Acquisition Finance 2019

Last Updated November 07, 2019

Belgium

Law and Practice

Authors



Eubelius is Belgium’s largest full-service independent law firm, with 20 partners, 18 counsel and more than 100 associates practising Belgian and European law. Eubelius’ corporate and M&A team is recognised as one of the leading practices in Belgium. It is one of the most prominent and active Belgian equity and debt capital market practices and the market leader in the Belgian REIT sector. The banking and finance team advises in all aspects of (syndicated) corporate, asset-based, real estate, acquisition and project financing. It further provides comprehensive banking and securities advice as well as assistance in litigation and in contacts with supervising authorities. The team is composed of 15 lawyers, headed by Marieke Wyckaert (partner). Frédéric Heremans (counsel) and Thomas Donnez (senior attorney) are prominent members of the team. The firm has privileged working relationships with outstanding independent law firms in many foreign jurisdictions. Its practice has a strong national and international focus, and a significant proportion of work is cross-border.

The main parties involved in acquisition finance on the Belgian market are as follows.

  • Major Belgian banks (such as BNP Paribas Fortis, KBC Bank, Belfius Bank and ING Belgium, frequently acting in syndicated or club deals), and to a lesser extent specialised banks (for example, Degroof Petercam) or smaller banks (for smaller transactions, such as CBC).
  • International banks, often acting as part of an international syndicate. Many of these banks are based in the largest financial centres, such as New York or London (Goldman Sachs, Morgan Stanley, JP Morgan, Credit Suisse), Barclays, HSBC), Paris (Natixis, Société Générale, CACIB, BNP Paribas) or Frankfurt (Deutsche Bank).

Additionally, a significant number of venture capital and private equity firms are active on the Belgian market, ranging from:

  • state or region-owned funds (for example, LRM, GIMV, PMV and GIMB);
  • privately (often family) owned funds (for example, Cobepa, Baltisse and Verlinvest);
  • bank-controlled funds (for example, KBC Private Equity, BNP Paribas Fortis Private Equity and Belfius Private Equity); and
  • publicly traded funds (for example, Brederode, Sofina and Ackermans & Van Haaren).

Leveraged buyout (LBO) techniques are frequently used in Belgium. LBOs remain subject to (rather stringent) Belgian financial assistance rules that only authorise a Belgian company to advance funds, make loans or provide security with a view to the acquisition of its shares by a third party under very strict conditions (which in practice frequently leads to a prohibition for the target to grant any form of financial assistance) (see 5.4 Financial Assistance).

In the past years, the competition in the MBO and MBI market is said to have increased, mainly in the segment of medium-sized to large deals. As an evolution of LBO, some family-owned companies have been acquired through so-called owner buy-outs (OBOs): shareholders sell their shares to a newly incorporated holding created by the selling shareholders and the purchaser. The holding may then seek various forms of financing: equity, bank loans and subordinated loans.

The market seems to show a genuine trend in the increase of the number of private equity companies and of family offices in particular. As a result of the ageing population, the Belgian SME market offers various opportunities. In addition, many companies have undergone restructuring since the 2008 financial crisis. In combination with the improved economic outlook, more and more companies have been put up for sale. Conversely, increasing numbers of wealthy Belgian families are interested in investing solo or via family offices. In turn, former entrepreneurs may, after selling their own company, wish to reinvest the money in new companies, in their own sector or otherwise.

Since the 2008 financial crisis, the debt ratio in acquisition finance has tended to remain prudent. For SME transactions, banks usually limit the financing to a reasonable multiple of EBITDA, while frequently requiring a significant equity investment. Generally, banks have become far more cautious about lending since the banking crisis and the introduction of new regulations. As the banks now require a higher own contribution, the amount available for deals has decreased. In the same line of thought, the debt conditions (such as personal guarantees, pledges and mortgages) have tightened significantly.

Some major banks have also launched funds dedicated to investment in LBO debts, offering the possibility to institutional investors to invest in senior and mezzanine debts.

In the context of a crescendo of supervisory warnings at international level (USA and Europe) against the risks of leveraged finance (due to a deterioration of the underwriting standards for leveraged loans towards loans with looser rules, known as “covenant-lite”), there is no information publicly available about the exact exposure of the Banking Union’s and Belgium’s financial sector, banks and non-banks.

Acquisition financing agreements in domestic Belgian transactions (that is, without cross-border aspects and with Belgian sponsors) are generally governed by Belgian law.

Transactions that involve major international sponsors or that include cross-border elements (such as international banks as part of the club or syndicate) are usually subject to English law or New York law, but also French law.

Loan agreements are increasingly based on the Loan Market Association (LMA) or similar standard documentation, which is widespread in the Belgian market.

