Two recent legal developments significantly affect Belgian M&A practice. The first concerns legislative modifications to the law on money laundering, and the second relates to a recent decision of the European Court of Justice (ECJ) on insider dealing.

Modifications to the Money Laundering Act of January 11, 1993

The Belgian Law of January 18, 2010, modified the Belgian Law of January 11, 1993 (the Money Laundering Act). Stakeholders in the financial sector, including lawyers, notaries, accountants, real estate agents, casinos, trustees and similar company service providers, now must heed new anti-money-laundering due diligence requirements.

Existing legislation already required stakeholders to verify the identity of their clients and the effective “beneficiaries” of the transaction in question, and to inform the Belgian National Financial Intelligence (CTIF/CFI) before executing a transaction for a client (or its beneficiary) if the stakeholder knew or suspected that the requested transaction was linked to money laundering or terrorist financing.

The principal amendments to the Money Laundering Act made by the Law of January 18, 2010, are the following:

  • Establishing certain objective criteria for identifying a beneficiary—notably, any person who holds more than 25 percent of the capital stock or equity of a company
  • Identifying circumstances in which reduced diligence is allowed—notably, when the effective beneficiary of the transaction is a Belgian or EU public authority
  • Requiring stakeholders to carry out enhanced due diligence in situations that, by their nature, present a high risk of money laundering and terrorist financing—notably regarding business relations with “politically exposed” persons (e.g., persons that have a reputation of having ties with terrorist groups) living abroad
  • Exempting notaries, auditors, external accountants and tax advisers from the obligation to notify the CTIF/CFI referenced previously, unless they themselves take part in the money laundering activities or the financing of terrorism, or provide legal advice in furtherance of such activities, or they know that the client is requesting advice in furtherance of such activities
  • Prohibiting stakeholders from creating or maintaining business relationships or carrying out occasional operations when such stakeholders are unable to perform their supervisory/control duties under the Money Laundering Act

In relation to the last point, it should be noted that lawyers, however, are not required to terminate their legal representation when assessing the legal situation for their clients or when performing their task of defending or representing clients in judicial proceedings, including advice in the context of such proceedings and, in particular, how to engage in or avoid such proceedings. In cases where stakeholders do notify the CTIF/CIF, lawyers are prohibited from informing their clients or the effective beneficiaries or third parties that such notification has taken place, except among professionals within the same organisation.

In any event, these legislative changes will force M&A practitioners to adhere more diligently to the know-your-client principle and to withdraw more quickly from a transaction if the information received from a client proves unclear or unsatisfactory.

Insider Dealing – A Rebuttable Presumption of Illegality

The Spector Judgment

On December 23, 2009, the ECJ ruled that when a person trades in a security while in possession of “inside information” relating to that security, he or she is presumed to “use the information” and therefore commits the offense of insider trading as defined by European legislation (Directive 2006/6/EC). Thus, according to the ECJ, the prohibition on insider trading applies when an insider who possesses “inside information” takes unfair advantage of the benefit gained from that information by entering into a market transaction based on that information.

Nevertheless, the ECJ recognises that the individual concerned has the right to rebut the presumption by proving that he or she did not “use the information.” In a complicated discussion of how the individual might rebut the presumption, the ECJ concluded that the individual could exculpate himself or herself by proving that he or she did not use the information in a manner contrary to the purpose of Directive 2006/6/EC—namely, to protect the integrity of financial markets and to enhance investor confidence—which is based on the principle that everyone must be placed on equal footing and protected from the misuse of inside information.

This leaves traders and regulators with an important factual analysis and judgment call as to whether there has been insider trading or if a legitimate rebuttable presumption exists. Requiring a factual analysis and judgment call ultimately creates uncertainty.

Some comfort can be drawn, however, from examples mentioned in the recitals to Directive 2006/6/EC (and referred to by the ECJ):

  • The mere fact that market makers, bodies authorised to act as counterparties, or persons authorised to execute orders on behalf of third parties with inside information confine themselves in the first two cases to pursuing their legitimate business of buying or selling financial instruments, or, in the last case, to carrying out an order dutifully, should not in itself be deemed to constitute use of such inside information.
  • Having access to inside information relating to another company and using it in the context of a public takeover for the purpose of gaining control of that company or proposing a merger with that company should not in itself be deemed to constitute insider trading.

Consequences Under Belgian Law

Under Belgian law, insider dealing is punishable under Article 25 of the Law of August 2, 2002, with criminal penalties imposed by Article 40 of the same Law.

In its present form, Article 25 prohibits a person who possesses information that he or she knows, or ought to have known, to be inside information from acquiring or disposing of, or trying to acquire or dispose of, for his or her own account or for the account of a third party, either directly or indirectly, the financial instruments to which that information or connected financial information relates.

The insider dealing offence under the Law of August 2, 2002, appears to be defined more strictly than the ECJ’s interpretation of Directive 2003/6/EC, because Article 25 of that Law does not require, as an element of the offense, that the person concerned “used” the inside information.

Since the objective of Directive 2003/6/EC is maximal harmonization at EU level (i.e., to reach the highest degree of harmonization between the national laws of the EU Member States), it would appear that Article 25 of the Law of August 2, 2002, will be interpreted to include a requirement that the accused person actually “used” the inside information.