On December 4, 2023, the Belgian Government filed a draft law with the Chamber of Representatives containing “provisions regarding digitization of justice and miscellaneous provisions Ibis” (the “Bill”). With the Bill, the Government seeks to introduce a shareholder approval requirement for transfers of significant assets by listed companies, thereby aligning Belgian company law with some of our neighboring jurisdictions such as France and the U.K. While the Bill has not been adopted by Parliament yet, building on the earlier contributions by Stijn De Dier and Tom Vos on this blog,[1] this post discusses a number of practical difficulties raised by the Bill in its current form and offers some initial insights on how the new requirement could be applied in practice.
The Belgian Code of Companies and Associations (the “CCA”) currently requires the board of directors of a listed company to seek shareholder approval for decisions that may impact the company’s assets in a limited number of situations only (e.g.,for corporate reorganizations such as mergers, (partial) demergers, etc.). Shareholder approval is currently not a requisite if part of the company’s assets is transferred through a “simple” asset transfer that does not involve one of the corporate reorganization procedures of the CCA. Recognizing that such asset transfers can fundamentally alter the company’s business, shareholders could be faced with a fait accompli for which the law hardly offers them any protection. To counter situations in which virtually all of the company’s assets are transferred and shareholders are left with an empty shell and to give (minority) shareholders a say in decisions that may profoundly impact the company, the Bill introduces a new article 7:151/1 to the CCA.
The proposed article 7:151/1 CCA requires boards of listed companies to seek shareholder approval for transfers representing more than 75% of the company’s assets on a stand-alone or consolidated basis. To avoid artificial or strategic splitting up of transfers that would otherwise exceed the threshold, all transfers in the prior twelve months should be taken into account to calculate whether the 75% threshold is met (the so-called “look-back period”).
The exact % of the threshold, however, still remains a topic for discussion. During the Parliamentary proceedings, certain MPs have raised the idea of lowering the threshold to e.g., 25%, and the Government, in its explanatory memorandum, also stated that the 75% threshold could potentially be lowered in the future. Thus, while the impact of the Bill may be limited if a threshold of 75% is adopted, a lower threshold (now or in the future) could impact listed companies in a much more significant way. Our observations should notably also be read in that light.
While the Bill appears straightforward, its application is far less so. Other than the shortcomings of the Bill referred to in the earlier contributions of Stijn De Dier and Tom Vos, this post raises a number of additional points. We center these around three themes: (I) which “transfers of assets” are to be taken into account for the purposes of article 7:151/1 CCA, (II) how should the threshold be calculated, and (III) what is the temporal scope of article 7:151/1 CCA?
I. What constitutes a “transfer of assets”?
The central concept of the proposed article 7:151/1 CCA is the concept of a “transfer of assets” which determines both the scope of application as well as the scope of the look-back period. Nevertheless, in the absence of further specification, the concept leaves a number of open questions which could give rise to practical difficulties.
A. Any transfer, even in the ordinary course
Based on the current phrasing of the Bill, the concept of “transfer of assets” covers any and all transfers of assets. This is awfully far-reaching, as it would imply that also transfers executed in the ordinary course of business of a company, such as the sale of its finished goods inventory, could fall within the scope of article 7:151/1 CCA and should be aggregated for the application of the look-back period. It is not only impracticable for companies to continuously monitor any and all transfers for this purpose, but it may also downright preclude certain companies with a high inventory turnover from pursuing their day-to-day business: once sales in the last twelve months would reach the statutory threshold of article 7:151/1 CCA, any further ordinary course transactions by the company would require shareholder approval (while perhaps rather unlikely at a 75% threshold, the likelihood would increase if a lower threshold were to be adopted). This cannot have been the intent behind the Bill.
It would therefore be prudent to provide an exemption for any transactions executed in the ordinary course of business, and to exclude them from the calculation for purposes of the look-back period.
A similar exemption already exists in the related-party transaction procedure (article 7:97 CCA). In addition, this approach was also adopted by the U.K. regulator where the regime on the transfer of significant assets only applies to “transactions that are outside the ordinary course of the listed company’s business and may change a security holder’s economic interest in the company’s assets or liabilities”.[2]
B. Intra-group transfers
Additionally, and again unlike the related-party transactions procedure and as is the case the U.K.[3], the Bill does not include an exemption for intra-group transfers between a listed company and its subsidiaries. Such transfers merely relate to the internal organization of the group and no asset or value is being transferred to a party not under the control and (indirect) ownership of the shareholders. An exemption (and exclusion from the calculation of the look-back period) would therefore also be appropriate for these intra-group transfers. Similar to what is currently already the case for the related-party transactions procedure (article 7:97 CCA), special attention would be required for subsidiaries that are not wholly-owned by the listed company.
