Benefiting from solid economic growth and an abundance of liquidity, in 2015 the Belgian leveraged and acquisition market experienced a surge in activity. Despite several headline news deals, most activity is concentrated in the small and mid-cap transactions.
Most acquisition and leveraged financing deals are arranged and financed by the largest Belgian banks, with one or a few foreign banks participating in the club or syndicate.
Belgian debt capital markets, private placements in particular, have been very active and certain acquisitions have been financed by the issue of notes as well, in many cases alongside bank financing. Notable examples from last year are the bond issuance by Solvay for an amount of €4.7 billion to finance its acquisition of the American company Cytec Industries and the bond issuance by AB InBev for an amount of €3.5 billion to (partly) finance its takeover of SAB Miller.
There are no Belgian debt funds and foreign funds are not active in Belgian transactions.
Bank financing documentation is most often drafted in English (even for purely Belgian transactions). It is usually based on the Loan Market Association standards. It may be governed by English law, for any transaction that may be syndicated internationally, or by Belgian law (even for club deals involving certain foreign banks).
II REGULATORY AND TAX MATTERS
i Licensing - no banking monopoly
In Belgium, no banking licence is required to grant loans to commercial entities. No regulatory restrictions apply to lenders when participating in leveraged and acquisition financings.
ii Sanctions, anti-corruption and anti-money laundering
Economic or trade sanctions or other restrictive measures may be enacted, administered or enforced against credit institutions, notably by the Office of Foreign Assets Control in the US, the United Nations Security Council, the European Union or national authorities.
Belgian banks, and in particular BNP Paribas Fortis (as a consequence of the huge fine imposed by the US Department of Justice on BNP Paribas in 2014), have become more sensitive to these issues and request detailed representations and warranties and undertakings in this respect.
Leveraged finance transactions are subject to the general Belgian anti-corruption and anti-money laundering laws and regulations, without any specific transparency requirements being applicable.
The Belgian anti-money laundering law4 implements the European Directive of 2005.5 Credit institutions should be mindful of the ‘know your customer' requirement applicable to any transaction in excess of €10,000.6
iii No other regulatory concerns
In Belgium, no legislation prohibits or controls any investment, national or foreign, into any sector for the purpose of protecting the Belgian national interest.
There are currently no specific exchange controls for the transfer of funds abroad.
iv Tax issues
The main tax structuring issues affecting acquisition financing transactions relate to the deductibility of interest and the avoidance of withholding tax on the service of the debt.
Interest is generally deductible from the Belgian tax base of the borrower, to the extent it accrued in the relevant tax period, was borne to obtain or retain taxable income and meets the arm's-length standards.
In very particular circumstances only, interest on debt financing will not be deductible, including:
- a Anti-thin capitalisation rule for intragroup loans and loans from tax-privileged entities: interest paid on intragroup loans or loans from tax-privileged entities are not deductible above a 5:1 debt-to-equity ratio.7 The concept of ‘group' refers to all companies that are connected within the meaning of the Belgian Companies Code. 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.8
- b Loans from tax-privileged entities: notwithstanding the above rules, interest payments to tax-privileged entities are only tax deductible if made (1) in the framework of genuine and sincere transactions and (2) to entities other than artificial arrangements.9
- c Payments to entities in certain listed tax-havens: in addition to other anti-abuse provisions, direct or indirect payments to recipients located in certain listed jurisdictions are not tax deductible if not duly and timely disclosed using a special form.10 This disclosure only applies when payments exceed an aggregate amount of €100,000 per tax year. Targeted jurisdictions are those published by Belgian Royal Decree and those mentioned on the OECD ‘Blacklist', which no longer includes Luxembourg and Cyprus.
- d Loans from individual shareholders and corporate bodies: interest on loans from individual shareholders and corporate bodies are not deductible above a 1:1 debt-to-equity ratio.11 Exceptions apply to publicly issued bonds, loans from companies subject to Belgian corporate income tax and loans from recognised cooperative companies.
A withholding tax at a rate of 30 per cent is normally due on interest payments, subject, however, to exemptions or reductions as may be available under applicable domestic or tax treaty provisions.
