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
       

Introduction

29.983.000.000 EUR (5,2% of GDP), that is the number on which the Dutch government’s deficit landed in 2010.[1] In order to seal this gap, the Dutch government recently announced a plan containing a variety of structural measures to save up to € 18 billion between 2012 and 2015.[2]

Specific for the M&A field, one topic catches the attention: the restriction on the deductibility of interest on acquisition debt in a fiscal unity as from 1 January 2012.

What does it mean?

Under the current legislation, it is common practice that following an acquisition the leveraged acquiring company (holding) enters into a fiscal unity with the former Target, mostly an operational entity. The fiscal unity provides that income and cost from both companies can be offset against each other. Doing so, the tax base of this Dutch operational Target erodes due to a ‘debt push down’.

The new law wants to discourage such constructions. It imposes that the interest cost relating to the acquisition debt can only be offset against the taxable income of the acquiring (holding) company to the extent it does not exceed the taxable profit of this acquiring (holding) company. It will no longer be possible to offset the interest expenses of the acquisition debt against taxable profits of the acquired company. Hence, due to this exception on the Dutch fiscal unity a ‘debt push down’ will no longer be realised.

 The amount that is not deductible is the lower of (i) the excess interest expense minus 1m EUR or (ii) the result of the formula: total acquisition interest expenses * (excess debt / total acquisition debt). The amount that could not been offset in a given year can be carried forward.

Exceptions

The interest cost of the acquisition debt remains deductible when the debt/equity ratio of the fiscal unity does not exceeds 2:1 or, as mentioned above, when the interest cost of the acquisition debt is less than 1million EUR.

Conclusion

In order to safeguard the tax deductibility of interest on acquisition debt, proper debt structuring is (and remains) key.

P.S. Other measures

It should be pointed out that the Dutch Budget 2012 also includes proposals in respect of (i) the Dutch tax exemption on non-Dutch permanent establishments, (ii) substantial interest rules (ii) and dividend withholding tax relating to Dutch Cooperatives.

Further information can be found on: http://www.pwc.nl/nl/prinsjesdag/index.jhtml

Whether you’re making an acquisition or looking for opportunities to simplify your group structure within the EU, this guide is intended to help you navigate the complexities of cross-border reorganisations. The book provides information on the technical fiscal aspects of the directive and an overview of its implementation within each member state. You will also find detailed country chapters, which facilitate comparison of the different rules in operation within each jurisdiction.

Find out more about our new book  on how to simplify your group structure in the EU: ‘ Tax Restructuring in the EU‘.

UK corporate lending was therefore relatively quiet in Q2 with borrowers and lenders alike waiting for the outcome of the UK’s general election and emergency budget. There has been a steady flow of new Leveraged Buyout (LBO) deals over the last six months, but we should not forget activity levels are the lowest since the late 1990’s.

On the debt restructuring front, payment defaults and new formal restructuring discussions are substantially lower than a year ago, covenant resets less so. This perhaps indicates we are through the worst of the restructuring cycle. However, whilst the maturity wall continues to be chipped away by new bond and leveraged loan issuance, we still expect that a significant pool of the more highly leveraged borrowers will require formal restructuring to address their gearing issues.

Simon Boadle, head of the Debt Advisory team comments, “Overall the debt markets look set for a quiet summer and only by the end of Q3 will a clearer – and hopefully more positive – longer-term picture begin to emerge.”

For further info consult the Debt Markets Update – Summer 2010 from our UK colleagues

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.)

Identifying the most important value drivers and estimating values in distressed companies is key for a successful restructuring process, especially in the case of debt for equity swaps. That’s what Michael De Roover, Partner at PwC and Philippe Rasquin, Director at PwC talked about on the fourth session of our M&A Academy.

They shared with our audience their experience in valuing distressed companies and business restructuring, highlighting the key issues and discussing some of the key steps to consider when faced with a restructuring.

Download “Safeguarding value through business restructuring“.

