The mergers and acquisitions (M&A) and Private Equity (PE) markets have experienced fluctuations in deal activity since 2022. After two consecutive years of a shrinking volume of M&A transactions, which can, among other things, be ascribed to the pressure of escalating interest rates, combined with macroeconomic and geopolitical uncertainties, global deal volumes are beginning to stabilise. While the Belgian market initially proved more resilient, M&A experts point to a strongly declining trend in the country in 2023. The drop appears most pronounced for very large deals and private equity transactions.

The near future looks brighter, however. Despite ongoing geopolitical concerns, industry professionals do not expect the decreasing trend to continue in 2024. In fact, an upsurge in large transaction deal activity is anticipated. The expected rise is particularly significant for financial buyers, fuelled by an abundance of dry powder and anticipated cuts in interest rates.

It is well established that small and medium-sized enterprises (SMEs) form the backbone of Belgium’s economy, as they serve as the fundamental structures that sustain and drive its economic activity. Following increased activity within the SME sector in 2022, the Belgian M&A market has experienced a decrease in this deal segment during the past year, reflecting lower resilience to economic challenges.

However, given their importance in the local economy, SMEs remain appealing targets for acquisitions, particularly in the context of buy-and-build transactions. As the market is expected to stabilise, we can anticipate renewed interest and growth opportunities in this vital sector.

Impact of Interest Rates on PE Deals

One of the key features of the economic climate in 2023 is rising interest rates. These have a significant impact on PE deals, which often rely heavily on external debt financing. In 2023, the average NFD/EBITDA ratio has returned to its 2021 level, and remained relatively stable overall. The average ratio of net financial debt to EBITDA was equal to 3.2, which is consistent across various size segments. However, for the largest deals exceeding EUR100 million, this ratio averaged 4.0. The 2024 Belgian M&A Monitor, published by Vlerick Business School, provides an insight into the impact of rising interest rates following tighter monetary policy. According to the report, only 47% of industry professionals explicitly attribute the increased cost of debt financing to the decline in deal activity, and 59% noted a negative impact on valuation multiples. Moreover, they indicate a reduced recourse to debt in acquisition financing and an increased reliance on organic versus inorganic growth.

The legal landscape in Belgium has witnessed significant developments in recent years, which are exerting a growing influence on M&A. Below is an overview of certain significant changes within the Belgian or European Union (EU) legal framework in recent years that have had an impact on the PE deal landscape.

Contract Law

As of 1 January 2023, Book 5 of the new Belgian Civil Code has become effective, primarily focusing on two main objectives: (i) codifying principles that are currently established through case law, and (ii) enhancing the autonomy of parties to independently address their concerns. The latter involves granting parties the authority to apply sanctions without seeking prior judicial intervention, thereby enabling unilateral actions such as price reductions or anticipatory terminations. It is important to acknowledge that several of these provisions function merely as supplementary laws, which can be made inapplicable upon mutual agreement by the parties.

Additionally, Book 6 of the new Belgian Civil Code on extra-contractual liability has been approved, and is expected to take effect at 1 January 2025. The new rules mark a significant shift from the traditional prohibition of combining contractual and extra-contractual liability, which could have a profound impact on M&A practices.

Sustainable Finance Disclosure Regulation (SFDR)

The EU has introduced the SFDR, which came into effect in two phases, partly on 10 March 2021, and partly on 1 January 2023. The SFDR outlines the requirements for financial market participants to disclose sustainability information, aiming to ensure that investors can make well-informed decisions. Moreover, the SFDR facilitates the assessment of sustainability risks in investment choices, empowering investors to evaluate them accurately.

For PE firms, adhering to SFDR is of utmost importance to safeguard their reputation and attract investors interested in sustainable products. Consequently, PE managers offering such products must implement effective environmental, social, and governance (ESG) strategies. This could include creating sustainable products, integrating sustainability principles into their company’s structure, establishing streamlined reporting processes, and conducting thorough ESG due diligence.

Corporate Sustainability Reporting Directive (CSRD)

Effective from 5 January 2023, the CSRD has been enacted, replacing the EU’s Non-financial Reporting Directive (NFRD). The primary objective of the CSRD is to enhance the legal framework surrounding mandatory ESG disclosures by large companies within the EU. To achieve this, the CSRD will be implemented gradually, with the first companies required to report in 2025 for activities carried out in 2024, and the last companies required to report in 2029 for activities carried out in 2028.

Large EU companies, who exceed certain thresholds set forth in the CSRD in terms of number of employees, turnover, and total assets, will fall under the purview of these regulations. Additionally, even non-EU companies generating more than EUR150 million in revenue within the EU or with an EU branch generating more than EUR40 million will also need to comply by 2029.

The CSRD will play a crucial role in providing access to comprehensive and standardised ESG information, allowing PE players to make better-informed investment decisions based on standardised and, in some cases, audited information.

Corporate Sustainability Due Diligence Directive (CSDDD)

The EU has enacted a second directive aimed at improving the ESG and corporate social responsibilities of companies active within the EU. The CSDDD was approved by the EU Parliament on 24 April 2024 and by the EU Council on 24 May 2024. It will enter into force 20 days after its publication in the Official Journal, and member states will have two years from that date to transpose its provisions into national law.

