduct Fundamentals for Credit
Rating Agencies into their own codes of conduct.
ƒ An effective approach to addressing the conflicts of interest by sell-side securities analyst. Art. 46 and 46a RR-BSE
both focus on the prohibition of market manipulation by the members of the BSE and its employees. It is not clear
whether the IOSCO Statement of Principles for Addressing Sell-side Securities Analyst Conflicts of Interest have been
incorporated.
ƒ Those in the business of providing analysis or advice that is relevant to decisions by investors to disclose conflicts of
interest and how they are managed. The legal and regulatory framework does not provide for those providing analysis
or advice to disclose conflicts of interest and how they are managed.
The implementation and enforcement of the corporate governance framework: A number of interlocutors have pointed
to on-going issues with respect to conflicts of interest and general market manipulation that have served to compromise the
integrity of the market, although obvious transgressions have largely subsided over the past few years.

Recommendations:
19. The BSE should ensure that the regulatory framework effectively covers conflicts of interests by sell-side
securities analysts and other financial advisory firms.
20. The FSC should ensure that the regulatory framework effectively covers conflicts of interests by credit rating
agencies, and that these disclose (potential) conflicts of interests.

Section VI.: The Responsibilities of the Board 22

The corporate governance framework should ensure the strategic guidance of the company, the effective
monitoring of management by the board, and the board’s accountability to the company and the shareholders.

Principle VI.A: Board members should act on a fully informed basis, in good faith, with due diligence and care, and
in the best interest of the company and the shareholders.

Assessment: Broadly implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle VI.A. was materially not observed
in 2002, in particular as the responsibility and accountability of directors was not defined in 2002. In terms of practice,
Bulgarian companies were known to be run by company insiders, with little to no oversight by the (supervisory) board. The
2002 CG ROSC recommended to amend the CA to clearly define the duties of care and due diligence for board members,
and to develop a voluntary corporate governance code focusing on the role, structure, and functioning of the board, as well
as establishing an institute of directors to provide training and disseminate good practice approaches to directors and senior
managers. Most of the recommendations found in the 2002 CG ROSC have been implemented in law, if not in practice.
The legal and regulatory framework requires or encourages companies to:
ƒ Act with due care. The duty of care requires board members to act on a fully informed basis, in good faith, with due

22
We note that the CA allows for both the one-and two-tiered board structures. Approximately 75 percent of listed companies have
adopted the one-tiered structure, with most citing the ability to better hire and fire the CEO as the key reason for choosing the one- over
the two-tiered structure. The older, privatized companies and holding companies typically have a two-tiered board structure, as do the
banks which are legally required to do so. And while important differences between these two governance structures exists—in
particular the fact that the management board under the two-tiered system is solely responsible by law for its business decisions,
whereas management under the one-tiered system has delegated authority and the board thus still carries the responsibility for the
management of the company—a great deal of convergence is currently taking place, with unitary boards increasingly becoming a
supervisory organ (for example, executive sessions among non-executive directors in US corporations) and supervisory boards in
Germany, for example, strengthening its strategic role within German companies. In the end, good practice calls for directors and
managers to adhere to the underlying principles of good corporate governance, namely: responsibility, accountability, fairness and
transparency. The following section will thus only distinguish between supervisory boards and boards of directors when important
differences exist.

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diligence and care. The CA, LPOS, and NCGC all have been amended to touch upon the duty of care. Specifically,
Art. 237 (2) CA specifies that directors shall be obliged to perform their functions with the care of a good merchant; Art.
116b LPOS specifies that directors and managers act with care […] by using solely information which they reasonably
believe is true and comprehensive; and Chapter One, 1.8. NCGC requires that (supervisory) board members act in a
professional and diligent manner and conduct themselves according to the commonly accepted principles of integrity
and due care. The NCGC further recommends that this duty of care be stipulated by contract with the (supervisory)
board member (Chapter One, 2.2. NCGC) and included in a code of conduct/ethics (Chapter One, 1.8 NCGC), in-line
with good practice. On the other hand, neither the laws, regulations, or NCGC, nor the courts have defined the terms
“good faith”, “fully informed basis” and “due diligence” to better and more effectively guide the board in fulfilling its
duties to the company and shareholders.
ƒ Act within the duty of loyalty: The duty of loyalty calls for directors to ensure that their own interests do not prevail over
those of the company and its shareholders, keep information confidential, and avoid or manage conflicts of interest.
Art. 116b LPOS meets this requirement by requiring that directors demonstrate their loyalty to the company by: (i)
placing the interest of the company before their own; (ii) avoiding or formally disclosing direct or indirect conflicts of
interests, and neither participating nor exerting influence on other directors in their decision-making; and (iii) not
disclosing confidential information both during and following their tenure on the (supervisory) board. Chapter One, 2.2.
NCGC, further stipulates that the duty of loyalty be formally captured in a contract between the company and directors.
The implementation and enforcement of the corporate governance framework: Art. 240a CA states that shareholders
holding at least 10 percent of the company's equity may file a claim against directors (and managers) for damages caused to
the company. Art. 118 (2) 1. LPOS in turn allows any shareholder(s) holding at least 5 percent to bring before the district
court the actions of the company for indemnification of any detriment inflicted on the company, willfully or by gross
negligence, through acts or omissions by directors or managers. Derivative suits are thus possible. Direct lawsuits, by
which shareholders are able to enforce a claim that concern their own interests as owners, are regulated in Art. 71 CA,
which states that any shareholder in a company may bring an action to the district court of the company's seat to protect his
or her right to be a shareholder and its individual rights as a shareholder, when these have been violated by the company's
organs. Shareholders are further able to bring an action to the district court for the repeal of a resolution of the GSM when
such resolution is inconsistent with a mandatory provision of the law or with the articles of association of the company (see
Art. 74 CA). Finally, any shareholder can lay a tort claim, according to Art. 45 Law of the Obligations and the Contracts, for
damages inflicted on him by the company. Bulgarian law does not provide for class actions suites.
Art 240 (2) CA specifies that directors are jointly and severally liable before the company for any damages caused through a
fault of theirs; Art. 240 (3) CA in turn calls for any director to be held harmless if it is established that s/he has no fault for the
damage suffered by the company. Of particular note in this respect is that Art. 118a LPOS introduces the concept of the
“shadow director”, in-line with good practice, and specifies that any person who controls or exerts influence over a public
company’s directors or managers, and induces them to act or to refrain from acting against the interest of the company, shall
be held liable for damages inflicted on the company. However, as previously mentioned, the Bulgarian judiciary does not
appear to have issued rulings that have served to define or interpret the duties of care and loyalty, as well as business
judgment rule, nor have the courts expanded upon the terms “fault” in Art. 240 CA and “willfully” or “gross negligence” in Art.
118 LPOS. Finally, it should be noted that directors and officers liability insurance (D&O insurance) is not required or
recommended, or offered in practice. On the other hand, directors and managers are obliged to furnish a managerial bond,
which shall not be less than the three-month gross remuneration. However, it is questionable as to whether such a
managerial bond would be able to cover any potential damages to the company or its shareholders, which can potentially
run to the millions of dollars.
Our understanding is that the practice differs significantly from the law. It appears that the majority of directors do not
properly prepare themselves for board meetings, do not receive (or request) material information prior to board meetings,
and do not constructively challenge or oversee management during board meetings (unless the chairman is the majority
owner). Most directors further act in the interest of the majority owner, rather than all shareholders, including minorities.
Finally, it appears that conflicts of interests are still prevalent in many Bulgarian companies, in particular among holding
companies, and that directors and managers do not always take the necessary steps to prevent or disclose conflicts of
interests. Finally, it is our understanding that shareholders have never been able to successfully sue directors or managers
for damages.

