Transactions Blog

The Belgian Official Gazette of 18 January 2012 includes the publication of the Act of 8 January 2012 modifying the Companies Code pursuant to Directive 2009/109/EG regarding reporting and documentation requirements in case of mergers and demergers (the “Act”). This Act modifies the procedure applicable for merger and demergers.

Intervention independent expert

Until now, the following reports of an independent expert (i.e. the company’s statutory auditor or an external auditor or accountant) were required:

•  For mergers: a report on the merger proposal (the “merger report”), but this merger report could be waived by unanimous decision of the shareholders. Based upon unclear drafting of the law, there was however some discussion in legal practice as to whether in case of such waiver, it was required to provide for a report on the capital increase by contribution in kind at the level of the acquiring company (the “contribution report”)
•  For demergers: a report on the demerger proposal (the “demerger report”), which could be waived by unanimous decision of the shareholders and a report regarding the capital increase by contribution in kind in the receiving companies (the “contribution report”), which could not be waived.

The requirements for both mergers and demergers have now been aligned and clarified.

For both mergers and demergers:

• The (de)merger reports can be waived by unanimous decision of the shareholders.
• In case of such a waiver, a contribution report at the level of the acquiring company / receiving companies will be required.

In other words: the intervention of an independent expert will be required both for mergers and for demergers, either to draft a (de)merger report on the (de)merger proposal or to draft a contribution report on the contribution in kind.

It is to be noted that the foregoing does not apply to simplified mergers (between a parent company and its 100% subsidiary). There, the situation remains unchanged: no expert’s report at all is required.

Other important changes

Besides the above, other important changes are made to the company law procedure applicable for mergers and demergers, such as:

• if all shareholders agree, the special report of the board of directors on the merger can be waived;
• if all shareholders agree, no intermediary statement of assets and liabilities is required anymore;
• if all shareholders agree, the intermediary information duty (in case of important changes to the assets and liabilities of the companies involved between the date of the (de)merger proposal and the extraordinary general shareholders meeting) can be waived;
• an extract of the (de)merger proposal must be published in the Belgian Official Gazette (instead of a mere notification) or a hyperlink to the website of the company where the full text can be found.

Entry into force

The new procedure applies for all (de)mergers for which the (de)merger proposal is filed after 28 January 2012.

For more information, please contact:

Karin Winters                                              
Partner                                                               
+ 32 2 710 74 04               
karin.winters@pwc.be  

Bart Vanstaen
Legal Counsel
+ 32 2 710 43 10
bart.vanstaen@pwc.be
       

Since 25 January 2010, it is possible to carry out all types of mergers without the intervention of an independent expert (i.e. the company’s statutory auditor, or an auditor/external accountant if no statutory auditor has been appointed).

Articles 695 and 708 of the Belgian Companies Code (“BCC”), modified following implementation of the European Directive 2007/63/EC, now provide that no independent expert’s report on the merger proposal is required, if all shareholders (and holders of other securities conferring the right to vote) of each of the companies involved in the merger, have so agreed.

Prior to such modification of the BCC, it was only possible to carry out a so-called “parent-subsidiary merger” without the intervention of an independent expert (i.e. a merger whereby the acquiring company already held all shares of the acquired company).

The report of the management bodies of the companies involved in the merger is however still required (articles 694 and 707). The new European Directive 2009/109/EC provides for the possibility to also abolish the requirement to draw up such report. For the time being however, this Directive has not yet been implemented in the BCC, and it is not yet clear whether the Belgian legislator will seize the opportunity to further reduce the burden of formalities for mergers.

For (partial) demergers, the intervention of an independent expert remains required, more in particular for the drawing up of the report with respect to the contribution in kind (articles 602 and 313 BCC). If all shareholders (and holders of other securities conferring the right to vote) of each of the companies involved in the (partial) demerger so agree, no additional independent expert’s report on the (partial) demerger proposal will be required.  This was however already the case prior to the recent modification of the BCC.

Karin Winters, Director Corporate & Commercial Law
Bart Vanstaen, Senior Legal Consultant

2008 and 2009 are challenging times for the M&A market due to the lack of available funding. Many investors and international groups are looking for cost-cutting opportunities and cash optimisation.

During the 5th session of our M&A Academy, we tried to evaluate how reshaping your conventional business model towards a more flexible structure can help you in for example the improvement of your business model or the optimisation of your tax credits and/or cash position.