The CSDDD imposes a duty on companies to identify and assess adverse impacts on human rights and the environment. This includes an obligation to map their operations, supply chains and business activities. If risks are identified, the companies will need to take action to prevent or mitigate these risks. This can be done, for example, by creating stringent policies or compliance procedures. The companies also need to be transparent about their due diligence efforts (the CSDDD mandates regular reporting and monitoring), and can be held accountable. Companies must also engage with relevant stakeholders and create an effective remediation procedure in the event that negative situations arise (eg, affected individuals or communities file grievances for solutions/remediation).

The CSDDD will impact private equity investment processes going forward, as investors will focus more on their targets’ ESG compliance. Additionally, the CSDDD targets not only the company itself but also its entire supply chain, further complicating the due diligence process.

Foreign Direct Investments (FDI)

The Belgian legislature has implemented a new framework regarding the screening of foreign direct investments, which became effective on 1 July 2023.

This screening mechanism is designed to regulate foreign investments made by non-EU investors who intend to acquire, directly or indirectly, either 10% or 25% of the voting rights in Belgian entities or undertakings operating within specific strategic sectors. Transactions falling under the scope of the Belgian FDI regulation are required to undergo a mandatory filing process before the deal can be completed.

To oversee the Belgian FDI regulation, the Interfederal Screening Commission (ISC) has been established as the public supervisory authority.

The implementation of the Belgian FDI regulation will undoubtedly impact the process of (PE) deal-making in Belgium, affecting deal-certainty, the timing of transaction implementation and the provisions of the transaction documentation (such as an FDI clearance condition precedent).

Foreign Subsidies Regulation (FSR)

On 21 January 2023, the EU’s FSR came into effect, introducing a set of regulations aimed at addressing market distortions arising from foreign subsidies in the EU. These rules are designed to maintain the EU’s commitment to trade and investment openness while ensuring a fair and level playing field for all companies.

According to the SFR, the European Commission (EC) will be empowered to investigate financial contributions provided by non-EU governments to companies operating within the EU. If the EC determines that certain financial contributions create distortive subsidies, it will have the authority to impose measures aimed at rectifying the adverse effects caused by such distortions.

The FSR will introduce three key tools to address distortions caused by foreign subsidies:

• A notification-based tool for investigating concentrations – this tool applies when financial contributions granted by non-EU governments are involved in mergers, acquisitions, or joint ventures where at least one of the parties involved generates a turnover of EUR500 million within the EU. The investigation is triggered if the transaction involves foreign financial contributions exceeding EUR50 million.
• A notification-based tool for investigating public procurement bids – this tool applies to public procurement procedures where financial contributions from non-EU governments are involved. The investigation is initiated if the estimated contract value is at least EUR250 million, and the bid includes a foreign financial contribution of at least EUR4 million per third country.
• A general tool for investigating other market situations – the EC has the authority to initiate investigations on its own accord in all other market scenarios not covered by the previous two tools. This enables the EC to proactively review and address potential distortions caused by foreign subsidies.

As with FDI, a deal falling within the scope of the FSR will be impacted in terms of deal-certainty, the timing of transaction implementation and the provisions in the transaction documentation.

In Belgium, PE funds are subject to oversight from various regulatory bodies, particularly pertinent to private equity transactions. Some notable authorities involved in this supervision are outlined below.

Merger Control and Anti-competitive Behaviour - European Commission (EC)/Belgian Competition Authority

The EC and the Belgian Competition Authority are both responsible for aspects of merger control regulations, depending on the size and region of (the entities involved in) the transaction.

Private equity-backed buyers engaging in M&A activities must assess whether the contemplated transaction meets the thresholds triggering mandatory notification to the EC, the Belgian Competition Authority or any other competition authority.

Aside from merger clearance, the EC and the Belgian Competition Authority also investigate anti-competitive behaviour of companies and state-aid matters.

Foreign Subsidies - European Commission (EC)

The EC is the supervisory authority charged with reviewing and investigating financial contributions provided by non-EU governments to companies operating within the EU under the Foreign Subsidies Regulation (FSR). As the regulation only entered into effect on 21 January 2023, parties should be aware that few precedents are available, for instance in terms of the timing of FSR clearance.

FDI Screening - Interfederal Screening Commission (ISC)

In Belgium, the Interfederal Screening Commission (ISC), established on 1 July 2023, is the public authority responsible for screening foreign direct investments.

Financial Services and Markets Authority (FSMA)

The FSMA is the Belgian regulatory authority responsible for supervising and regulating various financial and monetary activities, including those related to the formation of PE funds.

The FSMA plays a crucial role in ensuring compliance with financial regulations, investor protection, and market integrity. PE funds operating in Belgium must strictly adhere to the FSMA’s guidelines and regulations, particularly in areas such as fund management, marketing, and disclosure obligations.

