On 1 January 2009, new capital maintenance rules for Belgian limited-liability companies (NV/SA) will enter into effect and bring about more flexibility with respect to financial assistance, share buy-backs and contributions in kind. The relevant legislation - a royal decree of 8 October 2008- amends the Belgian Company Code and implements EU Directive 2006/68/EC amending the Second Company Law Directive. The same rules will apply to private companies (BVBA/SPRL) and – as regards financial assistance and contributions in kind - cooperatives (CVBA/SCRL).
Under the existing rules, a Belgian company may not advance funds, extend loans or provide security with a view to the acquisition of its shares by a third party.
This prohibition will be repealed on 1 January 2009, provided the following conditions are met:
- the financial assistance may not exceed the amount of the company’s freely distributable funds and the company is required to maintain a reserve, which may not be distributed, equal to the amount of the financial assistance;
- the company’s board must ensure that the financial assistance is provided at fair market conditions (in particular the interest and security received if the company provides a loan) and must investigate the recipient’s creditworthiness;
- the board must issue a report indicating the reasons for providing the financial assistance, the terms of the transaction, the company’s interest in entering into the transaction, the risks involved (with respect to e.g. liquidity and solvency) and the acquisition price of the shares;
- the transaction must be approved in advance by the general meeting of shareholders (by a 75% majority and with a quorum of 50%);
- if the acquired shares are newly issued shares or own shares, the acquisition or subscription price must be fair.
We expect the main benefit of the partial repeal of the financial assistance prohibition to be greater legal certainty as to the validity of the assistance if the abovementioned conditions are met. Over the years, practitioners developed several structures to allow acquisition finance for Belgian target companies, but the validity of many of these structures was questioned (in either the literature or the case law). A similar procedure authorising financial assistance was in place until recently in the UK for private companies (the so-called whitewash procedure). However, experience in the UK indicated that such a procedure is cumbersome and of limited benefit if the acquired company has limited distributable reserves.
The existing rules already exempt certain management buyouts (MBOs) from the financial assistance prohibition, provided the assistance does not exceed the company’s distributable funds. The new rules clarify this exemption, which is, however, of limited application since a transaction will only qualify as an MBO if at least 50% of the acquiring company’s share capital is held by employees of the target (keeping in mind that it is frequent for members of management to be self employed, in which case it is doubtful whether they could qualify for the exemption).
The penalties for violation of the financial assistance rules remain unchanged: avoidance of the transaction, director’s liability and criminal sanctions.
Share buy-backs will be more flexible as from 1 January 2009, as the number of own shares that a company is authorised to acquire will increase, the maximum duration of the share buy-back authorisation will be extended and listed companies will be able to purchase their own shares over the counter.
Under the existing rules, Belgian limited-liability companies (SA/NV and SPRL/ BVBA) are not allowed to acquire own shares representing more than 10% of their issued share capital. This threshold will be raised to 20%.
A share buy-back by a Belgian company must be approved in advance by the general meeting of shareholders. The maximum period for which such an authorisation remains valid is currently 18 months; this period will be extended to five years under the new rules. The maximum period during which a company (SA/NV) may buy back its own shares in order to prevent serious, imminent harm (e.g. a hostile takeover) remains unchanged, i.e. three years.
Companies (SA/NV) listed on regulated markets or MTFs, such as Alternext Brussels or the Free Market, are in principle required to effect share buy-backs by means of a public offer, unless the purchases are made on the market to which the shares are admitted to trading. Under the new rules, the “public offer” exemption will also be available for purchases effected over the counter or on other trading platforms, provided all shareholders are treated equally. A royal decree must still be adopted to set out the rules pursuant to which an OTC transaction will be deemed to comply with the equal treatment principle. Such rules will most likely require that the purchase price not be higher than the relevant market price and that the terms of any OTC share buy-back be disclosed to the public.
Contributions in kind
Capital increases by means of a contribution in kind will be facilitated under the new rules. Subject to certain conditions, an auditor’s report and a report by the board will no longer be required when shares in a Belgian company are issued (upon or after incorporation) in return for a contribution in kind. This rule will apply - broadly speaking - where the consideration consists of:
- listed securities or money market instruments; or
- other assets whose value (i) has been determined by an auditor no earlier than six months prior to the date of the contribution in accordance with generally accepted valuation standards for the type of assets in question (such as international valuation standards or international private equity and venture capital guidelines) or (ii) can be derived from the latest audited annual accounts (for which the auditor has issued an unqualified opinion).
If this simplified procedure is used for a capital increase approved by the general meeting of shareholders, the company must file a statement no later than one month after the transaction setting out the terms thereof. If the simplified procedure is used for a capital increase approved by the company’s board (within the limits of its authorised capital), the statement must be filed prior to the transaction (although the Company Code does not specify how long in advance the filing must be made).
The company should always be able to decide to nevertheless apply the existing procedure for capital increases by means of a contribution in kind (meaning an auditor’s report and a report by the board will be required). In any event, it will be required to do so in the following cases:
- if the company’s board must re-valuate the relevant assets (which it is required to do if exceptional circumstances have affected the assets’ value); or
- if shareholders owning 5% or more of the company’s share capital so request.
Similarly and also subject to certain conditions, it will no longer be necessary for an auditor’s report and a board report to be drawn up if a company acquires assets that are or were owned by any of the founders, shareholders or directors of the company in the two-year period following the company’s incorporation.
Impact on articles of association and shareholder authorisations
Companies should review their articles of association in order to verify that their provisions do not somehow prevent the company from benefiting from the new rules on financial assistance, share buy- backs and contributions in kind. For share buy-backs, the new provisions do not invalidate existing shareholder authorisations; such an authorisation can be replaced by a new one in order to benefit from the new threshold and extended time period.