Recommendation:
1. The Bulgarian Corporate Governance Code Task Force should reconstitute on the agreed-upon date (18-months
following the publication of the NCGC) to update the NCGC to include more detailed guidance on the duty of
care, specifically, by defining the terms “good faith”, “fully informed basis” and “due diligence”. For example the NCGC
could specify that directors, inter alia: (i) properly prepare themselves for board meetings by reviewing board materials
(and avoid talking on too many other board seats that would effectively impede them from doing so); (ii) assure
themselves that management information and compliance systems are robust and provide reliable information; (iii)
regularly attend and actively participate in board meetings; and (iv) only take decisions after reasonable discussion.
2. The BSE should lead a public-private sector initiative to launch a training program for directors and senior
managers on corporate governance and related issues. The FSC, respectively BNB, may wish to require that all

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directors and senior managers of listed companies and banks undergo a minimum amount of training. Such
training could be organized by a new institute of directors or corporate governance institution for Bulgaria or,
alternatively, be a part of current institution or university should such an institute prove unsustainable on its own
following a market study and business plan. For banks, this program could be organized by the Bulgarian Association of
Commercial Banks and/or Bulgarian International Banking Institute. These programs should focus on corporate
governance issues, including the above-mentioned duties of care and loyalty, but also focus on topics of relevance to
directors in carrying-out their responsibilities, such as on finance and accounting, strategy, and risk. This institute would
ideally be established with the support of all key stakeholders, including the FSC and BSE, all relevant associations and
university institutions, but be led by the private sector.

Principle VI.B: Where board decisions may affect different shareholder groups differently, the board should treat all
shareholders fairly.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This principle was materially not observed in
2002 due to the fact that boards, in carrying-out their duties, typically failed to treat different shareholder groups, in particular
minorities, fairly.
The legal and regulatory framework requires or encourages companies to:
ƒ Act in the best interest of the company and all shareholders. Art. 237 (2) CA requires directors to act in the interest of
the company and all shareholders, in-line with good practice, as do Art. 116b LPOS and Chapter One, 1.1. NCGC,
which require directors to act in the interest of all shareholders (if not specifically the company).
The implementation and enforcement of the corporate governance framework: It appears that the practice still differs
significantly from the law in that directors are generally thought to act in the interest of the majority shareholder, who
frequently holds the position of chairman or CEO and is known to dominate company decision-making.

Recommendation:
3. The FSC, in collaboration with all relevant stakeholders in the public and private sectors, should embark on an
awareness raising and public education campaign to educate directors on the need to treat all shareholders
fairly when taking decisions.

Principle VI.C: The board should apply high ethical standards. It should take into account the interests of
stakeholders.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: The requirements for directors to act in the
interests of the company encouraged directors to ensure that the company complies with applicable laws and regulations.
However, as noted above, board behaviors did not always follow in practice, and so this Principle was materially not
observed in 2002.
The legal and regulatory framework requires or encourages companies to:
ƒ Develop, under the board’s supervision, a code of ethical behavior covering, inter alia, compliance with the law and
professional standards, and setting clear limits on the pursuit of private interests by employees. The CA, LPOS, and
other legal and regulatory acts do not require boards or companies to adopt a code of ethics or business conduct. The
NCGC, on the other hand, does recommend that the (supervisory) board, as well as management board, adopt, follow
and disclose a professional ethical code of conduct (see also Art. 54 RR-BSE). However, of the top-10 publicly listed
companies by market capitalization, only a single company had published its ethics code on their internet site, or
provided an explanation as to why they had not complied with the NCGC.
ƒ Encourage their boards to report regularly on compliance with the code by board members and employees, and the
implementation actions taken by the company. The Art. 100m (4) and (6) LPOS does require the company to disclose
the barriers the companies is facing in implementing good corporate governance practice, as well as how the company
intends to overcome these barriers.
ƒ Have their boards take into account the interests of stakeholders and publicly disclose how it is doing so in relation to
significant matters. As previously mentioned under Principle IV. On the Role of Stakeholders in Corporate Governance,
the NCGC in Chapter Five does recommend for boards to take stakeholder interests into account. Specifically, the
(supervisory) board is recommended to establish specific rules for addressing the interests of stakeholders, which
should ensure for appropriate stakeholder engagement when decisions requiring their input are made, as well as
balancing the interests of the company versus those of the economy, society and environment in which the company
operates. The NCGC further recommends for the (supervisory) board to support effective stakeholder participation in
accordance with the law and international good practices in matters of non-financial information disclosure and
reporting, and ensure that the company discloses information about economic, social, and environmental issues.

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The implementation and enforcement of the corporate governance framework: It does not appear that the adoption
and use of codes of ethics/conduct is widespread among Bulgarian companies. In fact, out of the ten largest Bulgarian
companies in terms of capitalization, only a single company had disclosed its ethics code online, in-line with good practice.
Anecdotal evidence suggests that, similarly, boards do not incorporate stakeholder interest into their decision-making.

Recommendation:
4. The FSC should both follow-up and monitor compliance with the NCGC, in particular with respect to whether
companies are following and disclosing the NCGC’s provision calling for boards to adopt an ethics code.
5. The FSC, in collaboration with all relevant stakeholders in the public and private sectors, should embark on an
awareness raising and public education campaign to educate directors on the need to identify and manage
stakeholders’ interests.

Principle VI.D: The board should fulfill certain key functions, including:

Principle VI.D.1: Board oversight of general corporate strategy and major decisions

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: Principle V.D. was materially not observed in
2002, mainly because the roles and responsibilities of boards were not defined in the law and poorly understood in practice.
The legal and regulatory framework:
ƒ Clearly defines the key functions of the board. According to good practice, the main role of the (supervisory) board is to
provide strategic guidance to and oversight over management in order to achieve an adequate return for shareholders.
In addition, good practice calls for the board to set the company’s corporate governance framework and define key
policies, such as with respect to disclosure, risk management, and dividends. The role of management on the other
hand is to manage the company on a day-to-day basis, either on a delegated basis under the unitary board model or as
defined by law under the two-tiered board model. Good practice calls for the division of roles and responsibilities of the
board vis-à-vis management to be formalized to ensure for an effective and efficient governing structure.
While the CA defines the competencies of the GSM in Art. 221 CA, the CA and LPOS do not explicitly define the
competencies of the (supervisory) board (and management board under the two-tiered model). Only Art 241 CA makes
reference to board oversight, stating that the management board manages the company under the control of the
supervisory board, while Art. 242 CA specifies that the supervisory board may not take part in the management of the
company. In this same vein, Art. 243 CA states that the management board is required to report to the supervisory
board at least on a quarterly basis. Art. 244 CA, finally, specifies that under the one-tiered system, the board of
directors manages and represents the company.
The NCGC on the other hand addresses the key functions of the board of directors under Chapter One and clearly
states that the board is responsible for governing the company and setting the company’s strategy (noting that the
supervisory board under the two-tiered model is further responsible for overseeing and controlling the management
board), and then specifically enumerates key functions, including determining strategy, establishing risk management
policies and internal audit processes, compliance, and defining information disclosure policies (for both the board of
directors and supervisory board). The management board’s functions and tasks are also spelled out in detail, focusing
on its key role of managing the company on a day-to-day basis in accordance with the company’s strategy as
established by the supervisory board.
However, there are a number of inconsistencies with good practice that may serve to obfuscate the respective roles and
responsibilities of the (supervisory) board vis-à-vis management. More specifically, it is noted that good practice calls
for management to: (i) develop and the board to approve strategy (Chapter One, 1.2 NCGC currently calls for the board
to determine the strategic direction); (ii) ensure for the company’s compliance with relevant laws and regulations (and
not the board, as stated in Chapter One, 1.3 NCGC); and (iii) develop the company’s disclosure policy (Chapter One,
1.7. calls for the board and not management to define the company’s disclosure policy).
The implementation and enforcement of the corporate governance framework: It appears that the majority of
(supervisory) boards lack an appropriate understanding of and do not effectively carry-out their roles and responsibilities,
perhaps unsurprisingly given the absence of appropriate guidance in this area. Almost all market participants cited two key
factors in this respect: the first is that most companies continue to be dominated by majority shareholders who typically
either serve as CEO or board chairman; a separation of ownership and control has still effectively not taken place. The
second reason is the absence of a deep pool of professional directors that are able to constructively guide and when
necessary challenge management. Indeed, while it was thought that executives generally possess the necessary business
and entrepreneurial skills to manage the business, it was thought that directors lacked the expertise (in particular in finance),
experience, and independence to effectively carry-out their roles and responsibilities. Director professionalism, or lack
thereof, was thought to be a particular crucial issue in state-owned enterprises (SOEs). This issue is compounded when the
majority owner decides to serve as CEO, in which case the board’s authority is effectively muted as it is the CEO, in his
capacity as majority owner, who elects the board. Of note is that even when the majority owner takes the position of board

