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ALTIUS contributed to a publication on International Acquisition Finance accross mutiple jurisdictions. The volume provides counsel with a full insight into the law and regulation across numerous jurisdictions. Johan De Bruycker, Caroline Wildemeersch and Kasper Van Landeghem from ALTIUS' Banking & Finance team untangle the complications of debt funding regimes for the Belgian jurisdiction.
1. MARKET
The main players in the Belgian market are large local banks, such as KBC, Fortis, Dexia and ING, and a number of international banks. In transactions which are smaller and purely Belgian, Belgium banks, Petercam and Bank Degroof often intervene.
Over the years, a large number of venture capitalists such as GIMV, CVC, NIBC, Indufin and private equity players such as KBC Private Equity and Fortis Private Equity have become increasingly important.
The year 2007 was an exceptionally good year for Belgium in terms of the number of finance deals and their accumulated transactional value. However, the first six months of 2008 experienced a market downturn, it was reported that there were approximately 30% less transactions than the corresponding period in 2007 and the private equity houses were hit especially hard during these first six months.
2. DOCUMENTATION
2.1 Applicable law
In international acquisition financings English law predominantly governs facilities agreements and Loan Market Association (LMA) standards most often apply, whereas transactions mainly and/or solely involving Belgian players will generally be governed by Belgian law. Irrespective of whether international transactions or Belgian transactions are involved, security documents whereby security is given by Belgian companies over their assets are governed by Belgian law.
2.2 Language
Documents may be drafted in any language, however the majority of documents are drafted in English, especially in international acquisition financings. There are a number of documents, such as mortgages and business pledges that must be drafted in one of Belgium’s official languages (French, Dutch and occasionally German), as this is required for the registration of the above documents at the Mortgage Registry in Belgium.
3. ACQUISITION/FINANCING STRUCTURES
Although the use of hybrid securities, other forms of alternative financing products or combining debt with equity kickers have increased in the Belgian market, acquisitions are still typically financed through a credit agreement often with mezzanine financing.
In international acquisitions, leveraged investors often use special purpose entities as acquisition vehicles (in Belgium public limited liability companies, naamloze vennootschap, are preferred), they will typically be incorporated into the financing transaction as the primary borrower of the acquisition financing. Once the special purpose vehicle has acquired the parent, the subsidiaries of the parent will accede to the financing agreements and will provide guarantees and security. It is important to pay particular attention to any financial assistance and corporate benefit issues that may arise. (see respectively paragraphs 10 and 8.2 below).
4. REGULATED TARGETS
If shares in regulated targets are acquired, such as credit institutions, investment firms, insurance companies, etc., specific rules will have to be complied with. If an entity wants to acquire securities or shares of a credit institution (whether or not these securities or shares represent share capital or have voting rights) or an investment firm governed by Belgian law and in doing so the proportion of the capital or of the voting rights directly or indirectly held by that entity reach or exceed 5%, 10%, 15%, 20% and so on, it must inform the Belgian Banking, Finance and Insurance Commission. The authorisation of the Belgian Banking, Finance and Insurance Commission is required:
(i) For mergers between credit institutions or investment firms respectively or between investment firms and other financial institutions; and
(ii) When all or part of the activities or the network are transferred between credit institutions or investment firms
respectively or between credit institutions or investment firms respectively and other financial institutions.
Similar rules apply with respect to insurance companies.
5. LISTED TARGETS
If shares of a listed target are acquired, the Belgian laws on transparency and public takeovers must be respected.
The Transparency Law requires, among other things, that any entity directly or indirectly acquiring shares (or other financial instruments carrying voting rights) of a listed company must notify that company and the Belgian Banking, Finance and Insurance Commission of the number and proportion of shares (or other financial instruments carrying voting rights) held by it in the company concerned as a result of the acquisition, provided that the voting rights attached to the shares (or other financial instruments carrying voting rights) reach or exceed 5% 10%, 15%, 20% and so on of the total existing shares (or other financial instruments carrying voting rights) of that company. It must be noted, however, that the articles of association of a listed company often provide for a threshold of 3% instead of 5%. If the 3% threshold is reached, the company and the Belgian Banking, Finance and Insurance Commission will need to be notified.
