CONTENTS

Establishment of a Mutual Fund Pursuant to Article 8 of the Law on Transformation and Privatization of State-owned and Municipal Enterprises

By Dr. Daniela Bobeva
Director, Economic Program, Center for the Study of Democracy and Member of the Commission for Foreign Investments, Council of Ministers

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 (LTPSME)

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 are contemplated.

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 corporation.

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 follows:

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 Mutual Fund.

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 flexibility.
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 the Law.

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 AD.
(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 headquartered.

Headquarters

Art. 4 The Corporation shall be headquartered in the city of Sofia.

Terms of Operation

Art. 5 The existence of the Corporation shall not be limited within a term or through other condition of termination.

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 liquidation quota.

Increase and Decrease of Capital

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 issued.
(3) The Corporation's capital may be decreased by decreasing the face value of stock, as well as invalidation of stock.

Bonds

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 following:
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 shall:
1. Decide on amendments and addenda to the Articles of Incorporation.
2. Decide on increasing and decreasing the Corporation's capital.
3. Decide on the transformation and termination of the Corporation.
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' obligations.
12. Decide on loan agreements in favor of third parties.
13. Decide on entering into mortgage and pledge arrangements on long-term

Corporation assets

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 regarding:
3.1 Significant changes of the Corporation's scope of activity.
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 overseas corporations.
3.5 Donations, sponsorship and other expenses for not-for-profit purposes.
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 consulting vote.
(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 convened.
(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 member.
(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 minutes book.
(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 be required.

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 Corporation.
(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 Corporation.
(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 Corporation.
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 term.

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.

Reserve Fund

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 Code.
(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 Assembly.
(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 Fund.
(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 capital.

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 made.

Termination and Liquidation

Art. 27 The Corporation shall be terminated and declared in liquidation:
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.

Additional Provisions

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 represented.

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 document.