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chairman, in principle raising the profile of the board, the board as such does not appear to collectively play its assigned role
due to the fact that the majority owner frequently remains actively involved in the day-to-day business of the company and
hence effectively serves as executive chairman and as such is not controlled by the board. Some companies have tried to
fill this “legal vacuum” by negotiating director contracts, in which the roles and responsibilities of directors were specified.
However, these director contracts were confidential and not publicly disclosed to shareholders. The 2002 CG ROSC
estimated that about one-third of companies on the Official Market concluded director contracts and/or by-laws for the board.
However, change is taking hold, albeit slowly, and majority shareholders are now starting to empower their boards to fulfill
their oversight role, in particular as the majority owners take on new responsibilities and/or transition to the next generation
of management.
Ensuring for a robust policy on succession planning, a key board responsibility, is not recommended in the NCGC or carried-
out in practice, which is particularly worrisome given the concentration of ownership and prevalent role majority owners play
in the day-to-day management of the company.

Recommendations:
6. The institute of directors or other entity should focus on creating a cadre of professional directors that, over
time, is able to demonstrate the necessary skills and experience to effectively guide and monitor management.
The institute should further start raising awareness for the need of a new boardroom culture in which actively dialogue
and rigorous if constructive discussions take place on issues of strategy and control.

Principle VI.D. 2: Monitoring effectiveness of company governance practices

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages companies to:

ƒ Take responsibility for corporate governance practices. Art. 100m (4) 3. LPOS is positively unique in that it calls for all
publicly listed companies to develop an action plan on implementing internationally recognized principles of corporate
governance, which until recently was defined as the OECD Principles, and to disclose this action plan in their annual
report. Today, companies are generally thought to comply with this article by following the NCGC, instead of the OECD
Principles, given that the NCGC is based on the OECD Principles. Art. 54 (10) RR-BSE, moreover, requires all publicly
listed companies that are listed on the Official Market, Segments ‘A’ or ’B‘, to disclose their compliance with the NCCG.
Of note is that the NCGC (and above-mentioned norms) does not specifically recommend the (supervisory) board to set
the overall governance framework of the company. Most national codes of good practice do, however, recommend for
the boards to take ownership in defining the company’s overall governance structure and policy, and to even establish
corporate governance committees when necessary (which may also focus on remuneration and/or nomination issues),
although it is understood that the NCGC’s authors did not wish to overburden boards with too many committees. On the
other hand Art. 116d LPOS assigns important responsibilities—akin to those of a company secretary under the Anglo-
Saxon legal tradition—to the IR officers. These, in contrast to company secretaries, exclusively report to management
and not to the board.
ƒ Assess, at least annually, the performance of the board as a group and its standing committees, as well as the
performance of each board member and the senior executive officers, and to identify areas for improvement together
with a plan for such an improvement. Such (supervisory) board evaluations, which can serve as an effective tool to
allow the board to improve upon crucial governance structures and board processes, and also play an important role in
determining non-executive remuneration, are not regulated or recommended in the corporate governance framework.
The implementation and enforcement of the corporate governance framework: To date, it appears that few companies
have followed the practice of disclosing their corporate governance action plan in their annual report. Of the top-10
companies in terms of market capitalization, only two had a dedicated corporate governance section in their annual report
and/or website. Moreover, a small sample selection of these corporate governance action plans showed that they often
missed key corporate governance elements and could best be described as using “boiler-plate” language. A few companies
had moved beyond corporate governance action plans and had implemented their own, company-level corporate
governance codes or charters, although publicly available information as to how many had developed their own codes is not
available. Of note is that 40 companies, most of those listed on the Official Market, recently agreed to fully implement the
NCGC.
In practice, it is the IR officers that play a leading role in developing and implementing corporate governance practices, in
particular in drafting the above-mentioned action plans and generally recommending corporate governance reforms. The IR
officers in effect take on most of the duties typically performed by the company secretary (e.g. taking minutes, helping to
disclose information and serving as a liaison between the governing bodies), as per Art. 116d LPOS. Anecdotal evidence,
however, suggests that the IR officers effectively report to the management board and that many of their recommendations
are not brought to the board’s attention. In practice, it was generally thought that the board played a secondary role in
shaping the company’s governance framework.
Finally, board evaluations, whether conducted by the board itself or by an outside facilitator, are not known to take place in
Bulgaria.

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Recommendations:
7. The FSC should closely monitor corporate governance related disclosure during this first year of
implementation, in particular to ensure that companies are consistently disclosing their compliance with the
NCGC (or providing qualitative explanations for non-compliance).
8. The BSE may consider developing a model corporate governance disclosure template, which it can make
available on its website to guide companies in their corporate governance disclosure.
9. It may be desirable to modify Art. 100m (4) 3. LPOS and specifically make reference to the NCGC, instead of
generally recommending for companies to follow the OECD Principles, which are in fact directed towards
governments whishing to implement corporate governance policy reforms and not the private sector per se.
10. The NCGC should eventually be amended to include a provision assigning the responsibility of approving the
company’s governance framework to the (supervisory) board. Over time, the NCGC may also wish to suggest the
introduction of corporate governance committees and for companies to develop their own corporate governance codes.
11. The position of company secretary should be strengthened and distinguished from that of the IR officer.
Indeed, both are key positions for implementing good corporate governance in practice, yet are fundamentally different,
with the IR function being primarily responsible for communicating effectively with existing shareholders and potential
investors, and the company secretary supporting the chairman and the board in discharging their duties in an effective
and efficient manner, serving as a key facilitator between the main governing bodies, and advising the board on
corporate governance matters.
12. The NCGC should recommend for boards to conduct self-evaluations, with a particular focus governance
processes and board structures.
13. The NCGC should recommend for larger companies to establish corporate governance committees. Such
committee could be useful in this particular stage of development, as Bulgarian companies gradually separate
ownership from control and nascent corporate governance structures are being introduced. The corporate governance
committee could take on the role of advising the board on nomination and remuneration issues as well, duties that are
typically assigned to separate committees yet could be initially combined so as not to overwhelm the board with too
many committees (in addition to the audit committee).

