Last year 2018 was a mixed bag: M&A continued at an energetic pace in the first six months and then slowed down substantially in the last quarter due to growing geopolitical tensions and market volatility. Although it is difficult to predict what 2019 will bring in these times of increased levels of uncertainty and instability, bearing in mind the key considerations below when engaging in cross-border M&A involving a Belgian target would serve parties well.
Geopolitical Uncertainties and Rising Protectionism – Allocating risks between signing and closing
The cloud of geopolitical uncertainty is hovering over many countries in the world. For example, Brexit and the European Union, the US-China trade wars and tariffs, shifting alliances in the Middle-East, the rise of nationalism and opposition to free trade – all these events definitely create ripple effects in the business world. And the rise of protectionism and the predominance of national security over economic interests are a global phenomenon: CFIUS in the US, the provisional EU agreement on FDI, the strengthening of national screening systems. All these factors are likely to interfere with M&A transactions and impact the deal’s certainty.
Consequently, allocating risks between signing and closing will become increasingly challenging. MAC clauses, (reverse) break fees, obligation to satisfy conditions, bringing down of the representations & warranties and disclosures will become more important and will be considered more carefully. Parties might also wish to consider transaction structures, such as minority stakes or joint-ventures, that can be helpful in overcoming potential regulatory issues.
GDPR Concerns – Paying attention in each stage of the transaction
Data security and data protection compliance, especially in the face of the EU’s GDPR, will also be a major headwind.
GDPR basically impacts every single step in the M&A process: structuring and planning, NDA, Data Room, Due Diligence, Share Purchase Agreement, integration planning, completion, and Transitional Service Agreement. At each of these stages, parties must check data minimisation, marketing lists, legal grounds for data processing, DPIA and records, privacy notes, non-EU data transfers, and contractual provisions. GDPR is also increasing buyer’s scrutiny of target companies’ data protection policies and processes. Technical Due Diligence is therefore becoming the new normal.
Debt Financing – Requiring more thorough consideration
Corporate credit will endure a more difficult year in 2019, as both financing and operating conditions become more testing. Although positive economic momentum would likely sustain more increases in operating performance, markets would likely demand higher premiums to compensate for the deterioration in conditions and intensifying risks.
Parties to a transaction might want to consider alternatives that could minimize financing and re-financing. They should also consider allocating the financing risks between them, how to orchestrate the banks selection process, how to select the appropriate banks that offer the best terms and conditions, as well as the impact of the new Belgian interest limitation deduction rules (see below).
Corporate Law and Tax Reform – Seizing opportunities
The new Belgian corporate law reform and corporate tax reform will definitively impact the M&A scene. The purpose of the new corporate law reform is to modernize Belgian company law by making it simpler, more flexible, and more appealing to foreign investors. Some key corporate tax changes that will impact M&A are the gradual decrease in the corporate tax rate, the corporate income tax consolidation, and the new interest limitation deduction rules.
Parties should seize the opportunities presented by the reformed corporate landscape. While the benefits of the long-awaited decreased corporate tax and the corporate tax consolidation are obvious, careful tax planning ahead of time will be required to factor in the impact of the new limitations on net interest expense deductions.