Belgian domestic provisions provide for significant withholding tax exemptions, which may be particularly relevant in acquisition financings:
- a interest paid by professional investors on loans from financial institutions within the meaning of the BITC, in other words, Belgian resident credit institutions (or Belgian branches of foreign credit institutions) and credit institutions (or branches of foreign credit institutions) established within the European Economic Area or within a country having a double tax treaty with Belgium;
- b interest paid on Belgian registered bonds subscribed by a non-resident investor, provided that the latter is not tax-privileged or is not more than 50 per cent owned by Belgian residents, provided further that the bonds are held during the full interest period;
- c interest paid by certain listed companies (or their subsidiaries) on loans to non-resident investors, provided that the bonds are held during the full interest period;
- d interest paid to UCITS, collective investment undertakings investing in receivables, and public alternative investment funds, based either in Belgium or within the EEA; and
- e interest paid on securities registered with the X/N clearing system supervised by the National Bank of Belgium, in particular to non-resident investors (without subject-to-tax or holding conditions).
Next to these exemptions, certain double tax treaties provide for an exemption on interest payments to, for instance, enterprises or financial enterprises located in the other treaty state.
Treaty exemptions with Germany, Luxembourg and the Netherlands are commonly used, typically leading to financing structures involving a Luxembourg or Dutch lender.
In any case, the above exemptions are subject to specific requirements and formalities that are to be carefully examined in light of the particular circumstances.
Tax consolidation of the acquisition debt
Belgian tax law does not provide for any tax consolidation system, precluding from compensating acquisition and financing expenses at the level of the acquisition vehicle and operational profits of the target companies. Cash upstreaming, reorganisation or other debt pushdown mechanisms are to be analysed on the basis of the specifics of each transaction.
iii SECURITY AND GUARANTEES
i Financial assistance
Belgian limited liability companies are only allowed to grant financial assistance (by way of loans, guarantees or security) for the acquisition or the subscription of their own shares by a third party provided that certain stringent requirements are met (including the limitation of the financial assistance to the amount of 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). In practice, these requirements are never met.
These requirements do not apply to the financing of the acquisition of parent, sister or subsidiary companies.
ii Corporate purpose
Any credit support (by way of guarantee or security interest) must be within the corporate purpose of the company as specified in its articles of association. The wording of purpose clauses in the articles of association is usually sufficiently wide. If not, it can be changed by the shareholders' meeting subject to certain formalities. Such a procedure may take a few weeks.
iii Corporate benefit and guarantee limitations
Any credit support granted by a Belgian company must be part of a transaction that, taken as a whole, is in its (direct or indirect) corporate benefit, failing which its credit support may be void. The concept of ‘group benefit' does not exist under Belgian law.
The Belgian Supreme Court recently held that corporate benefit is determined by the collective profit objectives of the current and future shareholders,12 which may be interpreted as allowing the company to take more clearly into account the interest of the group to which it belongs. However, this decision may not be decisive and the interest of other stakeholders may also need to be taken into account.
In order for a guarantee or security interest by a Belgian company of obligations of other group companies or obligors to be considered to fall under its corporate benefit, it is usually considered that the following conditions must be met:
- a the guarantor must derive an actual (direct or indirect) benefit from the transaction; downstream guarantees are considered to meet this condition, except in exceptional circumstances; the analysis is more difficult for sidestream and upstream guarantees; and
- b the guaranteed amounts must be commensurate with the direct or indirect benefit derived from the transaction and the financial capabilities of the guarantor or value of its assets.
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 downstreamed to the guarantor and a minimum fixed amount.
iv Misuse of company assets
Officers of a Belgian corporation who knowingly use its assets or credit directly or indirectly for personal gain (which could include acting in a way that favours another entity of the group) and in a way that is contrary to its interests, risk personal criminal liability.13
Lenders in acquisition financings should be aware that, in certain circumstances, they may be considered as accomplices to such criminal offence.
v Types of security interest available in Belgium
Under Belgian law, no general form of security exists. For each type of asset, a specific form of security interest, with its own requirements, will be vested. Security interests in Belgian acquisition financings are most commonly granted over the business as a going concern, shares, bank accounts, receivables and intellectual property. Security interests may also be taken over real estate or stock and inventory where these assets are of particular relevance, but costs and formalities may be cumbersome.
Pledge over business assets
The closest in form to a floating charge under Belgian law is a pledge over business assets. The pledge covers the assets that constitute the business of the pledgor including the clients, goodwill, commercial name and signs, commercial organisation, trademarks, patents, knowhow, rights under leases, furniture, commercial records, equipment and vehicles. Ships, land and buildings are excluded and only 50 per cent of the inventory value may be covered by the pledge (the remaining 50 per cent can be the object of a separate specific pledge agreement - see below). The pledgor may keep on running its business and may sell the assets in the ordinary course of business (i.e., with proper business justification). Fraudulent disposition of assets, however, may lead to criminal sanctions.
