Road book on private mergers and acquisitions in Belgium (part 4)

1. Financing of M&A: main sources and developments

Given that the majority of the Belgian M&A transactions are mid-market deals, and considering the low interest rates that were applicable throughout 2016-2017, financing continues to be available on reasonable conditions. 

Asset-backed lending in different forms is still gaining popularity, while club financing and syndicated loans for small and mid-cap deals also remain popular. However, financial institutions remain very careful, and sometimes risk-averse, requesting proper and solid securities for almost all transactions.

More and more industrial players finance deals through their existing credit lines or sometimes even through their own funds. Belgian debt capital markets, private placements of bonds in particular, have been very active, in many cases alongside bank financing. Almost all financing transactions include senior debt (for the largest amount) and junior debt (provided by shareholders, sponsors or other banks).

2. Financial assistance

Pursuant to Article 629 of the Belgian Companies Code, financial assistance by a Belgian target company to a third party for the acquisition of its own securities is only permitted under very strict conditions. 

Providing funds, granting loans or providing security with a view to the acquisition of its own shares or profit certificates by a third party is subject to the following conditions:

• (i) the transaction must take place under the responsibility of the company’s board of directors at fair market conditions (e.g. taking into account the usual market interest rate and the usual collaterals for similar types of financing as well as the credit standing of the third party);

• (ii) the transaction is subject to prior approval by the general shareholders’ meeting (with the same quorum and majority requirements as for an amendment of the articles of association);

• (iii) the board of directors must draft a special report explaining

(a) the reasons for such transaction, 
(b) the interest of the company to enter into such transaction, 
(c) the conditions of the transaction, 
(d) the liquidity and solvency risks for the company and 
(e) the price at which the shares are sold. 
In addition, if a director of the parent company or the parent company itself benefits from the transaction, the report of the board of directors must explicitly justify such a decision taking into account the capacity of the beneficiary and the consequences for the assets of the company;

• (iv) the assistance must be paid out of and cannot exceed the amount of the distributable profits (within the meaning of Article 617 of the Belgian Companies Code); the company must set up a non-distributable reserve on the liabilities’ side of its balance sheet equal to the total amount of the financial assistance.

Article 629 of the Belgian Companies Code further provides that if the shares are acquired directly from the assisting company (i.e. not from a selling shareholder), either through the sale of its own shares or through a subscription by the beneficiary to a capital increase, the acquisition of the company’s shares must occur at a fair price.

The provisions on financial assistance aim to protect the creditors of the Belgian target company by preserving its main assets and the integrity of its corporate capital. It is unanimously agreed that “security” means all forms of security in rem, as well as personal security, i.e. guarantees.

Any violations of this Article 629 of the Belgian Companies Code are subject to both civil and criminal sanctions. A transaction which violates the financial assistance prohibition will be retroactively annulled. Moreover, the directors of the target company can be held liable for any damage that the target company or third parties may have suffered. In addition to these civil sanctions, a violation of the financial assistance regulations can also entail criminal penalties.

3. Thin-cap rule

Interest paid by the buyer on the loan taken out to finance the acquisition of shares is normally tax-deductible if the interest rate of the interest-bearing loans is not higher than the general market interest rate.

However, an anti-thin capitalization rule exists in respect of (i) intragroup loans and loans from tax-privileged entities. The concept of “group” refers to all companies that are affiliated within the meaning of the Belgian Companies Code. Under the current regime, interest paid on intragroup loans or loans from tax-privileged entities are not deductible above a 5:1 debt to equity ratio. A series of exceptions apply, including on publicly issued bonds, loans from credit institutions and loans from leasing companies. Back-to-back arrangements aiming at circumventing the rule may be disregarded in certain circumstances.

4. Intra-group guarantees

As outlined here above in respect of “Financial Assistance”, intra-group guarantees given in view of the financing of own (group) securities, must comply with the rules of financial assistance (including the limitation of the financial assistance to the amount of the distributable reserves, fair market conditions to be determined by the board of directors, shareholders’ approval and the publication of an extensive report by the board of directors), as they are considered to fall within the definition of “security” used in the provision of financial assistance. Aside from the financial assistance limitation, two additional requirements determine the validity of an intra-group guarantee: (i) the corporate purpose and (ii) the corporate interest.

(i) Corporate purpose

An intra-group guarantee will only be valid if the granting of such a guarantee falls within the corporate purpose of the company as specified in its articles of association. If the articles of association do not mention the granting of (intra-group) guarantees, they should at least permit the company to engage in a broad range of (financial) transactions related to or in line with its corporate purpose. The wording of purpose clauses in the articles of association is usually sufficiently wide. If not, it can be changed by a shareholders’ meeting subject to certain formalities. Such a procedure may take a few weeks.

(ii) Corporate interest

As with any other act performed by a Belgian Company, a guarantee issued by a Belgian company must be in its corporate interest.

Firstly, this means that the guarantor must derive an actual (direct or indirect) benefit from such act. Although the general benefit to the group as a whole will be taken into account when assessing whether or not the guarantee is in the company’s corporate interest, this alone is not sufficient to justify the granting of the guarantee. There must also be an individual benefit for the guarantor. Downstream guarantees are considered to meet this condition, except in exceptional circumstances; the analysis is more difficult for side-stream and upstream guarantees.

Secondly, this benefit must be reasonably proportionate to the risks assumed by the guarantor, meaning that the amount guaranteed cannot be disproportionate to the benefit derived or the financial means available to the guarantor.

Therefore, finance documents usually include guarantee limitations in respect of Belgian guarantors. The limitation may be based on (a combination of) various elements, including a percentage of net assets, the amount of the financing down streamed to the guarantor and a minimum fixed amount.

The assessment of the corporate interest itself is essentially a cost/benefit analysis that is influenced by several relevant factors.

In case a court finds that the guarantee was not granted in the guarantor’s corporate interest, the granting of the guarantee may be declared null and void. In addition to the annulment, the directors of the guarantor may be held liable for acting against the guarantor’s interest.