The Belgian banking industry, through the Belgian Financial Sector Federation (Febelfin), has developed an industry-wide "LMA light" mid-market documentation standard, which is not commonly used yet. Additionally, Belgian banks are increasingly developing their own standard “LMA light” documentation. In mid-market deals, Belgian law firms usually each use their own “LMA light” type of documentation.

The acquisition of assets is typically financed through LMA or other standard agreements, or even by simple credit letters. Credit letters are usually limited to a short document containing the specific conditions of the loan and are subject to the general terms and conditions of the lender.

The lender's counsel is typically responsible for drafting the financing documentation (including the security package).

Generally, all documentation is drafted in English, even when all parties involved are Belgian, as this allows for an easy (primary or secondary) syndication or transfer and assignment of the loan at a later stage.

Belgian language legislation (which varies depending on the relevant region of the country) may require that some corporate documentation is drafted in French or Dutch, depending on the location of the company’s place of business.

Providing a legal opinion is almost invariably a condition precedent to the advance of a significant loan or bond issue. There is no model form legal opinion, and while each law firm has its own standard form legal opinion, the contents are relatively aligned across law firms.

Two types of legal opinions are commonly issued in the Belgian market (sometimes combined):

  • enforceability legal opinions provide formal statements as to the validity and enforceability of the finance documentation (including the security documents) and are customarily provided by the lender’s counsel (or the counsel to the arrangers and bookrunners, in the case of a bond issue); and
  • capacity legal opinions provide formal statements as to the valid existence of legal entities involved in the transaction and their capacity to enter into the transaction documentation and execute the relevant documents, and are customarily provided by the borrower’s counsel (or the issuer’s counsel, in the case of a bond issue).

No legal opinion is usually required in respect of the valid transfer or ownership of shares purported to be acquired under the acquisition documentation.

On the Belgian market, in larger deals acquisition financing is mainly provided using a combination of senior (secured) financing, mezzanine financing and equity from the investors (as shareholders and sponsors in the SPV). Equity from the investors is typically provided by a combination of capital in the acquiring SPV (in exchange for shares) and subordinated loans provided to the SPV. The subordinated loans are usually not to the target itself, so as to avoid any structural subordination.

Mezzanine credits constitute the bulk of funding when it comes to large acquisition finance transactions. Common mezzanine mechanisms and techniques, such as stop notice periods and deferred acceleration rights, are often included in the (intercreditor) agreements between senior and mezzanine lenders.

Bridge loans are less frequent in an acquisition context. They are commonly provided to a company that intends to go public in the coming six or twelve months, by issuing shares (by way of primary or secondary public offering) or bonds, or to refinance (part of) the acquisition costs through a new (public or private) capital increase of the purchaser.

The use of (high-yield) bonds is not particularly widespread for acquisition finance in Belgium. The time required to prepare for and market (high-yield) bonds may not fit with the acquisition timetable. Moreover, the risks of market conditions not being conducive to a successful placement of the bonds at the time of acquisition funding is generally not acceptable to the purchaser. Debt financing in the form of bonds is not unusual outside an acquisition context and offers certain advantages in terms of flexibility of the documentation (with limited covenants, tests, events of default and collateral compared to loan financing).

Any public offering of securities in Belgium or admission to trading on Euronext Brussels requires the prior publication of a prospectus (save in the case of a private placement, see 3.5 Private Placements/Loan Notes).

Public bond issues (ie, bonds that are not issued on a private placement basis, see 3.5 Private Placements/Loan Notes) where the total consideration of securities offered over the preceding 12-month period is less than EUR5,000,000 or less than EUR8,000,000 where the securities are offered on a Multilateral Trading Facility (MTF) do not require a prospectus, but only the filing of an information note (the simplified version of a prospectus) with the Belgian Financial Services and Markets Authority (FSMA).

When using private placement exemptions, bonds issues will not require the filing of a prospectus nor of an information note with the FSMA. The following private placement exemptions apply:

  • offers addressed solely to qualified (professional) investors;
  • offers to less than 150 persons other than qualified (professional) investors;
  • offers whose denomination per unit amounts to at least EUR100,000; and
  • offers addressed to investors who acquire securities for a total consideration of at least EUR100,000 per investor, for each separate offer.

Bonds listed on an MTF (such as Euronext Growth, an often used MTF to list bonds in Belgium) require the filing of an information note, except in the case that the bonds have a denomination per unit of at least EUR100,000.

Parties benefit from a wide contractual freedom when drafting the terms of an intercreditor agreement. It is common in Belgium for intercreditor agreements in the context of acquisition finance to be based on LMA standards.

