Ordinance No. 41 of 11.06.2008 on Requirements for the Justification of Share Prices of Public Companies in Cases of Transformation, Joint Venture Agreements, and Public Offers

ORDINANCE No. 41 of 11.06.2008 on the requirements for the content of the justification of the price of shares of a public company, including the application of valuation methods, in cases of transformation, joint venture agreement, and public offer

Published - State Gazette, No. 59 of 01.07.2008; amended, No. 65 of 22.07.2008; amended and supplemented, No. 83 of 17.10.2017; amended and supplemented, No. 84 of 21.10.2022

Adopted by Decision No. 104-N of 11.06.2008 of the Commission for Financial Supervision

Chapter One
GENERAL PROVISIONS

Art. 1. (Amended and supplemented - State Gazette, No. 83 of 2017) (1) This Ordinance regulates the requirements for the content of the justification of the fair price of shares of a public company, including the application of valuation methods, in the following cases:

1. transformation of commercial companies with the participation of at least one public company;
2. conclusion by a public company of a joint venture agreement under the conditions of Art. 126b of the Law on Public Offering of Securities (LPOS).

(2) This Ordinance also regulates the requirements for the content of the justification of the offered price (offered exchange value) and the fair price of shares of a public company, including the application of valuation methods, in the following cases:

1. (new - State Gazette, No. 83 of 2017) obligation to make a public offer arising for a person who acquires directly or through related parties more than one-third of the votes in the general meeting of a public company, in which there is no person or persons holding directly or through related parties more than 50 percent of the votes in the general meeting;
2. (previous item 1 - State Gazette, No. 83 of 2017) obligation to make a public offer arising for a person who acquires directly, through related parties, or indirectly under Art. 149, para. 2 of LPOS more than 50 percent or 2/3 of the votes in the general meeting of a public company;
3. (previous item 2 - State Gazette, No. 83 of 2017) right to make a public offer by a person who acquires directly, through related parties, or indirectly under Art. 149, para. 2 of LPOS more than 90 percent of the votes in the general meeting of a public company;
4. (previous item 3 - State Gazette, No. 83 of 2017) repurchase of shares under Art. 157a LPOS, when the public offer with which the last threshold was reached was voluntary and the person has acquired less than 90 percent of the shares with voting rights.

(3) This Ordinance also applies to any non-public company participating in the transformation under para. 1, item 1.

Art. 2. The offeror may justify the price offered by him in accordance with the provisions of this Ordinance in a public offer:

1. for the acquisition of more than 3 percent of the total number of shares within one year from a person holding directly, through related parties and/or indirectly under Art. 149, para. 2 LPOS more than 50 percent of the votes in the general meeting of a public company;
2. for the acquisition directly, through related parties, or indirectly under Art. 149, para. 2 LPOS of more than 1/3 of the votes in the general meeting of a public company from a person holding at least 5 percent of the votes in the general meeting of the same company;
3. for the acquisition by a public company during one calendar year of more than 3 percent of its own shares with voting rights in cases of capital reduction through cancellation of shares and reverse repurchase.

Art. 3. The fair price of a share of a company is the value determined on the basis of the share price from the trading venue with the highest traded volume of shares and/or generally accepted valuation methods in accordance with the requirements of this Ordinance.

Art. 4. The information contained in the justification of the fair price of shares shall be presented in a clear and accessible language.

Chapter Two
VALUATION METHODS AND REQUIREMENTS FOR THEIR APPLICATION

Section I
General Requirements

Art. 5. (Amended - State Gazette, No. 83 of 2017) (1) The fair price of actively traded shares is determined as a weighted average value of the weighted average price of all transactions during the last six months preceding the date of justification, from the trading venue with the highest traded volume of shares for a period of six months before the date of justification, and the value of shares obtained by the applied valuation methods under para. 3.

(2) In the event that the Commission for Financial Supervision, hereinafter referred to as "the Commission", has taken a decision for a final ban on the publication of a public offer and within one month from the date of this decision the offeror registers a new public offer, in determining the fair price of actively traded shares, the offeror may use the weighted average price of all transactions during the last six months used for the justification of the previous public offer, for the publication of which the Commission imposed a final ban. The first sentence applies if, within one month from the date of the decision for final ban, the company subject to the public offer has not published a financial report or other important information.

(3) If the shares of the company are not actively traded during the last six months before the date of justification, the fair price of the shares is determined as a weighted average of the values of shares obtained according to methods from at least two of the following groups:

1. discounted cash flow method;
2. net asset value method, and
3. methods using market multiples of similar companies or of concluded transactions for the acquisition of similar companies or of large blocks of shares of similar companies, including in public offers.

