Establishment of a Mutual Fund Pursuant to Article 8 of the Law on
Transformation and Privatization of State-owned and Municipal
By Dr. Daniela Bobeva
Director, Economic Program, Center for the Study of Democracy
and Member of the Commission for Foreign Investments, Council of
Articles of Incorporation Mutual Fund Inc.
By CSD Team
ESTABLISHMENT OF A MUTUAL FUND
PURSUANT TO ARTICLE 8 OF THE LAW ON TRANSFORMATION AND
PRIVATIZATION OF STATE-OWNED AND MUNICIPAL ENTERPRISES
The legal framework of privatisation was established
in 1992. Its basis is the Law on Transformation and Privatisation
of State- Owned and Municipal Enterprises (LTPSME). As it is the
tradition of the legal system in Bulgaria, the Law has a framework
character, which means that its implementation requires adoption of
some regulations and laws to detail some of the provisions of the
Law. One of the issues which had to be legislated with follow-up
legal documents is the regulation of privatisation revenues use.
Unfortunately, the terms given in the LTPSME for the adoption of
such documents were not met. This is relevant to the establishment
of the Mutual Fund.
According to Art. 8 par. 1 of LTPSME, the Council of Ministers was
to establish a Mutual Fund within three months of LTPSME's entering
into force, i.e. by August 1992. Twenty percent of revenues from
the privatization of state-owned and municipal enterprises was to
be contributed to the Fund. Two years later, the Fund is yet to be
established, and the results have been detrimental:
- Privatization revenues have been blocked in a non-budget account
of the Ministry of Finance;
- Authorities charged with the implementation of privatization
have had no incentive to direct revenues from privatization deals
to the Fund;
thus, the moneys have failed to accumulate and;
- The Fund has failed to realize its objectives to concentrate
privatization revenues and ensure appropriate spending of
privatization revenues on:
o Social security funds;
o Encouraging the free participation of Bulgarian individuals in
the privatization process;
o Compensating of former enterprise owners.
Seeking to reverse the adverse effects of the failure to establish
a Mutual Fund within the time specified by law, the Center for the
Study of Democracy formed a team of leading experts from the
Council of Ministers, Privatization Agency and other institutions,
to draft the Articles of Incorporation for a Mutual Fund.
The proposal was discussed and the draft Articles were adopted by
the Council of Ministers. Two major controversies, however,
regarding the legal status of the Mutual Fund and its governing
structure were identified during the discussion.
Reading the legal status of the Mutual Fund, according to Art. 8
of LTPSME, it is to be "established" by the Council of Ministers.
The law does not specify the Fund's legal status, but two options
The first option would be to establish the Fund as a state-owned
stock corporation. This option is supported by the text of Art. 8
par. 3 of the Law, under which "the Council of Ministers shall
transfer its stock from the Mutual Fund" according to the specific
legal regulations and in compliance with the purposes stated in the
Law. According to the text, the Fund has stock, which in this case
is the object of the transaction. Ergo, the Fund must be a stock
The second option is to establish the Fund as a property trust
managed by the Council of Ministers or an authorized body. There is
no specific justification for this option in the existing legal
text. Possible arguments in favor of this option are those of
inference, common sense and expediency. They can be summarized as
1. Art. 7 of LTPSME provides for the establishment of a fund to
cover expenses of the privatization of state-owned enterprises. The
fund is not identified as a separate legal entity. It is an
independent branch of the Privatization Agency whose financial
resources are to be used for strictly defined purposes. One could
infer that lawmakers intended the same structure for the Art. 8
2. Given the unclear legal framework for the transfer of stock to
social security funds (the legal status of which is yet unclear),
as well as for the compensation of former owners, a less rigid
Mutual Fund legal status will provide for operational
3. Fund moneys will not need to be factored into the budget. All
revenues will therefore be used for the sole purpose of investing
in social security funds, encouraging public participation in
privatization deals and compensating former owners, as specified in
These arguments are subject to their own drawbacks:
1. It is unacceptable to draw analogies between LTPSME Articles 7
and 8 because they provide for the establishment of two funds with
different purposes. The Art. 7 fund is established to cover the
maintenance and contractual expenses of a specific institution -
the Privatization Agency -incurred during the privatization
process. These expenses are easily estimated and unrelated to
investment moneys. The Art. 8 Fund should be an investment fund, as
evident from Art. 8, par. 3, which allows for the "management" of
stock, operated by the Fund. The Art.8 Fund should be a model for
future social security funds which will be economic agents as well,
or assets involved in economic activities as is established in
international practice. Moreover, compensation of former owners
initially will be through Fund assets used in economic activities.
Should the Fund not acquire the status of legal person and be a
passive holder of assets and funds as in a property trust its
minority participation in stock companies and stagnation of
monetary instruments will result in lack of motivated in their
management. Their value will fall and a possible result will be a
negative interest rate against inflation.