Furthermore, in accordance with the Takeover Law and the Takeover Decree, a mandatory takeover bid to all shareholders must be made when, as a result of its own acquisition or the acquisition by persons acting in concert with or representing it, an entity owns more than 30 per cent of the securities with voting rights of the target.
In addition, when the target is listed on the Euronext Brussels Market, the rules laid down in the Euronext Rule Book (Book I and Book II) must be complied with.
6. MEZZANINE DEBT AND INTERCREDITOR ARRANGEMENTS
6.1 Common techniques
Mezzanine financing arrangements in Belgium commonly take the form of unsecured or subordinated debt whereby the claims of the mezzanine lenders is subordinated to the claims of the senior lenders. Such subordination is provided for either in an intercreditor agreement (which is often governed by UK law) or in the Belgian law security documents, making these security documents second ranking security. Most mezzanine mechanisms and techniques usually applied in the UK, such as stop notice periods, deferred acceleration rights, entrenched senior facilities amendments, etc are also common features in Belgium.
6.2 Use of high yield bonds
Acquisition financing techniques in Belgium do not often include the use of high yield bonds. Nonetheless, it is not uncommon in Belgium that part of the debt takes the form of securities (i.e. different forms of hybrid security).
7. EQUITY KICKERS
Equity kickers are usually used if the target shows a strong potential for increase in value, allowing the investors to benefit from an increase in the value of the company and to compensate for unsubordinated debt or for lower priced debt. Equity kickers commonly take the form of convertible bonds, warrants, bonds with warrants or options.
Apart from compliance with corporate provisions, such as the necessity to issue convertible bonds and warrants through a shareholder’s resolution and compliance with pre-emption rights, there are no specific Belgian law issues in relation to equity kickers.
8. SECURITY
8.1 Security packages
A full security package under Belgian law includes as a rule a mortgage over real property, a pledge over the business, a pledge over shares, a pledge over receivables (including bank accounts) and a pledge over any other important tangible and intangible assets.
8.1.1 Mortgage
Security over real property is created through the vesting of a mortgage. A mortgage entitles the mortgagee to a preference right upon the proceeds of the sale of the property on foreclosure. A mortgage is granted up to a specified amount (the secured amount). As mortgages are quite expensive in Belgium (approximately 1.5% of the secured amount), this secured amount will often, and in particular in international acquisition financings, not be equal to the aggregate amount of the facilities granted, but will be limited to the market value of the underlying property. Furthermore, mortgage mandates are sometimes used as an alternative or an addition to a mortgage in order to avoid or limit these costs. Mortgage mandates do not create security right as such, but create a contractual obligation for the company to allow the creation of a mortgage. If a company grants a mortgage mandate, it appoints a proxy holder (as a rule, a person/company affiliated to the beneficiary of the mortgage mandate) who is authorized at any given time to vest a mortgage in favour of the beneficiary (the lender or the security agent). The security will only be created and the security will only rank from the moment the proxy holder exercises its powers under the mortgage mandate and vests a mortgage (and the mortgage is registered with the Mortgage Registry).
Both mortgages and mortgage mandates must be granted through the execution of a notaries deed whereby both the pledgor and the pledgee need to be represented. A mortgage must subsequently be registered in the Mortgage Registry competent for the judicial district where the real estate is situated. The registration is valid for an initial period of thirty years and is renewable.
8.1.2 Pledge over the business
A pledge over a business, which is similar but not identical to a floating charge, confers upon the beneficiary a preferential right on the assets constituting the business of the pledgor, subject to certain exclusions and other limitations with regard to both the beneficiaries and the covered assets. A beneficiary of a business pledge, must be either:
(i) a credit institution which has obtained a license in one of the EU member states and of which the activities consist in:
- (a) the collection of deposits or other refundable funds and the granting of credits for its own account, or
- (b) the emittance of payment instruments in the form of electronic money, or;
(ii) a financial institution, i.e., an undertaking which is not a credit institution (as defined above) and of which the main activity consists of, amongst others, one of the following:- (a) granting of loans, factoring and financing of business transactions
- (b) leasing, or
- (c) granting of guarantees and securities.
