The Royal Decree of 8 October 2008 amending the Belgian Companies Code (“BCC”) has amended the rules on financial assistance. The new rules entered into force on 1 January 2009. The Royal Decree implements European Directive 2006/68/EC amending the Second Company Law Directive.
The Belgian rules on financial assistance apply to public limited-liability companies (NV/SA), private limited-liability companies (BVBA/SPRL), partnerships limited by shares (Comm.VA/SCA) and co-operative limited-liability companies (CVBA/SCRL). This contribution only addresses the modifications which affect public limited-liability companies.
2. Recap of the old rules
Under the previous rules, and in line with Article 23 of the Second Company Law Directive, a company was prohibited from advancing funds, making loans or providing security with a view to the acquisition or the subscription of its shares or profit-sharing certificates by a third party. The only two exceptions related to (i) financial assistance provided as part of the day-to-day business of financial institutions, and (ii) management buy-outs. For example, if a bank lends money to a borrower, the borrower can use the funds to acquire shares in the bank – at least if the normal business of the bank is to lend money to its clients and if the money is lent under “arm’s length” conditions. In management buy-outs, a company can provide financial assistance to employees of the company (e.g. the management or a management company) to enable them to acquire the company’s shares.
3. Summary of the new rules
Under the new rules, a company may advance funds, make loans or provide security, with a view to the acquisition or the subscription of its shares or profit-sharing certificates by a third party, if the following conditions are met:
1. The transactions must take place under the responsibility of the Board of Directors at fair market conditions, especially with regard to interest received by the company and security provided to the company. The credit standing of each counterparty must be duly investigated.
2. The transactions must be submitted to the general shareholders’ meeting for prior approval, using the same quorum and majority requirements as for an amendment to the Articles of Association (minimum 50% quorum and 75% majority).
3. The Board of Directors must draft a written report to the general shareholders’ meeting, indicating the reasons for the transaction, the interest of the company in entering into the transaction, the conditions of the transaction, the risks involved in the transaction for the liquidity and solvency of the company and the price at which the third party is to acquire the shares. The entire report must also be published in the Belgian State Gazette. If a director of the parent company or the parent company itself will benefit from the transaction, the report of the Board must explicitly justify such a decision, taking into account the capacity of the beneficiary and the consequences for the assets of the company. This requirement does not free the Board of Directors from applying the general conflict of interest procedure.
4. The financial assistance must be paid out of, and cannot exceed, the distributable profits. The company must include among the liabilities on its balance sheet, a reserve, which is unavailable for distribution, and equal to the amount of the aggregate financial assistance.
5. Where a third party uses financial assistance from a company to acquire shares in the same company (i.e. in case of a transfer by the assisting company of its own shares) or to subscribe for shares issued in the course of an increase in the subscribed capital, such acquisition or subscription must be made at a fair price. The requirement that the consideration has to be fair is logical, since the directors have to act in the best interest of the company.
The aforementioned exceptions with respect to financial institutions and management buy-outs remain largely unchanged.
4. Attention points
The new rules give rise to some interesting points of attention and a couple of practical issues.
The Belgian financial assistance rules remain a matter of public policy. Any advance, loan or security granted in breach of the financial assistance rules is void or voidable. Moreover, the directors of the target company are jointly and severally liable towards the company and third parties for any damages resulting from any breaches to the rules and they are also criminally liable for any such breach.
The new rules explicitly state that the Board of Directors is responsible for the financial assistance. Most notably the Board has to investigate whether the assistance is given under fair market conditions or not, and whether the purchaser of the shares (the beneficiary of the financial assistance) is creditworthy or not. On the other hand, as for share buy-backs, the general shareholders’ meeting has to approve the financial assistance.
Quite naturally, the Board of Directors of the target company whose shares are transferred is responsible for the financial assistance, not the Board of Directors of the company selling or buying the shares. This should be taken into account when structuring the transaction. For instance, if the financial assistance is provided prior to closing (i.e. prior to the acquisition of the shares in the target company) the seller, as (controlling) shareholder of the target company, may ultimately be held responsible for the financial assistance; if it is only provided after the acquisition, and was not contemplated beforehand, the buyer (at least his representatives on the target’s Board of Directors) will be responsible.
4.2. Corporate benefit
As mentioned above, the Board of Directors has to draft a report dealing with the reasons for the transaction, the conditions, solvency and liquidity risks, the consideration for the shares as well as the benefit the company derives from providing the financial assistance. Under Belgian corporate law, a “group” of companies is not a legal concept. However, in corporate benefit cases, most lawyers accept that the “group benefit” can be taken into account when a company provides financial assistance, if certain conditions are met. In the case of an integrated group which has a common economic purpose, the group benefit can be taken into account if the assisting company has sufficient financial capacity, if there is no disproportion and if the pros and cons for providing the financial assistance are balanced. These conditions are derived from the famous Rozenblum case before the French Supreme Court (Cour de Cassation).
4.3. Publication of the conditions of the transaction and the consideration for the shares
The third topic relates to the publication of the report in its entirety, including the conditions of the transaction and the consideration for the shares.
The requirement will undoubtedly be considered as very burdensome, as all details, including the consideration, have to be published extensively in the Belgian State Gazette. Many companies would prefer to be more discreet. It should be noted that the Belgian government opted for such a publication in extenso. European Directive 2006/68/EC only provides that the report has to be submitted to the register for publication; under European rules, an extensive publication is not required.
