The Private Equity

Review

Law Business Research

Third Edition

Editor

Stephen L Ritchie

The Private Equity Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Private Equity Review, 3rd edition(published in March 2014 – editor Stephen L Ritchie).

For further information please emailnick.barette@lbresearch.com

The Private Equity

Review

Third Edition

EditorStephen L Ritchie

Law Business Research Ltd

THE MERGERS AND ACQUISITIONS REVIEW

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THE PRIVATE EQUITY REVIEW

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PUBLISHER Gideon Roberton

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i

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

acknowLEdgEmEnTs

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ADVOKATFIRMAET STEENSTRUP STORDRANGE DA

BA-HR DA

BAHAS, GRAMATIDIS & PARTNERS

CAMPOS MELLO ADVOGADOS

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ENSAFRICA

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KIRKLAND & ELLIS LLP

Acknowledgements

ii

KROGERUS

LABRUNA & ASSOCIATI (LMS) – STUDIO LEGALE

LENz & STAEHELIN

LEXYGEN

LOYENS & LOEFF

MACFARLANES LLP

MAPLES AND CALDER

MCCULLOUGH O’CONNOR IRWIN LLP

NISHIMURA & ASAHI

PLMJ – LAW FIRM

PwC

SCHULTE ROTH & zABEL LLP

STIKEMAN ELLIOTT LLP

URíA MENéNDEz

WONGPARTNERSHIP LLP

iii

conTEnTs

Editor’s Preface ..................................................................................................viiStephen L Ritchie

PART I FUNDRAISING ................................................................. 1–196

Chapter 1 BRAzIL.......................................................................................3Sergio Ros Brasil, Marcus Vinicius Bitencourt, Leonardo Homsy and Rodrigo Pires Mattos

Chapter 2 CANADA ..................................................................................14Jonathan McCullough, James Beeby and Isaac Filaté

Chapter 3 CAYMAN ISLANDS ................................................................24Nicholas Butcher and Iain McMurdo

Chapter 4 CHINA .....................................................................................35James Yong Wang

Chapter 5 GERMANY ...............................................................................46Felix von der Planitz, Christoph Keil and Sandra Horst

Chapter 6 INDIA .......................................................................................60Siddharth Shah and Bijal Ajinkya

Chapter 7 JAPAN .......................................................................................73Kei Ito, Taku Ishizu and Akihiro Shimoda

Chapter 8 KOREA .....................................................................................84Young Jay Ro, Young Man Huh, Yong Seung Sun, Joon Ho Lee and Kyle Park

iv

Contents

Chapter 9 LUXEMBOURG ......................................................................92Marc Meyers

Chapter 10 NORWAY ...............................................................................104Klaus Henrik Wiese-Hansen and Stig Nordal

Chapter 11 PORTUGAL ...........................................................................115André Luiz Gomes and Catarina Correia da Silva

Chapter 12 SINGAPORE ..........................................................................125Low Kah Keong and Felicia Marie Ng

Chapter 13 SOUTH AFRICA ...................................................................135Johan Loubser, Jan Viviers and Andrea Minnaar

Chapter 14 TURKEY .................................................................................149Ümit Hergüner, Mert Oğuzülgen and Zeynep Tor

Chapter 15 UNITED KINGDOM ...........................................................161Mark Mifsud

Chapter 16 UNITED STATES ..................................................................174Joseph A Smith and Conrad Axelrod

PART II INVESTING ....................................................................197–519

Chapter 1 AUSTRALIA ...........................................................................199Philip Kapp and James Delesclefs

Chapter 2 BELGIUM ..............................................................................211Stefaan Deckmyn and Wim Vande Velde

Chapter 3 BRAzIL...................................................................................225Sergio Ros Brasil, Marcus Vinicius Bitencourt and Camila Caetano Cardoso

v

Contents

Chapter 4 CANADA ................................................................................235Brian M Pukier and Sean Vanderpol

Chapter 5 CHILE ....................................................................................246Andrés C Mena, Salvador Valdés and Francisco Guzmán