(4) In the event that an assessment of the company prepared by an independent appraiser has been prepared and publicly disclosed during the last 12 months before the date of justification, the Commission, respectively the Vice-Chairman heading the "Supervision of Investment Activity" Department, may reasonably request that this assessment be included in the fair price of shares under para. 3.

(5) The weighting under para. 1, 2, and 3 is carried out by multiplying the value of shares obtained from the market and/or according to the applied valuation methods by their relative weights. The transforming companies or companies parties to a joint venture agreement, respectively the offeror, hereinafter referred to as the "applicant", determine weights by which they reasonably believe that a more realistic assessment of the fair price will be determined as of the date of justification. The use of a weight lower than 20% and higher than 80% is not permitted.

(6) In the event that the applicant has used only two valuation methods specified in para. 3, the Commission, respectively the Vice-Chairman heading the "Supervision of Investment Activity" Department, may request the applicant to use a valuation method from the group of valuation methods that was not used in determining the fair price of shares.

(7) In the event that the weights of the methods determined by the applicant are not justified, the Commission, respectively the Vice-Chairman heading the "Supervision of Investment Activity" Department, may request the applicant to provide additional justification for the determined weights, respectively to correct them.

(8) The applicant may replace any of the methods specified in para. 3 with another generally accepted valuation method when one of the specified methods is inapplicable or when the application of another generally accepted method results in a more realistic value of one ordinary share of the company. The justification of the value of shares obtained by the method shall also describe its methodology.

Art. 6. (Amended - State Gazette, No. 83 of 2017; amended and supplemented, No. 84 of 2022) (1) The fair price of shares is their liquidation value in cases when:

1. the liquidation value exceeds the fair price of shares determined in accordance with Art. 5, or
2. the general meeting of shareholders has adopted a decision for the liquidation of the company or the company is in insolvency proceedings under the conditions of Art. 630 of the Commerce Act.

(2) The liquidation value of shares under para. 1, item 1 is calculated when it can be reasonably assumed that it exceeds the price of shares determined in accordance with Art. 5.

(3) (Amended - State Gazette, No. 83 of 2017) The Commission for Financial Supervision, respectively the Vice-Chairman heading the "Supervision of Investment Activity" Department, may, during the relevant administrative proceedings under Art. 124, 126g, or 152 LPOS, request the applicant to prepare an assessment of the shares of the company by the liquidation value method when any of the following circumstances exist:

1. during each of the last three financial years preceding the registration of the public offer, respectively the submission to the Commission of the joint venture agreement or the preparation of the plan or agreement for transformation, the company has realized a negative financial result and/or is decapitalized;
2. not less than 30 percent of the assets of the company are formed by real estate and facilities, which according to the accounting policy of the company are presented in the financial report by the acquisition cost model and have not been revalued to the last annual audited financial report;
3. the company uses in its business activity a significant amount of almost or fully amortized assets (the book value of amortizable non-current tangible assets exceeds their balance sheet value by more than 4 times);
4. the balance sheet value of equity participations exceeds 15 percent of the assets of the company;
5. the assessment of the company by the "Net Asset Value" method (without corrections) exceeds by more than 1.5 times the fair price (exchange value) proposed by the applicant;
6. (amended - State Gazette, No. 84 of 2022) the values of the shares of the company, subject to assessment, obtained according to the methods under Art. 5, para. 1 and 3, differ from each other by more than 1.5 times;
7. corrections to the values in the balance sheet of the company have been made in an amount greater than 20 percent of the sum of assets under Art. 15, para. 3;
8. other cases where it can be reasonably assumed that the liquidation value of the shares exceeds their value determined in accordance with Art. 5.

(4) (New - State Gazette, No. 84 of 2022) The Commission, respectively the Vice-Chairman heading the "Supervision of Investment Activity" Department, during the relevant administrative proceedings may request the applicant to present a new assessment of the shares of the assessed company by the liquidation value method, prepared by another appraiser certified by the Chamber of Independent Appraisers in Bulgaria, when the following conditions are met:

1. any of the circumstances under para. 3 exists, according to which it can be assumed that the liquidation value may exceed the price per share of the assessed company proposed by the offeror;
2. incompleteness and inconsistencies have been found in the submitted assessment, which cast doubt on the objectivity and/or quality of the prepared assessment.

Art. 7. (Amended and supplemented - State Gazette, No. 83 of 2017) (1) The applicant must justify the use of each valuation method under Art. 5, the weight he has determined for each of the used valuation methods, as well as any assumptions, statements, or forecasts made in determining the value of the shares of the company by the valuation methods.

