It is generally provided in the legislation in force each shareholder is entitled to a part of the profits proportionate to his/her shareholding. In order the profits to be distributed, a resolution for distribution and payment should be adopted by the general meeting of the company. Such resolutions are passed on a case-by-case basis – when profit has been obtained (not all the profit promoted is payable immediately after obtaining; sometimes it remains as part of the company’s assets for a period of time).
However, in practice, alternative solutions for profits distribution might be encountered, with view to depriving a shareholder of such profits, for example, in order for such shareholder to lose his/her interest from participating in the company (indirectly forcing the shareholder to terminate his/her shareholding in the company).
Practically, queries regarding alternative profit distribution is likely to arise in the following two cases:
- in the event of worsening in the relations between the shareholders in a limited liability company (an “LLC”) – as an intimidation by a major shareholder against a minority one;
- when before a LLC share-transfer the company has accumulated profits which have not been distributed in favour of the shareholders prior to the transfer.
In the first case, the resolution for selective distribution of profits is predominantly conducted in the pursuit of additional objectives aside from financial benefit for certain majority shareholders. In the second case, it is basically the fact that the new shareholder has not contributed for the accumulation of such profits and, thus, it is normal and expected that he/she is not supposed to take part in profit distribution. Of course, the sale price for the share-purchase may be
Regardless of the specific reasons, the Bulgarian Commerce Act provides that an agreement between the shareholders that the profit will not be distributed proportionately to their shareholdings can be concluded. Such arrangement to distribute profit unevenly may be concluded by:
- a provision in the company articles of association regulating the proportion of distribution applicable for each of the shareholders.
Thus, a specific ratio or percentage of the profits may be arranged. It is also possible that the articles of association provided that until a specific moment (date/event), profits will be distributed only to one or more explicitly specifies shareholders and, after expiration of this period profits shall be distributed evenly between all shareholders.
- a provision in the articles of association that profits will be distributed if a resolution of the general meeting in this sense is adopted.
Thus, on a case-by-case basis, when a resolution for profit distribution is adopted, the general meeting can enforce uneven distribution. This option is quite appropriate since it is adaptable in due course to possible market changes – it takes account that the contribution of shareholders as for accumulation of profits may vary in the different periods of the company’s operation.
Uneven distribution of profits in joint-stock companies
The complicated ways of unequal distribution of profits reviewed above can easily be avoided in joint-stock companies (a “Jsc.”). A provision that preferential shares will be issued in favour of certain shareholders might be included in the company’s articles of association. Thus, there will be different classes of shareholders where each class is entitled to a different percentage of the profits accumulated by the company.
Distribution of profits to the company’s management
An option for distribution of profits only to certain shareholders if the latter are also appointed as managing directors (in LLC)/members of the board of directors (in Jsc.)/controllers, is to pay them the so-called “profit share” (a “tantième”).
“Profit share”, according to preceding legislation, is defined as:
- remuneration paid to directors and management members of companies (after deduction of the taxes due), comprised of a percentage of the profits, income, turnover or other economic indicators of the company;
- a part of the company profits which members of the management or the control body are entitled to receive once a year by resolution of the general meeting of shareholders.
This category of remuneration has no relation to and is not payable by the company as an employer – it is not a remuneration under an employment agreement.
Profit share is payable if:
- the company has achieved a certain economic result – a certain profit from its own activity;
- the beneficiary of the payment is a managing director/a member of the company’s management body;
- the articles of association/statute of the company provides that the managing director/member of board of directors has the right to receive part of the profits as a royalty if such profits are accumulated.
The articles of association/statute may even provide that profit shares shall be payable if profits at a specific amount have been achieved, or if such profits exceed a specified amount.
- a resolution of the general meeting for profit distribution shall be adopted.
In Jsc., a resolution for determination of additional remuneration for each member of the board of directors should also be adopted.
It should be noted that different types of payments – dividends, profit shares, etc. – are subject to different tax treatment and, hence, are taxed differently.