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02 January 2020 / article

What is the impact of the new Belgian Companies and Associations Code on financing transactions?

Informal tax practice regarding stock options and personal service companies now prohibited, but tolerated for the past

The changes brought by the BCAC impacting financing transactions are relatively limited. Most notable are:

  • Abolition of share capital in BV / SRL
  • Increased flexibility for share transfers in BV / SRL
  • Scope of change of control clause approvals limited to listed companies
  • New criterion for applicability of Belgian company law
  • Cap on director’s liability

No more share capital in BV / SRL

The abolition of the concept of share capital in the BV / SRL may appear rather inconsequential at first glance to lenders. Lenders’ risk analysis will – broadly speaking – give more weight to certain financial ratios (e.g. debt/equity ratio, debt service coverage ratio) rather than to the nominal amount of share capital on the balance sheet of the company. However, the abolition of share capital has some interesting implications.

The decrease of share capital under certain thresholds was traditionally the test for the so-called “alarm bell procedure”, triggering the requirement to convene a general meeting of shareholders to resolve on a possible liquidation of the company.

With the concept of capital disappearing, the Belgian legislator replaced this test by a double test. As of the entry into force of the BCAC, a general meeting must be convened when the net assets of a BV / SRL threaten to become negative or have become negative. In addition, such meeting must also be held if the management body of the BV / SRL is no longer certain that the company will be able to pay its debts as they fall due in the following 12 months.

As a result, the introduction of these new triggers may provide the lenders with additional red flags that the situation of their borrower is deteriorating and that restructuring talks may need to be initiated. Additionally, attention must be paid to how “equity” is determined when defining financial ratios in loan agreements in view of the disappearance of the capital concept.

Increased share transfer flexibility in BV / SRL

Under the old regime, the BV / SRL was a very “private” company: there were transfer restrictions provided by law which could not be derogated from by the articles of association or by agreement. Shares could only be freely transferred to other shareholders, certain relatives of shareholders and persons named in the articles of association. These restrictions were also a factor of considerable uncertainty when pledging shares in a BV / SRL, possibly hindering enforcement proceedings.

While the BCAC retains the restrictions as the main rule, it will now be possible to provide for more flexible rules – or to abolish the restrictions entirely – in the articles of association, enabling borrowers and lenders to more efficiently use shares in BV / SRL as collateral in financing transactions.

Change of control clauses

As part of protection for prospective acquirers of Belgian public limited liability companies (NV / SA), the old Code provided that change of control clauses needed to be approved by the general meeting of shareholders and such approvals deposited with the enterprise court. This procedure was to be followed before the publication of a public takeover bid on the shares of the company. If it had not been followed, the change of control clause would be held null and void.

With the introduction of the BCAC, the Belgian legislator limited the scope of this requirement (i) to listed companies; and (ii) to clauses which, when triggered, have a substantial influence on the assets of the company or cause a substantial liability to arise. This way, the new regime strikes a balance between the protection of potential acquirers and the reduction of administrative burdens in (among others) financing transactions.

New criterion for applicability of Belgian company law

With the new code changing the criterion of applicability of Belgian company law from the real seat doctrine to the statutory seat doctrine, there will likely be less uncertainty on the question of whether Belgian company law applies.

However, the choice for the place of incorporation may trigger new uncertainty in other areas of law. While the criterion for applicability of Belgian company law has changed, the question of whether Belgian insolvency law applies – as (largely) determined by the Insolvency Regulation (recast) – is still determined by a company’s ‘centre of main interests’. Equally, the criterion for the application of Belgian law to a transfer of rights in rem or pledge of receivables is the transferor/pledgor’s ‘habitual residence’ – a concept very similar to the ‘real seat’.

Under the (old) real seat theory, in many cases the centre of main interests of a company, its ‘habitual residence’ and its real seat could be assumed to be in the same place. The new rule, however, may result in more cases where Belgian company law applies but Belgian insolvency law does not and vice versa. Lenders and borrowers alike will do well in taking this into account.

Cap on director’s liability

Finally, under the BCAC the liability of directors is limited to a fixed amount under certain conditions (click here for more information). While it is uncertain whether this cap will change the risk appetite of directors of Belgian companies (in view of the fact many already benefit from D&O liability insurance), lenders may consider taking precautionary action by including contractual guarantees or other types of ‘skin in the game’ for directors going forward.

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