C. No de minimis exception
As mentioned under A. above, the concept of transfers captures any and all transfers. This implies that, for purposes of the look-back period, all transactions in the last twelve months prior to the asset transfer in question – irrespective of their (in)significance – would need to be aggregated with the value of the proposed transfer to determine whether the threshold requiring approval is reached. It would not be practicable, nor in line with the ratio legis, that consent from the shareholders meeting would need to be sought for minor transactions (and result in the company incurring the costs related to the organization of a shareholders’ meeting).
We believe it would make sense to introduce an exemption for de minimis transactions, similar to the de minimis threshold of 1% of net assets applicable to the related-party transactions procedure (article 7:97 CCA). The exact amount of such de minimis threshold is a policy question, but a threshold between 1% and 5% of total assets would seem reasonable.
This de minimis threshold should operate at two stages. First, transactions below the de minimis would be exempt for the shareholder approval requirement, meaning that even if the de minimis transaction would lead the company to trip the threshold, no shareholder approval would need to be sought. E.g., if the company already executed one or more transfers in the past twelve months for 74% of the total assets and subsequently enters into a 1% transaction, this de minimis transaction could occur without shareholder approval.
Second, to avoid an overly complex calculation process for companies and given the limited value of such de minimis transactions, it is equally fair to exclude them from the calculation of the look-back period. De minimis transactions that occurred in the last twelve months would not be aggregated for purposes of the look-back period.
D. Only asset disposals
It is clear that the proposed article 7:151/1 CCA only applies to disposals (vervreemdingen/cessions) by listed companies, and not to acquisitions. It is an interesting choice by the legislator, as e.g., in France and the U.K. the regulator chose to also capture acquisitions through the rules on shareholder approval for significant transactions. One could argue both ways.
On the one hand, the ratio legis of the Bill is to give shareholders the opportunity to vote on decisions that can have a material impact on the future and the continuation of the company’s business.[4] Against this background, a difference in treatment of acquisitions and disposals is not obvious as acquisitions could equally impact the company’s future business.
On the other hand, having to seek shareholder approval for acquisitions could have adverse consequences. To name a few:
- The additional requirement could negatively impact the competitiveness of Belgian companies in auctions processes for the acquisition of assets, as it would require them to add an additional condition precedent to their offer. Sellers will undoubtedly dislike the increased deal uncertainty associated with the shareholder approval requirement.
- It could stifle IPOs on the Belgian market. In an environment where Belgian IPOs are already becoming increasingly scarce, this additional burden for listed companies may dissuade promising companies that are growth-oriented from listing, as it could hamper their flexibility and agility in M&A projects.
The choice not to include acquisitions thus is a matter of policy, and one that can be supported from a business perspective.
II. How should the threshold be calculated?
The Bill currently contemplates introducing a 75% threshold in order for asset transfers to be considered “significant”, i.e., shareholder approval would be required once the transfer of assets represents 75% or more of the company’s total assets.
By setting a numerical threshold, the Bill adopts a quantitative test instead of a qualitative assessment. It requires a comparison between (1) the transferred assets (numerator) and (2) the company’s total assets (denominator).
As previously mentioned, to avoid circumvention, all asset transfers that occurred during the prior twelve-month period but which did not receive shareholder approval, should be aggregated with the assets intended to be transferred in order to determine whether the 75% threshold is met.
A royal decree detailing how this threshold must be calculated, is expected to be issued. However, in the absence of a draft decree, it yet remains unclear how the 75% threshold should be applied, which can have important implications in practice.
A. What values should be compared?
First, one needs to determine how to value the “transferred assets” and the “total assets of the company”. Although not specified in the Bill, the only practical way of doing this, is looking at the respective book values on the company’s balance sheet and comparing them:
| book value of transferred assets |
| total book value of the company’s assets |
This approach of comparing book values is also the approach of the U.K. Listing Rules[5] (where it is called the “gross assets test”) and the recommendations of the French Autorité des marchés financiers (“AMF”)[6]. However, both jurisdictions also use additional, cumulative, tests, such as the profits test, whereby the profits generated by the transferred assets are compared with the company’s total profits.[7]
B. Which financial statements to use?
If the listed company publishes consolidated annual accounts, the threshold calculation needs to be conducted on the basis of both the consolidated and the stand-alone annual accounts. Otherwise, the stand-alone annual accounts suffice.
The reference annual accounts are the “last annual accounts that were made public”. In stipulating so, the Bill deviates from the language generally used by the legislator when referring to annual accounts (“latest approved” or “latest filed” annual accounts). As a result, it remains unclear whether one should look at the latest approved annual accounts, or whether after publication by a listed company of its annual accounts on the website (e.g., as part of the convening notice) but prior to approval thereof by the shareholders’ meeting, these unapproved accounts should nevertheless already be used for the threshold calculation.