Where multiple sources of debt are used, there are a number of different types of creditors and each of these will be keen to protect its own interests. An intercreditor agreement is therefore usually necessary to regulate the relationship between the different types of creditors.

Depending on the transaction, a full intercreditor agreement may not be necessary. Where there is one unsecured party and one secured or unsecured, a simple subordination agreement may be sufficient. However, in more elaborate acquisition finance transactions, the parties will need to regulate ranking of debt, order of distribution of enforcement proceeds and a number of additional areas. In such cases, an intercreditor agreement will typically be appropriate.

The LMA standard forms are frequently used as a starting point for drafting intercreditor agreements on leveraged transactions. Key provisions of an intercreditor agreement typically include provisions relating to ranking of debt and distribution of proceeds (including in insolvency or enforcement scenarios), but also the rights of the security agent to release claims from certain types of creditors, restrictions on amendments of the financing terms and provisions relating to payments.

The hedge counterparties are usually required to be party to the intercreditor agreement given that the borrower may incur payment obligations to the hedge counterparties.

As such payment obligations can be significant, the creditors and the hedge counterparties will have to ensure the ranking and priority of the hedging liabilities in the intercreditor agreement. Hedge counterparties may also want to benefit from the security interests granted by the borrower to secure the hedging liabilities, but usually are excluded from voting on enforcing transaction security.

The security package primarily depends on the lenders’ analysis of credit risk and the exact scope of the security package therefore depends on the creditworthiness of the borrower and its group and the type of business activities (for example, whether there is a lot of fast-moving inventory or if the borrower has many fluctuating receivables claims). Given the leveraged nature of acquisition financing, lenders will generally require a comprehensive security and guarantee package from the borrower, the target and its material subsidiaries (taking into account financial assistance prohibitions).

The security package typically includes a pledge on the shares of the Belgian group companies, a pledge over the receivables, a pledge over the bank accounts and, depending on the circumstances, a pledge (floating charge) over the entire business and a mortgage over real estate assets. Guarantees (and, to the extent possible, upstream and cross-stream guarantees) are also granted. Whether or not security over intellectual property rights is requested usually depends on the type of business involved. The composition of the security package is also often influenced by cost concerns: mortgages are costly to vest and certain techniques may therefore be used to limit these costs to reasonable amounts (see below).

Upstream securities are a particular concern under Belgian law. Security vested by a subsidiary to secure the obligations of another group company (other than the security provider’s own subsidiaries) must meet the corporate benefit test of the subsidiary. The restrictions concerning financial assistance must also be considered carefully.

Shares Pledge

In acquisition finance transactions, a pledge over the shares of the target and, as the case may be, over the other group companies is customary. Pledge agreements can be entered into by way of a private agreement and do not require the intervention of a public notary or of any other Belgian public authority. The pledge agreement is enforceable against third parties as of the recordation of the pledge in the share register of the company (for registered shares, which is the case in almost all non-listed Belgian companies). Shares can also take the form of book-entry shares (in which case the pledge is perfected by pledging the security account) but this is exceptional for non-listed entities. Bearer shares are no longer allowed under Belgian law. A power of attorney is usually provided to the legal counsel of either the borrower or the lender to record the pledge. There are no formal registration duties or external costs. The articles of association of the target company must be closely examined for transfer restrictions and must be amended if applicable, to ensure the enforceability of the pledge.

Receivables Pledge

A pledge on receivables is common under Belgian law and requires a private agreement without the intervention of a public notary. No registration is required. The pledge agreement is valid between the parties and enforceable against third parties (other than the debtors of the pledged receivables) as from the mere execution of the pledge agreement, provided that the pledgee is contractually entitled to notify the debtors. Certain institutional counterparties are customarily immediately notified of the pledge and are requested to acknowledge its existence (for example, banks and insurance companies). However, it is Belgian market practice that solvent borrowers are not requested to notify the pledge to their customers and that such notification (by the pledgor or by the pledgee) only takes place after the occurrence of an event of default (or if the pledgee believes an event of default is imminent) under the secured credit agreement.

Bank Accounts Pledge

Bank account pledges are a subset of receivable pledges and are pledged by way of a private agreement without the intervention of a public notary. No registration is required. The pledge agreement is valid between the parties and enforceable against third parties (other than the account bank) as from the mere execution of the pledge agreement. In order to be enforceable against the account bank, the pledge must be notified and the bank will be requested to acknowledge the pledge in writing. The general terms and conditions of the bank usually provide that the bank accounts have already been pledged to the underlying bank itself. In that case, the bank is requested to waive its own pledge on the bank accounts. Increasingly, banks have become reluctant to waive their prior existing pledge under their general terms and conditions.