Principle VI.D. 3: Selecting/compensating/monitoring/replacing key executives

Assessment: Broadly Implemented

The legal and regulatory framework requires or encourages the board to:
ƒ Take responsibility for selecting and replacing executives or executive directors. Art. 221 (4) CA states that the GSM is
the competent body to elect and remove directors, in-line with good corporate governance practice. Art. 241 (2) CA
further clarifies that the members of the management board are appointed and removed by the supervisory board, and
Art. 244 (4) CA determines that the board of directors elects the company’s executives from amongst its members (and,
argumentum ex, would imply that it could remove the executive directors).
ƒ Take responsibility for compensating and monitoring executives or executive directors. Art. 221 (5) CA assigns the
GSM to determine the remuneration of the supervisory board members and non-executive directors on the board of
directors, including directors’ right to receive a part of the company's profits, and to acquire shares in and debentures of
the company. Art. 241 (2) CA specifies in turn that the remuneration of the members of the management board is
determined by the supervisory board. Art. 116c LPOS, on the other hand, states that the compensation of the
(supervisory) board and management board members is set by the GSM and not the (supervisory) board—contrary the
CA and NCGC, which recommends for the GSM to approve, and not set, executive remuneration—and indeed good
corporate governance practice. It is the (supervisory) board that should set executive compensation so as it has
effective authority to ensure that strategy is being properly implemented—which can be achieved by the board if it is
able to tie executive compensation to key performance indicators linked to the company’s strategy. Moreover,
managers will be incentivized to work in the interest of those that set their remuneration, i.e. the majority shareholders—
and not the company and all shareholders as they should. In summary, having the GSM and not the board decide on
compensation may well hollow-out and further weaken the board’s authority over management. Of note is that the
NCGC does not recommend for the board to establish a remuneration committee, which as previously mentioned could
be combined with a corporate governance committee.
ƒ Take responsibility for overseeing succession planning. The legal and regulatory framework does not require or
encourage boards to develop succession policies or support and monitor management in implementing succession
plans.
The implementation and enforcement of the corporate governance framework: Formally, it does appear that executive
compensation is proposed by the board for shareholder approval, in-line with good practice. However, in practice the
nomination, election, and dismissal of executives, as well as their remuneration, is determined by the majority owner.

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Recommendations
14. Art. 116c LPOS should be amended to specify that it is the (supervisory) board that sets executive
compensation and not the GSM, which should be able to approve executive compensation, in particular when
shares and options are offered as part of the executive compensation package due to the risk of dilution.
15. The NCGC should recommend that companies establish a remuneration committee to better allow the board to
set executive compensation. For smaller companies, the duties of this committee could be rolled into the above-
mentioned corporate governance committee.

Principle VI.D.4: Aligning executive and board pay with long term company and shareholder interests

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages (supervisory) boards to:
ƒ Develop and publicly disclose a remuneration policy covering key executives and board members that aligns, and
explains how it aligns, remuneration with the longer term interest of the company and its shareholders. Chapter One,
4.2. NCGC recommends that the level and performance criteria for board remuneration should be: (i) set to attract and
retain qualified board members; (ii) aligned with the long-term interest of the company; and (iii) should match their
contributions and responsibilities to the board (e.g. attendance of board meetings or chairing the board/committees)—
in-line with good practice. However, this same section also recommends that director remuneration be linked to the
company’s performance and results, which, while appropriate for executive directors, is commonly thought to be
inappropriate for non-executive directors as they are not involved in the day-to-day management and are hence unable
to directly affect the company’s performance. Chapter One, 4.3 NCGC does recommend that executive compensation
also include a variable component, which if tied to the right performance indicators could help to align managerial
behavior to the long-term interest of the company and its shareholders. However, this same section also recommends
share options as part of the executive package, which, unless restricted, should be treated with great caution due to
their ability to induce short-term managerial behavior. Restricting options or simply offering equity may be more
appropriate in this respect. Chapter One, 2.2. NCGC specifies that remuneration levels and performance criteria be
stipulated by contract with the directors, in-line with good practice.
ƒ Ensure that the policy’s development, ongoing application, and the setting of actual remuneration is overseen by a
sufficient number of non-executive board members capable of exercising independent judgment. While Art. 116a (2)
LPOS requires at least one-third of the members of the (supervisory) board to be independent, there are no
requirements for independent directors to play an active role in developing the company’s remuneration policy for
executive directors. Similarly, the NCGC does not provide any recommendation in this respect. It should be added that
the NCGC does not contain a recommendation to create a board-level remuneration committee, which in the unitary
board structure would help handle an inherent conflict of interest when determining executive pay.
The implementation and enforcement of the corporate governance framework: There is little to no disclosure on non-
executive and executive remuneration policies, structures, and levels. Board salaries, in particular for non-executives, are
generally thought to be low and negatively impact the ability of companies to attract, motivate, and retain non-executive and
independent directors to the board. Similarly, anecdotal evidence suggests that executive compensation is generally not
linked to key performance indicators that in turn are tied to the long-term interest of the company and its shareholders.

Recommendations:
16. Amend the NCGC to ensure that executive and non-executive compensation is dealt with separately.
17. Amend the NCGC to recommend that it is the independent directors, ideally through a remuneration committee
(which could for smaller companies be combined with the corporate governance committee), who should
develop the company’s remuneration policy for its executive directors and managers. An independent
remuneration committee under the one-tiered board structure should ensure that management is no way involved in
setting their own pay.

Principle VI.D.5: Transparent board nomination/election process

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages boards to:

ƒ Adopt procedures that ensure a formal and transparent board nomination process in which potential conflicts of interest
are appropriately managed. Directors and management board members are elected for not more than a five-year term
of office, unless a shorter term is provided for in the company’s articles of association (see Art. 233(2) CA). Directors
may be re-elected for any number of terms (Art. 233(3) CA); and although some countries have chosen to limit the
number of terms a director may serve on the board, the current provision is entirely appropriate for Bulgaria in the
absence of a deep pool of experienced directors; indeed, it would be against good practice to have to remove a
qualified director following a specified term. However, the board should be aware that directors that serve two terms or

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approximately seven years may cease to be independent due to their longstanding relationship with company officers.
Any natural person possessing the legal capacity to act may be a director (Art. 234 (1) CA). Art. 116a LPOS, however,
prohibits individuals with a specific criminal record from becoming a director, as does the fit and proper criteria issued by
the BNB in Art. 11 (1) LCI, which, inter alia, specifies that a management board member must have a masters-level
university degree in economics or law; possess qualifications in banking and demonstrate at least five years of
professional experience in a senior banking position; and not be a spouse of any other member of a management or
supervisory body of the bank. Supervisory board members, on the other hand, are not required to have a masters-level
university degree in economics or law or have to demonstrate at least five years of professional experience in banking—
against good practice (see Art. 12 LCI). Indeed, it is precisely in banks that the fit and proper criteria for supervisory
board members should be equal, arguably even higher that those for the management team, due to the important
oversight function played by the board and importance of risk management and control processes in the banking sector.
In addition, Art. 234 (1) CA states that legal persons may also be a director, where provided for in the articles of
association, in which case the legal person designates a representative to perform its board duties. This runs counter to
good corporate governance practice, largely because it is difficult for shareholders to determine the personal
experience, qualifications, and characteristics of a legal as opposed to a natural person. Of note is that Art. 10 LCI
stipulates that no legal person shall be eligible for election to the management board or supervisory board of any bank.
The CA is silent on how candidates to the (supervisory) board are nominated. In some jurisdiction, shareholders with 5
percent (or more) are allowed to directly nominate directors for election to the (supervisory) board, and Art. 223a (1) CA,
which allows shareholders with 5 percent of the vote to include items on the GSM agenda, could be interpreted to mean
such. However, in absence of a clear regulation or interpretation by the courts, at present it is assumed that any
shareholder may nominate a candidate for a (supervisory) board seat.
ƒ Adopt procedures for the election of board members that ensure effective shareholder participation in the nomination
and election process. Art. 224 (1) CA calls for the names, permanent addresses, and personal qualifications of the
board candidates to be furnished to shareholders for due consideration when electing the (supervisory) board. Chapter
One, 3.7. NCGC specifies that the election of directors must be done through a transparent process, which should
ensure that timely and complete information on a candidate’s personal and professional qualities is provided to the
GSM. However, the NCGC does not provide guidance as to how to best organize a transparent nomination and
election process, which is considered by many as one of the key means to improve corporate governance practices.
ƒ Disclose to shareholders the nomination procedures including the role and composition of any nomination committee.
Neither the law or regulation, nor NCGC require the board to disclose the nomination process, including the role of a
nominations committee, to shareholders.
The implementation and enforcement of the corporate governance framework: In practice, board members are
formally appointed and approved by the majority shareholder; at times, the exact number of board seats a majority owner
may fill are specified by a shareholder agreement. Other shareholders, in particular minorities, are effectively unable to
participate in the nomination process with the help of counterproposals.

