- Pieter Dierckx - Leo Peeters
- M&A , mergers and acquisitions , due execution of the agreement , completion
After the structuring of the business transfer and the execution of certain preliminary-agreements (phase 1), the due diligence and the negotiations about the sale and purchase agreement (phase 2), a third phase starts in the context of a private M&A transaction, namely the due execution and completion of the agreement.
Once the negotiations regarding the sale and purchase agreement are finalised, the agreement is duly executed when signed by duly authorised signatories of the parties or by persons acting under a power of attorney given by such duly authorised signatories. Information on authorised signatories of Belgian legal entities is available from public registers. The due authorisation of the signatories is normally supported by board meetings approving both the transaction and the ability of the signatories to enter into the agreement.
Under Belgian law, there are no specific requirements for the execution of documents by non-Belgian parties. However, in some cases parties may request a copy of the articles of association or the bylaws of the foreign company, as well as an extract from the relevant commercial or trade register confirming the signatories’ authority. In addition, legislation or an apostille might be required for the use of foreign documents in Belgium. Further, parties sometimes require a legal opinion confirming the incorporation and existence of the foreign company as well as the capacity of the signatories of the transaction documentation.
2. Between signing and closing in case of a two-step approach
As stated in earlier contributions to our M&A road book, although in theory it is possible to have signing and closing coincide in time, most agreements follow a two-step approach: after signing, a number of conditions precedent are to be fulfilled before the purchase price is paid and the transfer of ownership takes place, which constitutes the closing of the transaction.
It is typical that obligations of one or both parties to close (i.e., to complete the purchase) will be conditional on external factors (such as regulatory approvals) required for the parties to be able to proceed with the transaction, as well as deal-specific economic preconditions (such as signing up key employees or restructuring). The conditions precedent (“CP’s”) should only apply to the obligations to transfer ownership of the shares in the target and to pay the purchase price. Other obligations of the parties should be unconditional (including in particular the relevant covenants between signing and closing). Otherwise, no enforcement of such covenants could be sought pending satisfaction of the conditions precedent. Accordingly, it would not make sense to have all of the parties’ obligations being subject to the CP’s.
3. Conditions precedent (“CP’s”)
If any of the CP’s are not fulfilled and none of the parties exercises its right to waive any of the unfulfilled CP’s, closing will not occur. It is common to provide that in these circumstances, the agreement shall either terminate or that one of the parties has the option right to terminate the agreement.
It is recommended to have a provision inserted in the agreement, stating that notwithstanding Belgian law, the fulfilment of the CP’s do not have a retroactive effect. The neutralisation of this effect (which is allowed under Belgian law) brings the implication of a completed CP in line with the fact that the sale/purchase (and transfer/payment) will only become effective as from the closing date of the transaction (and not on the date when the obligations were undertaken (i.e. the signing date).
Under Belgian law, CP’s whose realisation entirely depends on the will of the party that benefits from such CP are null and void. A CP whereby the board of directors of the seller and/or the buyer would have to approve the sale/purchase is to be considered as such.
The text book example of a CP is obtaining the necessary competition approvals of the competent competition authorities. The period between signing and closing usually corresponds to the time granted to the authorities to adopt a decision or not to object with respect to the transaction contemplated by the agreement. Implementing a transaction before these completion approvals have been obtained, is prohibited and subject to penalties. In principle, such concentration notifications are the responsibility of the purchaser, but will necessitate the assistance of the seller as well.
Other common CP’s include a.o. the obtaining of market conform bank financing and the execution of other transaction related documents such as management agreements.
For asset transfers, it is usual practice to require the seller to provide a.o. a number of certificates issued by certain tax and social security authorities, stating that no taxes, respectively social security obligations, are due by the seller.
4. Conduct of business
For the interim period between signing and closing, parties will generally have agreed on a standstill clause implying that in this period the seller is only allowed to conduct the company’s business in the ordinary course. The seller shall be required to preserve the business as a going concern. Certain actions shall be explicitly prohibited such as dividend distributions, amendments to the articles of association, granting of securities, incurring of indebtedness other than in the ordinary course of business, etc. Further, the seller shall be required to pay all indebtedness owed to the company in full before the closing.