(2) The justification under para. 1 should contain detailed information on:

1. the characteristics of the assessed company, namely:
   a) features of its activity; b) total value of assets and liabilities by balance; c) strengths and weaknesses and comparison with competitors; d) profitability coefficients; e) asset and liquidity coefficients; f) coefficients per share; g) dividend coefficients; h) growth coefficients; i) leverage coefficients; j) market coefficients; k) (new - State Gazette, No. 83 of 2017) description of the method of calculation of all coefficients, the values used for their calculation, and the sources of information; l) (previous letter k - State Gazette, No. 83 of 2017) other significant circumstances;
2. the characteristics of the assessed company in historical terms;
3. the economic trends and conditions relevant to the activity of the company in the Republic of Bulgaria and worldwide;
4. (amended - State Gazette, No. 83 of 2017) the characteristics under item 1 for a similar company, respectively generally accepted benchmark, and comparative analysis with the assessed company;
5. other significant circumstances due to which the applicant considers the choice of valuation methods, their weights, the assumptions made, statements, and forecasts to be appropriate.

(3) The coefficients under para. 2, item 1, letters "d"-"e", "g", and "i" are calculated based on the last published financial report, the coefficients under para. 2, item 1, letter "g" are calculated based on the last annual audited financial report, and those under para. 2, item 1, letter "j" are calculated based on the information under Art. 17, para. 3 and 4.

(4) The information under para. 2, item 3 is presented on the basis of an analysis of the macroeconomic environment and the industry in which the company carries out its main activity.

Section II
Discounted Cash Flow Method

Art. 8. (Amended and supplemented - State Gazette, No. 83 of 2017) (1) (Amended - State Gazette, No. 83 of 2017) The discounted cash flow method includes models for determining the value of shares based on the time value of money.

(2) (Supplemented - State Gazette, No. 83 of 2017) The valuation method based on the time value of money is a principal way of determining the value of a company and/or its shares by discounting forecast future cash flows, dividends, and profits.

(3) (Amended - State Gazette, No. 83 of 2017) In determining the value of shares according to the discounted cash flow method, the applicant uses models justified by the characteristics of the company and the cash flows generated by it, such as:

1. free cash flow to equity (FCFE) model according to Appendix No. 1;
2. free cash flow to firm (FCFF) model according to Appendix No. 2;
3. dividend discount model (DDM) according to Appendix No. 3 - provided that the public company has paid dividends during the previous three financial years.

(4) The selected model under para. 3 must be described, reasonably applied, corrected in the presence of preferred shares, and adapted to the life cycle of the assessed company.

(5) In cases where one of the models under para. 3 is inapplicable for determining the value of shares of the company, the applicant may apply another model if it will determine the value of shares more realistically. The choice of this model must be justified by the characteristics of the company and the specific features of the cash flows generated by it.

Art. 9. The value of one ordinary share of the company according to the models under Art. 8, para. 3 is determined as follows:

1. by the free cash flow to equity model - the value of equity obtained in accordance with Appendix No. 1 is reduced by the value of preferred shares, and the resulting value is divided by the number of ordinary shares in circulation;
2. by the free cash flow to firm model - the value of total capital (equity and borrowed capital), obtained in accordance with Appendix No. 2, is reduced by all debts and other legal claims of investors holding priority over ordinary shareholders, and the resulting value is divided by the number of ordinary shares in circulation;
3. by the dividend discount model - the value of a share obtained in accordance with Appendix No. 3.

Art. 10. (Amended - State Gazette, No. 83 of 2017) (1) Forecast cash flows are determined based on justified forecasts.

(2) Forecasts are justified by retrospective data from at least the last three annual audited financial reports of the company and the last published financial report before the date of registration of the public offer, respectively before the date of submission for approval of the joint venture agreement or preparation of the plan or agreement for transformation of the company, as well as based on the characteristics of the company under Art. 7, para. 2. When the company prepares a consolidated financial report, the information in the first sentence must be presented based on the consolidated financial reports.

(3) Cash flows for the purposes of the model under Art. 8, para. 3, item 1 are the forecast cash flows of equity.

(4) Cash flows for the purposes of the model under Art. 8, para. 3, item 2 are the forecast cash flows of the firm.

(5) Cash flows for the purposes of the model under Art. 8, para. 3, item 3 are the expected dividends for distribution.

(6) (Amended - State Gazette, No. 83 of 2017) Forecast flows for discounting are presented in one or more scenarios at the discretion of the applicant, with the addition of additional scenarios being justified. The value of shares according to the models under Art. 8, para. 3 and 5 is determined as a weighted average value of the values of shares obtained by the different scenarios. The relative weights are determined by the applicant and justified based on the assumptions, statements, and forecasts under Art. 7, para. 2. When using several scenarios, the realistic scenario cannot have a weight lower than the weight of the other scenarios.

Art. 11. (Amended - State Gazette, No. 83 of 2017) (1) Forecast cash flows are determined by year, distinguishing two periods - a forecast period and a post-forecast period.