Recommendations:
18. The NCGC should be amended to specifically recommend how best to structure the nominations process. This
process would ideally encompass the creation of a nominations committee, which could initially be combined with the
corporate governance committee. The committee would: (i) develop a “board profile”, serving to identify the ideal
attributes desirable in a board member, as well as ideal mix-of-skills and mix between executive, non-executive, and
independent directors; (ii) identify and recommend to the GSM potential candidates for directorship, both in follow-up to
nominations by shareholders but also following their own search; (iii) ensure that candidates meet the relevant “fit and
proper” criteria, if applicable; (iv) oversee the board induction/appointment process; (v) develop criteria for determining a
board member’s independence and the duty to keep shareholders informed as per their independent status (or loss
thereof); (vi) oversee the conduct of any background checks, interviews, reference checks, etc. on candidates; and (vii)
consider the needs of individual board committees in terms of specific qualifications and skill sets.
19. The NCGC should further recommend that the nomination process be conducted in a transparent manner and
disclosed to shareholders. More specifically, the board or its nominations committee should ensure that the list of
candidates, relevant background information on the candidates, including by whom the candidates were nominated by,
counter nominations, as well as actual voting, should be publicly disclosed.
20. The NCGC should be amended to contain a list of model attributes a director should be able to demonstrate,
which could compliment the BNB’s fit and proper criteria.
21. The CA may be amended to lower the maximum tenure to three instead of five years.
22. The CA or other appropriate legal or regulatory norm should be amended to determine who is able to nominate
candidates to the (supervisory) board.
23. The BNB should review its fit and proper criteria, in particular with respect to its directors.

Principle VI.D.6: Oversight of insider conflicts of interest, including misuse of company assets and abuse in related

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party transactions

Assessment: Partially implemented

The legal and regulatory framework requires or encourages the board to:
ƒ Oversee a system of internal controls designed to facilitate the monitoring and managing of extra-ordinary transactions.
Article 114 (1) (a) LPOS states that the board of directors or management board may only effect transactions for fixed
asset under or equal to 33 percent of the company’s total assets (as per last year’s audited financial statements, i.e.
book value, when assets are transferred and as per market value when fixed assets are acquired). Any transaction
exceeding this threshold is subject to shareholder approval, unless the transaction was conducted, inter alia, during the
course of ordinary business (Art. 114 (8) LPOS), with “ordinary business” being defined as the totality of acts and
transactions effected by the company within the objects thereof and in conformity with the customary commercial
practice, excluding any transactions and acts arising from contingency circumstances. On the other hand, the
(supervisory) board is not specifically mandated to oversee this process.
ƒ Oversee a system of internal controls designed to facilitate the monitoring and managing of related party transactions.
Article 114 (1) (b) LPOS states that the board of directors or management board may only effect transactions for fixed
asset under or equal to 2 percent of the company’s total assets (as per last year’s audited financial statements, i.e. book
value, when assets are transferred and as per market value when fixed assets are acquired by related parties). Any
transaction exceeding this threshold is subject to dual approval: that of the board of directors or management board, as
well as approval through the GSM. Art. 114 (4) further specifies that when several transactions are conducted that
individually fall under the above thresholds, however, in aggregate exceed the thresholds specified in Art. 114 LPOS,
then these transactions are to be treated as one and subject to the relevant approvals, if effected within a period of
three calendar years and the transactions are essentially conducted with the same party or constitutes a related party
transaction. On the other hand, the (supervisory) board is not specifically mandated to oversee this process.
ƒ Manage self-dealing and related party transactions consistent with the duty of board members to act in the best
interests of the company and its shareholders. With respect to the board’s role in assuring itself that a robust control
framework is in place to effectively identify and manage self-dealing and related party transactions, the laws and
regulations are silent. The NCGC (Chapter Two, 3. and 4.) on the other hand generally recommends that the company
establish an internal control system that guarantees effective reporting and disclosure of information, and that this
system be developed and operated to ensure the early identification of any material risks the company may face, and to
effectively manage those risks. More specifically, Chapter 1, 5 recommends that the members of the board of directors
(identical provisions exist for supervisory and management board members) develop a by-law on conflicts of interests,
and further act to prevent any real or potential conflict of interests, and to disclose these conflicts should they
nevertheless occur. And while the management board is required to adopt and follow a professional code of conduct
(see Chapter One, 1.8.), which would presumably cover issues with respect to conflicts of interests, the (supervisory)
board is not. The issue of providing loans to directors or managers is not addressed in either the CA, LPOS or NCGC.
Good practice would call for such loans to be entirely forbidden or conducted under strict guidelines and market
conditions.
The implementation and enforcement of the corporate governance framework: Related party transactions continue to
be an issue among companies in Bulgaria, in particular the larger holding companies. It was generally thought that policies
and procedures, as well as internal control structures, concerning related party transactions were weak to non-existent, and
that disclosure in this area was haphazard. IR officers play an important role both ex ante and ex post, in that they are
responsible for developing an “insiders list” in which directors and managers are required to disclose their interests, as well
as facilitating disclosure. However, given that most IR officers do not report to the board or an independent audit committee,
and that the internal audit function which reviews such processes is still underdeveloped, the influence and ability of
individual (supervisory) board members to proactively address this sensitive issue is likely to be thwarted by the interested
parties, who are thought to generally be synonymous with the majority owner.
Of note is that the auditors do not play the assigned role with respect to related party transactions and the company’s
internal control framework by, respectively, monitoring the disclosure of related party transactions and providing the
company with a management letter on the strength of the company’s internal controls (auditors are in fact obliged to provide
a management letter, in-line with good practice, however, do so to management and not to the (supervisory) board or,
ideally, its audit committee, as per Art. 33 (3) LIFA).

Recommendations:
24. The FSC should amend the definition of an “interested party” in Art. 114 (5) LPOS. The amendment would
expand the current definition to include: (i) board members of the parent, affiliate or sister companies or associates,
wholly or partially owned; (ii) the parent, stepparent, mother-in-law, father-in-law, sibling, spouse, child, stepchild, son-in-
law, daughter-in-law, brother-in-law, or sister-in-law, as well as any person (other than a tenant or employee) sharing the
household of the above-mentioned natural persons; or (iii) any person whose judgment or decisions could be influenced
as a consequence of an arrangement or relationship between or involving themselves and any of the persons in Art. 114
(5) LPOS.