Pledge on the Entire Business

Since the entry into force, on 1 January 2018, of the Collateral Act of 11 July 2013, pledges on the entire business (floating charges) or on specific movable assets are facilitated. Any movable asset, tangible or intangible, in whole or in part, can now be pledged without actual physical dispossession of the pledged assets. The pledge agreement is valid between the parties as from the mere execution of the pledge agreement and is enforceable against third parties if it is registered in the National Pledge Register. The registration is made electronically by the pledgee (or its attorney). Costs are limited (registration fees are calculated on the secured amount, with a maximum of EUR500).

A pledge on the entire business includes, except as agreed otherwise, all assets that are necessary or useful to the business, including the clientele, goodwill, trade name, intellectual property, property lease rights, trade and other receivables, tangible assets such as raw materials, industrial or commercial furniture and equipment and inventory (but excludes any real estate assets).

Such pledge is a security in rem without effective dispossession of the pledged business, so that the pledgor continues to have full control over its business and the pledged assets will fluctuate during the term of the pledge.

Business pledge agreements or movable assets pledge agreements are entered into by way of a private agreement and do not require the intervention of a public notary. The registration with the National Pledge Register is valid for an initial period of ten years, which can be renewed.

The Collateral Act still provides for the possibility to create possessory inventory pledges, whereby the dispossession of the pledged inventory into the hands of the agreed pledge-holder will make the pledge enforceable against third parties. Given the possibility to create non-possessory pledges, possessory pledges are bound to remain exceptional in practice.

Intellectual Property Rights (IPRs) Pledge

A pledge on IPRs used to be a contested issue in Belgium and as a result, such pledges were unusual and IPRs were generally pledged as part of a pledge on the entire business.

Since the entry into force of the Collateral Act, a pledge over IPRs is generally accepted and sometimes requested by lenders in acquisition finance transactions (depending on the type of the business). IPRs can also be pledged as part of a pledge on the entire business.

The pledge agreement is valid between the parties as from the mere execution of the pledge agreement and is enforceable against third parties if it is registered in the National Pledge Register. The registration is made electronically by the pledgee (or its attorney). Costs are limited (registration fees are calculated on the secured amount, with a maximum of EUR500). It is unclear whether such pledge must also be registered in the relevant public IPR registers (for example, the register kept by the public service for industrial property and trade mark register), but this is usually done in practice to err on the side of caution.

IPR pledge agreements are entered into by way of a private agreement and do not require the intervention of a public notary. The registration with the National Pledge Register is valid for an initial period of ten years, which can be renewed.

Real Property Mortgage

A mortgage can be granted over real estate property, which requires the intervention of a public notary. A mortgage is expensive, with a registration duty of 1% of the secured amount applying (to be increased with other costs ranging between 0.3% and 0.5%). In practice, in order to avoid or to reduce these costs, a mortgage mandate is often granted instead of an effective mortgage or a split may be organised between (i) the creation of a mortgage for a limited secured amount (on which the registration duty and other costs are due) and (ii) the granting of a mortgage mandate for the remainder of the secured amount (on which no registration duty or other costs are due). Technically, a mortgage mandate is, however, not a right in rem (but only an irrevocable power of attorney, allowing the creditor to vest a mortgage at a later date, usually at its discretion). A mortgage mandate is not enforceable against a bankrupt estate and a mortgage created as a result of the conversion of the mortgage mandate into an effective mortgage may be set aside by the trustee in bankruptcy if such conversation took place during the so-called hardening period of up to six months preceding the bankruptcy of the mortgagor.

No specific form is required to register a pledge under Belgian law. For pledges that require registration with the National Pledge Register, the procedure to be followed is outlined on the National Pledge Register website.

Upstream securities are a particular concern under Belgian law. Security vested by a subsidiary for the obligations of another group company, other than the own subsidiaries of the security provider, must meet the corporate benefit test of the subsidiary (see 5.5 Other Restrictions). The restrictions concerning financial assistance must also be considered carefully (see 5.4 Financial Assistance).

The Belgian financial assistance rules prohibit a Belgian company to advance funds, make loans or provide security with a view to the acquisition of its shares by a third party unless and to the extent the company has room for profit distribution. In addition, the operation may only occur under other strict requirements; ie, fair market conditions to be determined by the board of directors, shareholders’ approval subject to the conditions of an amendment to the Articles of Association and the publication of an extensive report by the board of directors. Although these provisions on financial assistance were relaxed from the start of 2009 (that is, it is now allowed to the extent that the whitewash procedures have been complied with, which are substantially aligned with Directive 2006/68/EC on the formation of public limited liability companies and the maintenance and alteration of their capital), they still substantially hamper the structuring of acquisition financing. Financial assistance is a factor that must be taken into account when planning acquisitions. While there may be sufficient awareness, (sometimes rather aggressive) financial and tax planning must be reviewed with great care in view of financial assistance or of corporate interest.