Chapter 6 CHINA ...................................................................................257David Patrick Eich, Pierre-Luc Arsenault, Stephanie Tang and Jesse Sheley

Chapter 7 FINLAND...............................................................................275Mika Ståhlberg, Marcus Möller and Leif Laitinen

Chapter 8 FRANCE .................................................................................285Maud Manon, Xavier Norlain, Jeremy Scemama and Guillaume Valois

Chapter 9 GERMANY .............................................................................298Hans-Jörg Ziegenhain and Alexander G Rang

Chapter 10 GREECE .................................................................................310Christos Gramatidis

Chapter 11 INDIA .....................................................................................318Vijay Sambamurthi

Chapter 12 IRELAND ...............................................................................330David Widger

Chapter 13 ITALY ......................................................................................344Fabio Labruna

Chapter 14 JAPAN .....................................................................................353Kei Ito, Taku Ishizu and Tomokazu Hayashi

Contents

vi

Chapter 15 KOREA ...................................................................................363Young Jay Ro, Jong Koo Park, Yun Goo Kwon, Sung Uk Park and Yun Bak Chung

Chapter 16 MEXICO ................................................................................373Carlos del Rio, Eduardo González and Jorge Montaño

Chapter 17 NIGERIA ................................................................................388Folasade Olusanya, Adekunle Soyibo and Oluwaseye Ayinla

Chapter 18 NORWAY ...............................................................................396Peter Hammerich and Markus Heistad

Chapter 19 PORTUGAL ...........................................................................406Tomás Pessanha and Manuel Liberal Jerónimo

Chapter 20 SINGAPORE ..........................................................................420Andrew Ang, Christy Lim and Dawn Law

Chapter 21 SPAIN .....................................................................................432Christian Hoedl and Diana Linage

Chapter 22 SWITzERLAND ....................................................................444David Ledermann, Olivier Stahler and Nicolas Béguin

Chapter 23 TURKEY .................................................................................457Ümit Hergüner, Mert Oğuzülgen and Zeynep Tor

Chapter 24 UNITED KINGDOM ...........................................................470Stephen Drewitt

Chapter 25 UNITED STATES ..................................................................487Norbert B Knapke II

Appendix 1 ABOUT THE AUTHORS .................................................... 503

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .. 531

vii

Editor’s PrEfacE

This third edition of The Private Equity Review comes on the heels of a very good 2013 for private equity. Large, global private equity houses are now finding opportunities to deploy capital not only in North America and western Europe, where the industry was born, but also in developing and emerging markets in Asia, South America, the Middle East and Africa. At the same time, these global powerhouses face competition in local markets from home-grown private equity firms, many of whose principals learned the business working for those industry leaders.

As the industry becomes more geographically diverse, private equity professionals need guidance from local practitioners about how to raise money and close deals in multiple jurisdictions. This review has been prepared with that need in mind. It contains contributions from leading private equity practitioners in 28 different countries, with observations and advice on private equity dealmaking and fundraising in their respective jurisdictions.

As private equity has grown, it has also faced increasing regulatory scrutiny throughout the world. Adding to the complexity, regulation of private equity is not uniform from country to country. As a result, the following chapters also include a brief discussion of these various regulatory regimes.

While no one can predict exactly how private equity will fare in 2014, one can confidently say that it will continue to play an important role in the global economy. Private equity by its very nature continually seeks out new, profitable investment opportunities, so its continued expansion into growing emerging markets appears inevitable. We will see how local markets and policymakers respond.

I want to thank everyone who contributed their time and labour to making this third edition of The Private Equity Review possible. Each of them is a leader in his or her respective market, so I appreciate that they have taken their valuable and scarce time to share their expertise.

Stephen L RitchieKirkland & Ellis LLPChicago, IllinoisMarch 2014

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Chapter 2

BELGIUM

Stefaan Deckmyn and Wim Vande Velde 1

I OvervIew

i Deal activity

General transaction activity in 2013Although no detailed figures have been released on Belgian M&A and private equity deal activity in 2013, provisional figures indicate that the general trends in the Belgian market were in line with the overall European trends. The levels of activity were comparable to those of 2012, although they remained substantially below the levels of 2007 (especially as far as buyout activity is concerned).

