Road book for Mergers and Acquisitions in Belgium (part 5)

• 'Caps', 'baskets', and 'de minimis'-clauses

The thresholds set to limit the liability of the seller in connection with the provided representations and warranties.

The 'cap' is the agreed maximum threshold to which the seller is bound.

The 'de minimis' clause sets the minimum threshold that the claim must meet in order to recover the damages from the seller. It prevents parties from becoming endlessly involved in disputes over small amounts, or amounts that are of minor importance compared to the total sale price.

The 'basket', as like the de minimis clause, sets a minimum threshold, the difference being that individual, not separately claimable, infringements must be added for the calculation of this thresholds, before the buyer starts claiming.

It can be further agreed that in the event of exceeding the threshold, the seller will owe either the full amount of all the claims or only the amount that exceeds the threshold.

• Closing

The moment at which the sales price is paid and the transfer of the ownership takes place.

• Completion Accounts-clause / Closing Accounts-clause

These clauses are widely used mechanisms for determining the final purchase price. In this case, a provisional purchase price is paid at the time of signature, for example on the basis of a corrected EBITDA, or on the basis of the net debt position of the target company and its estimated working capital on a date agreed. This provisional purchase price is then tested against the actual adjusted EBITDA and/or the net debt position of the target company and the actual working capital at closing.

• Data Room

A data room is a room in which information about the target company is stored to make it available to potential buyers and their advisers (lawyers, accountants, ...). The legal due diligence is carried out on the basis of the information stored in the data room. A data room can be either a physical room or virtual.

• Discharge

Discharge is a legal act that is taken by the general meeting of shareholders of a company. The general meeting formally confirms that it agrees with the policy pursued by the directors in a certain period. Strictly legally, all management acts for the relevant period are approved and the company waives any legal action against its directors.

The shareholders can still invoke the invalidity of a discharge if, for example, it is established that the directors have provided the shareholders wrong information or have withheld relevant information to the shareholders.

In order to prevent a buyer from using the rules on directors' liability to claim compensation outside the SPA, it is customary to hold an extraordinary general meeting of shareholders of the company on the date of closing, in which discharge of the resigning directors for the period from signing to closing. In most cases, it is also agreed that the buyer undertakes or shall procure that discharge will be granted at the next annual general shareholders' meeting.

• Due Diligence

A Due Diligence investigation establishes the correctness of the information submitted to the buyer and maps out the risks and opportunities of the target company. A Due Diligence investigation has financial, legal and commercial aspects, each of which are carried out by various specialists in their domain. Depending on the nature and size of the transaction, the research may be expanded to aspects relating to the environment, human resources, IT or privacy.

• Earn-out agreements

In case of an earn-out agreement, the payment of part of the purchase price is postponed. The amount of that deferred payment depends on the results of the company after the acquisition. Earn-out agreements can result in a 'more correct' value being charged for the target company, which also takes account of developments in the future. Moreover, they stimulate the seller not to leave a 'defective' company. Even if the seller continues to play an active role in a company, such agreements can lead to the seller continuing to work in a positive way for a good course of business and smooth integration after the takeover.

• EBITDA

EBITDA or Earnings Before Interests, Taxes, Depreciation and Amortization is used as a measure of the profit that a company achieves with its operational activities, without incorporating costs and revenues from financing.

• Going concern

Going concern is the assumption that an enterprise will not run a risk of liquidation in the foreseeable future. In order to maintain the company as a going concern, certain actions of the seller in the period between signing and closing will be prohibited, such as dividend payments, changes to the articles of association, emission of securities, incurring excessive debts, and so on.

• Guarantee periods

The period after the closing during which the seller remains liable for certain defects, claims and guarantees. On the Belgian market, this period usually lasts in average for 12 to 24 months. However, for certain matters such as taxes and environmental liability, considerably longer guarantee periods apply, general in line with the legal prescription period applicable.

• Heads of Agreements

By means of Heads of Agreements or a Memorandum of Understanding, the negotiating parties establish the elements on which a consensus has been reached. At the same time, however, this document indicates that certain terms still have to be agreed upon or elaborated. The final agreement will not be concluded until an agreement has been reached on the other terms or on all the terms and conditions. Specifically, under Belgian law, such an agreement in principle binds the parties as soon as there is consensus on the essential elements for the intended agreement. For an M&A transaction, these elements are, roughly outlined, the object of the sale, e.g. sale of shares, of certain assets, of an industry, of the business, and the price to be paid.

• Leakage

Leakage is a phenomenon whereby the value of the company decreases during the interim period between the date on which the price is fixed and the closing date. Parties will make arrangements to avoid leakage. Some examples are the ban on dividend payments, bans on the payment of management bonuses and any other transactions which, compared to the past, cannot be qualified as normal, recurrent business operations.

