Transfer of shares

What is a share deal?

In a share transfer (share deal), the acquirer acquires the shares of a company, as opposed to a asset deal In which specific assets are acquired. Shares represent the whole of a company: both its assets (buildings, machinery, clientele, etc.) and its liabilities (debts and other obligations).

From a prudential point of view, both forms of transaction basically aim for the same result, namely the transfer and continuation of commercial activityn. From a legal, financial and tax perspective, however, they are fundamentally different transactions.

The major advantage of a share deal is that operations are continued by exactly the same legal entity. The company and VAT number are retained, bank accounts continue to run, contracts remain in effect in principle, and licenses are automatically transferred with them. The disadvantage, however, is that the acquirer may be faced with claims or demands that predate the acquisition.

The acquisition process: from intention to execution

1. The pre-contractual phase

Due Diligence: a thorough vetting process

Whereas in an asset deal one can be selective in which parts one acquires, in a share deal one de facto acquires the company itself, with its full history, risks and (latent) liabilities.

Due diligence, literally "due diligence," is therefore crucial. This investigation is not a mere formality, but an essential step in knowing exactly what one is acquiring and what price one is willing to pay for it.

Thorough due diligence includes:

• Corporate law research: Was the company incorporated correctly? Was the capital fully paid up? Were all listing and publication requirements complied with? With the introduction of the Code of Companies and Associations the conformity of the corporate form and bylaws must also be examined.
• Financial analysis: Do the books give an accurate and complete picture of operating results and financial condition? Is the asset valued correctly? Are there any overvalued accounts receivable or inventory? What debts and financial liabilities exist?
• Assets of the company: Are tangible and intangible assets (buildings, machinery, intellectual property) free of mortgages, liens or other security? In family businesses, intellectual property rights are often in the name of the founder or manager rather than the company itself.
• Know-how and trade secrets: Certain know-how may not be written out or protected, but is essential for production or sale. The acquirer must ensure that this know-how is transferred.
• Contracts and permits: Is there continuity in relationships with key suppliers? Are there agency or distribution relationships? Are there (off-take) contracts with key customers or is everything done on demand? Are there intuitu personae contracts that may be terminated by the acquisition?
• Employees and collaborators: What is the total personnel cost? What seniority have employees accrued? Are there union representatives with protected status? What fringe benefits, pension promises, group insurance or bonus systems exist?

In principle, the obligation to inform lies with the prospective transferee. In principle, the prospective transferee has no legal obligation to provide information, although he may not, of course, be guilty of fraud. The more professional a prospective transferee is, and the more he is assisted by professional advisors, the more strictly any subsequent claims will be assessed.

Confidentiality and secrecy

Prior to disclosure, entering into a Non-Disclosure Agreement (NDA) or confidentiality agreement is essential. After all, prospective acquirers are often industry peers or even direct competitors who could misuse the information obtained for purposes other than a potential acquisition.

A confidentiality agreement anchors the confidentiality of both the information exchanged and sometimes the negotiations themselves. From the transferor's point of view, it is best to include lump sum damages, with the possibility of recovering the actual damages suffered should they be higher. After all, proving the damages suffered as a result of disregard for confidentiality is usually not an obvious task.

Letter of Intent (LOI).

A Letter of Intent (LOI) or letter of intent is a document prepared unilaterally by the prospective acquirer, or signed as an agreement by both parties. In the latter case, it is more commonly referred to as a Memorandum of Understanding (MoU) or an actual preliminary agreement.

The LOI or MoU indicates the parties' intent to reach a final agreement and records:

• The broad outlines and principles of the intended transaction
• An initial indication of price
• The further course of negotiations
• Any period of exclusivity
• Matters or commitments essential to the prospective transferee

For the prospective transferee, such an agreement means the certainty of an agreement in principle. This is especially important if the prospective buyer stipulates exclusivity, because other interested parties must then be kept out. The letter of intent must then be sufficiently binding so that the prospective transferee cannot simply drop out.

The advantage for the prospective acquirer is that there is already an agreement on the principles and that he acquires a preferential right for a certain period of time. Elements of such importance to the acquirer that he does not want to take over without them can be formulated as a condition precedent.

2. The contractual phase

The acquisition agreement (Share Purchase Agreement).