In terms of buyout transactions (and general M&A transactions) in Belgium, 2013 was comparable to 2012 in the following respects: some high-profile deals took place, but most deals took place in the mid-market sector; and both private equity parties and strategic, industrial buyers were involved in transactions.

Regarding venture capital, 2013 has been a rather good year, with total investments reaching €177 million, being 28 per cent higher than 2012 and more than twice the amount of venture capital investments in 2011, which was a particularly difficult year for Belgian venture capital. In 2013, Belgian venture capital grow more than the European average. In the 2013 Global Venture Capital Private Equity (VCPE) Country Attractiveness Index (an initiative by E&Y and the IESE Center for International Finance), Belgium confirmed its position as an attractive country for venture capital and private equity investments (ranking in 16th place out of 118 countries).

Type of transactionsThe Belgian venture capital sector experienced a good year in 2013, with increased investments by both traditional venture capital players and wealthy individuals and

1 Stefaan Deckmyn is a partner and Wim Vande Velde is a counsel at Loyens & Loeff.

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families (some of them forming new investment funds). Investments mainly consisted of seed and growth capital investments, mainly focusing on the life sciences/biotech and the ICT sector. The largest venture capital transaction in 2013 was undertaken by the Belgian/Swiss biotech company Biocartis, who collected €30 million from Belgian and international investors (including both wealthy individuals and venture capital funds).

With respect to buyouts, overall the 2013 deal volume was average. Belgium saw a number of buyouts and management buyouts, often in the mid-market segment but with few high-profile buyout transactions really standing out. The largest transaction in Belgium in 2013 did, however, involve a private equity fund: in a €6.8 billion deal US-based private equity fund Lone Star, together with Credit Suisse, acquired Royal Park Investments’ structured credit portfolio (the ‘bad bank’ activities of Fortis bank). Other notable private equity transactions included the buy out of Noordzee Helikopters Vlaanderen by its management and French private equity fund Ardian as well as the acquisition by Towerbrook Partners of a majority participation in the Belgium-based Metallum group.

With respect to the financing of buyout transactions, 2013 confirmed a trend towards financing through the public issue of high-yield bonds.

In terms of exits, 2013 mostly confirmed trends revealed during previous years: trade sales and secondary sales (and, to a smaller extent, management buyouts) remain the most frequent exit transactions. In a notable exit, CVC sold its participation in global fruit and vegetable group Univeg to a consortium led by Univeg’s founder Hein Deprez (who had sold a 50 per cent stake in Univeg to CVC in 2006 for €422 million). Other exits include the €360 million sale by Summit Partners of Ogone to French Industrial Player Ingenico and the secondary sale of Belgium-based ADB by Montagu Private Equity to the French private equity fund PAI (for an estimated deal value of €220 million).

It is believed in some quarters that 2013 may well have been the year in which initial public offerings made their (cautious) comeback in Belgium. In a high-profile transaction, CVC exited a major part of its participation in the Belgian Post Group through a €812 million initial public offering on the Brussels Stock Exchange. The US private equity group Apollo, who had acquired the Belgium-based chemical group Taminco in the largest buyout in Belgian history in 2011, organised an initial public offering of Taminco on the New York Stock Exchange in April 2013, allowing it to sell a part of its participation in the course of 2013. Other initial public offerings are rumoured to take place in 2014, although none have yet been officially confirmed. It therefore remains to be seen whether initial public offerings will again become an attractive exit mechanism for private equity firms.

Private equity players on the Belgian marketWith respect to the identity of private equity funds, it should be noted that traditionally, as a result of Belgium’s open economy, international private equity houses (UK and US, but also (and increasingly) Dutch, French and Asian) have been active on the Belgian market. Most major buyouts are carried out by international private equity houses.

The ongoing trend whereby wealthy individuals or wealthy families set up new investments funds or family offices was continued in 2013. A notable transaction in this respect was the formation of Down2Earth, a new investment fund backed by a number

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of wealthy families raising more than €50 million in 2013 (and also announcing its first investment).