The pledge must be registered with the mortgage registrar of each judicial district in which the pledgor has a place of business and such registration is valid for 10 years. The pledge is subject to registration tax and other costs equal to 0.5 or 0.6 per cent of the secured amount. However, a much cheaper - but unregistered - power to pledge business assets may be accepted by lenders, as an alternative or, in most cases, in addition to a pledge over business assets registered for a limited amount. Such power will only provide security once it has been exercised and a pledge over business assets has been registered.
The pledge may only be granted for the benefit of EU-licensed credit institutions or specific types of financial institutions. It may, however, be subsequently assigned (together with the claim) to any other type of creditor.
Pledge over shares
The perfection of a pledge over shares will depend on the nature of the shares (registered shares, dematerialised shares or shares held in the Euroclear system).
In principle, the rights inherent to the shares, such as voting rights, participation in dividends or new issues, will be retained by the pledgor; however, the pledge agreement will usually contain certain restrictions on the pledgor's exercise of these rights and typically provide that the pledgee may exercise such rights in the case of an event of default.
Pledge over receivables
A security interest over Belgian law receivables (including, for example, the purchaser's rights under warranties and indemnities granted by the seller under the share purchase agreement) is taken by specific pledge or, provided the receivables are specifically covered in the agreement, as part of a pledge over business assets (or, as often occurs, by both means).
A pledge over receivables is valid between parties and enforceable against third parties (other than the debtor of the receivables) as from the date of the pledge agreement. To be valid against the debtors of the receivables, the debtors must be notified of, or acknowledge, the pledge.
A pledge can cover future receivables provided they are sufficiently identifiable and determinable. Otherwise they will need to be separately pledged as they arise.
Special attention must be paid to conflict of laws rules where the debtor of the pledged receivables is located abroad.
Pledge over bank accounts
As a pledge over a bank account is generally viewed as a pledge over a receivable (i.e., the claim on the bank for the funds standing to the credit of the account), it can be included in the pledge over receivables agreement. An acknowledgement by the bank holding the pledged account is required in order to protect the pledgee against the rights of the Belgian account banks, which, based on their general terms and conditions, usually benefit from a pledge over the accounts and other similar rights, which must be waived in favour of the pledgee. The pledgor may continue to operate the pledged account, subject to contractual restrictions, if any.
Pledge over intellectual property rights
Security interests over certain intellectual property rights are taken by specific pledge or, provided the intellectual property rights are specifically covered in the agreement, as part of a pledge over business assets (or by both means). Specific perfection requirements apply.
Pledge over moveable assets
Security over moveable assets (including inventory) can be taken by specific pledge or as part of a pledge over business assets (but only up to 50 per cent of the inventory value).
In practice, special care must be taken when setting up a specific pledge over moveable assets. It requires the transfer of the pledged assets out of the control of the pledgor, which is not always feasible. The control over the pledged assets must be exercised by the pledgee or a mutually agreed third party.
Future moveables may be pledged, but the pledge will not be perfected until the moveables are in possession of the pledgee or third party.
A mortgage over real estate must be created by means of a deed drawn up by a notary public and must be registered in order to be valid against third parties. It is valid for 30 years as from registration and is renewable.
The creation of a mortgage is expensive. The mortgage is subject to registration tax and other costs equal to approximately 1.5 per cent of the secured amount (including notarial fees). However, a much cheaper - but unregistered - power to mortgage is usually accepted by lenders, as an alternative or, in most cases, in addition to a mortgage registered for a limited value. Such power will only provide security once it has been exercised and a mortgage has been registered.
Upcoming changes to the rules on security interest over moveable assets
A recent Belgian law on security over moveable assets,14 which is expected to finally come into force in January 2018, will affect some of the existing security interests, in particular the pledge over business assets and the pledge over moveable assets.