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25. The NCGC should be amended to include a provision on providing loans to directors or managers, stipulating
that these be at least conducted at market conditions or entirely forbidden (which they should for bank
directors).
26. The NCGC should be amended to focus on the role of the IR officer, or ideally company secretary, as well as
internal auditor in developing policies on, respectively monitoring related party transactions.

Principle VI.D.7: Oversight of accounting and financial reporting systems, including independent audit and control
systems

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages boards to:

ƒ Oversee the administration of internal controls designed to ensure: (a) the integrity of the corporation’s accounting and
financial reporting systems; and (b) that appropriate systems of control are in place, in particular, systems for risk
management, financial, and operational control. The CA and LPOS do not have any requirements for boards to set
policies, oversee and/or guide management with respect to risk management, internal controls, internal audit
procedures, and the independent external audit, which is not unusual as most company or securities laws do not
legislate in these areas. Instead, most jurisdictions have chosen to recommend good practice in this area through
corporate governance codes. In Bulgaria, the NCGC does indeed cover these control and audit issues in Chapter One,
in which the (supervisory) board is recommended to establish a corporate-wide risk management policy, control
procedures and compliance function. Chapter Two further recommends that the company set-up an internal control
system that guarantees effective reporting and disclosure of information, and that this internal control system be
developed and operated in order to ensure the early identification of any material risks the company may face and to
effectively manage those risks. However, concrete guidance as to how to structure and implement these control
structures and processes is not offered, as the U.K.’s national corporate governance code, the Combined Code, does
23
for example in its annexes.
Banks in turn are required to submit to the BNB a description of the risk management and internal control systems when
applying for a banking license (see Art. 13 (2) LCI). Art. 9 LCI specifies that the bank’s articles of association shall state,
inter alia, the particulars of the internal control system of the bank. Art. 15 (1) LCI then states that a banking license is
only granted by the BNB if the applicant certifies that the following conditions, inter alia, have been fulfilled: (i) internal
control rules have been developed, including clear administrative and accounting procedures; (ii) an internal control unit
has been set up, and the employees appointed possess the professional qualifications and experience required for the
operation; (iii) reliable internal rules for management have been elaborated, including a clear organizational structure
with precisely defined, transparent, and adequate levels of responsibility and effective procedures for identification,
management, monitoring, and reporting of risks to which the bank might be exposed. All of these provisions are
generally in-line with good corporate governance policy. However, the LCI and the BNB’s Ordinance No. 10 on Internal
Control (Ordinance No. 10) deviate from good practice in a number of cases: First, Art. 74 (1) LCI states that any bank
shall establish a specialized internal control unit, whereof the principal officers shall be elected and dismissed by the
GSM. However, good corporate governance would specify that management is responsible for the company’s internal
controls and should thus be held accountable for establishing and implementing a robust control function. Second, Art.
73 (1) LCI (and Art. 5 (4) BNB Ordinance No. 10) regulates that the competent management body of a bank adopt and
review from time to time, inter alia: the risk management and control policy; the organization of operational control,
including the rules and procedures for approving, effecting and reporting of operations; the internal rules and procedures
for risk monitoring and effectiveness of control systems and for reporting of weaknesses detected in the organization
and operations of structural units. However, it should be specified that the supervisory and not management board is
responsible for approving risk management and control policies, while the management board is responsible for
developing and implementing these. Third, while Ordinance 10 does refer to the establishment, scope, nature, and
structure of the internal audit function, as well as qualifications of the head of internal audit, it does not regulate one
important aspect: the importance of a direct reporting line to the board and its audit committee to ensure that the internal
auditor has unfettered access to the board and thus is independent from management. And finally, there is no mention
for the board to establish an audit committee in the LCI or Ordinance No. 10, which serves the important role of
coordinating these various control and audit functions and assuring the board that a robust control environment is in
place.
ƒ Manage the overall relationship with the external auditors so as to be reasonably satisfied that the audit of the financial
statements has been conducted in an independent and competent manner. As previously mentioned in Section V.C.,
there are critical gaps in the corporate governance framework with respect to the independent audit, in particular given
that few companies have established independent audit committees.

23
See http://www.frc.org.uk/corporate/combinedcode.cfm

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ƒ Establish internal programs and procedures to promote compliance with applicable laws, regulations and standards,
including the company’s ethical code. The programs should ensure that compliance is rewarded and breaches of law
are met with dissuasive consequences or penalties. Compliance programs should also extend, where possible, to
subsidiaries. As previously mentioned, the NCGC does indeed recommend that the (supervisory) board establish a
corporate-wide compliance function, although it does not specifically state that this function be extended to all
subsidiaries.
The implementation and enforcement of the corporate governance framework: The boards of most companies do not
appear to play a key role in assuring themselves that accounting and financial reporting systems, including independent
audit and control systems, are robust and defensible. Indeed, few companies have established audit committees, which
play an important role in this respect, or appear to have the necessary expertise—in particular with respect to finance and
accounting, but also matters relating to the control and audit environment—at the board level to set policies in these key
areas and guide management in implementing these policies.

Recommendations:
27. The LCI and/or Ordinance No. 10 should be amended to specify that the supervisory board is responsible for
establishing appropriate policies in the area of risk management, internal control, and internal audit policies,
whereas management is responsible for developing specific processes and generally implementing a robust
risk management, control, and audit framework. In particular the issue of internal audit independence should figure
prominently in the amendment of the LCI and/or Ordinance 10, establishing the importance of the independent internal
audit and the necessity to have the internal auditor reporting directly to the supervisory board, with a dotted reporting
line to the management board. Moreover, the supervisory board may wish to establish a board-level risk committee
that focuses on establishing the bank’s risk appetite and policies, as well as an audit committee which oversees the
internal control, compliance, internal audit, and external audit processes.
28. The NCGC should be amended to include guidance on the role of the board and management bodies in
building a robust control environment. Specific model guidance notes for the board in establishing policies on risk
management, internal control, and internal audit structures and processes, as well as the compliance function, should
be annexed to the NCGC. The NCGC may also wish to highlight the role of the audit committee, and attach a model
audit committee charter for practical guidance.

Principle VI.D. 8: Overseeing disclosure and communications processes

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages the (supervisory) board to:
ƒ Oversees the disclosure of material information about the company. The LPOS has a number of provisions on
information disclosure, however, typically assigns this responsibility to management and does not discuss the role of the
(supervisory) board in information disclosure (the CA is completely silent in this respect). For example, Art. 116d LPOS
does oblige all joint stock companies to appoint an IR officer, however, specifies that this officer is appointed by
management (Art. 116d (1) LPOS) and accountable to the GSM rather than the board (Art. 116d (4) LPOS). And Art.
100l (2) LPOS assigns the responsibility for preparing and publicly disclosing financial statement to the management
and not supervisory bodies. The NCGC does, however, recommend that the (supervisory) board define the company’s
disclosure policy and establish guidelines for the relationships with investors, in-line with good practice (see Chapter
One, 1.7, and Chapter Four, 1.).
ƒ Take responsibility for the company’s communications strategy with the shareholders. On the other hand, Chapter One,
1.7, and Chapter Four, 1. NCGC calls for the (supervisory) board to inform shareholders in a timely manner, although
the act of informing shareholders is probably best left to management and IR officers. Chapter Four, 2. NCGC further
recommends that that (supervisory) board oversees the implantation of and ensure proper support for an effective
system for information disclosure, again in-line with good practice.
ƒ Hire an IR officer who reports directly to the board. As mentioned above, Art. 116d LPOS does oblige all joint stock
companies to appoint an IR officer, however, specifies that this officer is appointed by management (Art. 116d (1)
LPOS) and accountable to the GSM (Art. 116d (4) LPOS). There is no direct or indirect reporting relationship to the
board.
The implementation and enforcement of the corporate governance framework: Given that information disclosure is
generally underdeveloped and that a number of disclosure items that are mandated by law are not in fact disclosed, for
example with respect to the disclosure of board remuneration and corporate governance improvement plans, the
(supervisory) boards do not appear to play a role in effectively overseeing disclosure and communication processes.