Since business restructurings trigger multiple tax issues, not only transfer pricing aspects, this module also focused on the following aspects:

• the arm’s length risk allocation to restructured group entities;
• the potential ‘exit charges’ and indemnifications upon restructuring;
• the recognition, by tax authorities, of restructuring transactions.

Download “Tax implications of business restructuring”

More info about the M&A Academy season (programme, registrations, etc.)

The PwC China M&A press release revealed that domestic and inbound M&A deal volumes in China (including Hong Kong and Macau) in the second half of 2009 are returning to robust 2008 levels, indicating that the impact of the global economic downturn on China M&A seems to have been short lived.

More than 1,800 domestic transactions (deals being intra-China or from HK to the mainland and vice versa) are likely to be recorded in the second half of 2009, for a total of about 3,200 mergers and acquisitions for the full year, compared to nearly 3,800 in 2008. Looking to 2010, domestic deal activity is expected to grow by more than 20% compared to 2009.

A continued decline however was noted for deals made by foreign strategic buyers (focussed on sorting out problems in their home markets) and also foreign financial players finding new deals harder to come by as gaps in pricing expectations between sellers and buyers continued. There are indications though that those foreign strategic buyers will re-emerge in greater volume and deal size soon, reflecting a pent-up appetite for China targets.

The China outbound growth story will continue and year-on-year outbound M&A growth of about 40 per cent is not an unlikely outcome. Whilst deals for energy and resources will continue to dominate, owners of the larger Chinese privately owned enterprises are looking for know-how and access to foreign markets, being encouraged by the Chinese government.

Lead advisors are often placed in the role of ‘bad cop’ when pushing the deal through for the seller and getting the highest price possible for the business. But what is the best way to work with a lead advisor and in what ways can they add the most value in a transaction process?

Planning before the sales process even starts is essential to allow the setting of strategic and financial objectives as well as getting an idea as to the internal resources available for the transaction process. One of the key messages from Kris Geysels, CFO of Aviapartner, in his presentation at the M&A Academy was that lead advisors will not take any of the preparation work away from the internal team.

Selecting a lead advisor should be part of the planning and preparation phase for management and key to the selection process should be the credibility of the firm, their knowledge of the market and value drivers, their knowledge of the potential buyers and any eventual contacts with same, a good ‘connection’ with the internal team they will be working with throughout the process and of course, the fees they will charge for services. The selection process can also give a good indication for the valuation – there will be a range of valuations performed on the business by each corporate finance house asked to tender for the work.

Ideally, the mandated lead advisor should contribute speed and focus to the process to keep things moving along once all the preparation and planning is in place. They should also have analysed the potential buyers and be of assistance in driving the buyers to the potential synergies that exist through their knowledge of the market and value drivers. A concise information memorandum summarising this market knowledge and outlining the potential synergies should also be the key document prepared with the lead advisor but close attention is to be paid to ensure any financial information mentioned will be consistent with any vendor reporting or dataroom information to be made available to buyers at a later stage.

Your company acquired several businesses over the last year and you know that not all of your synergy targets and potential have been achieved? In that case, we strongly recommend completing the unfinished business.

The precedent 3 to 5 years were marked by an unparalleled frenetic M&A activity illustrated by many large corporations who acquired each several companies in that time period or even within a year.  Thereby, a certain level of integration has been clearly achieved for those acquisitions, but we observe that in most cases, these have not been completed, as management already looked out to the next acquisition. 

This is no longer acceptable in today’s economic circumstances. In the rush of cost savings to face the dramatic economic crisis, companies have their last chance to complete their unfinished business. Typical unfinished integration areas are:

Integration of the support functions into shared services;

• Alignment and simplification of the processes and systems for further efficiencies in non-core operating activities (assuming for core operating activities, these have already been completed!);
• Purchase grouping/consolidation of materials and services affecting not only the Cost of Goods Sold, but also the overheads;
• Group structure simplification and further group tax structure optimisation, including liquidation of non-active or dormant entities;
• Prepare non-core activities into quasi stand alone activities (with transition and service level agreements) for considerations of a potential future divesture

Feel free to contact me to discuss

A new Tax Act Implementing the EU Tax Merger Directive into Belgian law was published in the Belgian Official Gazette on the 12th January and came into force immediately.

The act introduces a tax-free regime for cross-border reorganisations. In addition, it also brings the existing tax provisions applicable to internal reorganizations in line with the EU Merger Directive.  Most provisions are applicable as of the date of publication.