The most important new element is that a new type of security interest will be created, in other words, a registered pledge. Pursuant to this new form of security, all moveable assets, tangible and intangible, in whole or in part, can be pledged by private agreement without the need for these assets to be taken out of the control of the pledgor. This new pledge will replace the current pledge over business assets and be more flexible in various ways. The pledge will be valid against third parties by registration in a newly established National Pledge Register. This registration will be valid for a renewable period of 10 years. The success of this new security interest will depend upon a number of elements that are still uncertain at the moment, such as the cost of the registration. It seems, however, that the cost of registration will remain limited (and, in any event, much cheaper than the current pledge over business assets).
Other notable changes include the possibility to pledge the entirety of a pledgor's inventory under the new registered pledge and the possibility to grant the new registered pledge in favour of entities other than credit or financial institutions (unlike the current pledge over business assets).
vi Enforcement of security interest
All Belgian security interests may be enforced, with a court's prior approval, by sale of the mortgaged or pledged assets at public auction or, for pledged assets, direct sale pursuant to the process decided by the court.
In addition, based on the implementation of the Financial Collateral Directive:
- a enforcement of pledges over shares (or other financial instruments) may, without a court's prior approval, take the form of a sale or, provided the parties have expressly agreed thereto and have provided a contractual mechanism for the valuation of the relevant shares (or other financial instruments), appropriation by the pledgee; and
- b enforcement of pledges over bank accounts occurs, without the court's prior approval, by the application of the credit balance on the secured debt, based, where applicable, on the exchange rate or determination mechanism agreed between the parties.
From the entry into force of the new Belgian law on security over moveable assets, with the permission of the pledgor, granted in the pledge over business agreement or register pledge agreement or at a later stage, the pledgee will, subject to satisfying certain conditions, be able to appropriate the pledged assets, without prior court approval.
Stay of enforcement against a grantor subject to Belgian insolvency proceedings
The lenders retain the right, in the case of insolvency of the debtor or security grantor, to initiate or continue proceedings, but any enforcement procedure is automatically suspended for a maximum period of 60 days while creditors' claims are checked. In addition, enforcement procedures by the lenders may be suspended by the court, at the request of the receiver, for a period of up to one year from the declaration of insolvency, in order to allow the receiver to proceed himself or herself with the sale.
In case of judicial restructuring, an initial ‘cooling-off' period of a maximum of six months may apply during which the lenders can be prevented from enforcing their security. This period may be extended to 12 (or in exceptional circumstances 18) months in total. However, pledges over receivables set up prior to the opening of the judicial restructuring procedure are not covered by the moratorium.
vii Security agents and parallel debt
A security interest must be granted to the actual creditors of the secured liabilities, not to a person acting on account of the creditor or group of creditors (i.e., security agent or security trustee). It may be granted to future creditors.
However, a Belgian or foreign security interest over financial instruments (including shares) or bank accounts may be granted in favour of a representative of a fluctuating body of creditors, acting in its own name but for the account of the creditors or beneficiaries, provided these beneficiaries may at all times be determined on the basis of the pledge agreement. This allows the use of a security agent for this type of security. However, it is highly uncertain that Belgian law would recognise a trustee for this purpose (as the concept of trustee does not exist under Belgian law). The representative must not necessarily be a creditor itself. The changes in beneficiaries will not affect the validity, enforceability and ranking of the collateral. The representative exercises all rights that would normally be exercised by the beneficiaries.
A specific problem arises for mortgages and pledges over business assets: the names of the beneficiaries must be mentioned in the mortgage registers. Therefore, any future change of lender or secured party should be registered as well, which is cumbersome and entails certain costs.
In order to avoid this problem, it is customary to set up a ‘parallel debt' in favour of the security agent. Pursuant to the parallel debt structure, the security agent (parallel debt creditor) becomes the holder of a direct claim against the obligors, which may be secured by the granting of security in its favour.
iv PRIORITY OF CLAIMS
i Preferred creditors and claims
Belgian law grants priority to the payment of a number of preferred creditors, including employees, officials appointed by the insolvency court, certain secured creditors and the Belgian state (in respect of taxes and social security contributions).
ii Intercreditor agreement
Intercreditor agreements in the context of Belgian leveraged financings tend to be based on LMA standards. No specific Belgian rules are relevant in this respect.
The choice of a foreign law to govern agreements to which a Belgian entity is a party will be recognised by Belgian courts pursuant to the Rome I Regulation15 in relation to contractual obligations and (if applicable) the Rome II Regulation16 in relation to non-contractual obligations.
