The B2B Law furthermore includes a black list (4 clauses which are irrefutably deemed to be unfair and therefore prohibited) and a grey list (8 clauses which are presumed to be unfair but the presumption can be refuted).
The legal uncertainty created by this legislation may have an important impact on the Belgian M&A practice.
Given the large scope of the B2B Law, (nearly) all agreements used in the Belgian M&A practice will be subject to this legislation, even if they are (heavily) negotiated between parties: sale and purchase agreements (whether share deals or assets deals), shareholders’ agreements, joint venture agreements, non-disclosure agreements, (transitional) service agreements, option agreements,…
These agreements will be subject to the B2B Law if they are entered into between enterprises. Given the functional definition of enterprises and the type of parties usually involved in M&A transactions, this requirement will often be met.
From a corporate perspective, one could also question whether the B2B Law applies to the articles of association of a company as, at least according to some legal doctrine, the articles of association are of a contractual nature.
Before analyzing the most relevant clauses on the black list and the grey list of the B2B Law from a M&A perspective, it should be reminded that these lists are not the only test. Each provision in a M&A contract subject to the B2B Law can be challenged based on the general significant imbalance test as well (except for core provisions provided they meet the transparency test). Even if a particular clause in an agreement does not qualify as belonging to the black list or the grey list, it can still be considered null and void if it creates “a significant imbalance between the rights and obligations of the parties” to the agreement.
Below, we will examine the possible impact of one black list clause and of two grey list clauses which are of particular relevance in a M&A context.
“Clauses that aim to create an irrevocable obligation of the other party while the performance of the enterprise’s obligations is subject to a condition of which the achievement depends solely on the will of that enterprise”
According to the parliamentary preparatory works, the aim of this clause is to prohibit potestative clauses whereby one party is irrevocably bound whereas the other party’s obligations are subject to a condition which depends solely on its will.
Conditional obligations are very common in M&A practice. They do not pose a problem with the exception of purely potestative conditions precedent (Article 1174 of the Belgian Civil Code). Typical examples of such purely potestative conditions include agreements entered into subject to satisfactory due diligence at the sole discretion of the buyer or board approval of a party.
Given the broad wording of this black list clause, questions have been raised in legal doctrine as to its compatibility with option agreements granting the beneficiary the option to sell or acquire shares (or assets). In principle, the obligations of the party granting the option are (often) irrevocable and subject to the (often discretionary) decision of the beneficiary of the option to exercise its option. In a strict reading, this would fall within the black list clause, obliging the court to annul the option (and de facto rendering many option mechanisms unlawful). A more practical interpretation of the clause is therefore defended in legal doctrine whereby the prohibition only concerns clauses giving a party the discretionary opportunity to create a significant change in the contractual relations. Without repair legislation, it will remain up to the courts to decide on how to interpret this broadly drafted black list clause.
"Clauses that aim to place, without compensation, the economic risk on one party, where that risk is normally borne by the other party or by another party to the contract”
This grey list clause risks being one of the main sources of legal uncertainty for the Belgian M&A practice as allocating risks between the parties is one of the main characteristics of M&A documentation.
The clause itself raises several questions: how to distinguish between an economic risk and other risks (operational, legal,…), how to determine which party should normally bear a certain risk, does any compensation suffice to justify a shift of risk or should it be a reasonable compensation,…? All these questions are left to legal authors, practitioners and case law as neither the B2B Law nor its parliamentary preparatory works offer any useful guidance.
When testing, for example, the often-used mechanism of representations and warranties (and specific indemnities) against this grey list clause, several questions arise:
- Are the risks covered by representations and warranties (or specific indemnities) economic risks as they have a financial impact or mere legal or operational risks?
- Who should normally bear these risks: the seller (as owner of the company prior to closing) or the purchaser (as, under general Belgian civil law, the purchaser of shares will usually not benefit from protection against the risks covered by the contractual representations and warranties mechanism)? This question is particularly relevant as it will determine which clauses should be considered as exceptional (and therefore on the grey list and presumed unfair): the seller friendly clauses (such as liability limitations) or the purchaser friendly clauses (the clauses organizing the right to indemnification).
- What type of compensation could justify a shift of these risks? While the purchase price may be impacted by the existence and the general characteristics of the indemnity mechanism included in the agreement, this will not always be the case. The details of these mechanisms are often negotiated at a time the price has already been agreed. In addition, a seller may be reluctant to confirm (in the agreement) the existence of a relation between this mechanism and the purchase price as this may open the door to the purchaser using multiples or other valuation methods used for the calculation of the purchase price when claiming indemnification.
