In many jurisdictions ¹ , it is illegal for a company whose shares are being or have been acquired, to provide financial assistance for the purpose of that acquisition. Such financial assistance may take place in the context of an M&A transaction where, before or after the acquisition, the buyer is inducing the target company to provide financial backing for the bid. In essence, this would mean that a company has effectively paid for its own acquisition to the detriment of its minority shareholders and creditors.

Under Belgian Company law these prohibitions are set out in Section 629 Belgian Company Code (BCC) for the public limited liability companies (“société anonyme / S.A. - naamloze vennootschap / N.V.”) and in Section 329 BCC for the private limited liability companies (“société à responsabilité limitée / S.P.R.L. – besloten vennootschap met beperkte aansprakelijkheid / B.V.B.A.)

These sections ¬¬are inspired by the Second Company Directive 77/91/EEG and say that companies may not advance funds, grant loans or offer securities (in short provide “financial assistance”) in order to allow a third party to acquire their own shares, dividend shares, convertible bonds or warrant. ²

Section 629 BCC and Section 23 of the Directive both intend to safeguard the registered capital and, as a matter of consequence, to protect the company’s creditors; the registered capital must be considered so to say as a ‘buffer zone’ in favour of the creditors. The maintenance of the registered capital means in essence that the company’s assets cannot be decreased under the registered capital by voluntary benefits. For this reason the Second Company Directive created a “closed” system of payments: only the payments explicitly authorized by law, such as dividends, are allowed.

For what concerns the financial assistance from a company in the purchase of its own shares, it results in a decrease of liquidities of the company, so that the company’s assets eventually can be affected. This form of payment has then to be regulated.

Section 629 BCC seems to cover a wide range of interventions from the target since “advancing funds” and “granting loans” “in order to allow a third party to acquire shares or profit sharing certificates” refer to the most various financing operations.³ In general the Belgian principles confirm that if the target has tried to facilitate the acquisition of its shares, the application of Section 629 BCC should be checked.

Indirect financing is also prohibited by Section 629 BCC : by “Securities” are meant all kind of personal or collateral securities, such as pledges, mortgages, mortgage proxies or liens, as well as personal guarantees and joint obligations, which can affect the target’s assets or can create financial obligations chargeable to the target.

Parties are not entitled to derogate from this provision of strict law and violation will not only result in both civil and criminal liability of management, but also in the nullity of the transaction or of the security. So, the vendor or the bank of the purchaser might find their claims uncovered. Any interested party can invoke the nullity of the transaction and the security, and the criminal sanctions imposed by Section 648, 7° BCC, are imprisonment of one month up to one year and/or fines ranging from € 50 to € 10.000.

However there are a number of limited exceptions to Section 629 BCC :

- Share deals operated by banks in the normal course of their operations
- Financial assistance to employees of the target either directly (by distribution of shares to the employees) either to a holding company controlled by a minimum 50 % majority of said employees (Leveraged Management Buy-Out)

However the amounts used by a public limited liability company for financial assistance purposes under these exceptions must be available for distribution in accordance with Section 617 BCC; in fact the net assets of the target, as appearing in the last annual accounts, must not have dropped below or must not as a result of the distribution or assistance drop below the amount of the paid up capital or if higher, the amount of capital requested to be paid-up.

It is important to underline, due to the criminal penalties on its violation, that in the prevailing Belgian set of guidelines, Section 629 BCC has to be interpreted in a restrictive manner. ⁴

Belgian Courts have confirmed in the past the scope of application of Section 629 BCC shall be restricted to “advancing of funds”, “granting loans” and “offering securities”, or, to a combination of these proceedings.

The Brussels’ Commercial Court judged on April 3th 2001 that Section 629 neither applies to a distribution of dividends nor to the providing of security by pledging shares. The Commercial Court of Charleroi judged in the same way. ⁵

We have experienced cases where foreign – mostly non European – investors involved in Belgian share deals were neither familiar with such kind of legal provisions applicable in Belgium, nor with the consequences for the financial structuring of share deals. We have then received quite a few demands concerning how to structure purported deals.

Section 629, in principle, does not apply to following financing schemes, and under certain – sometimes rather strict – legal conditions to:
- facilitating assets deals between the target and a third party
- distribution of dividends before the acquisition, eventually after inter company restructuring (e.g. subsidiaries’ sell off)
- any financial assistance granted by subsidiaries of the target or other related companies
- reduction of capital in the target
- deferred financial support after acquisition, providing that this was not intended to be part of the initial financial scheme of the said acquisition
- acquisition through a Belgian holding company followed by a merger with the target.

Of course this is a non exhaustive list of options and depending on the specific financial, operational, tax and legal conditions other financial schemes must be considered from time to time in share deals.

Finally we fully agree with the prevailing European legislation reflected in the “Winter report” which regrets the very strict legal framework for financial assistance from the target involved in share deals. We hope the proposals submitted in the said report will be one day formalised. In fact, the General Assembly should be able to decide on this matter and to delegate its powers for a maximum period of time (e.g. 5 years) to the Board in order to decide on financial assistance in share deals within the limits of the distributable funds, providing that specifications on duties should be respected.

In the meantime counsels and their clients must keep the content of Section 629 BCC and Section 23 of the Second Company Directive (and their related Sections) in mind.

Benoit Simpelaere
Partner
bsimpelaere@be.hochelaw.com
M&A Transactions

(1) Applicable law in several EU jurisdictions : United Kingdom : Sections 151 to 158 Companies Act (1985); the Netherlands : Sections 98 C and 207c Civil Code; France : Sections 217-8 and 217-9 of the n° 66-537 Act on Commercial companies; Germany : Section 71A 13.12.1978 Aktiengesetz; Luxemburg : Section 49-6 of the 10.08.1915 Company law.

(2) Section 23 of the Second Company Directive 77/91/EEG of the Council of 13 December 1976 on the coordination of safeguards states that:

1. A company may not advance funds, nor make loans, nor provide security, in the perspective of acquisition of its shares by a third party;
2. Paragraph 1 shall not apply to transactions concluded by banks and other financial institutions in the normal course of business, nor to transactions realized in the perspective of acquisition of shares by or for the company’s employees or the employees of an associate company. However, these transactions may not cause reduction in the net assets below the amount specified in Section 15 (1) (a);
3. Paragraph 1 shall not apply to transactions realized in the perspective of acquisition of shares as described in Section 20 (1) (h)

(3) K. Troch, Ondernemingsfinanciering bij de overname van vennootschappen. Een praktische commentaar op artikel 629 Wetboek van Vennootschappen, Brussel, Larcier 2004, nr.8.

(4) K. Geens, “Verwerving van eigen aandelen en personeelsaandelen”, NV en BVBA na de wet van 18 juli 1991, Kalmthout, Biblo, 1991, nr. 21; M. Verplancke, “Artikel 629 W.Venn.”, Vennootschapsrecht: artikelsgewijze commentaar met overzicht van rechtspraak en rechtsleer, Antwerpen, Kluwer 2000, nr. 29; R. Tas, Winstuitkering, kapitaalvermindering en kapitaalverliesverlies in NV en BVBA, Biblo, 2003, nr. 171; K. Troch, Ondernemingsfinanciering bij de overname van vennootschappen. Een praktische commentaar op artikel 629 Wetboek van Vennootschappen, Brussel, Larcier 2004, nr. 51.

(5) Commercial Court Tongeren, 5 December 2001, R.W. 2002-20023, 1394; Commercial Court Charleroi, 29 August 2002, DAOR 2002/64, 433.