Due diligence investigations are a critical component of M&A and PE transactions, including the performance of a comprehensive legal due diligence. Typically, a high-level, “red flag” due diligence is conducted to swiftly identify potential major issues and risks associated with the target. The scope of a legal due diligence conducted in Belgium is extensive and usually covers at least the following key areas (of course depending on the size, sector and other elements considered relevant by the buyer):

• Corporate – review of corporate documents, ownership structure, securities, governance, shareholders’ agreements, and board minutes.
• Regulatory compliance – assessment of licences, permits, authorisations, and compliance with industry-specific regulations.
• Commercial contracts – examination of material customer and supplier agreements, distribution agreements, joint ventures, and intellectual property agreements.
• Employment – analysis of employment agreements, benefit plans, compliance with labour laws and employee relations.
• Intellectual property rights – verification of ownership, validity, and potential infringement risks related to trade marks, patents, copyrights, software, and trade secrets.
• Litigation and disputes – review of ongoing or potential legal disputes, regulatory investigations, and significant judgments or settlements.
• Real estate – assessment of property ownership, leases, permits, zoning compliance, and environmental liabilities related to the target’s real estate assets.
• Financial matters – review of financial agreements such as credit agreements, guarantees, and security interests.
• ESG compliance – assessment of ESG policy (labour practices, diversity & inclusion, climate, etc).

It is common for a tax and financial due diligence to be conducted by specialised advisors, separately from the legal due diligence. Operational due diligence is carried out on a case-by-case basis.

Vendor due diligence, whereby the seller of the target conducts a pre-sale due diligence investigation of the target, is becoming increasingly common in the sale of a PE-backed target as it facilitates a smoother transaction process and enables potential buyers to assess the target in a more efficient manner. In the context of a controlled auction sale – ie, the sale of a target whereby the bidding process is controlled and governed by the target itself – vendor due diligence reports (or similar reports) are typically provided to bidders after the acceptance of a non-binding offer submitted by a bidder.

The role of legal advisors in the preparation of the sale of a PE-backed target can consist of assistance with (i) the preparation and establishment of a virtual data room, (ii) conducting issue-oriented vendor due diligence or (iii) establishing a non-issued legal factbook (a descriptive report).

In controlled auction sales, bidders often rely on the vendor due diligence reports (or similar reports) provided by the sell-side advisers. In general, sell-side advisors in Belgium are willing to accept that the bidder may rely on its report, under standard conditions. Regardless of any reliance provided by sell-side advisors, depending on the specific circumstances of the transaction and the buyer’s risk appetite, buyers will generally conduct their own additional (purchaser’s) due diligence.

Private M&A Transactions

In Belgium, M&A transactions are commonly structured as share deals, the terms of which are set out in a sale and purchase agreement (SPA). Neither the execution of the SPA nor the transfer of the shares require the involvement of a notary. Mergers, where two or more legal entities become one legal entity, are relatively uncommon.

In a controlled auction sale, the sale process documentation (eg, the process letter) typically already sets out the deal-structure contemplated by the seller, which will usually be the private acquisition of the shares of the target by a buyer.

A common notion is that a controlled auction enables the sellers to negotiate or impose more favourable deal-terms than would be possible through a direct private negotiation between the parties.

Within the framework of such an auction, the sellers’ advisors provide potential bidders with a process letter that outlines the procedure and instructions for potential bidders participating in the sale process. The process letter typically includes important information such as the envisaged timeline of the transaction, instructions for submitting bids, confidentiality requirements, details about the data room access, terms and conditions of the sale, and any specific requirements or qualifications that bidders must meet. It is important to note that a controlled auction can lead to better deal terms, especially in the event of multiple bidders; however, all transactions are tailor-made and the acquisition terms will depend on the specifics of the transaction and the bargaining power and position of the parties.

Public Takeovers

Publicly traded targets can be acquired by making a public offer to purchase the shares of the target directly from its shareholders (tender offers). While tender offers are not very common in Belgium, there have been some noteworthy instances of such offers in recent times. For example, the takeover bid for Telenet made by its majority shareholder Liberty Global, as well as the takeover bid for Exmar initiated by the Saverys family.

Acquisitions by PE funds, particularly in management buyouts (MBOs) or leveraged buyouts (LBOs), are commonly structured by the incorporation of an acquisition vehicle that, following the completion of the transaction, will serve as the new holding company for the target.

Such a special purpose vehicle is specifically incorporated for the purposes of (i) acquiring debt financing, (ii) acquiring the target and (iii) if applicable, the (re)investment of management in the special purpose vehicle. In this manner, the special purpose vehicle acquires the shares in the target directly and the PE fund owns all or a number of shares in the special purpose vehicle.

Irrespective of this “textbook” structure, it is worth noting that the actual structure can vary depending on the transaction and the preferences of the PE fund. Each deal is unique, and the structure will be tailored to meet the specific objectives and circumstances of the transaction.

In Belgium, private acquisitions such as PE deals are typically financed through a combination of equity and debt. In general, the equity portion is provided by (i) the PE fund itself, and (ii) in certain scenarios, such as management buyouts, the seller(s) and/or managers (who will also acquire an equity stake). The debt portion is generally sourced from (i) third-party debt providers such as banks and (ii) seller(s) through a vendor and/or deferred payments. In this regard, we also noted that there was a notable increase in the proportion of M&A transactions involving vendor loans, especially for smaller and mid-sized deal segments. We also find that financial buyers tend to finance a slightly higher proportion of the deal price through debt compared to strategic buyers.