The listed private equity and venture capital provider Gimv NV, which is adopting an increasingly international investment strategy, now clearly has a leading role among Belgian private equity funds. Listed holding company Ackermans & van Haaren (through Sofinim) also remains an important player. Other Belgian investments funds (such as Sofindev and Verlinvest) were also (internationally) active in 2013. Netherlands-based funds such as Waterland Investment and AAC Capital are also increasingly active in Belgium.

The traditional players on the venture capital market are seeing more and more competition from university incubators and funds as well as business angels (although their investments are smaller).

ii Operation of the market

Market-standard equity arrangements in BelgiumIn general, a distinction should be made between: a the equity-based remuneration granted to the managers of a buyout or private

equity fund; and b the equity-based incentives in a leveraged buyout (LBO) environment, which are

intended to motivate the management of the target company by offering them the opportunity to benefit from a future exit by the majority shareholder (buyout funds).

We will focus on the second type of equity incentives. (The remuneration granted to fund managers will not be addressed in further detail in this chapter, but it usually consists of a combination of management fees and carried interest (often structured as a preferred dividend).)

Techniques and key provisions in shareholders’ agreementsThe most frequently used methods for rewarding directors and management in LBO companies are equity-based incentive mechanisms (in addition to their normal salary package), whereby managers often have the opportunity to acquire securities at a discount (envy factor).

Different types of securities can be used depending on the importance of the management’s investment or reinvestment in the target company (or in a newco holding shares of the target company). A combination of different types of securities is often used to distinguish between first-tier management and second-tier management.

Below is a summary of the securities most often used in this context, and a brief description of the most frequently used shareholders’ agreement and investment agreement clauses applying to directors and managers holding this type of securities.

The most frequently used type of securities are as follows:a Directors and managers in LBO companies often receive shares, either in the

operational company itself or in the acquisition vehicle used by the buyout fund. b Sometimes buyout funds prefer granting share certificates over shares. This is often

the case in situations where many directors or managers participate in the incentive

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scheme. Share certificates entitle holders to the proceeds generated by the shares (e.g., in cases of a sale of the security or in cases of a dividend distribution), and thus allow the separation of the ‘legal ownership’ and the ‘economic ownership’ of the securities. Certification (usually on shares) is therefore sometimes used as an incentive mechanism in situations whereby the majority shareholder (e.g., a buyout fund) wants to economically incentivise the directors and managers without granting them voting rights in the company. In practice, the securities themselves are then held by a special purpose vehicle (usually a Dutch foundation or ‘STAK’), which issues certificates on these securities to the directors and senior employees concerned.

c An alternative to the use of share certificates consists of granting profit certificates to the directors or managers. Profit certificates are equity securities that do not represent the company’s corporate capital. Their rights and characteristics can be determined in the articles of association. For example, they can be used as an instrument to grant their holder (e.g., the directors or managers) a preferred dividend or a priority right to any liquidation bonus, or both, without granting voting rights (other than some limited mandatory voting rights provided for in the Belgian Companies Code). In practice, they therefore can also allow a separation between the legal and economic ownership. They usually require less administration than share certificates.

d Warrants (entitling holders to subscribe in the future for shares to be newly issued by the company) and options (entitling holders to acquire existing securities from the party providing the option) are also used in LBO companies (often in combination with one of the above-mentioned securities). With respect to stock option plans and warrant plans, it should be noted that they are usually subject to an upfront tax payment due by the beneficiary at the time the option or warrant is given (which may require the beneficiary to obtain funding for these taxes). This upfront tax is final, and no tax will be due upon exercise of the option or warrant. In such economically uncertain times, this upfront taxation (which cannot be recovered or deducted) undermines the use of these plans as an incentive mechanism. Indeed, in view of this upfront taxation, the beneficiary risks ultimately losing money (if the options are ‘out of the money’ at the time of exercise).