2. It is not realistic to expect significant positive results from
a property trust fund because it will operate assets directly or
through a bank, in a manner regulated by the Council of Ministers.
This arrangement allows for the use of assets for purposes other
than those stated in the law. Moreover, assets will diminish if
held in stagnation.
3. A property trust fund will not help solve "social problems".
Although a fund operated as a stock corporation would require the
status of a legal person (and could be potentially factored into
the budget), this is not a drawback. Social security and all
expenses for social purposes are currently dependent on the budget.
The tax payments of the fund as far as they contribute the sate
budget will contribute to efforts to solve social problems (stated
among the Fund's priorities) even before the law takes effect, in
extra budgetary account - part of the Art. 8, par. 3 of LTPSME.
An additional argument in favor of creating a state-owned stock
corporation is that such entities are subject to closer oversight
and control than property trust formations.
In response to the above arguments submitted to the Council of
Ministers by the Center for the Study of Democracy's expert team.
The Council of Ministers adopted a decision to establish the Mutual
Fund as a stock corporation.
The second issue of controversy regarding the Fund structure and
governing bodies is currently under discussion.
The establishment of the Mutual Fund will no doubt have a positive
effect upon the accumulation of privatization funds. The end result
will be the establishment of a successful financial institution
both in terms of capital accumulation and proper governance. Such a
Mutual Fund will also serve as a basis for creating future
independent social funds. It will thus achieve its social as well
as its political and economic goals.
ARTICLES OF INCORPORATION
MUTUAL FUND INC.
Art. 1 MUTUAL FUND Inc. is a stock corporation established
pursuant to Art. 8 of the Law on Transformation and Privatization
of State-owned and Municipal Enterprises (LTPSME) with permission
No 68 of the Council of Ministers of September, 1st 1994.
Art. 2 MUTUAL FUND Inc., hereinafter referred to as the
Corporation, is a legal person existing separately from its stock
holders. The Corporation shall be liable for its obligations with
its own property. Stock holders shall assume liability for the
obligations of the Corporation to the limit of their share
participation in its capital.
Registered Trade name
Art. 3 (1) The Corporation's trade name shall be MUTUAL
FUND INC., and may be spelled out in Roman letters, as VZAIMEN FOND
(2) The trade names of the Corporation's branches shall be formed
by adding the word "branch" to the name of the Corporation,
followed by the name of the location where the branch is
Art. 4 The Corporation shall be headquartered in the city
Terms of Operation
Art. 5 The existence of the Corporation shall not be
limited within a term or through other condition of
Scope of Activity
Art. 6 The Corporation's scope of activity shall be:
"Management of stock, shares, and monetary revenues from privatized
state-owned enterprises and transfer of stock to social funds and
compensation of former owners".
Capital and Stock
Art. 7 The Corporation shall be incorporated with
registered capital in the amount of 190 000 000 (one hundred ninety
million lev) million lev.
Art. 8 (1) The Corporation's registered capital shall be
distributed in 190 000 (one ninety thousand lev) of registered and
non-divisible stock whose individual face value shall be 1,000 (one
thousand) lev, in notes of 10 and 20 lev. Notes shall be issued
with dividend slips with a twenty-year term of validity.
(2) Every stock shall correspond to one vote in the general stock
holders' assembly. Its owner shall have the right to dividend and a
Increase and Decrease of
Art. 9 (1) The Corporation's capital may be increased or
decreased with resolution of the General Assembly including the
transformation of profit into capital.
(2) The Corporation's capital may be increased by issuing new
stock, and by increasing the face value of stock already
(3) The Corporation's capital may be decreased by decreasing the
face value of stock, as well as invalidation of stock.
Art. 10 The Corporation may issue bonds in accordance with
the Commercial Code. Management and Governing Bodies.
Art. 11 The Corporation's governing bodies shall be the
1. General Assembly of stock holders.
2. Board of Supervisors.
3. Board of Directors.
General Assembly of Stock Holders
Art. 12 (1) The General Assembly of stock holders
1. Decide on amendments and addenda to the Articles of
2. Decide on increasing and decreasing the Corporation's
3. Decide on the transformation and termination of the
4. Elect and dismiss the members of the Board of Supervisors and
determine their remuneration.
5. Appoint and dismiss certified public accountants.
6. Approve the annual report on the balance sheet after its
certification by the appointed certified public accountant.
7. Decide on the issuance of bonds.
8. Appoint liquidation officers upon termination of the
Corporation, except in cases of bankruptcy.
9. Dismiss the members of the Board of Supervisors.
10. Decide on the acquisition or disposition of real estate or
property rights thereon.
