De facto, still prohibited?
Financial assistance (in the context of a company acquisition) has, in principle, been allowed since 2009. However, some conditions provided by the law concerning financial assistance create
issues regarding its actual implementation ; hence,
the chances of success of the law are compromised.
Until 1 January 2009 all kind of financial assistance was prohibited except in two cases for which the law has determined otherwise. A company was prohibited to advance funds, to make loans, or to provide security, with a view to the acquisition of its shares by a third party (herein referred to as financial assistance).
The practice of mergers and acquisitions was already requesting for a relaxation or even a complete abolishment of this prohibition.
As a matter of fact, everyone who purchases a company borrows often money from a bank in order to (partially) finance its acquisition. To ensure this loan, a pledge on the shares of the acquired company is often a minimum. A bank would accept much easier to lend money if receiving more tangible assets as guarantee. With a mortgage on a building belonging to the acquired company or with a floating pledge on its business the bank usually feels much more comfortable.
In addition, the excess liquidity of the acquired company is transferred very often to the acquiring company (upstreaming). This can also occur by means of a payment of dividends or a sharecapital reduction. In this way, cash from the acquired company can serve as a financing source to its acquisition. Another solution would be for the acquired company to lend money to the acquiring company. The main disadvantage to working with dividends or sharecapital reductions is the decline of the equity of the company being acquired. Hence, it could also reduce its notional interest deduction. Moreover, when the acquiring company is a holding company or a management company the deduction of notional interest is often not realized in favour of the acquiring company. When the acquired business makes its liquidity available in favour of the acquiring company by means of a loan, the equity of the acquired business does not diminish. Its possibility to benefit from the notional interest deduction remains intact.
Because the prohibition of financial assistance created very often an obstacle to acquisitions and because this prohibition was not adapted anymore to the economic reality, the EU Directive of 6 September 2006 amending the second directive on the company law obliged the Member States to abolish this prohibition.
Although the scope of the directive is limited to the rules applying to public limited liability companies (Naamloze Vennootschap/Société Anonyme), the Belgian legislator chose to extend its scope to the limited liability companies (Besloten Vennootschap met Beperkte Aansprkaleijkheid/Sociétés Privées à Responsabilité Limitée (BVBA/SPRL)) and to the co-operative companies (Coöperatieve Vennootschap met Beperkte Aansprakelijkheid/Sociétés Cooperatives à Responsabilité Limitée (CVBA/SCRL)).
Since t 1 January 2009 financial assistance is authorized subject to complying with certain legal conditions.
On the one hand, the most important conditions applicable to the redemption of shares have been made applicable to the financial assistance (authorization of the general shareholdersmeeting, limitation to the distributable profits, compulsory creation of an unavailable reserve). On the other hand, other conditions have to be respected to ensure that the operation be realized at fair market conditions, that the corporate interest of the company is respected and finally that particular proceedings in case of a conflict of interest are taken into consideration.
It is not sure yet whether all these conditions are necessary or useful. Many of them leave a substantial room for interpretation and they will not make its actual implementation easier. The success of this new regime will depend highly on the sanctions that will be implemented in case of infringement of the conditions of financial assistance.
Hereinafter, three points of the current regulation that could raise issues, are highlighted:
1. The responsibility of the board of directors
Financial assistance takes place under the responsibility of the board of directors. The board of directors will be responsible to make sure that the legal conditions are not only formally respected but also contentwise.
The prior approval of the shareholders meeting does not constitute a release of the liability of the board of directors.
In order to release the representatives of the seller in the board of directors from their possible liability, in the context of financial assistance, it has already been suggested to have the financial assistance approved by the representatives of the buyers (new shareholders) after the closing of the acquisition. According to this suggestion, the company will grant a loan to the buyer, after the completion of the acquisition, in order for the latter to be able to reimburse the bank loan, received prior to the acquisition (the financial assistance being limited to a bridging credit). Nothing goes again such an operation if it fulfils the conditions contained in the relevant article f the Company Code.
2. Publicity requirement
The report of the board of directors must not only be filed with the competent Commercial Court within 15 days, but also bepublished in full in the annexes of the Belgian Official Gazette.
This publicity requirement may be considered a nuisance for the practitioner. More precisely, the obligation to disclose the price of the acquired shares is a serious obstacle to the current regime.
3. Limitation of the amount of financial assistance
The amount of financial assistance is limited to the amount that the company is allowed pay out as a dividend. Financial assistance may not lead to a reduction of the net assets of the company to an amount lower than the share capital increased with retained earnings that are unavailable (not-distributable) in accordance with the law or with the articles of association of the company. In addition, the company has to record on its balance sheet an unavailable reserve equal to the total amount of the financial assistance.
In case of a loan, the total amount of the loan will have to be recorded. In case a guarantee was granted, one should be very careful when estimating the value of this guarantee. If the valuation of the assets given as a guarantee is not straightforward, it is better to explicitly limit the amount awarded to such guarantee. Otherwise, the safest approach is to take into account the total value of the guaranteed debt. This indeed represents the maximum (potential) loss for the company.
The abolition of the total prohibition of financial assistance is certainly positive. However, the question arises whether this new law has changed a lot in practice, comparing to the situation prior to 1 January 2009. De facto, the new regulation regarding financial assistance will remain qualified as a prohibition.
The alternative ways of realizing financial assistance, which were common in the past, will then remain useful, in particular, (i) the interposition of a company related to the target company or (ii) the carve-out of certain assets of the target company followed by a progressive takeover from the same company.
20 April 2015
Pieter Dierckx - firstname.lastname@example.org
Leo Peeters - email@example.com
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