Similar questions can be raised with respect to the compatibility of several other mechanisms often used in M&A documentation such as earn-out mechanisms, material adverse change clauses and put options with a fixed purchase price equal to at least the subscription price of the shares to which the put option relates.
“Clauses that aim to inappropriately exclude or limit the legal rights of a party in the event of total or partial non-performance or defective performance of the other enterprise’s contractual obligations”
This clause is described as a catch all clause in the parliamentary preparatory works…
Only inappropriate exclusions or limitations fall within the scope of this grey list clause. Unfortunately neither the B2B Law nor the parliamentary preparatory works offer any guidance as to the interpretation of the inappropriate nature. Will any limitation or exclusion allowed for by general Belgian civil law be appropriate (as permitted under general law but in which case the grey list clause does not seem to have added value) or should a proportionality test be applied, considering all specific circumstances of the agreement?
This grey list clause is clearly relevant for the Belgian M&A practice. M&A documentation often includes all types of liability limitations or exclusions: exclusion of liability below certain threshold amounts and/or above contractually agreed maximum amounts, contractual prescription terms which are often much shorter than the legal prescription period,…
The exclusive remedies clauses often used in M&A documents could also fall within the scope of this grey list clause as they limit a party’s rights in case of breach of the other party to the (indemnification) mechanism included in the agreement, including de facto a waiver of other rights available to a party under general Belgian law.
Subject to some restrictions (such as the non-applicability of these limitations in case of fraud), these limitations are valid and enforceable under general Belgian civil law. Unfortunately, the unclear wording of this grey list clause and the absence of further explanations in the parliamentary preparatory works lead to legal uncertainty as to their validity and enforceability under the B2B Law.
No, as the B2B rules on unfair clauses are of mandatory law (at least), any contractual provision whereby parties waive the application of the B2B rules on unfair clauses to their agreement (or waive any rights resulting therefrom) will not be valid and will be unenforceable.
The B2B rules on unfair clauses are part of Belgian law and will therefore apply to Belgian law agreements. However, this does not mean that a choice for another applicable law will always suffice to avoid the application of the B2B rules as the application of conflict of law rules (Rome I Regulation) may result in the B2B Law being applicable regardless of a contractual choice for another applicable law, in particular given the (debated) qualification of the B2B Law as overriding mandatory law (“loi de police” / “politiewet”) in the parliamentary preparatory works.
Most of the legal uncertainty for the Belgian M&A practice results from clauses on the grey list. Grey list clauses are presumed to be unfair and unlawful but the presumption is refutable by demonstrating that the clauses do not create a significant imbalance and are truly wanted by the parties. While it remains to be seen how this will be interpreted in case law, parties could consider the following options to mitigate the risks resulting from the B2B Law:
- Documenting their negotiations by keeping (written) track of concessions made by each party as well as of different drafts of the agreements circulated between them.
While a negotiated agreement is not excluded from the B2B Law, delivering proof that a clause was (specifically) negotiated between parties and understood and accepted by all may be very useful in refuting the grey list presumption. It is therefore important for parties to be able to prove as much as possible of their negotiations.
- Including in (the recitals to) the agreement further information on the motives of the parties for entering into and accepting certain (grey list) clauses.
- To the extent applicable, specifying in the agreement that certain clauses are the result of intertwined negotiations whereby parties made reciprocal concessions in order to arrive to a balanced result.
In addition, parties could consider explicitly stating which clauses in the agreement they consider to be core clauses. These core clauses are exempted from the fairness test provided they are transparent. The viability of this approach will of course depend on the interpretation the courts will give to the notion of “core clauses”. General boilerplate clauses whereby (nearly) all clauses are described as being “core clauses” are unlikely to be effective and may even be counterproductive.
Contrary to initial rumours, the draft Book 5 “Obligations” (“Obligations” / “Verbintenissen”) of the new Belgian Civil Code does not abolish the B2B Law. After having recalled the principle of contractual freedom, article 5.52 of the draft Book 5 currently provides for a general prohibition of unfair clauses limited to adhesion agreements. This general prohibition will be applicable in the absence of specific rules, i.e. mainly to C2C relations and to the agreements which do not fall within the scope of the B2C and B2B rules. The parliamentary preparatory works expressly state that it will be up to the legislator to decide whether the B2B Law should be maintained or whether the interests of the enterprises are sufficiently protected by the new general provision.
For an in-depth analysis of the impact of the B2B prohibition of unfair clauses on the Belgian corporate and M&A practice, we refer to our article published in the TRV-RPS 2021/2.