Vendor loans and deferred payments are typical financing components of a deal, whereby the seller provides a loan to the buyer in view of the partial financing of the acquisition.

Prior to the completion of a deal, the seller(s) or managers who are invited to (re)invest in the buyout holding may be requested to execute an equity commitment letter or wrapper agreement to this effect.

In some cases, the PE fund will give comfort in respect of the debt-funded portion of the purchase price by providing a (binding) term sheet signed by the third-party financing party(ies).

In the domain of private equity and venture capital, a consortium refers to an alliance comprising multiple investors or funds with a shared goal of pursuing a specific investment opportunity. Rather than an individual PE firm or investor operating independently, the consortium enables the pooling of resources, expertise, and capital from diverse parties.

Within Belgium’s venture capital landscape, a substantial number of investments are effectively executed through consortia. In practical terms, a lead investor negotiates with the target company a term sheet outlining the critical transaction terms. Subsequently, the target company and the lead investor proactively seek out co-investors (ie, the consortium), collectively striving to achieve the desired investment amount.

The purchase price is generally established either by (i) a closing accounts mechanism whereby the purchase price is calculated on the basis of the accounts of the target as per closing or (ii) by a locked-box mechanism, whereby the purchase price is calculated on the basis of the accounts of the target on a date prior to closing (the locked-box date).

The fundamental distinction between these two mechanisms revolves around the point at which time the risk shifts from the seller to the buyer. With the completion accounts mechanism, this transfer takes place on the closing date, whereas with the locked-box mechanism, it occurs on the locked-box date.

The selected pricing mechanism determines the entire equity value of the target, which purchase price can be further subdivided in different components like the cash component, a vendor loan, a deferred payment, escrow amount, etc.

In the context of a closing account mechanism, the purchaser will usually pay an estimate of the purchase price at closing, which shall be finally determined post-closing.

PE deals generally include a locked-box price mechanism, as this mechanism does not necessitate post-closing adjustments (which can sometimes result in disputes). Consequently, it also provides certainty regarding the required (debt) funding needed to complete the transaction.

In Belgium, legally speaking – irrespective of the applied pricing mechanism (locked box or closing accounts) – the legal ownership of the target is transferred from the seller to the buyer at closing. From an economic point of view, however, when a locked-box pricing mechanism is employed, the target is transferred on the locked-box date (ie, a date prior to signing). The seller will continue to manage the activities of the target until closing, but the compensation for the seller will be calculated on the basis of the accounts on the locked-box date.

To mitigate the potential loss of equity value over the period between signing and closing, when parties adopt a locked-box price mechanism, parties may decide to apply interest charges (“equity ticker”) or some other form of compensation for the period between the locked-box date and closing to the benefit of the seller(s).

As the name suggests, the target should – as of the locked-box date – remain “locked”, meaning that the activities of the target should be carried out in the ordinary course of business and that the value of the “box” should be retained. The sale and purchase agreement will thus include a list of transactions between the sellers (or their affiliates) on the one hand, and the target on the other hand, which are not allowed in the period starting on the locked-box date and ending on the closing date (so called “leakage”). The occurrence of such leakage items will lead to a “euro-for-euro” reduction of the purchase price. Certain leakage transactions, typically referred to as “permitted leakage”, will be allowed and will not impact the purchase price. These may include payments such as the sellers’ management fees in alignment with past practices.

The contractual documentation will often provide that disputes arising out of the application of purchase price or earn-out mechanisms shall be deferred to financial experts, such as registered auditors (bedrijfsrevisoren or réviseurs d’entreprise), who will be tasked with the final determination. Since the locked-box mechanism doesn’t necessitate a post-closing price revision, there is typically less need to involve financial experts in such situations.

Depending on the specifics of a deal and the negotiating powers of the parties, the conditions to closing of the transaction can vary immensely between similar deals.

Deals are not often subject to third-party consent with the exception of merger clearance and FDI approval, which are fairly standard and uncontroversial.

If one of the target’s material agreements contains a change of control clause, consent or waiver from the counterparty will typically be required by the purchaser.

Material adverse change clauses are relatively uncommon, given their far reaching potential consequences. The inclusion of material adverse clauses will inevitably lead to discussions regarding their definition.

In its purest form, a “hell or high water” provision requires the buyer to take all necessary steps to satisfy measures proposed by regulatory authorities for the clearing of transaction.

These clauses impose an obligation for the buyer to accept any conditions (such as divestitures) imposed by regulatory authorities, even if those conditions could be materially detrimental to the target business. Given the inherent risks associated with such provisions, they are not customary and typically only accepted by buyers in highly competitive bid situations or when the buyer has a high level of confidence that the regulatory risks are manageable.

In Belgian private equity transactions, break fees, also known as termination fees, to the benefit of the seller are not commonly used. Similarly, break fees to the benefit of the buyer (also known as reverse break fees) are equally rare. As with most transaction terms, (reverse) break fees might be included depending on the negotiating leverage of each party and the deal specifics.