It would seem that an approach whereby the reference accounts have been approved by the shareholders is preferable.[8] In any event, with both approaches the reference accounts may be significantly outdated (up to 18 months) and the information contained therein may thus have become stale to a large extent.
In this respect, it is remarkable that, for certain transactions that may have a smaller impact on the company (e.g., a capital increase), the CCA requires that an ad hoc state of assets and liabilities is prepared and provided to the shareholders. We therefore believe that companies should be permitted, if not required, to draw up ad hoc interim accounts at the occasion of a transfer if the board of directors is of the opinion that material events, outside of the ordinary course of business, have occurred as a result of which the latest (approved) annual accounts are no longer representative (e.g., if the company completed a large acquisition in the meantime).
C. How to account for the look-back period?
To determine whether the threshold is met, a look-back period of twelve months should be applied. Such look-back period will invariably cover multiple financial years. This raises a question as to how the relevant asset values, across financial years, should be computed and aggregated.
Three approaches seem plausible. To illustrate them, we will use the following fictional example:
ListCo has a financial year ending on December 31. In August of FY X, ListCo sells assets representing 60% of the book value of the company’s assets according to the latest financial accounts (FY X-1). Additionally, in October of FY X-1, ListCo already sold certain assets. At the time, these assets represented 12% of the book value of the company’s assets according to the then latest annual accounts (FY X-2), but they represent 18% of the book value of the company’s assets according to the now latest accounts (FY X-1). Should ListCo seek shareholder approval?
A first approach would be to use the available annual accounts (i.e., FY X-1) for the denominator (total assets), to determine the respective share of the assets transferred in either financial year. This approach reflects a strict reading of the Bill but would yield inherently inadequate consequences: it takes the first transfer into account for the numerator (assets transferred), but at the same time uses a denominator which post-dates the earlier transfer and could be higher or lower than before such earlier transfer. Indeed, the value of any assets transferred prior to the end of the financial year will no longer be (fully) reflected on the end-of-year annual accounts, as the proceeds paid will not impact the balance sheet by the same amount. This could be the case because e.g., the proceeds generated will most often not be equal to the book value of the assets; part of the proceeds may be used to pay down debt, thus reducing the assets as well as the liabilities on the balance sheet and resulting in a lower balance sheet total; etc.
In addition, it would be impossible to stay within the confines of the latest annual accounts (i.e., FY X-1) to determine the part of the numerator that relates to prior transactions, as the assets sold in these transactions would no longer be (fully) reflected in those accounts.
Despite the flaws identified in the first approach, the conclusion in our hypothetical would be that ListCo should seek shareholder approval.
A second approach would be similar to the first one, but with the difference that the denominator would be adjusted for the impact of all transfers of the prior twelve months, i.e., by adding the book value of past transactions back to the denominator (i.e., total assets) and subtracting any proceeds that may at the time still be on the balance sheet from such denominator). While this approach may be considerably fairer than the first approach, it would be extremely difficult to implement in practice as it may not always be clear from the accounts how the transaction proceeds have been used. The example is not sufficiently detailed to concluded whether in our hypothetical shareholder approval would be required. However, to apply the look-back period to our hypothetical, the book value of the transaction that occurred in FY X-1 would need to be re-added to the FY X-1 annual accounts, neutralizing the movements on both the asset and liability side of the FY X-1 annual accounts.
A third approach would be to calculate the threshold by comparing the transferred assets to the company’s total assets as per the latest annual accounts at the time of each individual transfer (not just the latest annual accounts at the time of the last transfer). Subsequently, you would add the percentages (pertaining to different financial years) for each of these transactions to see whether the threshold is reached. In our hypothetical, this would mean the following:
- In the first transaction, ListCo sold 12% of its total assets as reflected in the annual accounts of FY X‑2 (i.e., latest available annual accounts at the time of the first transfer).
- In the second transaction, ListCo sold 60% of its total assets as reflected in the annual accounts of FY X‑1 (i.e., latest available annual accounts at the time of the second transfer).
- For the threshold calculation, these percentages (even though pertaining to different financial years) should be aggregated and lead to a total of 72%.
Pursuant to this approach, ListCo would thus not be required to seek shareholder approval. But that is not the reason why we believe this is the better approach. We believe this approach, where book values of the transferred assets are compared to the relevant pre-transfer annual accounts, is preferrable because it has the benefit of predictability, fairness and simplicity.
In all scenarios, a further complication may arise if a transfer involves assets that are only acquired after the end of the previous financial year and are already sold again within the same financial year (whether individually or as part of a larger package of assets). It is not clear in such event how the book value of these new assets should be calculated as there are no annual accounts in which they have been reflected. Again, for those scenarios, an ad hoc balance sheet may be an appropriate solution (cf. our suggestion above).