The EU Merger Directive of July 23, 1990 (as amended by the EU Directive of February 17, 2005) provides for a tax-neutral regime for cross-border reorganizations such as mergers, demergers, partial demergers, share-for-share transactions, contributions of assets and transfers of registered offices. Tax neutrality is provided both at the level of the companies involved in the reorganisation as well as in the hand of their shareholders.

Until now the EU Tax Merger Directive was not implemented in Belgian tax law, meaning that cross-border reorganisations were not covered by appropriate tax legislation. This situation is now resolved with the publication of the new Act.

The Act provides for a tax-neutral regime for cross-border reorganisations involving Belgian entities and/or Belgian permanent establishments. Moreover, various existing tax provisions applicable to internal reorganisations have also been aligned with the EU Tax Merger Directive. Other improvements have also been implemented to the existing general tax provisions relating to reorganisations.

Under specific conditions, Belgian tax resident entities and/or Belgian permanent establishments can now be involved in pan-European tax neutral reorganizations, where previously, for most cross-border reorganisations, tax-neutral regimes were not available.

The Act deals in particular with cross-border (inbound / outbound) mergers, demergers and cross-border (inbound / outbound) contribution of assets (lines of business / permanent establishment) and exchange of shares.

Because of the importance of this new legislation, the PwC Transactions team is organising a half-day conference in our office in the afternoon of 3 February 2009. PwC will give a thorough update on the changes that will be introduced by this new legislation and the opportunities it will bring for your business.

During this session, it will be explained how you will be able to carry out cross-border reorganisations tax-neutrally (whether in the form of a merger, demerger, contribution of a business, transfer of a seat of management, share-for-share deal, etc.). Among other innovations, it will allow you to utilise cross-border tax losses or simplify your group structure by reducing the number of entities in it, which will even become more and more important given the current market environment. It goes without saying that such reorganisations also have important social law aspects. PwC will also address these issues during the conference.

In addition, we take this opportunity to discuss the recent corporate law developments (regarding a.o. acquisitions of own shares, financial assistance and cross border mergers) and their impact on reorganisations.

Check the PwC M&A Academy website for more information.

Cross-border mergers are now regulated in Belgium further to the adoption by the Chamber of the Miscellaneous Provisions Act (the “Act”), which is aimed inter alia at implementing Directive 2005/56/EC on cross-border mergers of limited liability companies (the “Cross-border Directive”) into Belgian law. The Act entered into force on 26 June 2008.

Old Rules

Before the Act came into force, cross-border mergers were not organised under Belgian law. Legal writers were divided on the feasibility of cross-border mergers notwithstanding adoption of the Belgian Private International Law Code in 2004, which stipulates that mergers of legal entities are governed, for each of them, by the law of the State to which they belong before the merger. In a 13 December 2005 judgment known as the “Sevic judgment”, the European Court of Justice had also confirmed the principle of the freedom of movement and establishment of companies, allowing cross-border mergers[1], but the effects of such a merger remained uncertain under Belgian law.

Scope of the New Act

The Act introduces a new chapter V bis into the Belgian Companies Code, dealing with cross-border mergers and assimilated operations. The laws governing the tax consequences of cross borders mergers are currently in process.

Companies Entitled to Merge

The Belgian cross-border merger procedure applies to all legal entities that can merge at Belgian level, while the directive concerns only limited liability companies. The scope of the Act is therefore wider than that of the Cross-border Directive. A limited partnership (“société en commandite simple”), for example, can therefore validly merge with a foreign company if the latter’s national law allows so.

Public investment companies with variable capital and companies in liquidation are expressly excluded from the scope of the cross borders merger regulation.

Permitted Operations

In accordance with the terms of the Cross-border Directive, the Act only deals with three forms of merger: (i) merger by absorption, (ii) merger by incorporation of a new company and (iii) merger by absorption of a wholly owned subsidiary (this being defined as an assimilated operation). The Act does not regulate (i) (partial) demergers, (ii) contributions of a line of business or (iii) contributions by way of universal transfer.

Belgium has used the opportunity provided by the Cross-border Directive to allow remuneration in cash exceeding 10% of the par value. Cross-border companies can validly merge notwithstanding a cash consideration exceeding one tenth of the par value of the shares allotted by the company resulting from the cross-border merger or, in the absence of a par value, of the fractional value, provided the legislation applying to at least one of the foreign companies allows so.

I will address in a next posting the formalitites that need to be fulfilled …