In Belgium, the circumstances under which a PE seller or buyer can terminate the acquisition agreement largely depend on the terms specified within the agreement itself. Most sale and purchase agreements will contain a “no termination” clause whereby parties waive their rights to terminate or seek the annulment of the agreement, other than in certain specific circumstances listed in the agreement, such as:

• failure by a party to complete its closing obligations, which will typically allow the other party to choose between rescheduling the closing date or terminating the agreement; and
• failure to satisfy the conditions(s) precedent within the agreed timeframe (ie, by the longstop date), which will usually allow either party to terminate the agreement – the length of the longstop date in a transaction is contingent on the particularities of the deal (simple deals may have a relatively short long stop date (a few weeks), while agreements that require regulatory approvals or merger clearance may include a longer period, ranging from three to six months after the signing date).

The performance of a due diligence investigation is an integral part of any PE transaction.

In Belgium, the allocation of risk between a buyer and a seller typically occurs through the granting of representations and warranties to the buyer. It is important to note that the contents of the data room will generally form an exception to the representations and warranties to the extent the information contained therein is “fairly disclosed”.

Consequently, a purchaser who has identified a material risk during its due diligence may request that the representations and warranties be supplemented by (i) specific indemnities or (ii) conditions precedent (if the purchaser requires a certain measure to be taken before proceeding to closing).

In addition, the inclusion of a general tax indemnity has grown more common in PE-backed transactions over the last years, inspired by international practice.

The allocation of risk also often depends on the buyer’s appetite. While some PE funds may possess a higher risk tolerance due to their sector experience, a PE fund with limited familiarity in the target’s field might require extensive indemnities based on recommendations from its advisors. Experience also teaches that industrial buyers, who possess operational insight into the target’s business and inherent risks, may be more willing to assume certain risks that are considered inherent to any entrepreneurial venture.

Private Equity-Backed Seller

A private equity-backed seller will usually give the same representations and warranties as the other sellers in the context of an M&A transaction, unless the shareholders’ agreement entered into between the sellers (including the private equity-backed seller) would provide otherwise.

Representations and Warranties

In principle, a seller will always give representations and warranties to the buyer in an M&A transaction, relating to (i) the capacity of the seller and the unencumbered ownership of the shares (so called fundamental warranties) and (ii) the target’s business (so called business warranties).

Standard fundamental warranties include:

• ownership of the shares or assets;
• absence of undisclosed liens, mortgages, pledges, security interests, or other encumbrances on the sold shares; and
• authority and power of the seller to enter into the transaction.

Standard business representations include:

• financial accounts;
• contracts and agreements;
• real estate;
• regulatory matters;
• intellectual property;
• employees;
• tax;
• insurance;
• environmental matters;
• information technology;
• data protection and personal data; and
• anti-bribery.

The above non-exhaustive list is merely an example, and the scope and extent of warranties should be tailored to the specifics of the transaction and the target’s business and sector.

The seller’s liability under the warranties is usually subject to data room disclosures, which is standard in the Belgian M&A market. This means that the seller will not be liable for a breach of warranties arising from matters that are “fairly disclosed” in the data room.

Specific Indemnities

Apart from warranties, purchasers frequently aim to incorporate specific indemnities to address particular risks identified during the due diligence process. For example, a pending litigation with an uncertain outcome could be covered by a specific indemnity provided to the buyer, thereby mitigating the risk associated with it.

Limitations

The indemnification obligation of the seller for breaches of warranties is typically subject to the following limitations:

• Time limitation – claims have to be notified by the buyer within a time period after closing. A longer time period, usually aligned with the applicable statute of limitations to be increased with a certain number of days, is typically provided for claims relating to tax and environmental matters.
• De minimis threshold – individual claims must exceed a minimum monetary amount in order to be taken into account for indemnification.
• Basket – the purchaser will only be indemnified if all claims taken together (following application of the de minimis threshold) exceed the basket threshold amount. Depending on the transaction, the basket may be “tipping” (ie, exceeding the basket amount means the purchaser shall be indemnified for the entire amount of the losses) or “non-tipping” (ie, the purchaser shall only be indemnified for losses exceeding the basket amount).
• Cap on liability – the seller’s liability will be capped at a certain monetary amount, which could be between 10% and 30% of the purchase price, depending on the deal’s size.

The above-mentioned limitations will usually not apply to specific indemnities, it being understood that the sale and purchase agreement will typically provide that the aggregate liability of the sellers under the agreement (including breaches of warranties or specific indemnities) can in no event exceed an amount equal to the purchase price.