The prohibition on financial assistance is part of the rules on the maintenance of capital (a company must not return capital to the shareholders, except as permitted by law) and applies to all common forms of limited liability companies. The definition of “financial assistance” is interpreted broadly so that, for example, the "provision of security" relates to any type of guarantee or other security interests "in personam" and to any type of security interest "in rem" (such as pledges, mortgages or title transfer for security purposes), covering most common types of security granted under Belgian law.

The rules on financial assistance only apply to the target company itself and (in principle) not to that target company's direct or indirect subsidiaries or any other affiliate of the target company. That is, a Belgian target company is not allowed to grant security over the acquisition debt incurred by its (new acquiring) parent company, but a parent may (in principle) grant a loan for the acquisition of the shares in its subsidiary.

To comply with financial assistance provisions, facilities agreements that provide both acquisition and working capital facilities are often split up in tranches (that is, the tranche aiming to provide facility for the acquisition of the Belgian company is carved out from the guarantee or security granted by the company).

An exemption applies under certain (financial) conditions in the case of (leveraged) management buyout transactions:

  • financial assistance granted by the target company to employees of the target company or to employees of affiliated companies for the acquisition by those employees of shares in the target company; and
  • financial assistance granted by the target company to a company controlled by the employees of the target company for the acquisition by that company of a controlling interest in the target company.

A breach of the Belgian financial assistance rules can result in:

  • civil liability;
  • the nullity of the transaction (upon the request of any interested party); or
  • criminal sanctions (until 1 January 2020, at which time a new Code of Companies and Associations will enter into force, or prior to that date for any companies that decided to opt in to the new Code as of 1 May 2019).

The criminal sanctions (as long as they apply) do not only relate to the target company itself and its corporate officers, but could also be invoked against "secondary perpetrators", that is, those persons that knowingly and willingly have assisted or were a part of the transaction entered into in breach of the Belgian financial assistance rules (for example, a lender or a financial adviser that has prepared a step-plan to structure a certain transaction). There is relatively limited case law in relation to the Belgian financial assistance rules (outside the context of obvious fraudulent schemes).

Other than the provisions on providing financial assistance, the following general principles of Belgian company law apply to any legal acts entered into by a Belgian company and are especially pertinent to the provision of guarantees or the granting of security interests by a Belgian company (for example, in the framework of acquisition finance).

Under Belgian law, a company (or, in practice, a bankruptcy trustee in the case of a subsequent bankruptcy) may obtain the annulment of a legal act entered into by the company if that act exceeds the company's purpose, as set out in the articles of association, and its counterparty knew or reasonably should have known that the company's purpose was exceeded. Regarding the granting of security interests, the provision of guarantees, the assumption of debt and/or the accession to a credit agreement, it is important to verify whether such legal acts are allowed by the purpose clause in the company's articles of association. In particular, in relation to professional advisers (such as financial institutions or legal and financial counsels), Belgian case law and legal scholars generally admit that such professional persons have an increased duty to verify whether a certain transaction would not be ultra vires (ie, exceeding that company's corporate purpose).

In relation to the granting of security interests, the provision of guarantees, the assumption of debt and/or the accession to a credit agreement, it must further be verified whether the entry into that transaction would serve that company's own individual corporate interest. As a general rule, a Belgian company must not encumber its assets or give undertakings for the benefit of, for example, its direct or indirect shareholders. The corporate benefit must be considered for each individual company in a group of companies. However, several leading authors have asserted and case law has held that within a group of companies, the corporate interest of each entity can be assessed by taking into account the interests of the group, to a certain extent.

In particular, the corporate benefit may be present where it can be shown that:

  • the target company is or will become a member of a structured group, with a common economic interest and not a mere temporary and occasional group interest;
  • the target company itself derives a benefit from securing the transaction (for example, improvements in management will be made, the target company will have access to new or better technology, markets and so on); and
  • the amount for which the target company is held liable is not disproportionate to the financial means available to the target company and to the benefit it derives from the transaction. Whether this proportionality test is met can only be judged in light of the circumstances surrounding the transaction at the time it is entered into, and in particular:
    1. the value and duration of the liability/security granted by the target company;
    2. the amount of the target company's capital, its net assets and overall financial condition;
    3. the (direct or indirect) benefit the target company derives from the transaction; and
    4. the risk that the guarantee will be called or the security interest will be enforced, and the likelihood of reimbursement by the party for whose benefit the guarantee was undertaken or the security interest was granted.