As to the actual business, in principle all assets comprising the business are covered by the pledge. These items include the clientele, trade names, commercial organisation, any trademarks, any lease rights, furniture and equipment. However, only 50% of the stock will be covered by the business pledge. The business pledge will be granted up to a specified amount (the secured amount). As the cost of a business pledge is rather high (approximately 0.57% of the secured amount), business pledge mandates are sometimes used as an alternative or in addition to a business pledge in order to avoid or limit these costs.
The disadvantages of a business pledge mandate are similar to the disadvantages of a mortgage mandate, as set forth above.
A pledge over business must be constituted by a written agreement, either executed before a notary public or by private contract between the pledgor and the pledgee. Subsequently, the business pledge needs to be registered with the Mortgage Registry in the judicial district(s) where the pledgor has a place of business. The registration is valid for an initial period of ten years and is renewable. For registration purposes the pledge agreement will normally be drawn up in French or Dutch. 8.1.3 Pledges A pledge can be taken over financial instruments, tangible assets, bank accounts, receivables, shares and intellectual property. 8.1.3.1 Financial instruments
One of the most commonly used security rights is a pledge over the shares of those Belgian companies involved in the transaction. Specific care must be taken if shares of a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid – société privée à responsabilité limitée) are involved, as any transfer of shares (including any transfer of shares upon enforcement of the pledge) of the company (except for transfers to another shareholder of the company and, in case of shareholders that are physical persons, certain relatives thereof) are by law subject to an approval right of the existing shareholders. In order to solve this issue, it is often requested that the articles of association of the company concerned are amended in order to exempt any transfer of shares upon enforcement of the pledge of the approval right, although there is discussion in legal literature as to the validity of such exemption.
Irrespective of whether the pledge is for shares of a private limited liability company or a public limited liability company (naamloze vennootschap – société anonyme), the articles of association should be closely examined for any transfer restrictions and, if need be, the articles of association should be amended.
If the shares of the company are registered shares, a notice of pledge should be recorded in the shareholders’ register of the company. If the shares of the company are bearer shares, the shares should be put outside the possession of the pledgor(s) which is often effected by entering the shares into a securities account set up under specific conditions.
8.1.3.2 Bank accounts
In order to pledge a bank account, it is sufficient to enter into an agreement to that effect. In order to render the pledge opposable towards the bank, it is sufficient that the bank is notified that the bank account is pledged in favour of the pledgee. It is market practice that the bank is also requested to waive certain rights it has in respect of the pledged bank account pursuant to its general conditions.
8.1.3.3 Bank accounts
In order to pledge receivables, it is sufficient to enter into an agreement to that effect. In order to render the pledge opposable towards the relevant debtor, it is sufficient that the debtor is notified that the receivables are pledged in favour of the pledgee. As Belgian companies do not always wish that their trade customers are
aware of the pledge, receivables pledge agreements can provide that the pledge will only be notified to the trade debtors upon the occurrence of an event of default under the facilities agreement.
8.1.3.4 Tangible assets
When tangible assets are pledged, it is not sufficient to simply enter into an agreement to that effect, the pledged assets must also be put outside of the pledgor’s possession. In order to comply with the dispossession requirement, the assets are often delivered into the possession of an agreed third party (i.e. in case of a pledge over stock, into the possession of a warehouse agent).
8.1.3.4 Intellectual property
Trademarks and patents are pledged by entering into a pledge agreement and registering an extract of the pledge agreement in the appropriate trademark register (trademarks) or by notifying the pledge agreement to the service for intellectual property (patents).
