- Pieter Dierckx - Leo Peeters
- share deal , asset deal , incorporation , private foundation , family member , certification
Regardless the choice to be made, the acquisition and/or handing over a business / an undertaking often requires large investments and tough decisions.
Hypothesis 1: the sale of the family business
International studies have shown that family businesses, which are confronted with complex
strategic challenges, such as the expansion of the product range, as well as the necessity to find
new financial investors, will tend to sell their business faster.
If one speaks about the sale of a family business, one often primarily thinks of a sale of shares. This automatically includes the transfer of the entire company (including all assets and liabilities) to the acquirer. Sometimes, however, the prospective acquirer shall only be interested in parts of the undertaking, or there will be hindering circumstances with regard to the full take-over. In that case, the solution lies within the transfer of (some) parts of the undertaking. Both techniques lead to the same (economic) results, namely the acquisition of the undertaking, but from a legal point of view, this result will be completely different.
Hereinafter the legal aspects with regard to both acquisition techniques are briefly discussed. In addition, the tax related implications thereon will also be described briefly.
1.1 Share deal
In this event, the individual shareholders decide to transfer their shares. In certain cases,
the law prescribes special formalities, i.e. informing the works’ council.
With the acquisition of an undertaking by means of a share deal, the entire company, including all rights and obligations, is acquired. The agreements already concluded, including claims, permits, etc. remain into effect, unless approval of the contracting party or the government is required.
Since the company itself is not directly the subject of the sale and purchase agreement, this has far-reaching consequences with regard to the scope of the legal representations and warranties. The warranty of the seller regarding the hidden defects only relates to the shares sold, and not to the underlying undertaking. Therefore, the warranties needed have to be stipulated in de sale and purchase agreement. If the sale and purchase agreement does not contain any provision in this respect, any depreciation found later will in principle not be considered as a hidden defect.
Therefore, the risk primarily lies with the buyer, since the latter acquires the undertaking, including the liabilities and the contingent risks. The seller must thus provide the necessary warranties. In this respect, the due diligence to be performed by the buyer is essential.
A special case with regard to the acquisition of shares relates to the “management buy-out” (hereinafter referred to as “M.B.O.”), i.e. the purchase of shares of the company by its personnel. By personnel is meant: the persons connected with the company by means of an employment agreement. Therefore, directors are in principle not eligible.
The management often does not have the sufficient means to finance the take-over, nor is it able to grant warranties needed to the bank. In practice, such M.B.O. often occurs by means of a company specifically incorporated for the purpose of the acquisition. In that case, one speaks about a “Leveraged management buy-out”. This financing technique can be briefly described as follows: the bank grants a loan to the company specifically incorporated for the purpose of the acquisition (hereinafter referred to as “Newco”) for the purchase of the shares of the company to be transferred (hereinafter referred to as “Target”). Newco can fully deduct the costs of financing of this loan of its fiscal profit. The profit made by the Target is diverted to Newco in the form of management fees, distributions of profit, dividends, …, and remunerations of directors. Newco shall than use these diverted revenues to pay off the credit granted.
In this hypothesis the undertaking (i.e. the board of directors) sells some assets to the
purchaser. An asset deal can be executed in accordance with the general principles of Belgian law,
or by means of a contribution. In the most common form, all or certain assets are transferred by
the company, not the shares. As a rule, these are investments goods (trademarks, patents, land and
buildings, machinery, equipment, ICT-infrastructure, rolling-stock, etc.) stocks, and clientele.
In general, it can be said that an asset deal is less complex than a share deal. The history of the undertaking is in principle not taken over by the buyer. The seller may, in consultation with the buyer, determine which assets and liabilities will be purchased. In this respect, a form of “cherry picking” is possible, by which the buyer takes over the most interesting assets, and leaves the remaining assets and liabilities behind in the existing undertaking. The due diligence to be performed should than only have to relate to the assets and liabilities concerned. The price to be paid by the purchaser is the sum of the value of the assets acquired plus the goodwill, minus the amount of the possible acquired liabilities.
In case of an asset deal, the relevant legal provisions with regard to each asset have to be observed. For example, there are specific requirements regarding the transfer of immovable property (authentic deed), (soil certificate, only in the Flemish Region), claims (notification to the assigned debtor), agreements intuitu personae (not transferable, unless consent of the contracting party), environmental- and other permits (notification form), patents and trademark (registration), etc. Debts need the agreement of the creditors. The rights of employees are regulated by Collective Labour Agreement nr. 32bis of 7 June 1985.
In case of a transfer of a branch (an entity which exercises an autonomous activity on a technical and organizational level, and which can operate on its own) or universality of assets (the business as a whole), the liabilities are also transferred. In order not to be obliged to observe the opposition rule for each component of the transfer (assets and liabilities), one can use the procedure provided for in the Belgian Code of Companies.
1.3 Choice with important fiscal implications
Besides the aforementioned legal implications, the choice between a share deal and an asset deal
has also important fiscal implications. The share deal is mostly more interesting for the seller,
since the latter is in principle not taxed on the surplus value realised (exception: the so called
“Di-Rupo measures on speculative surplus values”).
Contrary to a share deal by which the buyer acquires non-deductible shares, the assets by means of an asset deal are deductible. By doing so, the buyer creates a fiscal advantage, although staggered. The seller will want to see this fiscal advantage translated into a higher price compared to a share deal. While in normal circumstances a share deal is not taxable, the surplus value realised on the business is taxable. Staggered taxation is possible, subject to the fulfilment of the conditions necessary.
When the purpose is to liquidate the selling company after the transaction, the liquidation bonus must also be taken into account.
Hypothesis 2: The transfer to a family member by means of a private foundation
Suppose that Mr Fransen has a large SME with 110 employees in several countries. He has 4
children, of which only his daughter Marleen is working in the business. The other children have
very different interests. Mr Fransen wants to avoid that his life’s work should have to be sold
after his death, but he also wants to treat his 4 children equally. While living, he prefers not to
give up any power, since he has established the business by itself.
2.1 Principle of certification
As a certification vehicle, the private foundation has created new perspectives with regard to
asset management and succession. This legal entity allows concentrating the control by one body
(i.e. the board of directors).
Certification is the technique by which the shares of the company are transferred to a foundation, the latter giving certificates in exchange. By means of the certification, the foundation becomes the legal owner of the shares concerned, and the transferor becomes a certificate holder. This gives the latter the right of “economic ownership”. Consequently, the foundation manages the participation, and exercises the voting rights attached to the shares. The certificate holder is entitled to all proceeds (dividends and surplus values).
The incorporation of a private foundation and the certification of the shares of the family business may redeem Mr Fransen of many concerns. Mr Fransen sits on the Board of Directors of the foundation, so that he may decide individually during his life. After his death, the articles of association of the foundation provide that his daughter Marleen obtains control. By means of various control mechanisms at the level of the foundation, the other children may also be involved in the management. Meanwhile, the will of Mr Fransen stipulates that each of his children will receive an equal part of the certificates, or Mr Fransen will donate these while living. With the foundation both the continuity of the company, as well as the equality of the heirs, is thus safeguarded.
2.2 Favourable taxation
In principle, private foundations escape from inheritance taxes. This is not the case for the
certificate holders. Instead, only an annual tax of 0,17% is levied on the capital of EUR 25,000.00
The most important levy is the indirect tax. On donations and the contribution for nil consideration of movable and immovable goods, in principle a registration fee of 7% is due. This percentage is applicable in Belgium as a whole, but, in order to enjoy this favourable rate in the Walloon Region, evidence must be delivered of the private foundation having a “social character”). For donations above EUR 100,000.00, an approval is required.