Belgian case law is scarce and does not offer clear guidelines on when a group transaction is within the corporate interest and when the proportionality test is met.

If these conditions are not met, the entry into the transaction is deemed contrary to the target company's interest. A violation of the corporate interest may lead to the nullity or the unenforceability of the relevant obligations if the other contracting party knew or should have been aware that the transaction was not in the corporate interest. Violation of the corporate interest could also lead to the nullity of the transaction as a whole, where a court could consider that such transaction was entered into without a (valid) cause. It may also lead to director liability.

Finally, a legal act entered into by a target company may be nullified by its bankruptcy trustee or (under certain conditions) by its creditors outside of bankruptcy if the act has been performed without an obligation to do so, the company's creditors were prejudiced as a result of the act and at the time of the performance of the act both the company and its counterparty knew or should have known that the company's creditors would be prejudiced.

Pledges over shares or other financial instruments may be enforced without a court’s prior approval, by sale or, provided the parties have expressly agreed thereto and have provided a contractual mechanism for the valuation of the relevant shares or other financial instruments, by way of appropriation by the pledgee.

Pledges over receivables may be enforced without a court’s prior approval by notifying the receivable debtor to pay the pledgee directly.

Pledges over bank accounts may be enforced without a court’s prior approval, by the application of the credit balance on the secured debt, based, where applicable, on the exchange rate or determination mechanism agreed between the parties.

Pledges over movable assets (business assets or specific assets) may be enforced, with the permission of the pledgor granted in the agreement, without prior court approval, subject to certain conditions (eg, prior notification to the pledgor) and provided that the pledgor is not a consumer, by sale or by appropriation of the pledged assets. Moreover, Belgian law allows the parties to determine the methods of enforcement in the agreement.

Mortgages may be enforced, with a court’s prior approval, by sale of the mortgaged or pledged assets at public auction.

Any enforcement of security without court’s prior approval is subject to a court’s possible review, if requested by a party.

As for the security package, the type of guarantees granted in acquisition finance transactions are heavily influenced by practical and regulatory constraints (see 5.1 Types of Security Commonly Used and 5.4 Financial Assistance). The prohibition of financial assistance significantly hampers the use of upstream guarantees.

Some transactions may include guarantees granted by natural persons, such as the management. These guarantees are subject to specific formalities or conditions.

It is market practice in Belgium that upstream guarantees are limited in amount, taking into account the corporate benefit of the guarantor. However, there are no legal provisions that clearly set out what the limits of an upstream guarantee should be. Although numerous variations are possible, enforcement of the guarantee is customarily limited to the higher of the following.

  • Any amounts directly drawn by the guarantor (and its subsidiaries) under the credit facility and any amounts on-lent to a Belgian guarantor (or its subsidiaries) that are drawn by affiliates under the credit facility.
  • A high percentage of that Belgian guarantor's net assets (often greater than 80%) (as defined in the Belgian Companies Code) either (whichever is the highest):
    1. at the time the guarantee was granted; or
    2. at the time of enforcement of the guarantee.

Financial assistance restrictions also apply to the granting of a guarantee by the target company in order for a third party to acquire the target company’s shares.

The corporate benefit and financial assistance restrictions on upstream guarantees are further outlined in 5.4 Financial Assistance and 5.5 Other Restrictions.

There are no legal requirement for guarantee fees (and no specific market practice exists in that respect).

There are no equitable subordination rules applicable in Belgium. A court does not have the power, under the current framework, to subordinate a debt claim when the creditor has acted inequitably.

Nevertheless, in the case of a non-arm’s length transaction, it could potentially be argued that the transaction did not take into account the corporate benefit of the company and as a result is null and void or unenforceable.

If any of the creditors receive a payment (or the benefit of a payment) to which they are not contractually entitled in accordance with the intercreditor agreement, a turnover of receipts or claw-back mechanism generally ensures that the prior ranking creditor (or security trustee on his behalf) is able to recover the relevant amount from the junior creditor.

Furthermore, a so-called suspect period (or hardening period) preceding a company’s bankruptcy allows creditors to request a court to declare a security null and void if that security was granted in order to secure a previously incurred debt or while the newly secured party was aware of the debtor’s insolvency. The suspect period begins at the moment the borrower is in a state of cessation of payments (ie, is no longer able to pay its debts at maturity and to obtain further credit), as determined by the court. Except in the event of fraud, the suspect period does not begin more than six months prior to the court’s order declaring bankruptcy.

While complex cross-border documentation may provide for this possibility, the purchase of own loans is not a common practice in Belgium and a commercial desire to terminate a facility prior to its end date is generally covered by prepayment clauses in the facility agreement.