The validity of pledges over copyrights, data bases, computer programs, etc. is deemed controversial in Belgian law simply because there is not a central register for these intellectual property rights where the pledge can be registered. As a result, the dispossession requirement (see 3.4 above) cannot be met. Although disputed, delivering the copyrights or the constitutive elements of the data bases or computer programs (such as source and object codes) into the hands of a third party (escrow agent) is sometimes used to comply with this requirement.
8.2 Limitations on security
Legal restrictions on providing security by Belgian companies are, as a rule, mainly driven by (i) the principles of financial assistance and (ii) corporate formalities and issues.
8.2.1 Financial assistance
The granting of security by a Belgian company should comply with the Belgian financial assistance rules. See paragraph 10 below.
8.2.2 Corporate formalities and issues
In order for a Belgian company to validly grant security, the company will have to make sure that (i) the granting of security is allowed pursuant to its corporate purpose and (ii) the granting of the security is in
its corporate interest.
8.2.3 Corporate purpose
The corporate purpose of a Belgian company is set out in its articles of association and Belgian companies can only act within the boundaries of this corporate purpose. Transactions entered into by a Belgian company which are deemed not to fall within it corporate purpose can be nullified and entail the liability of the directors.
8.2.3.1 Corporate interest
The granting of security by a Belgian company must always be in the corporate interest of such Belgian company. However, as this mainly depends on the factual situation (such as the benefit which the Belgian company will obtain from the transaction as a whole) this point can never be settled beyond doubt. In seeking to appreciate the corporate interest of a Belgian company which provides security, it is necessary to look into (i) primarily the direct benefits which the Belgian company will derive from the transaction, such as direct and indirect borrowings, and (ii) then only as an ancillary issue, the indirect benefits, such as the benefit to the group.
When appreciating the corporate interest of the company, the directors of the company
will have to take care that (i) the obligations and liabilities for the company resulting from the transaction are not materially disproportionate to the benefits derived by the company from the transaction and (ii) the obligations and liabilities for the company resulting from the transaction do not disproportionately exceed the financial means of the company.
8.3 Other issues: Parallel debt
Except in respect of pledges over financial instruments and pledges over bank accounts, Belgian law does not recognise the possibility that a security agent holds the security for the benefit of the lenders. In order to have a valid and enforceable security right in Belgium, a valid underlying claim of the beneficiary of the security is required (a security right is regarded as an accessorium of a claim).
In order to overcome this issue, a parallel debt clause or a joint creditor clause (whereby the security agent is a joint creditor together with the other lenders of all monies due to the lenders) is included in the finance documents (often in the intercreditor agreement) entitling the security right to claim payment or enforce the security in its own name either: (i) as creditor of the parallel debt or (ii) as creditor of the joint claim.
As mentioned above, the situation is different for pledges over financial instruments and pledges over bank accounts as the Financial Collateral Act of 15 December 2004 has explicitly recognised that a security agent can hold such collateral for the benefit of the lenders without the need for any parallel debt or joint creditor structure.
9. CORPORATE THIN CAPITALISATION RULES
Belgian tax law requires a debt equity ratio of 7/1 for Belgian resident companies if the beneficiary of the interest payments is not subject to corporate tax, or is subject to a taxation regime that is substantially more favorable than the common tax regime applicable in Belgium.
10. FINANCIAL ASSISTANCE
Under Belgian financial assistance rules, a Belgian company is not allowed to advance funds, make loans, or grant security with a view to the acquisition of its shares (existing shares or shares to be issued). Hence, a Belgian target (provided its shares are acquired directly) is not allowed to grant security for the acquisition debt of its parent.
Financial assistance rules do not prohibit, however, the up-streaming of cash through dividend distributions or repayment of capital.
A transaction breaching financial assistance rules may be declared null and void upon the request of any interested party. Such nullity will not necessarily be limited to the transaction itself but may also affect all connected transactions which would not have occurred without the relevant act or which led to the existence of the unlawful legal scheme that was set up, insofar as these transactions were willingly performed by all the parties involved. Moreover, non-compliance with financial assistance rules entails the liability of the directors.
