Inheritance represents the passage of the estate of the deceased (grantor) to another person/s (successor/s). The property of the grantor includes both their assets and debts. Part of the assets of the deceased is the shares they own in certain companies i Bulgaria.
In this article we will briefly introduce the peculiarities of the process of inheritance of shares in limited liability companies – the Bulgarian form of which is the OOD (or Ltd).
The indicated distinction needs to be made, insofar as there are at least two partners in the case of an Ltd., and in the case of a One-man Ltd. there is a sole owner of the shares, and upon his death, in practice, the company remains without any persons to take over the company's shares until the entry of the relevant heirs by law and/or by will.
In Art. 129 (1) of the Bulgarian Commerce Act (abbr. CA), it is stated that "company shares may be transferred and inherited." The share represents the number that corresponds to the value of the contribution of the partner in the company’s capital. The term "shareholding" covers the membership relationship in the company, which incorporates some material and immaterial rights and obligations.
Art. 129 CA provides details on how the shares may be transferred - as between partners, to third parties, as well as the form of the transfer agreement. Legislation is relatively sparse on the succession of shares, only outlining the possibility of inheritance, but not the procedure for its implementation. Case law is also inconsistent.
The absence of detailed regulation raises several issues that will be addressed in this article.
I. How do the shares pass on from the grantor to the successor - automatically or by a decision of the General Meeting of the company?
The answer to this question depends on what is provided in the articles of association:
- If the articles of association exclude the succession of shares, then the successors cannot enter into a membership relationship, respectively be subject to the rights and obligations ensuing therefrom. However, they must receive the monetary equivalent of the shares held by their grantor.
- The articles of association provide that the successors of a deceased partner automatically become partners. In this case, approval of the General Meeting (GM) was given at the very beginning when the articles were signed and a subsequent decision is not necessary. The possibility provided for in the articles that the successors of a deceased partner can become partners automatically is supported with the following arguments: in companies where there is a strong personal element, such as collective and civic associations, the law does allow companies to continue to operate after the death of one of the partners (Art. 97 (1) CA and Art. Art. 363, letter 'b' OCA). By stipulating in the articles of association that the successors become partners automatically, the partners are aware of who their partner would be at the death of each of them.
- The articles of association do not govern the effects on the inheritance of shares. Due to the controversial case law in this area, there are two separate views: first, that the successors are treated as third parties (arg. from Art. 129 (1), sentence. 2 in connection with Art. 137 (1), p. 2 CA) and a decision of the GM is needed; the second - the entry of successors in the membership relationship occurs automatically, without the need for a decision of the GM (arg. from Art. 137 (1) in connection with Art. 137 (3), sentence 3 CA, i.e. outside the hypotheses envisaged by law, the legal consequences cannot be subject to the approval of the GM.
It is important to note that when inheriting company shares, the heirs do not acquire a specific number of shares. They receive pro rata shares of each inherited company share according to their inheritance rights. E.g. if the deceased partner had 10 company shares and left 2 adult children as heirs, each of them acquires ½ ideal share of each of these 10 shares, not 5 shares. Co-ownership of shares may be terminated by a contract for the transfer of common shares from one heir to the other. A contract for the voluntary division of shares acquired by inheritance can also be concluded. These contracts must have notarized signatures. Until then, however, the heirs may exercise their rights jointly and be jointly and solidary liable for the obligations under this section, but they may designate a person to represent them before the Company.
II. Depending on whether the successor is a partner, a third party to the company, or a minor, the way in which the shares pass on to the successor is also different.
- If the successor is a partner in an LTD company, the successor’s share increases automatically with the adoption of the inheritance of the share capital that was property of the deceased partner.
- If the successor is a third party, legal theory maintains that if the articles of association state that the successor automatically becomes a partner, then there is no need for a decision of the General Meeting (GM) to admit them. There is also the opposite view that owing to the successor’s mixed nature - between partnerships and capital companies, where LTDs are concerned, a decision by the GM is necessary to admit the successor as partner (arg. from Art. 122, sentence. 1 and Art. 137 (1), p. 2 CA, which are of imperative legal nature) - to that effect Decision № 90 of 23.06.2010 of SAC under case № 282/2010, the TC; Order № 232 of 29.03.2002 of SCC under civ. case № 173/2002; Decision № 459 of 10.06.2004 of SCC under civ. case № 1636/2003, the TC.