Recommendations
29. The NCGC should be amended to specify that while the board is responsible for setting the company’s overall
disclosure policy, it is management’s responsibility for implementing this policy through the IR function.
30. Art. 116 LPOS should be amended to specify that the IR officer has a full reporting line to management,

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however, that the s/he have unfettered access to the board should management not be following appropriate
disclosure practices as established under the company’s disclosure policy. The board might wish to assign a
board member or committee, e.g. the board’s corporate governance committee, with the task for developing the
company’s disclosure policy, and guiding and monitoring management and the IR officer in implementing that policy.

Principle VI.E: The board should be able to exercise objective independent judgment on corporate affairs.

Summary of findings and recommendations from the 2002 CG ROSC: This Principle was materially not observed in
2002, in particular with respect to the composition of and nomination process for unitary boards, as neither the CA nor the
LPOS or other regulations required for boards to include independent directors.

Principle VI.E.1.: Boards should consider assigning a sufficient number of non-executive board members capable
of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key
responsibilities are ensuring the integrity of financial and non-financial reporting, the review of related party
transactions, nomination of board members and key executives, and board remuneration.

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages:

ƒ A proportion of the board to be independent. Under the two-tiered board system, Art. 241 (3) CA specifies that no
director may simultaneously serve on both the managing and supervisory board of one company. All supervisory board
members are hence, at a minimum, non-executive directors. Art. 244 (4) CA in turn specifies that under the unitary
board model the board of directors shall assign the management of the company to one or several executive directors
and that these executive members shall be fewer than the remaining non-executive members of the board. This
provision thus similarly requires that a majority of board members must at least be non-executive. Art. 116a (2) LPOS
further specifies that at least one-third of directors serving on either the supervisory board or board of directors of any
public company must be independent. The NCGC, too, recommends that boards be composed of a number of
independent directors, although it leaves the exact number to the company and its articles of association. Chapter One,
3.3. NCGC recommends that the chairman of the board be an independent director, in-line with good practice; no such
provision, however, exists for the chairman of the supervisory board.
ƒ Criteria for independence to be defined that address the primary agency conflicts. Art. 116a (2) LPOS defines
independence. Thus, a director is not considered independent when s/he: (i) is a company employee; (ii) is a
shareholder with a 25 percent (or more) equity stake; (iii) has sustained business relations with the company; (iv) is a
member of a management or supervisory body, a managerial agent or a person serving any commercial corporation or
any other legal person referred to in items (ii) and (iii); and/or (v) a person connected with another member of a
management or supervisory body of the company. The provision requiring (supervisory) boards to have at least one-
third of its members be independent is in-line with good practice. However, the definition of independence could be
strengthened by including additional reasons for excluding a director as being independent, for example, when: (i) a
director’s remuneration constitutes a significant portion of his or her annual income; (ii) the director is a member of the
immediate family of any individual who is, or has been at any time during the past five years, employed by the company
or its related parties as an executive officer; or (iii) has not served on the (supervisory) board for more than seven years.
ƒ The companies to declare who they regard as independent and the reasons. Neither laws and regulations, nor the
NCGC require companies to identify which directors are independent.
ƒ The company’s independent directors to oversee tasks where there is a potential for conflict of interest including: (i)
oversight of the integrity of financial and non-financial reporting, including the external audit; (ii) review and
management of related party transactions and self-dealing; (iii) nomination of board members and key executives; and
(iv) board and executive remuneration. Neither laws and regulations, nor the NCGC require, respectively recommend
for boards to ensure that their independent directors oversee these potential conflict of interest situations.
The implementation and enforcement of the corporate governance framework: Almost all interlocutors expressed their
doubt as to whether Art. 116a (2) LPOS was being fully implemented, with most citing concerns as to whether directors
designated as independent could be truly seen as such. For example, it was noted that a number of academics served as
independent directors on boards, yet acquired a great amount of their personal wealth from the directorship, at least relative
to their low income as university professors, and hence were unlikely to truly be considered as independent. Moreover,
even those directors that were formally considered as independent were generally thought to not possess the necessary
skills and characteristics to allow them to effectively fulfill their role. Finally, a review of the top ten listed companies in
Bulgaria found that not a single had clearly identified their directors as independent in their annual report or on their website.

Recommendations:
31. The LPOS or NCGC should require, respectively recommend for companies to declare who they regard as
independent and the reasons. Good practice would call for the independent directors to be clearly identified both on
the company’s website and annual report.

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32. The definition of an independent director should be amended, in-line with the above comments.
33. The NCGC should be amended to discuss the role of independent directors (and board committees composed
of independent directors) in providing assurance to shareholders that (real or perceived) conflicts of interest
are being handled in an appropriate manner, including the: (i) oversight of the integrity of financial and non-
financial reporting, including the external audit; (ii) review and management of related party transactions and
self-dealing; (iii) nomination of board members and key executives; and (iv) board and executive remuneration.
34. The NCGC could further be amended to also specify that the chairman of the supervisory board also be
independent.

Principle VI.E.2: Clear and transparent rules on board committees

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages the board to:
ƒ Fully disclose the mandate, composition and working procedures of the most important standing and ad hoc board
committees. Such disclosure should form an essential component of the company’s report on its corporate governance
practices. Neither the legal nor regulatory framework for listed companies and banks requires a board to form
committees. This is in fact the case in most jurisdictions, which have rightfully chosen not to legislate or regulate the
board’s operating procedures and processes, and have instead relied on codes of good practice to offer guidance to
boards. And while Chapter One, 6. NCGC does indeed recommend for boards to establish committees, in particular an
audit committee comprised of independent directors and experts, and for this committees to be established according to
formal terms of reference, the NCGC does not offer any practical guidance on the role, structure, composition, and
working procedures, in particular relationship with the board.
The implementation and enforcement of the corporate governance framework: In practice, it was thought that but a
handful of listed companies, in particular those with unitary board models, had established board-level committees and
hence were able to handle conflicts of interest in an effective and independent manner. However, a number of companies
were in the process of establishing committees, in particular audit committees, in follow-up to the publication of the NCGC.

Recommendations:
35. The NCGC should be amended to expand on the role, structure, composition, and working procedures of board
committees, in particular the audit committee. The NCGC should have an annex with a model committee charters.
36. The BNB may wish to require banks to form audit committees, given the complexity of financial information, as
well as control and audit processes within financial institutions, and the important role banks play in the
economy.