In order to comply with financial assistance rules, facilities agreements often split the facilities into different tranches whereby the tranche relating to the (direct) acquisition of the Belgian company is carved-out from the guarantee or security granted by such Belgian company. Also, a general carve-out clause is often included in the guarantee/security clause of a facility agreement pursuant to which any obligation breaching financial assistance rules is not covered by the guarantee/security.
Other options are to insert a holding company above the Belgian target whereby the shares of the holding are acquired instead of the Belgian target or to split the Belgian target and to divide the target’s assets over two or more companies (with each company cross-guaranteeing the other’s obligations). Nonetheless, these alternative options should always be used with caution as recent jurisprudence tends to interpret the financial assistance prohibition in an exhaustive manner.
11. DIRECTORS' LIABILITY
11.1 Rules
Under Belgian law, directors have a duty to act in the interest of the company, as a result of which they can be held liable towards the company for any shortcoming in the performance of this duty. Furthermore, directors can be held liable towards the company and third parties for breaches of the articles of association of the company and the Belgian Company Code. Some rules set forward by the Belgian Company Code are sanctioned criminally (such as the financial assistance rules).
In the context of acquisition financing, directors should in particular pay attention to the following:
- (i) the transactions should fall within the corporate purpose of the company; non-compliance with this rule entails the joint liability of the directors (see also paragraph 8.2 above);
- (ii) the transactions should be in the corporate interest of the company; non-compliance with this rule entails the joint liability of the directors (see also paragraph 8.2 above);
- (iii) if the directors have a conflict of interest in the transactions, this conflict should be disclosed and the
conflict of interest procedure should be complied with; non-compliance with this rule entails the joint and personal liability of the directors;
- (iv) the obligations and liabilities for the company resulting from the transactions should not be such that these could result in the bankruptcy of the company; non-compliance with this rule entails the joint and personal liability of the directors;
- (v) the transactions should not breach financial assistance rules; non-compliance with this rule entails the joint liability of the directors and could be sanctioned criminally.
12. LENDERS' LIABILITY
In respect to lenders’ liability, the liability to the debtor must be distinguished from the liability to third parties.
The lender will be liable to the debtor in the event of non-compliance by the lender with contractual terms of the facilities agreement or the rules of professional conduct. However, even if the contractual terms are complied with, the use of contractual rights can give rise to contractual liability in the event of abuse of contractual rights. Case law from the Belgian Supreme Court shows that, even if the withdrawal of funds without any notice period is within the scope of a facilities agreement and does not therefore constitute contractual misbehaviour, the lenders may still incur liability. If for instance the disadvantage or damages resulting for the debtor are disproportionate to the advantage obtained by the lenders, the lender may incur liability. Furthermore, the use of a short notice period for mandatory repayment may in certain circumstances be considered by the court as an abuse of law by the lender.
The lender will be liable to third parties when the following three conditions are met: (i) there must be a fault or a negligence on the part of the lenders (e.g. the lenders have breached a law); (ii) the fault or negligence resulted in damage; (iii) a causal link between the fault or negligence and the damages is necessary. The aforementioned subtle balance between the maintaining and the withdrawal of the funds is even more difficult to achieve with respect to the lender’s liability towards third parties. The maintaining of funds may be considered as a breach vis-à-vis a third party, provided that on the basis of objective information the debtor could no longer be considered as creditworthy. If the bank is aware or should be aware of the fact that the company which demands a loan is destined to become insolvent, the onus is on the bank to refuse to grant the loan. Third parties have to demonstrate that the omission of the lenders created an appearance of creditworthiness which induced them to start or continue to deal with the debtor. To obtain objective information with respect to borrowers, lenders have to monitor during the term of the facilities agreement the financial situation of Belgian companies, which should include a review of the annual accounts and the annual auditor report. That said, monitoring by lenders should not be continuous as it may result in shadow management of the Belgian company. The lenders must therefore avoid intervening more than necessary in the decision-making process of the Belgian company. As soon as the lenders are convinced that the situation of the Belgian company is hopeless, the lenders must withdraw the funds and thereby terminate the facilities agreement in order to avoid damage to third parties. In addition, the termination letter must mention the reasons and a reasonable notice period or a gradual reduction of the funds should be provided.