5. Purchase price adjustments
In two-step transactions as described above, it is common practice to include a price adjustment mechanism, following which the purchase price shall be adjusted upwards or downwards based on certain financial data (net debt, cash, etc.) at closing. It is crucial to have the procedure and different components of such mechanism clearly defined in the SPA.
Post-closing price adjustments are also possible, but in Belgian practice, they are quite exceptional, as the seller wants to know the final amount of the price when he transfers the shares in the target company at closing.
At closing, which may occur in connection with the “signing”, or as stated above, in a two-step transaction, following the completion or the waiver of the CP’s, the transaction closes once the purchase price is paid and the ownership is transferred.
In Belgian private M&A transactions, the predominant form of consideration is cash. However, payment in shares or a combination of shares and cash is also used.
With respect to a share transfer, there are no specific requirements or formalities. The transfer of ownership must be recorded by both parties in the company’s share register. According to Belgian law, such register exclusively provides evidence of ownership. However, in case of doubt or dispute other means can be sought after to prove ownership.
With respect to an asset transfer, the parties must comply with the Laws governing the transfers of assets and the enforceability of transfers towards third parties for all assets transferred, including contracts, unless the assets and liabilities, if any, are transferred under article 760 and following of the Belgian Companies Code.
The parties usually agree on certain other actions to be carried out at closing, for example the entering into agreements beside the SPA such as a transitional services agreement, and the resignation by the directors of the target company.
In many case, the directors of the target company are also shareholders or at least linked with them. It is expected that they resign from their positions, and are replaced by directors appointed by the purchaser. To avoid that a purchaser would use the regulations on directors’ liability to claim for indemnity outside the SPA (and thus to possibly circumvent some of the contractual limitations), it is common to have an extraordinary shareholders’ meeting of the company on the closing date. At this meeting, the following matters must be discussed and resolved upon:
- (i) acknowledgement of the resignation of the directors,
- (ii) release of liability of the resigning directors for executing their mandate until closing (which has to be confirmed by the next annual shareholders’ meeting) and
- (iii) the appointment of new directors.
In a two-step approach, the SPA and board documents are typically signed at signing, while the closing memorandum, share register, minutes and ancillary agreements are typically signed at closing. When the parties execute a closing memorandum, they will confirm:
- (i) the satisfaction of the CP’s, if any;
- (ii) respect of the relevant covenants between signing and closing;
- (iii) the proper implementation of any and all closing actions or formalities (partial completion is to be avoided in any event; therefore, the importance of a “conditional” closing should be stressed); and
- (iv) the transfer of the title and risk to the shares in the target company;
- (v) confirmation of receipt of the purchase price.
7. Some Post-Closing undertakings
An acquisition agreement usually contains also certain covenants of the parties which do not expire after the closing date. Some of these covenants are effective as of the date of the acquisition agreement and extend after the closing date, while other covenants are effective only as of the closing date.
Hereunder are certain covenants which typically occur in Belgian transactions :
7.1 Earn-Out undertakings
In case a portion of the purchase price has been made contingent on the performance of the (target) company after the closing date (i.e., the so-called “earn-out”), it is common that the Purchaser in essence agrees to conduct the business sold in the same as before. In addition, some mechanisms can be put in place to ensure that the seller keeps means to monitor certain developments, for example through reporting obligations of the purchaser.
More information on this topic, can be found by clicking here.
7.2 Undertakings of the Seller
It is market practice that the Seller agrees not to (i) compete with the company or the business sold, (ii) disclose or use confidential information concerning the business acquired, (iii) solicit employees, suppliers or customers and (iv) otherwise interfere with the business or impair its good will. As mentioned earlier, the purchaser in an asset deal shall benefit from the civil law protection with, except for example confidentiality undertakings which must be explicitly provided for in acquisition agreement. In the light of the difficulties involved in proving damages resulting from a breach of the undertakings mentioned here above (and in particular the non-compete restriction and confidentiality), it is advisable to foresee a lump sum indemnification in case of a breach.
7.3 Restriction on transfer and capital gains taxes
In transactions where the seller is an individual, the capital gains tax on the sale of shares belonging to a substantial shareholding in a Belgian company. Acquisition agreements often include the undertaking of the purchaser not to sell or otherwise transfer the shares to any third party outside the European Economic Area for a twelve-month period as of closing.