A transfer of shares is essentially nothing more than a buy-sell. As a purely consensual contract, it is consummated as soon as there is an agreement on the object and on the price, even without delivery or payment having already taken place, and without having to be recorded in writing.

Thus, no writing is required for the validity of a transfer, at least if one can prove the object and price. Even entry in the share register, a logical consequence of a share transaction, is not a validity requirement. In practice, entry in the share register makes the transfer opposable to the company and to third parties, but between parties the transfer is valid as of the will.

Nevertheless, a written agreement is strongly recommended to set forth the specific terms and modalities. The scope of such an agreement depends on:

• Company complexity
• The risks involved in the acquisition
• The capacity of the acquirer (existing shareholder, manager, outside party)

A full Share Purchase Agreement (SPA) typically includes:

• Identification of parties and object of transfer
• Price and payment modalities (cash, staggered payment, earn-out)
• Suspensive conditions (e.g., obtaining financing, permits, regularization construction violation)
• Representations and Warranties.
• Specific indemnifications (e.g., for known legal risks)
• Non-competition and non-solicitation clauses
• Liability arrangements and limitations.
• Payment guarantees (escrow, surety bond, bank guarantee)
• Procedure for disputes
• Specific agreements on transition

Representations and warranties.

Under Belgian law, a transferee of shares enjoys only limited legal protection. The protection offered by the Civil Code with respect to indemnification against foreclosure (Art. 1626 et seq. Civil Code) and hidden defects (Art. 1641 et seq. Civil Code) is often insufficient in substance. After all, the actual object of the buy-sell is not the company itself but the shares, while the warranties that the acquirer wishes to obtain mainly relate to the company and its underlying assets.

Therefore, a contractual arrangement under the form of "representations and warranties" is essential. These are the final part of due diligence, whereby the transferor contractually endorses the conclusions and additionally confirms or guarantees certain things.

The representations and warranties typically include:

1. Statements about the shares:
   • They are validly issued
   • The transferor is the rightful owner
   • They are free from burdens and securities
   • They represent the stated percentage of capital
2. Statements about the company:
   • Proper incorporation and compliance with corporate laws
   • Full payment of capital
   • Correctly maintained corporate documents
   • Compliance with applicable laws
3. Statements of financial condition:
   • Correctness and completeness of financial statements
   • No hidden debts or unrecorded liabilities
   • Proper valuation of assets and liabilities
   • No material negative changes since last financial statements
4. Asset statements:
   • Ownership of all assets
   • No encumbrances by mortgages, liens, etc.
   • Correct protection of intellectual property
   • Ownership or valid licenses for all software and technology used
5. Statements about contracts:
   • Completeness of communicated contracts
   • No default or threat of breach of contract
   • No intuitu personae contracts jeopardized by acquisition
   • Common market conditions for intra-group relationships
6. Statements about personnel:
   • Proper compliance with labor law
   • Correctly reported to social agencies
   • Completeness of communicated terms and benefits of employment
   • Absence of pending social disputes
7. Litigation and risk statements:
   • Full information on pending court cases
   • Absence of impending litigation
   • Environmental compliance
   • Compliance with privacy laws

In principle, these statements are considered obligations of result: without having to prove a mistake, the transferee can claim compensation if a statement turns out to be false. The burden of proof is on the transferee to prove that a particular statement was incorrect.

The statements are often reinforced by additional certainties such as:

• Personal guarantee of the transferor
• Bank guarantee
• Partially deferred payment
• An escrow account (escrow account)
• Representations and Warranty Insurance.

Non-compete and non-solicitation clauses

One of the worst scenarios for an acquirer is for the seller to restart the same activities shortly after the transfer, eroding the value of the acquisition. Especially in family businesses, where the manager is often the confidant of suppliers and customers, this can have far-reaching consequences.

Protection from competition

The acquirer has several options to protect against this:

1. Non-solicitation clause: A prohibition on the transferor from soliciting clients or personnel. This provides protection for the existing clientele, possibly extended to prospects with whom one was already in discussion at the time of the transfer. Moreover, via a hiring ban for employees and independent workers, human know-how is protected.
2. Non-compete: A general prohibition against engaging in competitive activities. This goes beyond simply protecting existing clientele.