• Letter of Intent (LOI)

An LOI is basically a non-binding agreement, in which, among other things, the general terms and conditions regarding the progress of the negotiations are laid down. It usually contains non-binding provisions but may also include some enforceable commitments. In case law it is  accepted that an LOI contains the obligation to continue negotiations in good faith. The careless termination of the negotiations must therefore also be assessed in this light.

• ‘Locked-box’-model

A mechanism for determining the sales price for M & A transactions, in order to eliminate the uncertainty for the buyer in the interim period (to closing) as much as possible. This model is based on a fixed price on a fixed date (based on a balance sheet drawn up on an agreed date). From the moment of the pricing, all economic risks, profits and losses of the target company are transferred to the buyer. Parties must therefore make arrangements to avoid 'leakage'. The partner can agree that interest on the purchase price will be paid.

• ‘MAC’-clauses

Material Adverse Change, or 'MAC'-Clauses, are in most cases suspensive conditions that protect the buyer against circumstances that have a significant impact on the (financial) position of the target company. Each agreement uses its own definition of a Material Adverse Change, and the criteria that have been applied.

• Memorandum of Understanding

By means of Heads of Agreements or a Memorandum of Understanding, the negotiating parties establish the elements on which a consensus has been reached. At the same time, however, this document indicates that certain terms still have to be agreed upon or elaborated. The final agreement will not be concluded until an agreement has been reached on the other terms or on all the terms and conditions. Specifically, under Belgian law, such an agreement in principle binds the parties as soon as there is consensus on the essential elements for the intended agreement. For an M&A transaction, these elements are, roughly outlined, the object of the sale, e.g. sale of shares, of certain assets, of an industry, of the business, and the price to be paid.

• Non-compete clauses

In a non-compete clause, the seller engages itself to the obligation that neither the seller, nor any of the affiliated companies will directly or indirectly carry out business or have any interest in any company that has activities in a specific geographical area that directly compete with the activities of the company to be acquired. The non-compete clause is always limited in time and geographically.

• Non-Disclosure Agreement (NDA)

In M & A transactions, it often occurs that confidential and proprietary information (such as financial information and important contracts) is shared with the other party. A Non-Disclosure Agreement or NDA ensures that the parties are bound to respect the confidentiality of the information provided and not to use it to the detriment of the disclosing party.

• Non-recruitment clauses

These clauses prohibit the vendor, or any of its affiliated companies, from recruiting employees or offering employees to leave the target company for a job with the vendor or an affiliated company.

• Permitted Leakage

The parties can agree to allow certain exceptions to the ban on leakage, such as an agreed amount to which a dividend can be paid to selling shareholders or a bonus paid to managers.

• Share deals and asset deals

An M&A transaction can be structured in two ways. In a share deal, the shares of the target company are sold. The buyer acquires the company with all its underlying assets and liabilities.

In an asset deal, assets of a company, such as the business, an industry, a branch or certain parts thereof) possibly with some personnel are sold. The purchaser will only acquire the assets that are specifically involved in the transaction (cherry picking).

• Shareholders’ register

A register that is required by law and is to be kept at the registered office of the company. The shareholder’s register will include:

1) accurate information concerning the person of the shareholder, as well as the number of shares belonging to him;
2) the deposits made;
3) the transfers of shares with their date.

This register provides the exclusive proof of ownership under Belgian law.

• Signing

The moment at which the purchase agreement is signed.

• Share purchase agreement (SPA)

The SPA is the actual contract for the transfer of the shares, which is signed by both parties (signing). After the signing, there are usually conditions precedent that must be met before the transfer of ownership and payment of the purchase price can take place (closing).

The SPA will also stipulate the representations and warranties given by the seller to the purchaser.

• Standstill-clause

A standstill clause stipulates that in the interim period between the signing and the closing, the seller is only authorized to carry out the activities of the company in a usual normal manner. The seller is obliged to maintain the company as a going concern.

• Target company

The target company is the company whose shares or assets are transferred.

• Teaser / blind profile

A teaser is a short brochure or an informative memorandum that is provided to potential buyers who want to participate in the auction process of a company. Sometimes this information is anonymized ('blind profile') or subject to confidentiality agreements or secrecy agreements.

• Two step approach

In the two step approach, the usual method for M & A transactions, signing and closing take place at different times. After signing, there are usually still a number of conditions precedent that must be met before sales price is paid and the transfer of the property takes place. It is also possible that signing and closing take place at the same time and thus coincide in time. 

• Vendor Due Diligence

A Vendor Due Diligence is a due diligence executed by an independent party (often a law firm or an audit firm) at the instruction of the vendor.

• Virtual Data Room

A data room based on electronic documents that are made available through specialized online applications.