Typical clauses in shareholders’ agreements applying to directors and managers include the following:a Restrictions on the transferability of securities held by the director or manager –

these nearly always include a lock-up clause, a right of first refusal for the buyout fund, and drag-along and tag-along rights.

b Good leaver and bad leaver clauses obliging the director or manager to transfer his or her participation in the case of early departure. The exit conditions will, of course, be more favourable for a good leaver than for a bad leaver. Key elements in these good leaver and bad leaver clauses are:• the definition of ‘good leaver’ (e.g., illness, dismissal without cause) and ‘bad

leaver’ (e.g., voluntary resignation; dismissal for cause);

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• the exercise price – in this respect, it should be noted that under Belgian law, good leaver and bad leaver clauses will only be valid to the extent the exercise price is determined in the agreement, or is at least determinable (without further negotiation between parties being required) on the basis of the contractual provisions; and

• the exercise conditions (e.g., an obligation to exercise options immediately upon leaving the company or the possibility to sell at a later stage).

c Clauses determining the rights of the directors and senior employees with respect to the governance of the company (e.g., right to board representation) and the right to receive part of the dividends and proceeds in the case of an exit event – the technical implementation will depend on the type of securities granted to the directors and senior employees. For example, if they receive shares, the most frequently used technique consists of granting them a separate class of shares, including certain specific rights and obligations.

d Clauses relating to protection and further incentivising the directors and senior employees – ‘anti-dilution’, ‘ratchet’ (allowing for an increase of the participation of the directors or senior employees in the event that certain results are obtained), etc. Sometimes a ‘reverse ratchet’ is also included (leading to a decrease of the participation of directors and senior employees in the event that certain results are not achieved).

Sometimes the shareholders’ agreement also includes provisions regarding the expectations the buyout fund has with respect to the role of the management in the event of an exit (e.g., willingness to stay with the company if so requested by the buyer, commitment to provide representations and warranties, management representations).

Standard sales process in BelgiumPrivate auction processWhile exceptions exist, many important transactions that took place on the Belgian market during the past few years were organised through a private auction process, usually led by an investment bank or other financial adviser of the seller.

While the actual organisation of such private auction will vary on a case-by-case basis, the following general steps will typically constitute the framework of the auction process:a Initially, limited (and generally publicly available) information is sent to a fairly

large group of parties that the seller (or his or her financial adviser) believes could be interested in the proposed transaction. This group will typically include both private equity funds and industrial investors. Depending on the nature of the information, the recipients may be requested to sign a ‘light’ confidentiality agreement. Based on this information, the parties receiving the information will be asked to decide whether they wish to participate in the next phase of the auction process.

b During the next phase of the auction process, more extensive information will be provided (usually in the form of an information memorandum containing high-level financial, operational and legal information) to the selected candidates.

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They will only receive such information after having signed a more extensive confidentiality agreement (which, in some cases, may contain non-solicitation, non-compete or similar undertakings). Based on this information, each candidate will have to submit a non-binding ‘indicative’ offer. In their offer letters, candidates will typically have to include not only their proposed purchase price but also, inter alia, their valuation method or methods, financing and due diligence requirements.

c On the basis of the indicative offers, a number of candidates will be allowed to conduct a due diligence on the target company, usually on the basis of information gathered by the seller and made available in a virtual data room or vendor due diligence reports, or both. In Belgian practice, the use of vendor due diligence reports is usually limited to financial and tax due diligence reports, although legal, environmental or commercial vendor due diligence reports are sometimes provided as well. During this phase, a draft purchase agreement will usually be provided to the different candidates as well.

d Whether (and if so, under which conditions) management interviews will occur varies on a case-by-case basis. As a general rule, sellers usually try to avoid (or at least control) any contact between the target’s management and the different candidates.

e At the end of the due diligence phase, each interested candidate will be asked to submit a ‘binding offer letter’, usually including a mark-up of the share purchase agreement. Such letter must set out all conditions of the candidate’s offer, including the offered purchase price, the valuation method or methods used, information on the financing of the offer (bank undertakings may be requested) and details of the management equity incentive scheme (if applicable).

f Following the submission of all binding offers, the seller will chose one or more candidates with whom he or she will enter into final negotiations relating to the purchase agreement and other transaction documentation. In their binding offer letter, candidates will typically ask for an exclusive negotiation right (e.g., for a period of one or two weeks), but in highly competitive auctions, the seller’s position can sometimes be strong enough to refuse exclusivity and to negotiate simultaneously ‘to the finish’ with several candidates.

g Following final negotiations, the purchase agreement will be signed. Whether the signing and closing will occur simultaneously varies on a case-by-case basis. In recent transactions, conditions precedent are often limited to obtaining regulatory approval.