In an asset deal that includes the entire trading fund, it is assumed that a non-compete clause is automatically contained in the contract, based on the indemnity against enforcement (Art. 1625 and 1626 of the Civil Code). In a share deal, this is not the case, so competition must be explicitly limited by contract.

Terms of validity

A non-compete obligation is an exception to the basic principle of freedom of trade and industry enshrined in the Code of Economic Law (art. II.3 and II.4 WER).

For a non-compete agreement to be valid, it must:

• Being limited in time: The duration depends on the sector and market conditions. In sectors with frequent customer contact, a shorter term will apply than in sectors with less frequent contact. Similarly, if the salesperson functioned prominently, a longer term may be defensible.
• Being limited in space: The territorial scope must be representative of the area in which the company operates. For example, for a regional company, one cannot define all of Belgium as its scope.
• Being limited in object: The prohibition can only concern activities that are effectively competitive with those of the acquired company.

A non-compete clause is best formulated broadly so that it includes not only the (natural) person of the transferor, but also legal entities in which the transferor has interests or for which he is active as a director, manager, employee or consultant.

Until 2015, a non-compete clause that did not meet these conditions was declared completely void. The Supreme Court has nuanced this: if the agreement contains a divisibility clause or mitigation power, an invalid clause can be reduced to what is legally permissible. It is therefore advisable to include such a clause in the contract (Cass. Jan. 23, 2015, C.13.0579.N and Cass. June 25, 2015).

In contrast to non-competition clauses, non-solicitation clauses for staff and clients are in principle without time limitation. Nevertheless, one must keep in mind the general prohibition against abuse of rights: reliance on a non-solicitation clause may be considered an abuse of rights if it is done without reasonable interest or causes disproportionate harm.

Investment protection

Investment protection

An acquirer bases a stock transfer on the company's track record: the sales and margins achieved in the years preceding the acquisition. However, these historical figures do not guarantee future results. Moreover, there is a risk that hidden flaws or unreported risks may not come to light until after the acquisition.

Earn-out arrangement

An earn-out is a variable and staggered payment structure that makes a portion of the acquisition price contingent on the company's future financial performance. This arrangement offers several advantages:

• For the transferee:
  • Assurance that the seller has a continuing interest in success
  • Partial protection against overly optimistic projections
  • Spreading of financing, which reduces cash flow impact
  • Ability to keep the transferor involved as a manager, consultant or vendor
• For the seller:
  • Ability to achieve a higher total sales price
  • Participation in future growth for which he/she has laid the foundation
  • Structuring payment, which can offer tax advantages

For an effective earn-out arrangement, it is crucial to establish clear and objectively measurable performance criteria, such as:

• EBITDA (earnings before interest, taxes, depreciation and amortization)
• Turnover
• Gross or net profit margin
• Retaining key customers

The period for an earn-out is typically 1 to 3 years after the acquisition, but can be longer in specific industries.

Escrow and other collateral

To hedge against risks arising from incorrect representations and warranties, the parties may agree that:

• Part of the price is blocked through an escrow agreement: An escrow means that a certain portion of the purchase price is not paid directly to the seller, but is placed in an escrow account with a third party (escrow agent, often a bank or notary). The escrow amount serves as a guarantee for any claims under the representations and warranties. The amount is released only at the end of the escrow period, possibly in installments at predetermined intervals, to the extent that no claims have been filed or after settlement of filed claims.
• A personal surety bond is provided: The seller or a third person personally guarantees the obligations arising from the representations and warranties. Ideally, this surety is joint and several, so that the transferee can sue both the seller and the guarantor for the whole.
• A bank guarantee shall be granted: A financial institution undertakes to pay a certain sum at the first request of the acquirer if certain conditions are met. This provides a high degree of security but is relatively expensive and banks often require collateral of their own from the seller.
• Representations and Warranties Insurance: A relatively new development, especially popular in large transactions, is the insurance of representations and warranties. This insurance covers the risks associated with the seller's failure to comply with representations and warranties. Although premiums can be substantial, it provides a "cleaner exit" for the seller and more security for the buyer. The insurance can be taken out by either the seller (sell-side policy) or the buyer (buy-side policy).

3. The postcontractual phase

Relationships between transferor and transferee usually do not end with the signing of the acquisition agreement. Often there are engagements that continue or new forms of cooperation that emerge.

