1. Financing of M&A: main sources and developments
Given that the majority of the Belgian M&A transactions are mid-market deals, and
considering the low interest rates that were applicable throughout 2016-2017, financing continues
to be available on reasonable conditions.
Asset-backed lending in different forms is still gaining popularity, while club financing and
syndicated loans for small and mid-cap deals also remain popular. However, financial institutions
remain very careful, and sometimes risk-averse, requesting proper and solid securities for almost
More and more industrial players finance deals through their existing credit lines or sometimes
even through their own funds. Belgian debt capital markets, private placements of bonds in
particular, have been very active, in many cases alongside bank financing. Almost all financing
transactions include senior debt (for the largest amount) and junior debt (provided by
shareholders, sponsors or other banks).
2. Financial assistance
Pursuant to Article 629 of the Belgian Companies Code, financial assistance by a Belgian target
company to a third party for the acquisition of its own securities is only permitted under very
Providing funds, granting loans or providing security with a view to the acquisition of its own
shares or profit certificates by a third party is subject to the following conditions:
- (i) the transaction must take place under the responsibility of the company’s board of
directors at fair market conditions (e.g. taking into account the usual market interest rate and
the usual collaterals for similar types of financing as well as the credit standing of the third
- (ii) the transaction is subject to prior approval by the general shareholders’ meeting (with
the same quorum and majority requirements as for an amendment of the articles of
- (iii) the board of directors must draft a special report explaining
(a) the reasons for such transaction,
(b) the interest of the company to enter into such transaction,
(c) the conditions of the transaction,
(d) the liquidity and solvency risks for the company and
(e) the price at which the shares are sold.
In addition, if a director of the parent company or the parent company itself benefits from the
transaction, the report of the board of directors must explicitly justify such a decision taking
into account the capacity of the beneficiary and the consequences for the assets of the
- (iv) the assistance must be paid out of and cannot exceed the amount of the distributable
profits (within the meaning of Article 617 of the Belgian Companies Code); the company must set
up a non-distributable reserve on the liabilities’ side of its balance sheet equal to the total
amount of the financial assistance.
Article 629 of the Belgian Companies Code further provides that if the shares are acquired
directly from the assisting company (i.e. not from a selling shareholder), either through the sale
of its own shares or through a subscription by the beneficiary to a capital increase, the
acquisition of the company’s shares must occur at a fair price.
The provisions on financial assistance aim to protect the creditors of the Belgian target company
by preserving its main assets and the integrity of its corporate capital. It is unanimously agreed
that “security” means all forms of security in rem, as well as personal security, i.e. guarantees.
Any violations of this Article 629 of the Belgian Companies Code are subject to both civil and
criminal sanctions. A transaction which violates the financial assistance prohibition will be
retroactively annulled. Moreover, the directors of the target company can be held liable for any
damage that the target company or third parties may have suffered. In addition to these civil
sanctions, a violation of the financial assistance regulations can also entail criminal
3. Thin-cap rule
Interest paid by the buyer on the loan taken out to finance the acquisition of shares is
normally tax-deductible if the interest rate of the interest-bearing loans is not higher than the
general market interest rate.
However, an anti-thin capitalization rule exists in respect of (i) intragroup loans and loans from
tax-privileged entities. The concept of “group” refers to all companies that are affiliated within
the meaning of the Belgian Companies Code. Under the current regime, interest paid on intragroup
loans or loans from tax-privileged entities are not deductible above a 5:1 debt to equity ratio. A
series of exceptions apply, including on publicly issued bonds, loans from credit institutions and
loans from leasing companies. Back-to-back arrangements aiming at circumventing the rule may be
disregarded in certain circumstances.
4. Intra-group guarantees
As outlined here above in respect of “Financial Assistance”, intra-group guarantees given in
view of the financing of own (group) securities, must comply with the rules of financial assistance
(including the limitation of the financial assistance to the amount of the distributable reserves,
fair market conditions to be determined by the board of directors, shareholders’ approval and the
publication of an extensive report by the board of directors), as they are considered to fall
within the definition of “security” used in the provision of financial assistance. Aside from the
financial assistance limitation, two additional requirements determine the validity of an
intra-group guarantee: (i) the corporate purpose and (ii) the corporate interest.
(i) Corporate purpose
An intra-group guarantee will only be valid if the granting of such a guarantee falls within the
corporate purpose of the company as specified in its articles of association. If the articles of
association do not mention the granting of (intra-group) guarantees, they should at least permit
the company to engage in a broad range of (financial) transactions related to or in line with its
corporate purpose. The wording of purpose clauses in the articles of association is usually
sufficiently wide. If not, it can be changed by a shareholders’ meeting subject to certain
formalities. Such a procedure may take a few weeks.
(ii) Corporate interest
As with any other act performed by a Belgian Company, a guarantee issued by a Belgian company
must be in its corporate interest.
Firstly, this means that the guarantor must derive an actual (direct or indirect) benefit from such
act. Although the general benefit to the group as a whole will be taken into account when assessing
whether or not the guarantee is in the company’s corporate interest, this alone is not sufficient
to justify the granting of the guarantee. There must also be an individual benefit for the
guarantor. Downstream guarantees are considered to meet this condition, except in exceptional
circumstances; the analysis is more difficult for side-stream and upstream guarantees.
Secondly, this benefit must be reasonably proportionate to the risks assumed by the guarantor,
meaning that the amount guaranteed cannot be disproportionate to the benefit derived or the
financial means available to the guarantor.
Therefore, finance documents usually include guarantee limitations in respect of Belgian
guarantors. The limitation may be based on (a combination of) various elements, including a
percentage of net assets, the amount of the financing down streamed to the guarantor and a minimum
The assessment of the corporate interest itself is essentially a cost/benefit analysis that is
influenced by several relevant factors.
In case a court finds that the guarantee was not granted in the guarantor’s corporate interest, the
granting of the guarantee may be declared null and void. In addition to the annulment, the
directors of the guarantor may be held liable for acting against the guarantor’s interest.