11. Decide on the provision of guarantees for third parties'
12. Decide on loan agreements in favor of third parties.
13. Decide on entering into mortgage and pledge arrangements on
Art. 13 (1) The General Assembly of stockholders shall be held
at least once every six months. The General Assembly is convened in
accordance with the Commercial Code.
(2) The General Assembly of stockholders shall elect a Chair and
Secretary for the duration of every session.
(3) The General Assembly may convene with the presence of
stockholders of not less than 75 percent of voting stock. Absent a
quorum, a new session shall be called within a month. Its
resolutions shall be valid regardless of the share of represented
capital. The date of the second session may be indicated in the
invitation for the first session as well.
Art. 14 (1) The resolutions of the General Assembly shall
be enacted with a simple majority of the voting stock represented,
except for resolutions pursuant to Art. 12, 1-4, and 8. Resolutions
shall take effect immediately, unless a delay is specified in the
text of the resolution itself.
(2) Sessions of the General Assembly are recorded in minutes,
certified by the Chair and the Secretary of the session. Minutes
and appendices shall be kept in a minutes book not less than ten
years from the end of the year of the respective session.
Board of Supervisors
Art. 15 (1) Members of the Board of Supervisors shall be
capable natural persons. The Board of Supervisors shall consist of
five elected members.
(2) Members of the Board of Supervisors shall be elected and
re-elected, respectively, for five-year terms. The first Board of
Supervisors shall be elected for a three-year term.
(3) Persons who do not meet the requirements as specified in the
Commercial Code may not be members of the Board of Supervisors.
Persons may not be members of both the Board of Supervisors and the
Board of Directors simultaneously.
(4) Members of the Board of Supervisors may be dismissed before
the expiration of their terms only in cases of infringement upon
the Corporation's interests or in case of incapacity to carry
functions arising from the position.
(5) The Board of Supervisors shall:
1. Adopt its own Rules of Operation and elect from among its
members a Chair and Vice-Chair.
2. Execute on-going control over the operation of the Board of
Directors on the basis of reports, memoranda, and probes initiated
by the Board of Supervisors, including with the assistance of
out-of-house experts. It shall represent the Corporation solely in
its relations with the Board of Directors.
3. Approve or reject proposals of the Board of Directors
3.1 Significant changes of the Corporation's scope of
3.2 Significant structural changes.
3.3 Long-term cooperation of overall importance to the
Corporation, or the termination thereof.
3.4 Participation or disposition thereof in other domestic or
3.5 Donations, sponsorship and other expenses for not-for-profit
4. Approve the reports about the activities of the Board of
Directors and about the state of the Corporation.
Art. 16 The Board of Supervisors shall:
1. Elect and dismiss the members of the Board of Directors and
determine their remuneration.
2. Designate the Chair and the members of the Board of Directors
and approve the executive directors.
3. Approve the Rules of Operation of the Board of Directors.
Art. 17 (1) The Board of Supervisors shall convene at least
once every two months. Participants in the session shall be the
Chair of the Board of Directors and the Executive Directors with
(2) The Board of Supervisors shall be convened by the Chair, with
written invitation, including facsimile, telex, or telegram. All
members of the Board of Supervisors and the Chair of the Board of
Directors may request that the Board of Supervisors be
(3) The Board of Supervisors may issue resolutions with the
presence of no less than 50 percent of its members in person, or
represented by present members of the Board of Supervisors by
written proxy. No member present may represent more than one absent
(4) Resolutions may be issued by absentee ballot, should all
members state in writing their position on the move. Proxies and
written position statements shall be appended to the minutes in the
(5) Resolutions are enacted by simple majority, except in cases
pursuant to subpart 1-3(5) of Art. 15, as well as Art. 16 (1,2,3)
where a two-thirds majority of those present and represented shall
Art. 18 The Board of Supervisors shall establish Rules of
Operation of the Corporation's stock and share participation in
enterprises, resulting from the Corporation's acquisition of
enterprise stock and shares.
Board of Directors
Art. 19 (1) The Corporation shall be managed by a Board of
Directors consisting of five members.
(2) The Board of Directors, with consent from the Board of
Supervisors, shall authorize at least one of its members to be
Executive Directors and represent the Corporation separately and in
conjunction, and conduct the operational management of the
(3) The Board of Supervisors designates one of the Executive
Directors as a Chair of the Board of Directors who shall conclude
the labor contracts with the employees on behalf of the
(4) The Board of Directors shall:
1. Determine the organizational structure of the Corporation.
2. Decide on the establishment of Corporation funds.
3. Implement the resolutions of the General Assembly of the
4. Plan the Corporation's business activity and ensure the
maintenance and preservation of its property.
5. Propose to the Board of Supervisors and the General Assembly on
issues under their discretion and benefiting the Corporation.
(5) The Board of Directors shall draft its Rules of Operation and
submit them for approval to the Board of Supervisors.