Ongoing commitments

After the closing of the transaction, different types of commitments may remain:

• Contractual obligations from the acquisition agreement:
  • Non-competition and non-solicitation clauses
  • Confidentiality agreements
  • Earn-out arrangements
  • Escrow agreements
• New forms of cooperation:
  • The former shareholder may remain involved as a manager or director
  • A service or consulting agreement may be entered into
  • The vendor can take on another role (supplier, customer, designer)
  • The seller may continue to provide financing through a subordinated loan

Dispute Resolution

However, it is inevitable that less positive encounters sometimes occur, such as:

• Discussions about the terms of earn-out or escrow
• Liability claims arising from defects
• Third-party claims against the company with pre-acquisition origins

To create a certain predictability even in such situations, it is appropriate to write out a procedure for claims and demands in the acquisition agreement:

• Terms: Until when can facts lead to claims? (often linked to statutes of limitations or tax audit deadlines)
• Notification: How and by what deadline should a claim be communicated?
• Amicable settlement: Will amicable dispute resolution be tried first, and for what period of time?
• Competent authority: Which courts have jurisdiction or is arbitration opted for? In the latter case: through which institution and according to which rules?

Limitations of liability

To avoid discussions about the extent of liability, limitations are often set forth as well:

• Thresholds and ceilings: A minimum and maximum amount for which the seller can be sued
• Time limits: Different deadlines depending on the type of claim (e.g. shorter deadline for operational cases, longer for tax and property claims)
• Insurance settlement: Agreements on how any insurance benefits will be settled
• Fiscal savings: Provisions whether or not tax benefits from losses are offset
• Damage limitation duty: The transferee's obligation to minimize damages as much as possible

These agreements ensure that even in conflict situations there is some predictability and that both parties know where they stand.

Tax aspects of a share deal

Benefits for natural person sellers

An important advantage of a share transfer versus an asset deal is the tax treatment, especially for a natural person as seller. When the transfer falls outside the professional activity and within the normal management of private assets, the transfer of shares is in principle tax-free under Belgian law.

An exception applies if the shares are part of a substantial participation (25% or more) and are transferred to a legal entity outside the European Economic Area. In that case, realized capital gains are still taxed. Moreover, the legislator has provided that capital gains in a basically non-visualized transaction will still be taxed if the shares are resold within 12 months to an acquirer outside the EEA.

Note: according to the Dewever coalition agreement, there will soon be a capital gains tax on shares be introduced.

Treatment for corporate vendors

If the shares are sold by a company, the capital gains realized by that company are in principle taxed. Only under certain conditions can they still benefit from an exemption. These conditions are linked to the conditions for the dividend received deduction (Definitively Taxed Income):

• Appraisal Condition: The company paying the dividends is a normally taxed company
• Participation condition: The acquiring company holds a participation of at least 10% in the disposed company, or the acquisition value is at least EUR 2.5 million
• Standing Condition: Shares were held in full ownership continuously for at least one year

Our guidance on a share deal

Our law firm has extensive expertise in assisting with share transfers. We support both sellers and buyers at all stages of the acquisition process:

1. Preparation phase

• Legal-strategic advice on the structure of the transaction
• Valuation and tax optimization
• Assistance in shaping the company (legal restructurings)
• Drafting confidentiality agreements
• Guidance on compiling data rooms

2. Negotiation phase

• Drafting and negotiating letters of intent (LOI) and agreements in principle (MoU)
• Organization and supervision of due diligence
• Identification of legal risks and remedial opportunities
• Negotiation of essential contract terms

3. Contractual phase

• Drafting and negotiating final acquisition agreements (SPA)
• Developing robust statements and safeguards
• Elaboration of appropriate collateral mechanisms (escrow, guarantees)
• Structuring earn-out arrangements and transition agreements
• Drafting of non-compete and non-solicitation clauses
• Draft shareholder agreements in partial transfers

4. Implementation phase

• Guidance on fulfilling conditions precedent
• Assistance with closing and administrative settlement
• Entry in the register of shareholders
• Reporting to relevant authorities

5. Postcontractual phase

• Guidance on disputes over representations and warranties
• Assistance with earn-out calculations and discussions
• Support for transition issues

A share transfer is complex and contains numerous legal pitfalls. Without sound legal counsel, you risk significant liability after the sale as a seller, or unpleasant surprises as a buyer that erode the value of your investment.

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