The submission by a Belgian entity to the jurisdiction of a foreign court will also be recognised as valid and binding and may not be unilaterally revoked by the Belgian courts, provided it is effective in such foreign courts under the laws of such jurisdiction and if not made with the intention of avoiding the application of mandatory provisions of Belgian law or of the laws of another relevant jurisdiction.
A final and conclusive judgment obtained in a properly selected foreign court from another EU Member State against a Belgian party for a sum of money due under the relevant finance documents would be enforced by the courts of Belgium without re-examination of any aspect of the litigation, pursuant to Regulation (EU) No. 1215/2012.17
Subject to an action for exequatur brought before the competent Belgian court, a final judgment for a sum of money due under the relevant finance documents obtained against a Belgian party in the courts of a properly selected foreign country that is not an EU Member State would also be recognised and enforceable by the Belgian courts without re-examination of the matter.
Asymmetrical jurisdiction clauses, pursuant to which one party submits to the exclusive jurisdiction of a court and another party has a discretionary option to choose any competent jurisdiction, are common in Belgian law finance documents. However, the impact under Belgian law of the decision of the French Supreme Court holding such clause invalid18 is unclear at this stage.
vi FINANCING ACQUISITIONS OF BELGIAN LISTED COMPANIES
Several particularities must be taken into account in the leveraged financing of an acquisition of a Belgian-listed company.
Each tender offer must cover all shares of the listed target,19 and financing from a Belgian credit institution must be available to purchase all the shares of the listed target that are not already owned or controlled by the initiator of the tender offer.20 This is usually evidenced by the delivery of a certificate from the relevant Belgian credit institution to the Belgian Financial Services and Markets Authority.
However, Belgian law does not require the disclosure in the prospectus of the leveraged and acquisition financing or any of its terms.
Where a shareholder crosses a 30 per cent threshold of share capital or voting rights in a Belgian-listed company, it is required to launch a mandatory tender offer for all the outstanding shares.21 Similarly, lenders enforcing their share pledge by way of appropriation over a number of shares exceeding the same threshold would themselves have an obligation to launch a mandatory tender offer.
Following a very active year, the M&A activity in the Belgian market is expected to return to its long-term average volume in 2016 and 2017. Especially for small and mid-cap transactions, the outlook remains positive, as the number of Belgian family-owned businesses struggling with succession and searching for buyers is still increasing. However, the UK's EU Referendum, whereby a majority of the British population voted to leave the European Union, marks the start of a period of uncertainty in the global markets and in M&A activity. Although the exact influence of Brexit on the M&A market remains unclear, Belgian economic activity in general is expected to be negatively affected.
No legislative initiatives that would have an impact on the market are currently foreseen, and no new initiatives that would negatively affect the activity of leveraged and acquisition financings are expected from the current government.
1 Jacques Richelle and Eric-Gérald Lang are former members of Strelia.
2 Law of 10 February 1999 on the punishment of corruption and Articles 246-252 of the Belgian Criminal Code.
3 Belgium is a party to the Criminal Law Convention on Corruption and the Civil Law Convention on Corruption of the Council of Europe, the United Nations Convention against Corruption and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The European Council Framework Decision 2003/568/JHA of 22 July 2003 on combating corruption in the private sector is applicable in Belgium.
4 Law of 11 January 1993 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.
5 Directive 2005/60/EC of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, which was recently replaced by Directive 2015/849 of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.
6 Article 7 of the Law of 11 January 1993.
7 Article 198, Section 1, 11° of the Belgian Income Tax Code (BITC).
8 Contrary to certain other jurisdictions, the anti-thin capitalisation rules do not apply by the mere fact that a group company guarantees funding by a third party.
9 Article 54 of the BITC.
10 Articles 198, Section 1, 10° and 307 of the BITC.
11 Article 18 of the BITC.
12 Cass. 28 November 2013.
13 Article 492 bis of the Belgian Criminal Code.
14 Law of 11 July 2013 on security over moveable assets.
15 Regulation EC No. 593/2008 of 17 June 2008 on the law applicable to contractual obligations.
16 Regulation EC No. 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations.
17 Regulation EU No. 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
18 Cass. Civ. 1st, 26 September 2012.
19 Article 2, first paragraph, 1° of the Royal Decree of 27 April 2007 on public takeover bids.
20 Article 2, first paragraph, 3° of the Royal Decree of 27 April 2007 on public takeover bids.
21 Article 5 of the Law of 1 April 2007 on public takeover bids.