(6) The Board of Directors shall report its activity to the Board
of Supervisors at least once every three months.
(7) Members of the Board of Directors shall be elected for
five-year terms. The first Board shall be elected for a three-year
Remuneration of Members of the Boards of
Supervisors and Directors
Art. 20 (1) Members of the Board of Supervisors shall have
the right to remuneration for their activity on the Board. The
amount and terms of payment shall be indicated in a contract
between the General Assembly of stock holders, respectively the
sole proprietor of the capital of the Corporation.
(2) Members of the Board of Directors shall have the right to
remuneration for their activity on the Board. The amount and terms
of payment shall be determined by the Board of Supervisors.
Art. 21 (1) Every member of the Board of Supervisors and
the Board of Directors shall leave a guarantee for his/her function
in the amount of three gross monthly salaries, as determined in
accordance with Art. 20.
(2) Members of the Board of Supervisors and the Board of Directors
shall be liable for damages to the Corporation caused
intentionally, pursuant to the Commercial Code.
Art 22 (1) The Corporation shall establish a Reserve Fund.
Sources of funding shall be:
1. Ten percent of the profit, set aside until reserve funds equal
ten percent of the Corporation's registered capital.
2. Other sources as provided for in the Commercial Code.
(2) Funds raised in the Reserve Fund shall be operated and
capitalized pursuant to the relevant provisions of the Commercial
(3) The Corporation may establish other Funds with a resolution of
the Board of Directors.
Review of Annual Financial Results
Art. 23 (1) The annual accounting report shall be reviewed
by two certified public accountants, appointed by the General
(2) Should the General Assembly not have appointed certified
public accountants by the and of the calendar year, the Board of
Supervisors shall file an application with the Court requesting
that it conduct the appointment.
Art. 24 (1) Upon submission of the report of
the certified public accountants, the Board of Directors shall
submit before the Board of Supervisors the annual balance sheet,
the annual report of activity, and the report prepared by the
certified public accountants, enclosed with suggestions on the
distribution of profit to be proposed to the General Assembly.
(2) The Board of Supervisors shall review the information
submitted as specified in par. 1. Upon approval, it shall convene
the General Assembly.
(3) The annual balance sheet and the distribution of profit as
approved by the General Assembly of stock holders, shall be made
public by the Board of Directors.
Cover of Losses
Art. 25 (1) Losses incurred to the Corporation as indicated
in the annual balance sheet shall be covered by the Reserve
(2) Should the actual property value of the Corporation fall below
the face value of its registered capital, the General Assembly of
stock holders may decide on covering its losses through additional
contributions in proportion to share participation, which stock
holders are compensated for from the profit before the distribution
of dividends. Dividends shall not be paid until full compensation
of additional contributions.
(3) Upon failure to reach a decision under Art 27 (2), the Board
of Directors shall register the actual value of the Corporation's
Bookkeeping in the Corporation
Art. 26 (1) Minutes shall be taken at sessions of the
General Assembly of stock holders and the Board of Supervisors.
Members' discussions, statements, proposals and objections shall be
recorded in the minutes. Minutes are certified with the signatures
of the Chair of the respective body and of the Secretary of the
session. Minutes shall be kept in minute books, retained for no
less than ten years.
(2) Stock holders and members of the Corporation's governing
bodies have access to the minute books, and obtain copies and
abstracts from the records.
(3) The Corporation shall keep a stock holders' register,
containing the names and addresses of all owners of registered
stock and certificates, as well as the amount and serial number of
notes, and the serial numbers of registered stock and certificates
owned by the stock holders. Transfers of stock shall be entered in
the same register.
(4) The Corporation shall keep a register on stock and bonds,
indicating their type, their subscription and face value, as well
as dividends paid on all stock and bonds, and contributions
Termination and Liquidation
Art. 27 The Corporation shall be terminated and declared in
1. By resolution of the General Assembly of stock holders.
2. Upon declaration of bankruptcy according to relevant provisions
of the law.
3. Should its capital fall below the limit required by law and
remain so in the course of one year.
Art. 28 (1) The provisions of the Commercial Code shall
apply should disputes arise on issues not regulated herein.
(2) "Simple majority" in these Articles of Incorporation shall
mean the votes of half plus one of the stock represented at a
session of the General Assembly of stockholders, and half plus one
of the members of the Board of Supervisors present or
Transitional and Final Provisions
§1 The State's rights as a stock holder in the Corporation shall
be exercised by a government agency and/or persons appointed by the
Council of Ministers. Before the circumstances appear, the
government agency and/or persons appointed by the Council of
Ministers as stated in the previous sentence shall exercise the
rights of sole owner of the Corporation's capital as well as the
rights of the Corporation's General Assembly.
§2 Amendments to the Articles of Incorporation may be enacted
solely in compliance with the procedure of adoption of this