- If the heir is a minor: The general rule is stated in Art. 65, para. 1 of the Trade Act, where the requirement that the partners should be legal persons is introduced. Exceptionally, however, it is permissible for the minor heir to become a partner in the company, provided that the general meeting adopts a decision on the adoption of a new company contract, in which it is specified that the participation of the minor partner is only capital and he is exempt from non-property obligations. For this purpose its activities with the remaining partners, and the child will rec, the heir must have at least limited legal capacity, that is, he must have reached the age of 14. Minors and heirs placed under full prohibition cannot acquire membership rights. In this case, the company will continue its activity, whilst the minor would receive the monetary equivalent of his bequeathed shares.
Preconditions for a successor to acquire partner status:
a) accepting the succession and submitting a written statement to the company that they wish to be admitted as a partner and accept the terms of the articles of association;
b) a decision of the GM approving the admission of the new partner with a majority of ¾ of the shares, to be reflected in the Minutes and to have the signatures of the partners and its content notarized, unless the company contract provides for a simple written form/Art. 137, Section 1, p. 2, in conjunction with Section 3, in conjunction with Section 4 of the Trade Act. In the case that one of the heirs is already a partner in the company, he does not need a decision of the general assembly to accept him as a partner.
c) entry of the new partner in the Commercial Register and proclamation of the new articles of association. According to Art. 4 of the Commercial Register Act (abbr. "CRA") in the Commercial Register shall be entered only these circumstances, for which there are legal provisions requiring their entry. While entering the inheritance of shares in LTD companies is not provided for, it must be done, because, according to Art. 596 (2) CPC, the changes in the registered circumstances must be entered.
The heir becomes a partner from the entry of this circumstance. Therefore, until this moment, the heir has no right to dispose of the company share of his testator, because he does not have the status of a partner in the Ltd. Until then, he can only dispose of his claim, because by accepting the inheritance, he does not automatically become a partner and does not acquire membership rights, but inherits only a claim.
In the event that the consequences of the inheritance of company shares are not stipulated in the company contract and the other partners refuse to accept the heirs in the company, the share of the deceased partner may be taken over by one of the other partners, by the other partners in accordance with their share of the company or by a third party, but in compliance with the requirements for accepting a new partner. If it is impossible to take over the share of the deceased partner in any of the mentioned ways, the capital of the LLC must be reduced by the share of the deceased partner.
In any case, an heir who is not accepted as a partner or who due to incapacity cannot become a partner, has the right to receive the monetary equivalent of the inherited shares. The monetary equivalent of the inherited shares is calculated based on the accounting balance at the end of the month in which the partner's death occurred. There is no statutory time limit within which the company must draw up this balance sheet and make the payment. The heir can make a request for the payment of his share by setting an appropriate term. If the company does not voluntarily pay him the value of the inherited shares, the heir must file a legal claim.
III. Inheritance of company shares in a One-man Ltd.
A special case is the inheritance of company shares upon death of the sole owner of the capital in a one-man LLC. Pursuant to Art. 157, Para. 1 of the of the Trade Act, in the event of the death of the sole owner of the capital, the one-man LLC is terminated, unless the heirs have declared that they wish to continue the company's activities. This means that the law enables the heirs to continue the company's activities. The conditions for this are that the heirs are of legal age, able to act and express their will for it. If the heir is one, accordingly, he would become the sole owner of the capital and will continue the commercial activity of the company. However, if there are several heirs, then all of them, provided they have accepted the inheritance, would become partners and the existing one-man LLC will be transformed into an LLC. The share of each of the heirs would then be determined by their inheritance share of the deceased owner of the capital.