Generally, a well-organised private auction process will lead to a transaction process that lasts between two and six months, although this timing may be impacted by regulatory approval requirements.

Traditional sale processIn exit transactions for private equity funds, the above-mentioned private auction process has become the ‘standard’ sale process. However, quite a few transactions in Belgium are still organised in a less formal way. The way such process is run will vary significantly

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depending on the specific circumstances of a transaction, but the following steps are usually taken before a final purchase agreement is signed:a Letter of intent (memorandum of understanding) – in most transaction

negotiations, parties will at some stage sign a letter of intent. The nature and scope of this document will vary on a case-by-case basis. In some transactions, the letter of intent will already provide for the main terms of the transaction, and so further letters of intent are limited to confirming the parties’ intention to continue negotiations, setting out the framework for future negotiations and possible due diligence, etc. In the Belgian context, a letter of intent should always be carefully drafted as, under Belgian law, a binding sale and purchase agreement will in principle exist as of the moment the parties have reached an agreement on the object of the sale (e.g., shares of the target company) and on the price. A letter of intent providing, for example, for a fixed price for the shares of a target company, could thus be considered as a binding sale and purchase agreement.

b Due diligence – nearly all Belgian transactions include some form of due diligence. The degree and organisation of due diligence will depend on the specific circumstances of a transaction (and the extent to which parties and their advisers are familiar with this process), but purchasers generally at least carry out a financial and legal due diligence (although sometimes only focusing on very high-level issues). In the framework of the due diligence, the purchaser will normally be required to sign a confidentiality agreement.

Since the traditional sales process is less strictly organised than a private auction process, the duration of the process can vary significantly. While some transactions are negotiated and signed in a matter of weeks, others tend to take several months of ‘stop and go’ negotiations.

II LeGAL FrAMewOrK

i Acquisition of control and minority interests

A control investment by a private equity fund in a Belgian company will usually require the fund to acquire a simple majority of the shares (at least 50 per cent plus one share) of that company.

The majority shareholder will, subject to specific provisions in the company’s articles of association, be able to appoint its representatives at the level of the company’s board of directors (the appointment of directors is a simple majority decision of the shareholders’ meeting) and control the majority decisions to be taken by the shareholders’ meeting (such as approval of the annual accounts and of dividend distributions, the granting of discharge to directors).

However, in order to obtain true control of the portfolio company, a fund will typically acquire at least 75 per cent (plus one share) or 80 per cent (plus one share) of the portfolio company, since a number of important decisions to be taken by the shareholders’ meeting are subject to a majority of 75 per cent (capital increases or decreases, mergers and demergers, amendments to the articles of association) or 80 per

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cent (amendment of the company’s corporate purpose or of its legal form, acquisition by the company of its own shares).

As mentioned above, buyout funds will sometimes prefer to structure the management’s equity incentives through securities (such as profit certificates), allowing a separation between ‘legal ownership’ (including voting rights) and ‘economic ownership’ in order to maximise their control over the portfolio company.

Whether or not the sponsor of the fund is located in Belgium will not alter the fund’s or sponsor’s rights, as the same corporate rules apply regardless of the country where the fund or its sponsor are located. However, it may be advisable for the fund to set up an acquisition vehicle in Belgium (or another EU country, or a country with which Belgium has entered into a tax treaty) to optimise the transaction from a tax perspective. To the extent that a transaction (either an investment or an exit) would include payments being made to or received from bank accounts in certain ‘tax haven’ jurisdictions, additional formalities and money-laundering regulations may apply.

ii Fiduciary duties and liabilities

The rights and obligations of a private equity fund as a shareholder or board member of a Belgian portfolio company are the same as those applicable to other shareholders and directors.