(2) (Amended - State Gazette, No. 83 of 2017) The forecast period covers the period during which the cash flows of equity, cash flows of the firm, expected dividends, or other financial indicators can be forecast with sufficient certainty. This period cannot be shorter than five years and should cover the entire term of receiving the financial effect from upcoming investments.

(3) Forecast cash flows are determined for each individual year within the forecast period.

(4) The post-forecast period covers the years after the expiration of the forecast period. This is the period for which it is expected that there will be no significant changes in the scale and profitability of the activity, and therefore it is forecast that cash flows will remain constant or will grow or decrease at a steady rate.

(5) Cash flows during the post-forecast period are assumed to be equal to the cash flow for the first year of the post-forecast period or are expressed through it at a constant rate.

(6) The provision of investment costs and the increase in net working capital for each year is permitted to the extent required to ensure the maintenance of capital and the forecast rate.

Art. 12. (Amended - State Gazette, No. 83 of 2017) (1) Discounting of forecast cash flows is carried out with a discount rate, which serves to calculate their present values.

(2) The discount rate for the models under Art. 8, para. 3, items 1 and 3 is the cost of equity financing.

(3) The discount rate for the model under Art. 8, para. 3, item 2 is the weighted average cost of capital (WACC) of the company.

(4) (Amended - State Gazette, No. 83 of 2017) In determining the relative shares for the purposes of determining the weighted average cost of capital of the company, the market values of all used sources of financing are used. The applicant may use their balance sheet values, provided he justifies their use.

(5) The applicant may apply a discount rate different from those specified in para. 2 and 3 in cases where its application results in a more realistic value of one ordinary share of the company. The discount rate in the first sentence must be justified by describing the methodology for its calculation and conducting an analysis and evaluation of the determining factors.

Art. 13. (Amended and supplemented - State Gazette, No. 83 of 2017) (1) (Previous text of Art. 13 - State Gazette, No. 83 of 2017) The terminal value is calculated by capitalizing cash flows for the post-forecast period according to the appendices to this Ordinance.

(2) (New - State Gazette, No. 83 of 2017) To the value obtained by applying the discounted cash flow method, the value of non-operating assets is added. In the event that the balance sheet value of non-operating assets is up to 10% of the balance sheet value of all assets as of the date of the last published financial report of the company, non-operating assets are valued at their balance sheet value. In other cases, non-operating assets are valued at market value.

Section III
Net Asset Value Method

Art. 14. (1) The net asset value method includes a group of models for determining the value of shares based on the net asset value.

(2) The net asset value method is a principal way of determining the value of a company and/or its shares using models based on the value of the company's assets, reduced by its liabilities.

(3) In determining the value of shares under para. 2, the applicant uses the model of net book value of assets.

(4) The applicant may apply another model, different from that specified in para. 3, if it will determine a more realistic value of shares. The choice of this model must be described and justified by the characteristics of the company and the specific features of its assets and liabilities.

Art. 15. (1) The value of the share by the model of net book value of assets is determined by taking the value of assets in the balance sheet of the company, reduced by the value of current and non-current liabilities in the balance sheet and all legal claims of investors holding priority over holders of ordinary shares, and dividing by the number of ordinary shares in circulation.

(2) The value of assets and liabilities of the company is determined based on information from the last published accounting balance sheet. If the company prepares a consolidated financial report, the information in the first sentence must be presented based on the consolidated accounting balance sheet.

(3) Any correction of the book value of assets and liabilities must be justified by the applicant. Correction of book values from the annual audited financial report is not permitted.

Section IV
Market Multiples Methods of Similar Companies
(Heading amended - State Gazette, No. 83 of 2017)

Art. 16. (Amended and supplemented - State Gazette, No. 83 of 2017) (1) (Amended - State Gazette, No. 83 of 2017) The market multiples methods of similar companies include a group of models for determining the value of the share of the company based on the market prices of shares of a similar company or group of similar companies.

(2) (Amended - State Gazette, No. 83 of 2017) The method based on the market prices of shares of similar companies is a principal way of determining the value of a company and/or its shares using one or more models that compare the company subject to assessment with a similar company with a market price or generally accepted benchmark.

(3) In determining the value of shares, the applicant uses one of the following models:

1. (amended - State Gazette, No. 83 of 2017) model of market multiples of a similar company; or
2. (amended and supplemented - State Gazette, No. 83 of 2017) model of market multiples of a generally accepted benchmark, which are justified by the characteristics of the assessed company and the similar company or generally accepted benchmark; or
3. (new - State Gazette, No. 83 of 2017) model of market multiples reached in transactions for the acquisition of similar companies or of large blocks of shares of similar companies, during the last one year.

(4) (Amended - State Gazette, No. 83 of 2017) A similar company, respectively generally accepted benchmark, is such a company or companies that provide a sufficiently good basis for comparison relative to