4.4. Distributable profits
The financial assistance has to be limited to the amount of distributable profits (within the meaning of Article 617 BCC). In accordance with the Report to the King, this means the “available reserves”.
This will need to be taken into account while structuring the deal. By realising capital gains, available reserves are created, but not always in a tax neutral way. Belgian resident companies are generally not subject to Belgian income tax on capital gains realised by the transfer of shares. Realising other assets is generally not tax neutral. Also, it should be noted that reserves are often used in practice for debt push down; if the target’s reserves are used for providing financial assistance for the acquisition of the shares in the target, they cannot be used any more for a debt push down.
4.5. Unavailable reserve
The company must include, among its liabilities in the balance sheet, a reserve, unavailable for distribution, for an amount equal to the aggregate financial assistance.
The requirement to create this reserve, which is also a requirement for share buy-backs, will be an important restriction for providing financial assistance, as maximum up-streaming of funds will not be possible anymore.
Other issues may arise while establishing the amount of the reserve. The reserve must be at least equal in value to the total amount of the financial assistance. This requirement will raise many questions in practice, especially how to estimate the value of the financial assistance.
Should a financial institution provide a credit facility to the buyer of the target’s shares and, in turn, the target provides security interests to the financial institution as collateral for the obligations of the buyer under the credit facility, the financial assistance must not be higher than the total amount due under the credit facility.
However, the value of the assets provided as collateral may be lower than this total amount.
Also, the amount of the unavailable reserve may have to be adapted from time to time. First, the amounts due under the credit facility will often vary over time. Second, the value of the assets provided as collateral will often vary from time to time. Third, in many LMA-style credit facility agreements, as a matter of corporate benefit, Belgian security providers limit their security to a certain amount, which often varies (e.g. it may be a percentage of the net assets of the Belgian company at the moment of enforcement of the security and/or cash derived from the credit facility (directly or indirectly, through intra group loans)).
Further, under Belgian law, many forms of security are possible, and the underlying assets that are provided as security may overlap. Take for instance a business pledge, which operates in a manner similar to an English law floating charge - securing all of the business assets of the company while not restricting the ability of the company to deal with those business assets. Such assets may include receivables (including bank accounts), inventory (up to 50%), shares and intellectual property rights, but separate pledges on receivables, bank accounts, inventory, shares and/or IP rights are possible as well. Whether or not these overlaps will be taken into account when calculating the value of the financial assistance is an open question.
Next, under Belgian law, a business pledge and a mortgage must be granted up to a specific secured amount. Such cap will have to be taken into account when calculating the value of the financial assistance. The secured amount is more or less in line with the actual value of the underlying assets or less than such value because there are significant costs connected to a mortgage and business pledge; on the basis of the secured amount, various costs and taxes are levied.
Also mortgage mandates and business pledge mandates must provide for a secured amount. Such mandates are irrevocable powers of attorney to execute a mortgage or a business pledge. They are often used as an alternative to a mortgage or a business pledge, in order to avoid the costs and taxes. It should be noted however that these mandates do not constitute a security enforceable against third parties. Mandates cannot be registered in the Mortgage Register, and if the company which has granted the mandate breaches any negative pledge obligations and grants a mortgage/business pledge to another creditor acting in good faith, or sells the underlying assets, before a mortgage/business pledge has been executed and registered pursuant to the mandate, then it would be the mortgage/business pledge of the other creditor or the new owner which would have priority.
Legal scholars agree that mortgage mandates and business pledge mandates may constitute financial assistance. Thus, the caps under the mandates will have to be taken into account when calculating the value of the financial assistance. Because the mandates do not cost as much as the actual mortgage/business pledge, the caps are usually taken for a much higher amount though.
The majority of legal scholars agree that the Belgian financial assistance rules must be interpreted restrictively, due to the criminal nature of the sanctions attached to the rules.
Under the new rules, a target cannot “advance funds”, ”make loans” or “provide security” with a view to the acquisition or the subscription of its shares or profit sharing certificates by a third party, unless the conditions referred to above are met.
The majority of legal scholars still believe that other forms of financial assistance are allowed and remain excluded from the financial assistance rules. For instance, dividend distributions, capital reductions and post-acquisition mergers of target and buyer (under certain conditions, most notably that the merger should be made mainly for sound economic purposes, not mainly for the purpose of providing financial assistance). However, it should be noted that the general principles such as fraud, abuse of rights, simulation and name-lending remain valid.
For the same reason (restrictive interpretation of the rules on financial assistance), it is generally admitted that financial support given by a company to acquire shares in its parent company is excluded from the scope of the financial assistance rules. However, one caveat in this respect should be noted. Directive 2006/68/EC provides that the aforementioned conditions apply to companies providing “direct or indirect” financial assistance. Though not entirely clear, this could mean that financial assistance by a subsidiary of the target is prohibited under the Directive because it would be considered as “indirect” financial assistance. Belgian law does not mention the words “directly or indirectly”.
Since 1 January 2009, financial assistance is allowed in Belgium if certain conditions are met. However, the new rules did not enjoy a warm welcome in Belgium, because some of the conditions required for financial assistance are considered to be too burdensome. In particular, the requirement to make the price of the share transfer public and the requirement to create an unavailable reserve for an amount equal to the aggregate financial assistance.