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

Whilst credit markets have improved since the beginning of the year, borrowers continue to find raising or extending existing credit lines challenging. One of the big stories of the year has been the bond market.
Banks remain cautious and often reluctant to advance loans to new customers. However, during the third quarter, upward pricing pressure on bank lending has abated. Although we have yet to see significant falls in bank pricing, in the absence of further major economic shocks, the peak for pricing may now have passed.

Key findings of Q3-09 Debt Market Update:

Corporate Lending - a focus on existing customers but cautiously open for new business. 
Any new lending proposal will be heavily scrutinised and banks are reticent to refinance lending with others to avoid taking on their “problems”. A slight recovery in confidence could signal potential for a competitive tendering process for modestly-sized debt. We are seeing a strong strategic drive within some state-backed banks to increase their lending, albeit within more stringent credit quality parameters.

Leveraged Finance – difficult for the remainder of the year but innovative thinking means deals are possible.
The leveraged market will remain subdued for the remainder of the year, although there are pockets of activity at the smaller end of the market.

Corporate Bonds – an increase in activity and risk appetite.
In contrast to the banking market, the public bond market has seen a significant increase in activity this year. Investor risk appetite has also increased with an increasing proportion of BBB issuance. Corporates have been attracted to the bond market not only because it is an available source of credit but also because they have been able to secure longer tenors than on bank loans.

Convertible Bonds – a significant increase in issuance of this cheaper, more stable form of debt financing.
In recent months, there have been a number of household names issuing convertible debt. Convertibles have a cheaper cost of carry than conventional bonds because the implied value in the option to convert reduces the cash coupon. Companies with a stretched credit position may be able to issue convertible bonds when conventional debt markets are closed and in difficult credit markets the spread between standard cash coupon bonds and convertible bonds is likely to increase, making the latter more attractive.

Asset Based Lending - remains well positioned to capitalise on lack of credit from traditional sources.
Lenders have adopted a “back to basics” approach in recent months and are focusing more financing on physical assets and good quality receivables and less on cashflow-based facilities. Notwithstanding this the size of deals which asset based lenders are willing to finance has decreased in terms of individual hold levels.

Restructuring - expect a substantial re-pricing of facilities.
Even if lenders are only resetting covenants rather than rescheduling repayment profiles and/or maturities, companies can expect a substantial re-pricing. Most restructurings involve a negotiation between the existing lenders and shareholders thanks to the limited availability of credit from new providers and depressed M&A values. Whilst lenders are seeking to re-price facilities to what they perceive as heightened credit risk, they do not tend to pursue debt-for-equity swaps unless they are being asked to write down debt by the borrower or its shareholders. The amount of new money required and the jurisdiction of the borrower are also major determinants of the outcome of a restructuring.

For further details, read the Debt Markets Update  from our UK colleagues.

The current economic climate leaves a lot of companies exposed to lower trading volumes, pricing pressure, stretched client payments and cost structures that can not easily be aligned. Consequently cash flows come under a significant pressure and are sometimes insufficient to pay back debts or worse interest payments. Combining this with a banking sector that remains very prudent and needs to align their own risk and capital structure, and we have the perfect scenario for potential stand off between the two major pillars of our economy.

Can this be avoided?

The answer to this question can be positive but this requires immediate pro active action from the companies facing these difficulties.

The first step would be to create that common information platform that answers some key questions about the strategy, the alignment of the operational cost base, the short and medium term liquidity needs and the projected cash flows. An independent view on these matters is imperative to create that platform and to take away part of the unrest amongst stakeholders.
A second step would be to think about options and solutions that can be brought to the table, these options may include further need for restructuring, a debt push equity swap, debt covenant adjustments, disposal of non core business, etc….
A third step would be to implement the solutions and to keep all stakeholders informed about the solution process.

Would this approach avoid the clash? Future will tell, however its shows that there are ways to avoid it.

On 28 May, we hosted the last M&A Academy session of the season, which dealt with tax aspects of debt restructuring. Jan Muyldermans talked about what it is that is driving debt structuring transactions, the tax basics, the tax aspects of overall debt restructuring and the continuity law. Finally, he put all this into practice using a case study.

Download the “tax aspects of debt restructuring” presentation.

The new season of the M&A Academy will be launched soon.