However, it is not uncommon for an issuer of listed debt to repurchase its own debt (for example, bonds). Often the terms and conditions of the bond allow for an early redemption of the bond (ie, a call option), subject to the fulfilment of specific conditions.

In principle, no documentary taxes, stamp duty or other fees are payable on the grant of a loan, guarantee or security interest, subject to a series of exceptions.

A stamp duty of EUR95 is payable in relation to any Belgian notarial deeds executed for companies with legal personality.

A EUR0.15 duty can be applicable under the Belgian Code of Miscellaneous Duties and Taxes of 2 March 1927 for transaction documents executed or registered in Belgium.

A registration duty of 1% of the secured amount (to be increased with other costs ranging between 0.3% and 0.5%) applies to mortgages.

A retribution ranging from EUR20 to EUR500 applies to the registration of pledges over movable assets.

The notification or registration of a pledge over IP rights with the competent authorities can also entail a retribution.

As a matter of principle, a withholding tax of 30% is applicable on interest payments, subject to exemptions or reductions under Belgian law or tax treaty provisions.

Significant Belgian withholding tax exemptions are relevant in acquisition finance, in particular:

  • interest paid by professional investors on receivables (other than bonds) from qualifying lenders; ie, Belgian resident credit institutions or Belgian branches of foreign credit institutions and credit institutions or branches of foreign credit institutions established within the European Economic Area (EEA) or within a country having entered into a double taxation agreement with Belgium;
  • interest paid to a Belgian financial institution on a loan embodied in a debt instrument;
  • interest paid on Belgian registered bonds subscribed by a non-resident investor and held during the entire interest period, provided that the investor is not tax-privileged or is not more than 50% owned by Belgian residents;
  • interest paid by certain listed companies or their subsidiaries on receivables (other than bonds) to non-residents that do not use the receivables for professional activities in Belgium, subject to certain conditions, including that the bonds are held during the full interest period; and
  • interest paid on securities registered with the X/N clearing system supervised by the National Bank of Belgium, in particular to non-resident investors, subject to certain conditions.

Double taxation agreements can also provide for an exemption on interest payments to, for instance, companies located in the other treaty state. The use of treaty exemptions is particularly common with Germany, Luxembourg, the USA and the Netherlands. Other treaties generally limit the rate of the withholding tax to 10%.

The application of the exemptions may be subject to certain conditions.

In principle, interest payments are deductible from the Belgian tax base of the borrower, subject to certain conditions and limitations, including thin capitalisation rules.

As of assessment year 2020 (ie, financial years starting on or after 1 January 2019), a new interest limitation rule entered into force. This so-called 30% EBITDA rule is the transposition of the interest limitation rules included in the EU Anti-Tax Avoidance Directive into Belgian tax law.

According to this 30% EBITDA rule, the exceeding borrowing costs (ie, the positive difference between interest expenses minus interest income) are not deductible to the extent that they exceed either (i) 30% of the taxpayer’s tax-adjusted EBITDA or (ii) a de minimis threshold of EUR3,000,000. Exceeding borrowing costs that are non-deductible following the application of the 30% EBITDA rule can be carried forward to subsequent years without limitation.

If a company belongs to a group, the exceeding borrowing costs, the tax-adjusted EBITDA and the de minimis threshold are determined on the basis of an ad hoc consolidation. In such case, the company will also have the possibility to transfer unused interest capacity to another group company within the framework of a so-called interest deduction agreement provided that certain conditions are met.

Certain entities are excluded from the 30% EBITDA rule (eg, financial institutions, standalone entities, companies whose only activity is the performance of public-private partnership (PPP) projects, etc).

This new 30% EBITDA rule partially replaces the existing 5:1 thin capitalisation rule, which remains applicable to loans concluded prior to 17 June 2016 (provided that the loan has not been substantially modified, in which case the 30% EBITDA rule will apply) and to interest payments to tax havens. Under the 5:1 thin capitalisation rule, interest expenses made to related parties or tax havens are not deductible to the extent that the debt-equity ratio exceeds 5:1.

To determine whether or not this 5:1 debt-equity ratio is breached, equity is defined as the sum of the taxed reserves at the beginning of the taxable period and the paid-up capital at the end of the taxable period. At the debt-side, the debtor of the interest does not need to take into account loans that are granted by credit institutions or insurance companies vested within the EEA and bonds (and similar securities) issued within the framework of a public offering.

Most entities within the financial sector are regulated by European and Belgian legislation (for example, credit institutions, insurance companies, market operators and investment firms).