Principle VI.E.3: Board commitment to responsibilities

Assessment: Partially Implemented

The legal and regulatory framework requires or encourages boards to:

ƒ Provide comprehensive disclosure about each board member’s activity including: (i) the member’s length of service as a
board member and their tenure on various board committees; (ii) basic information about primary employment, if any;
(iii) other board positions held concurrently; (iv) attendance records at board and committee meetings; and (v) any other
work undertaken on behalf of the board and the associated remuneration. The legal and regulatory framework does not
require disclosure of the above information as such. There are specific instance where information on directors is to be
disclosed, for example, to shareholders when electing directors (see Art. 24 (2) CA); however, as stated above, there is
no overall disclosure requirement.
ƒ Provide for board members initial and ongoing training relevant to the performance of their individual duties. Each board
member’s training needs are re-assessed periodically and additional training is provided to address any needs to
enhance the board member’s capabilities. Chapter One, 3.5. NCGC, recommends that (supervisory) board members
have the requisite knowledge and experience and, following their election the new (supervisory) board attend an
induction program. Continued professional training of directors is also recommended by the NCGC.
The implementation and enforcement of the corporate governance framework: It is not thought that directors serve on
too many boards and hence are unable to effectively perform their board duties. Most boards meet approximately once
every two months, in-line with good practice and the minimum legal requirement of four meetings per year (see Art. 242 (4)
CA and Art. 244 (3) CA). Moreover, board members were generally thought to regularly attend board meetings, although
this information is not publicly disclosed. .
With respect to continuous professional education, the Association of Banks for example trains managers and directors on
relevant banking issues (e.g. on credit and risk); similarly, the BNB itself offers seminars and lectures on relevant topics.
However, no similar institute appears to exist for companies in the real sector; and while the Bulgarian Investor Relations
Directors Association, Bulgarian Investors Association and the ICPAB are all known to include corporate governance and

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Corporate Governance Policy Assessment Bulgaria – June 2008

related issues in their activities and training programs, these course offerings are geared to their respective members and do
not include senior managers and (supervisory) board members.

Recommendations:
37. The NCGC should be amended to include a provision limiting the number of board seats a director can hold to a
number that will not impede a director’s ability to effectively carry-out his or her board duties.
38. The NCGC should further be amended and recommend that information on each board members activities,
including membership on board committees, attendance record and other board positions held, be made
publicly available in the annual report’s corporate governance section and company website.

Principle VI.F: In order to fulfill their responsibilities, board members should have access to accurate, relevant and
timely information.

Assessment: Partially Implemented

Summary of findings and recommendations from the 2002 CG ROSC: This Principle V.F. was deemed to be materially
not observed in 2002. The main reason was that directors did not have specific rights to inspect the accounting records of
the company and generally had limited access to company information. The policy recommendation was to grant directors
with broad access to company information, records, documents and property where needed to make informed decisions on
matters within the authority of the (supervisory) board. Directors were to also be able to obtain independent professional
advice at the company’s expense.
The legal and regulatory framework requires or encourages companies to:
ƒ Ensure that both executive and non-executive directors are provided with access to information that they consider
relevant for the fulfillment of their responsibilities. Art. 243 CA stipulates that the management board report on its
activities to the supervisory board at least once every three months (Art. 243 (1) CA, and that the supervisory board in
turn may at any time require that the management board provide information on any matter concerning the company
(Art. 243 (3) CA). Art. 243 (2) CA further requires the management board to immediately inform the chairman of the
supervisory board of all events or circumstance material to the company. Art. 244 CA, which in turn focuses on unitary
boards, is not as detailed and clear as Art. 243 CA in terms of information rights, and only requires that the board of
directors meets regularly, but not less than once every three months, to discuss the company’s state of affairs and
development prospects (see Art. 244 (3) CA); Art. 244 (5) CA requires that each director immediately inform the board
chairman of all circumstance material to the company.
ƒ Ensure that the company’s code of ethics prohibits the withholding or delayed disclosure of relevant information to the
board and there are effective enforcement mechanisms for ensuring that information is not withheld from the board.
While the NCGC does recommend that the company adopt and implement its own code of ethics/conduct, it does not
provide any detail on its content or with respect to a duty to promptly provide relevant information to the board.
ƒ In connection with proposed transactions or activities that fall outside the company’s ordinary course of business,
company disclosures indicate that the boards have been provided with timely advice, at no cost to them, from qualified
advisors (e.g. lawyers, accountants, financial advisors as appropriate) about the processes they should follow and
factors they should consider in fulfilling their duties of loyalty and care to the company in the context of the transaction
or activity. Company disclosures indicate that board members who are asked to participate in independent committees
are able to retain independent advisors as they see a need, and such advice is paid for by the company. Art. 243 (4)
CA specifies that the (supervisory) board is able to employ the services of experts to carry-out any necessary
investigations to support their duties as board members. There are no specifications in the law or NCGC to allow
committees to retain their own advisors.
The implementation and enforcement of the corporate governance framework: It was generally thought that the quality
of board briefing books and information by management to the board could be improved upon. Few companies are thought
to have ethics codes, specifying management’s duty to provide the board with material information on the company. Finally,
it is not generally thought that (supervisory) boards and board committees have access to their own, outside advisors.

Recommendations:
39. Amend Art. 244 to specify that the executive board members and other officers are under the same obligation to
furnish the non-executive board members with relevant information in a timely manner.
40. Amend the NCGC to include a provision in which company boards and their committees are able to retain
advisors on the company’s expense.
41. Annex to the NCGC a model code of ethics, which would include a requirement for all company officers and
directors to promptly provide information to the board, both to the executive and non-executive members.

– Page 78 out of 78 –
 Bulgaria Terms/Acronyms

AA: Accountancy Act

BNB: Bulgarian National Bank

BSE: Bulgarian Stock Exchange-Sofia

CA: Commerce Act (basic company law)

CEO: Chief Executive Officer

CDAD: Central Depository AD

CG ROSC: Corporate Governance Report on the Observance of Standards and Codes

Endorsed IFRS: International Financial Reporting Standards adopted by the EU

ESOP(s): Employee Stock Option Plan(s)

EU: European Union

FSC: Financial Supervision Commission

FSCA: Financial Supervision Commission Act

GSM: General shareholder meeting

GCGF: Global Corporate Governance Forum

IAS/IFRS: International Accounting Standards/International Financial Reporting Standards

ICPAB: Institute for Certified Public Accountants in Bulgaria

IFAC: International Federation of Accountants

IFC: International Finance Corporation

IMF: International Monetary Fund

IOSCO: International Organization of Securities Commissions

IR: Investor relations

ISA: International Standards on Auditing

LC: Labor Code

LCI: Law on Credit Institutions

LIFA: Law for the Independent Financial Audit

LPOS: Law on the Public Offering of Securities

LAMFFI: Law Against Market Frauds with Financial Instruments

MD&A: Management Discussion and Analysis (Activity Report)

MoU: Memorandum of Understanding

NCGC: National Corporate Governance Code

OECD: Organization for Economic Cooperation and Development

RA: Registry Agency

RR-BSE: Rules and Regulations of Bulgarian Stock Exchange–Sofia

SOE: State Owned Enterprise

SRO: Self-Regulatory organization

TOR: Terms of Reference

 This report is one in a series of corporate governance country assessments carried out under
the Reports on the Observance of Standards and Codes (ROSC) program. The corporate gover-
nance ROSC assessments examine the legal and regulatory framework, enforcement activities,
and private sector business practices and compliance, and benchmark the practices and compli-
ance of listed firms against the OECD Principles of Corporate Governance.

The assessments:

use a consistent methodology for assessing national corporate governance practices

provide a benchmark by which countries can evaluate themselves and gauge progress in
corporate governance reforms

strengthen the ownership of reform in the assessed countries by promoting productive
interaction among issuers, investors, regulators and public decision makers

provide the basis for a policy dialogue which will result in the implementation of policy
recommendations

To see the complete list of published ROSCs, please visit

http://www.worldbank.org/ifa/rosc_cg.html

To learn more about corporate governance, please visit the IFC/World Bank's corporate governance resource
Web page at: http://rru.worldbank.org/Themes/CorporateGovernance/

Contact us at CG-ROSC@worldbank.org