Beyond the traditional warranties and indemnities, the acquisition documentation often incorporates several other forms of protection for both the buyer and the seller, such as non-compete and non-solicitation clauses, conditions precedent (such as regulatory approvals), and confidentiality agreements. In addition, the following other protections are sometimes included in M&A transactions:

• Warranty and indemnity insurance (“W&I insurance”) – W&I insurance has gained traction in Belgian PE deals over the recent years, especially in the larger deals. W&I insurance is used comparatively more often in transactions where the seller is a PE firm. It is frequently used to cover breaches of representations and warranties as well as tax indemnities. It is, however, at least as of yet, not customary.
• Vendor loan – a vendor loan will often contain a provision stating that any outstanding amount of the vendor loan will be set of against any payment obligation of the seller under the transaction documents (ie, following a breach of warranties).
• Escrow account – part of the purchase price can be transferred to an escrow account which serves as a security in the case of a liability of the seller. This escrow account is usually held by a third-party escrow agent, typically a public notary, who acts as a neutral party and facilitates the transaction.

In Belgium, litigation related to M&A transactions does not arise infrequently. Disputes often involve issues relating to representations, as well as warranties and liabilities. Matters considering consideration or earn-outs are typically deferred to third-party experts.

Public Takeover Bids and Private Equity

In Belgium, public-to-private transactions involving private equity-backed bidders occur rarely compared to some other jurisdictions, such as the United States. Such transactions are subject to specific regulations to ensure transparency and fair treatment of shareholders.

Target’s Board Involvement in a Public Takeover Bid

Essentially, when initiating a public takeover bid, it is not mandatory to procure the approval of the target’s board. Nevertheless, the board retains the prerogative to comment on the bid through two primary means: (i) it can provide commentary on the comprehensiveness and potential deceptiveness of the preliminary prospectus, and (ii) it can establish a response memorandum, within which dissenting views may be articulated. In practice, though, the response memorandum will usually align with the viewpoint of the controlling shareholders due to their representation within the board.

A bidder intending to submit a public takeover bid is required to disclose this intention to the FSMA prior to initiating the bid. The FSMA then notifies the target entity, the general public, and the stock exchange.

Within this framework, the bidder formulates a prospectus that includes pertinent information about the bidder, its intentions, the target entity, the bid itself, and the financing structure for the bid. This prospectus is then published after receiving approval from the FSMA. Should the FSMA request additional information, the involved parties are obliged to provide all pertinent reasoning and explanations that could significantly influence the valuation of the bid.

In Belgium, a public takeover bid is legally required in the following situations:

• If an individual or group acquires over 30% of a company’s outstanding voting securities, they must make an offer for all the remaining outstanding voting securities and securities that confer the right to acquire voting securities of the target company.
• Additionally, a mandatory takeover bid can be triggered if a person acquires a controlling stake in a holding company that owns more than 30% of the voting securities of the target company. This is applicable if the holding company’s shareholding in the target company represents more than half of its net assets or average net results over the last three financial years, based on its last publicly filed unconsolidated financial statements.

It should be noted that the 30% threshold mentioned in the context of a mandatory takeover bid refers specifically to the number of securities with voting rights, and not the number of voting rights themselves. This means that the double voting right, which is allowed for Belgian listed companies, is not taken into account when determining the 30% ownership requirement.

Voluntary Public Takeover Bid

In principle, in the context of a public takeover offer, a bidder has the freedom to determine the price and form of consideration offered to the target’s shareholders, assuming they do not already possess a controlling interest in the target. The payment for the offered price can be made in cash, securities, or a combination of both. While there is no specific minimum price requirement for a voluntary takeover bid, the terms of the bid, including the price, should be reasonably expected to lead to a successful takeover.

In cases where there are different categories of securities in the target, different prices per category are only acceptable if they are based on the specific characteristics of each category. Additionally, if the bidder already holds control over the target, an independent expert will be tasked with drafting a valuation report for the target.

Mandatory Public Takeover Bid

In the scenario of a mandatory offer, there is a minimum price requirement which price must be equivalent to the greater of two factors: (i) the highest price paid by the bidder during the 12 months preceding the bid announcement, and (ii) the weighted average trading price over the 30 calendar days prior to the event that triggered the obligation to bid.

Moreover, a mandatory offer must be made in cash, or a cash alternative offered when other types of consideration (such as securities) are offered. This requirement ensures that shareholders have the option to exit their investment immediately, which may not be possible if the consideration is in the form of securities that may not be readily marketable.

A voluntary offer may be subject to multiple conditions, subject to approval from the FSMA. These conditions can encompass various factors including acquiring approval from competition or other regulatory bodies, reaching a certain acceptance threshold, the non-occurrence of a significant adverse effect, the absence of dividends, no modifications to the target’s articles of association, and so forth. It is essential that these conditions do not impede the potential success of the bid.

With regard to a mandatory offer, the main principle is that a mandatory offer must be unconditional. The bidder, having already obtained control of the target company, is not allowed to add conditions to the offer. This means that unlike in a voluntary offer, a bidder cannot condition a mandatory offer on factors such as the receipt of regulatory approvals or a minimum acceptance threshold.

Governance

If a PE bidder does not seek or obtain 100% ownership of a target, it can still seek additional governance rights to influence the management and strategic direction of the target. These rights might include representation on the board of directors, veto rights over certain major decisions (such as mergers, acquisitions, or significant capital expenditures), and rights to access information beyond what is provided to shareholders under applicable law.

