Q&A: due diligence for private M&A transactions in Belgium

Due diligence and disclosure

What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?

Due diligence will practically always relate to at least the legal, financial, tax and commercial aspects of a company or business. In addition, depending on the type of business, separate in-depth investigations may be conducted in relation to specific subjects such as environmental risks and pension obligations, but these can also be part of the overall legal due diligence exercise. A legal due diligence exercise will generally focus on corporate matters, commercial (customer and supplier) agreements, real estate (including environmental matters), employees (including pensions), intellectual property, information technology and financing agreements.

In small and medium-sized transactions, vendor due diligence reports are not often provided, whereas in auction processes relating to large or complex targets it is customary to facilitate and accelerate the due diligence phase of the auction process by providing candidate buyers with vendor due diligence reports. Most buyers will still conduct a limited confirmatory due diligence on the basis of these reports when evaluating a transaction. Reliance on the provided vendor due diligence reports is often provided to the successful bidder and its financing banks.

Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?

The seller has a pre-contractual obligation to inform. If they fail to notify the (potential) buyer about possible deal-altering information, they could be held liable pre-contractually, even if a contract is not ultimately entered into. Parties can by agreement exclude their extra contractual liability; however, no such exclusion is possible in the case of fraud or deceit.

What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?

A number of documents relating to private companies need to be deposited at the registry of the enterprise court in the territorial jurisdiction in which the company has its registered office. Such documents include the deed of incorporation, amendments to the articles of association and important corporate decisions. Extracts of these documents often also need to be published in the annexes to the Official Belgian Gazette.

Furthermore, if a company has changed its articles of association since 1 May 2019, the full text of the latest version of the articles of association can be consulted online. A company also needs to deposit its annual accounts at the National Bank of Belgium, which are made available publicly online. In addition, the Crossroads Bank of Enterprises, with which each company needs to be registered, includes certain basic information in relation to each company. However, this is not always accurate and should always be verified against the official publications in the Official Belgian Gazette. Finally, it is possible to consult the identity of the ultimate beneficial owners of a company in the ultimate beneficial owner UBO register.

Certain other databases, such as Graydon, may include additional information relating to, for example, the financial health of a company, but these are rarely used in the context of due diligence processes.

In relation to real estate, searches of the mortgage register can be conducted. Certain pledges over non-financial assets can be consulted in the Belgian pledge register. In relation to soil, depending on the location of the land, certain online public registers exist on the basis of which rudimentary information in relation to previously conducted soil investigations can be consulted. In addition, following the basic principle of government transparency, complete permits and certain soil investigations can be requested. However, such information would generally form part of the data room.

The status of registered IP rights and domain names can generally also be verified quite easily in freely accessible online registers.

The above searches are usually conducted in addition to and to verify, where possible, the information provided through the data room.

What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?

Transaction documentation will often specify whether a buyer is permitted to issue a claim on the basis of the matters or circumstances of which they were aware at the time of entering into the agreement. It is fairly common to exclude the possibility for the buyer to claim if they had actual knowledge of a matter (anti-sandbagging clause). The exclusion of deemed knowledge is less common but occurs from time to time. Such a purchaser’s knowledge provision is often included in addition to the concept of (fair) data room disclosure. Conversely, parties may also specify that the buyer’s actual or deemed knowledge of matters that could give rise to a claim does not limit the right to file a claim against a seller (pro-sandbagging clause).

In the context of an agreement containing a pro-sandbagging clause, the Belgian Supreme Court recently held that a buyer signing a purchase agreement ‘claim in pocket’ does not commit an abuse of rights when subsequently filing that claim against the seller, as a consequence of which the claim was successful; however, it cannot be excluded that in future cases, the courts may still consider a buyer to be acting in bad faith even in the presence of a pro-sandbagging clause, especially if the pro-sandbagging clause is a boilerplate provision and the buyer did not disclose, during contract negotiations, actual knowledge about a specific matter that could lead to a claim.

In the absence of a pro- or anti-sandbagging clause in the contract, the fact that a buyer has knowledge of a certain matter, such as a breach of representations and warranties, will, in principle, not prevent the buyer from claiming damages from a seller.

Certain scholars and case law, however, consider that in cases where the buyer had actual knowledge of the matter, the argument could be raised that the buyer is acting in bad faith, which is against the general principle that an agreement must be performed in good faith. This could potentially limit a buyer’s chances of successfully claiming damages. A buyer may be acting in bad faith if they have knowledge of certain matters of which the seller or target is not necessarily aware (eg, in the context of a due diligence conducted by the buyer assisted by professional advisers). If a buyer negotiates a warranty with fraudulent intent in relation to a matter known to the buyer but of which the seller is unaware, the seller could even claim the annulment of the purchase agreement in court. 

Buyers who have actual knowledge of matters that could lead to a claim and who wish to reserve the right to seek indemnification in that respect should, therefore, request to include specific indemnities in the purchase agreement covering those matters. A specific indemnity is preferred over an open-ended pro-sandbagging clause (or should be included in addition thereto) as it avoids a bad faith or abuse of rights debate in relation to the buyer’s knowledge.