III. Temporal scope of application
The Bill also leaves some unclarity as to its exact application in time, in particular in two respects: (A) it is unclear when a “transfer” is deemed to occur (signing or closing), and (B) the lack of a statutory transition period after the entry into force could create practical difficulties.
A. Reference date for the “transfer”
The Bill views transfers as a one-off event occurring at a single point in time. Reality, however, is often more convoluted. Asset (or, in the event of the transfer of a subsidiary, share) purchase agreements regularly foresee a bifurcation between the signing of the agreement and the actual closing of the transactions, e.g., as a result of regulatory approvals to be obtained or practicalities to be completed before the transaction can be consummated. From the phrasing of the Bill, it is unclear whether signing or closing should be viewed as the moment at which the threshold test of article 7:151/1 CCA should be performed.
In our view, the logical answer to that question is that signing should be the reference date. Deal certainty mandates that a company is able to assess, when it signs the transaction agreement, whether it will be required to seek shareholder approval for the transfer or not. The period between signing and closing can be long (up to a year or longer) and it would be next to impossible for the board of directors (and for the counterparty) to anticipate or estimate whether, at the time of closing, the transaction would meet the threshold. At the time of singing, the company already (irrevocably) commits itself to execute the transfer and thus it should know then the conditions of its engagement.
The above, however, does raise an additional question: do transactions that closed during the look-back period, but were signed prior to the look-back period still need to be aggregated for the look-back calculation?
In order to remain consistent, we believe that the look-back period should apply only to transfers signed in the last twelve months. Transfers that signed more than twelve months ago but closed during the look-back period, should in such approach not be aggregated to calculate whether the threshold is met for a proposed transfer. Other than the consistency argument, we see two additional reasons for such approach: (i) the alternative solution would mean that the look-back period would in effect be prolonged beyond twelve months for any transfer that has a bifurcated signing and closing, and (ii), more importantly, this would create considerable uncertainty pending closing, as (a) the book value of the transferred assets may change between signing and closing if closing occurs after new annual accounts became available and the reference accounts therefore change, and (b) for many transactions, the timing of closing may only be known a few days in advance, thus making it difficult to predict when negotiating a new transfer whether the closing of a prior transaction may still occur prior to signing of the new transaction. The latter could, e.g., be highly relevant if a transaction was signed more than twelve months ago (thus no longer counting towards the look-back period) but may still close before signing of the new transaction. The question whether shareholder approval would be required may then depend entirely on the exact sequencing of signing of the new transaction versus closing of the earlier (i.e., signing the new transaction first or closing the prior transaction first).
B. Lack of statutory transition period
The Bill currently does not provide for a specific statutory transition period, meaning that it would enter into force ten days after its publication in the Belgian Official Gazette. As a result of the look-back period, upon the entry into force of article 7:151/1 CCA, listed companies may suddenly be confronted with shareholder approval requirements for transfers that they have been negotiating for months and that are on the verge of being signed. A sufficiently long transition period (or, alternatively, at least a provision that the look-back period should only include transactions signed after the entry into force of the Bill) deserves serious consideration.
IV. Some concluding remarks
To wrap up, we have two additional observations.
- The Bill currently foresees one general regime applicable to all listed companies. The legislator may wish to consider whether companies in specific industries or circumstances (e.g., REITs, financial institutions, companies in severe financial distress, etc.) and which may have atypical balance sheets or require the ability to take swift and/or drastic measures to conduct their day-to-day business or ensure their continued existence should be subject to the same regime.
- While some of the ideas raised in this post could also be implemented in the future royal decree that will detail the threshold calculation, most of these topics would already warrant profound thought by Parliament in the legislative process towards adoption of a final version of the Bill.
Together with the reader, we impatiently await the outcome of the legislative process in this respect.
Marijke Spooren
Ruben Foriers
Emmanuel Wynant
[1] S. DE DIER, Nieuw wetsontwerp stelt aanpassing governance van genoteerde vennootschappen in het vooruitzicht (Corporate Finance Lab, Dec. 14, 2023); T. VOS, De goedkeuring door aandeelhouders van de overdracht van significante activa (Corporate Finance Lab Dec. 21, 2023).
[2] FCA Handbook, LR 10.1.4.G, as well as 10.1.3.R(5).
[3] FCA Handbook, LR 10.1.3.R(5).
[4] Explanatory Memorandum to Bill, pages 43-44.
[5] FCA Handbook, LR 10 Annex 1, 2R.
[6] AMF, Les cessions et les acquisitions d’actifs significatifs (Recommendation, DOC n° 2015-05).
[7] FCA Handbook, LR 10 Annex 1, 4R; AMF, Les cessions et les acquisitions d’actifs significatifs, page 3 (Recommendation, DOC n° 2015-05).
[8] The consolidated accounts will in any event not be approved by the shareholders’ meeting (as no approval is required for the consolidated accounts by the CCA).
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