Squeeze-out

Following a successful public takeover offer, a bidder who has not obtained 100% of the shares of the target can squeeze out the minority shareholders by means of a squeeze-out offer in order to obtain 100% of the share capital. A person holding 95% of the voting securities of a target can force all of the other holders of voting to sell their securities through a squeeze-out bid.

The squeeze-out procedure in a public takeover bid is subject to the following conditions:

• The bidder, either alone or in concert with others, must hold 95% of the share capital with voting rights and 95% of the voting securities after the takeover bid (or its reopening).
• The bidder must have acquired securities representing at least 90% of the share capital with voting rights to which the takeover bid applied through the acceptance of the bid. However, this 90% condition is not applicable if the bidder obtained the 95% ownership following a mandatory public takeover bid.

If these conditions for the squeeze-out are met, the takeover bid will be reopened at the same price. Securities that remain untendered to the bidder at the end of the reopened bid will be automatically deemed acquired by the bidder.

Debt Push-down

In Belgium, the two primary mechanisms for achieving a debt push-down are (i) the distribution of dividends or (ii) a reduction in capital, both financed through the incurring of debt (as applicable from a third-party provider or intra-group).

As a consequence of the debt push-down, the private equity-backed buyer, such as a newly established holding company, is able to promptly satisfy its acquisition financing debt, while the debt is transferred to the target company.

An irrevocable commitment is a commitment made by a shareholder of a listed target to a bidder, in which the shareholder agrees to accept the bidder’s offer once it is made. Irrevocable commitments allow bidders to have assurance that the securities will be tendered to them in the takeover bid, without directly purchasing the securities themselves. Under Belgian law, a security holder who accepted a bid during a takeover bid has the right to withdraw their acceptance at any time during the acceptance period.

It is worth noting that irrevocable commitments need to be carefully structured to comply with insider trading and market manipulation rules. This often requires the input of legal counsel with expertise in securities law.

Equity incentivisation of the management team is a common feature of PE transactions in Belgium. The rationale behind such incentivisation is twofold: (i) aligning the interests of the management team with those of the new shareholder and (ii) encouraging the management team to strive for the company’s long-term success by granting them a share in the potential upside.

The specific level of equity ownership granted to the management team can vary considerably depending on factors such as the size and nature of the company, the specifics of the transaction, the management team’s contribution, and market norms. However, it is not uncommon for the management team’s equity stake to be in the range of 2–30% of the company’s equity.

Management participation in private equity transactions is sometimes structured to include an element of “sweet equity” to be allocated to the management. This structure is designed to incentivise management by giving them the opportunity to participate in the upside of the business if it performs well, against favourable acquisition terms.

Sweet equity refers to a portion of equity that is issued to the management team at a low value in consideration of their efforts in building up or improving the business. These shares can appreciate greatly in value if the company performs well, hence the term “sweet” equity.

Furthermore, while some deal structures will allow the managers to acquire shares in the buyout holding on closing, an alternative possibility is to issue stock options to management, which will allow them to acquire shares in the future.

Acquisition of Shares on Closing

A customary structure in the context of a PE transaction involves management acquiring shares upon the closing of the transaction. This is partly because the equity investment required for issuing these shares constitutes an integral part of the funding structure.

In the framework of a private equity investment, the holding company will sometimes issue two different types of shares: (i) preferred shares (also known as fixed-rate shares) and (ii) ordinary shares. Preferred shares yield a fixed per annum return to the holder, which is paid out prior to any dividend or liquidation payment to the ordinary shares. After this preferred return is distributed, any remaining dividend or exit proceeds will be allocated to the ordinary shares. Consequently, the preferred shares hold a senior rank compared to the ordinary shares, while the ordinary shares capture the upside value (referred to as “sweet equity”). Management might receive a greater proportion of ordinary shares compared to their preferred shares as an incentive, understanding that a higher exit valuation will lead to a greater return on the ordinary shares (thus making the equity even “sweeter”).

Grant of Subscription Rights

An alternative way of setting op a management incentive programme could be by means of the issuance of subscription rights by the buyout holding.

Subscription rights provide their holders with the opportunity to acquire shares upon exercise in the future, at a predetermined price. Subscription rights can be exercised within a specified period and/or upon meeting certain performance targets. Usually, the subscription rights will only be exercisable in the event of an exit of the PE fund and the so acquired shares will be sold in the framework of said exit immediately, giving the managers a cash payment. The terms and conditions of the MIP subscription rights will be set forth in a subscription rights plan established by the board.

Manager-shareholders are usually crucial to the business. PE funds will therefore require such managers to remain active within the business until the occurrence of an exit.

A manager who leaves the company prior to the completion of an exit will be deemed a “good” or “bad” leaver, depending on the circumstances. An intermediary “early” leaver category is sometimes included as well. A leaver is forced to offer all or part of their shares for sale to another party, typically the PE fund or the company (who may reserve the right to allocate these shares to future managers).

Retirement or dismissal of the manager by the company (for reasons other than for cause) will typically be regarded as good leaver events. Voluntary resignation by the manager may, depending on the case, be a bad or early leaver event. In some cases, the shareholders’ agreement will provide that a manager will be a good leaver if the termination occurs after a certain number of years.