13. LEGAL OPINIONS
It is market practice in Belgium in international financing transactions that legal opinions for the benefit of the lenders are delivered on (i) the due execution and capacity of the borrower or entity granting security and (ii) the validity and enforceability of the agreements governed by Belgian law. Due execution and capacity opinions are as a rule delivered by the counsel to the borrower or the entity granting security whereas validity and enforceability opinions are as a rule delivered by the counsel to the lenders.
A validity and enforceability opinion will, amongst other things, contain assumptions and qualifications as to financial assistance, mandatory provisions of Belgian law, insolvency provisions, corporate interest, the existence of conflicts of interests of the directors and the fulfilling of formalities required for the perfection of the security interests.
14. POST-ACQUISITION RESTRUCTURINGS
Post-acquisition restructurings often involve mergers and de-mergers, de-listings, intra-group acquisitions, transfers of assets etc.
14.1 To what extent are squeeze-outs permitted?
If an entity has acquired 95% of the shares (and other financial instruments carrying voting rights) of a listed company, wishes to acquire 100% of the shares, it can do so by squeezing out the remaining 5%. Pursuant to this procedure the minority shareholders are obliged to transfer their shares to the bidder and, at the end of the procedure, the bidder will be deemed to have acquired 100%. The rules to be complied with for a squeeze-out are laid down in the Royal Decree of 27 April 2007 on squeeze-outs.
The Belgian Banking, Finance and Insurance Commission will verify supervise the squeeze-out offer (which involves the filing of a prospectus) and will verify whether all requirements have been complied with (e.g. whether the offer is made in respect of all financial instruments carrying voting rights or whether the price is a cash price).
15. DEBT RESTRUCTURING
Belgian companies which have severe financial difficulties can either enter into a judicial composition or go bankrupt. A judicial composition will only be possible provided that there is still a possibility to redress the financial situation of the company.
Once the company has requested a judicial composition, none of the security rights granted by the company may temporarily be enforced. If a provisional judicial composition is allowed by the court, the company will have to propose a debt restructuring plan. At least half of the creditors owing at least half of the outstanding debt will have to approve the definitive judicial composition. Once the court has approved the debt restructuring plan, it will become binding upon all creditors of the company (unsecured as well as secured creditors).
If a company is declared bankrupt, a receiver in bankruptcy will be appointed by the court. The receiver in bankruptcy will realise the assets of the company and will settle the creditor’s claims. The creditor’s claims will be settled in a specific order whereby secured creditors will rank before unsecured creditors and whereby creditors perfecting security first will rank before creditors holding the same security but which has been perfected at a later date. The creditor’s rights are mainly limited to the right to be heard. A European insolvency regime was created through the implementation of the EC Regulation on European Insolvency Proceedings (1346/2000/EC). Combined with a clause prohibiting the borrowers to change their center of main interest, forum shopping is thus avoided.
16. ENFORCEMENT OF SECURITY
Mortgages, pledges over the business, pledges over tangible assets and pledges over intellectual property rights can only be enforced after having obtained court approval, which can be a lengthy process. Such enforcement will take the form of either an auction or a private sale as ordered by the court. In case of a mortgage, the enforcement will always happen through an auction.
Unless provided otherwise in the security agreements, pledges over financial instruments and pledges over bank accounts can be enforced without court approval. In the case of a pledge over financial instruments, the beneficiary of the pledge is even allowed to appropriate the financial instruments, provided that the pledge agreement expressly allows this possibility and the valuation method is stipulated in the pledge agreement. Pledged receivables can be collected by the beneficiary of the pledge provided the pledge has been notified to the relevant debtors. |