For instance, entities or persons wishing to acquire shares in a Belgian credit institution, thereby increasing their shareholding above the thresholds of 20%, 30% or 50% of the outstanding shares, must notify the competent supervisory authority (the Belgian National Bank or the European Central Bank (ECB)) (Section 1, Directive 2007/44/EC on the procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector; transposed in Section 46 and following of the Belgian Banking Act of 25 April 2014; Section 4, Council Regulation No 1024/2013). The competent authority must evaluate whether the acquisition is in line with a prudent and diligent management of the credit institution and will then either authorise or reject the feasibility of the acquisition.

Authorisation of the competent authority (either the Belgian National Bank or the ECB) is also required for mergers between credit institutions or transfers of part of a credit institution to another.

Acquisition of investment firms and market operators must be approved by the FSMA. Similar provisions exist in the insurance sector (which is also supervised by the FSMA).

The Belgian Banking Act explicitly prohibits the granting of any form of loan, guarantee or security to a third party, whereby the proceeds of such assistance is used to acquire shares of that credit institution.

Some other industries are also subject to a specific legal framework that may impact the acquisition structure and the financing.

Belgian real estate investment trusts (REITs) are subject to a specific regulatory framework and prudential supervision by the FSMA. This regime provides, among other things, that the REITs must be listed on a Belgian regulated market, with a minimum free float of 30%. An acquisition of the shares of a REIT cannot infringe upon this rule, and as such, this rule will deter public takeover strategies over REITs. The specific legal framework will also affect covenants to be complied with and potential security interests to be granted by REITs. The REIT legislation imposes certain strict ratios on REITs, such as a maximum debt-equity ratio of 65% (which is often mirrored in the credit documentation, mostly with lower thresholds). REITs are also prohibited from granting loans to or providing security interests for the benefit of persons outside of the relevant REIT group, a covenant often mirrored in the credit agreements with REITs.

Under the REIT Act, a REIT (or its subsidiary) can only grant mortgages or any other securities, or provide guarantees, within the framework of the financing of its own or the group's real estate activities. The total amount secured by such mortgages, securities or guarantees must not exceed 50% of the total fair value of the REIT's and its subsidiaries' real estate. Additionally, a mortgage, security or guarantee granted by a REIT or its subsidiary encumbering specific real estate must include more than 75% of the value of the real estate. These restrictions are often explicitly provided in the credit agreements to be entered into with REITs.

When the acquisition of a listed target's shares is contemplated, the structuring must consider the Takeover Act of 1 April 2007, the Takeover Decree of 27 April 2007, the Squeeze-out Decree of 27 April 2007 and the Transparency Act of 2 May 2007.

A public takeover bid must cover all of the listed target’s shares that are not already owned by the bidder or related persons. The funds necessary for the purchase of all the shares must be held securely in a bank account opened with a Belgian credit institution or by way of an irrevocable and unconditional credit facility agreement entered into with a Belgian credit institution. The credit institution must provide the FSMA with a certificate of certain funds.

Where a shareholder exceeds a 30% threshold of securities with voting rights in a Belgian-listed company, it is required to launch a mandatory takeover offer for all the outstanding shares. This provision is also applicable where a shareholder exceeds a 50% threshold of securities with voting rights in a Belgian company whose shares are admitted for trading on an MTF. Lenders enforcing their share pledge by way of appropriation over a number of shares exceeding these thresholds have an obligation to launch a mandatory takeover bid as well.

Under the Transparency Act of 2 May 2007, a change of voting rights causing a person to exceed or fall below a threshold of 5% or a multiple thereof of the company’s voting rights triggers an obligation of disclosure to the company and to the FSMA. Companies are also allowed to identify their shareholders holding more than a certain percentage of shares or voting rights that they may determine.

Eubelius

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Brussels Capital Region
Belgium
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+32 2 543 31 00

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Law and Practice

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Eubelius is Belgium’s largest full-service independent law firm, with 20 partners, 18 counsel and more than 100 associates practising Belgian and European law. Eubelius’ corporate and M&A team is recognised as one of the leading practices in Belgium. It is one of the most prominent and active Belgian equity and debt capital market practices and the market leader in the Belgian REIT sector. The banking and finance team advises in all aspects of (syndicated) corporate, asset-based, real estate, acquisition and project financing. It further provides comprehensive banking and securities advice as well as assistance in litigation and in contacts with supervising authorities. The team is composed of 15 lawyers, headed by Marieke Wyckaert (partner). Frédéric Heremans (counsel) and Thomas Donnez (senior attorney) are prominent members of the team. The firm has privileged working relationships with outstanding independent law firms in many foreign jurisdictions. Its practice has a strong national and international focus, and a significant proportion of work is cross-border.

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