In the case of a good leaver event, the beneficiary of the call option will typically have the right to acquire part or all of the manager’s shares (depending on the inclusion of a vesting schedule) at fair market value. If a vesting schedule is included, it could have an impact on (i) the number of shares that the good leaver will need to offer for sale (limited to the unvested shares) or (ii) the price to be paid by the beneficiary of the call option upon exercise of the option (which could be the fair market value for vested shares and original subscription price for unvested shares).

In the case of a bad leaver event, the PE fund and/or the company typically have the right to acquire all shares (whether or not vested) at the lower of fair market value or the initial subscription price (sometimes after application of a discount).

In Belgian private equity transactions, manager-shareholders typically agree to restrictive covenants, including non-compete, non-solicitation, and non-disparagement undertakings. These covenants, which aim to safeguard the company’s interests during and after the manager’s involvement, are often included in both the shareholders’ agreement, as well as the service or employment agreement of the manager. With regard to non-compete clauses, the enforceability of these covenants hinges on their reasonableness and proportionality, and Belgian courts can modify or nullify any overly restrictive terms. To be valid under Belgian law, non-compete clauses must be limited in scope, duration, and region.

For the sake of completeness, it is worth noting that in certain instances, manager-shareholders could be bound by a commitment to remain actively involved for a determined period following an exit event.

Minority shareholder protection in Belgium is provided under the terms of (i) mandatory statutory provisions and (ii) a shareholders’ agreement.

Examples of mandatory statutory protection include information rights and, if the minority shareholder(s) holds at least a certain stake, the right to convene a shareholders’ meeting.

In addition to these statutory protections, the management’s interests may, depending on the deal structure and the negotiation power, be further protected via the shareholders’ agreement. Key provisions in these agreements can include:

• veto rights on approval of budget and crucial business decisions;
• director nomination rights;
• pro rata participation rights in the event of future issuances of securities (or catch-up rights following a rescue financing); and
• consultation on exit strategies.

Depending on deal size and complexity, veto or consultation rights are sometimes reserved to one of the managers, who is tasked with representing the views of the whole of the management body.

A PE fund shall usually maintain substantial influence over its portfolio companies to protect its investment and minimise associated risks. Depending on the type of PE fund, the stake in the target, the level of influence shall depend on the circumstances and negotiated documents.

Typical provisions relating to control include:

• veto rights over crucial business decisions;
• director nomination rights;
• information rights, ensuring access to comprehensive and timely financial data, performance reports, and other key metrics necessary for effective oversight; and
• the initiation of an exit process.

Under Belgian law, shareholders, including private equity funds, are in principle not liable for the actions of the companies in which they invest. This arises from the fact that companies are a legal entity separate from the shareholders, whereby the shareholders are in principle only liable for their contribution to the equity of the company.

However, a PE fund can under some circumstances still be held liable for portfolio companies. For instance, a shareholder who assume the role of a de facto director shall be subject to directors’ liability within the framework of the Belgian rules on director’s liability.

Exit Strategies

The exit strategies most frequently employed by PE funds include (i) a management buyout backed by a third-party PE fund and (ii) private sale to a third-party industrial player. Exits through an IPO are of course not unseen, but are certainly not common in the Belgian market.

With a dual-track exit strategy, both the private sale option and an IPO strategy run simultaneously, so as to allow the PE fund to have alternative exit options as long as possible. Adding the refinancing of the target as another strategy, the dual track can be extended to a triple-track exit strategy, to retain even more options. As IPOs are not common in Belgium, dual or triple-track exit strategies are also rare.

Roll Over Upon Exit of a Portfolio Company

After the sale of a portfolio company to a third-party PE fund, the original PE fund might be willing to reinvest together with the new PE fund in the target.

Drag-along and tag-along rights are standard clauses in shareholders’ agreements concluded in the context of the Belgian PE market. These are protective provisions designed to maintain the balance of power between majority and minority shareholders.

Drag-along rights allow majority shareholders to force minority shareholders to participate in the sale of a company and typically come into play when a third-party buyer offers to acquire 100% of the shares of a company. The threshold to trigger these rights varies but is often set at a value between (i) a simple majority, being 50% plus one share and (ii) 90% of the shares.

Tag-along rights protect minority shareholders by giving them the right to participate in a sale of shares to a third party at the same price per share and the same conditions as the selling shareholders. The tag-along rights are usually triggered in the case of a sale by a (majority) shareholder.

Even though those provisions are ubiquitous in the Belgian PE market, they are rarely used in practice, as most sales processes are organised jointly among all shareholders.

An IPO lock-up refers to a specific duration, usually ranging from 90 to 180 days, following an IPO, during which shares held by company insiders are restricted from being sold.

Upon the occurrence of an IPO, PE sellers in such cases typically agree to a lock-up period, which restricts them from selling their shares for a specified amount of time following the IPO. As an example, when Bpost Belgium launched its IPO in 2013, each of the company, the selling shareholder (CVC Funds), the Belgian State and SFPI/FPIM (the Belgian sovereign wealth fund) were expected to agree to lock-up arrangements of 180 days after the first day of trading of the shares.