This means that if the heirs decide to continue the activity, they should accept the inheritance and make a decision for the continuation of the activity. If some of the heirs do not wish to acquire membership rights in the one-man LLC, that is, to become partners, they can transfer their claims to the other heirs through voluntary division.
However, it is possible that all or the sole heir may not wish to continue the commercial activities of the one-man LLC. In this case, each of them will have the right to inherit the company share of the deceased. If all or the sole heir do not wish to continue the business of the commercial company, they should declare this circumstance in the commercial register, requesting its termination and initiation of liquidation procedure. Once all of the company's assets are liquidated and all of its creditors are satisfied, the remainder is distributed among the heirs.
In the event that the sole heir of the deceased partner is a minor, the one-man LLC will be terminated and the child will receive the monetary equivalent of his liquidation share, since the judicial practice is irrefutable that the content of the membership consists of rights and obligations that cannot be carried out by a minor or minor child, nor by his legal representative. It only has the right to receive the monetary equivalent of the inherited company share.
New to this hypothesis is the issued Interpretative Case No. 1/2020 of the Commercial Chamber of the Supreme Court of Cassation regarding the order in which a sole proprietorship with limited liability is terminated upon the death of the sole owner of the capital and manager of the company and inaction of his heirs. Before this decision, the judicial practice on the subject was contradictory. The explanation of the interpretative decision indicates that in the event of the death of the sole owner of the capital, who is also the manager of the sole limited liability company, and in case of inaction of his heirs within the meaning of Art. 157, Section 1, proposition last of the Trade Act, the company is terminated in accordance with art. 155, p. 3 of the Trade Act, in connection with Art. 154, Section 1, p. 5 of the Trade Act.
The court's reasoning in this regard is expressed in the circumstances that the provision of Art. 157, Section 1 of the Trade Act regarding the timing and/or order of termination of a one-man LLC upon death of the sole owner of the capital should not be interpreted by itself and in isolation, but in such a way as to maximally correspond to the legal regulations governing the liquidation of the company and the reflection of these circumstances in the Commercial Register. In view of the above and in view of the stated in Art. 157, Section 1 of the Trade Act negative conditions for the termination of a one-man LLC, the conclusion is imposed that the death of the sole owner of the capital is not an absolute, direct and automatically effective termination ground, but only a relative and indirect one, since it depends on the presence of two negative prerequisites - that it is not provided otherwise in the founding act or the heirs have not requested the continuation of the company's activities. The absence of a statement in the sense indicated leads to a state of suspense and expectation, which is an obstacle to the effect of the termination grounds provided for in the provision. Therefore, in the period from the death of the owner of the capital to the declaration of will to continue the activity in the sense of Art. 157, Section 1 of the Trade Act, the company cannot be considered as dissolved. This permission also corresponds to the provision of Art. 157, Section 2 of the Trade Act, that when the capital is owned by one legal entity, with its termination, the company must also be terminated, i.e. termination is not automatic.
Since the company is not terminated by the objective fact of the death of the sole owner of the capital, and at the same time its manager, the way remains open for its termination by the court in accordance with the order of art. 155, item 3, cf. art. 154, para. 1, item 5 of the Trade Act - at the request of the prosecutor, on the grounds that within three months the one-person LLC does not have a registered manager. The provision of Art. 155, p. 3 of the Trade Act is applicable without a broad interpretation, insofar as the death of the manager of a one-man limited liability company, depriving the company of legal capacity, is identical in legal consequences to the absence of a manager entered in the register. The reasons why the company is without a manager (whether it has a will-forming body that is inactive or does not have one) are irrelevant to the basis of the claim. Proceedings for the dissolution of the company by court order do not threaten the exercise of the rights of the heirs who want to continue the company's activities within the meaning of Art. 157, Section 1 of the Trade Act. First of all, the claim under Art. 155, p. 3 of Trade Act is would be rejected if, before the end of the oral contests before the courts, the heirs essentially constitute the company's bodies and register a new manager. In the next place, the heirs can also benefit from the possibility expressly provided for in the law to continue the activity of the already terminated company in the liquidation proceedings, according to the rule of Art. 274, Section 1 of the Trade Act.