In terms of fiduciary duties, it should be noted that as a general principle of Belgian law, a company can only carry out transactions that serve the company’s best interest. Although much discussion exists regarding the specific content of the ‘corporate interest’, in general it can be said that it includes primarily the interests of the company itself, its shareholders, its personnel and its other creditors. In this context, it is important to note that Belgian company law does not recognise the notion of group interest. A company should be managed independently, with a view to its sole individual corporate interest. As such, the company should receive a direct benefit from any transaction carried out with other members of the group, and the company may not be sacrificed for the benefit of the group or of a third party. There should be a balance between the commitments of the various members of the group.

The duty to take into account the ‘corporate interest’ predominantly affects the directors of the company. All of their acts and decisions must be justifiable in view of the company’s corporate interest; if not, they may be held liable. In addition, if a specific transaction is against the corporate interest of a company, this transaction could be declared null and void if the beneficiary was aware of such event or should have been aware thereof.

However, a trend that is noticeable in recent case law is the imposition on shareholders of an obligation to also take the ‘corporate interest’ into account (albeit to a lesser extent than the directors).

In addition to the ‘corporate interest’ requirement, the principle of ‘abuse of majority’ imposes restrictions on the actions taken by shareholders or directors, or both. According to this principle, the minority can claim that a certain decision taken in the shareholders’ meeting (or by the board of directors) is contrary to the company’s interest, and is only to the benefit of the majority shareholders, who abused their majority. As a consequence, such decisions can be declared void.

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Further liabilities of the sponsor’s fund with respect to its investment in a portfolio companyProvided the portfolio company is a limited liability company, the liability of the sponsor’s fund will normally be limited to its capital contribution to the portfolio company (or to the acquisition company set up for the acquisition). It will therefore not be personally liable for the debts and obligations of the company.

Of course, this general principle does not prevent shareholders themselves from ‘voluntarily’ (in practice, upon the request of other contract parties, such as banks) providing guarantees for the obligations of the company.

In addition, Belgian law and case law somewhat nuance this general principle. Indeed, Belgian law provides for a number of circumstances in which the shareholders can be held personally liable for liabilities of the company itself. One example, which may be relevant to some funds, is the liability of the ‘de facto director’ (or ‘shadow director’). Under Belgian law, a number of specific liabilities may also apply to shareholders who, due to their active role in the management of the company, are considered as being de facto directors of the company. These mainly relate to:a gross and manifest negligence having contributed to the bankruptcy of a company; b specific liability towards the Social Security authorities for unpaid social security

contributions; c failure to pay corporate tax prepayments; and d failure to pay VAT.

Over the years, Belgian case law has furthermore developed a doctrine of piercing the corporate veil, which may be applied in very exceptional circumstances. This doctrine, which is often (if not always) invoked in the context of a bankruptcy, sanctions the abuse of legal personality by shareholders. Such abuse has been upheld where there is evidence that the shareholders have continuously disregarded the separate existence and capacity of the company. Whether such abuse exists is a factual appreciation that depends entirely on the specific circumstances of a case. The sanction consists of denying those shareholders the benefit of limited liability, as a result of which they can be held liable for the debts and obligations of the company.

III YeAr IN revIew

i Recent deal activity

As mentioned in Section I, supra, transactions in 2013 involved not only private equity funds but also strategic industrial players (whether they were backed by private equity houses and acting in the framework of a ‘buy and build strategy’ or not). In several of these transactions, the industrial players ultimately succeeded in acquiring the company. A notable transaction in this respect was the sale by the financial group Dexia of its asset management subsidiary Dexia Asset Management. In 2012, Dexia reached an agreement for the sale of Dexia Asset Management with Hong Kong-based private equity group GCS Capital. Following the failure of this transaction to close in the summer of 2013, Dexia Asset Management was ultimately acquired by US-based industrial player New York Life Investments in a €380 million transaction (which closed in February 2014).

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In other transactions (such as the sales of Noordzee Helikopters Vlaanderen, ADB and Alphamin), private auctions relating to the sale of Belgian companies were won by (international) private equity groups, some of which were making their first Belgian acquisition.

Both Belgian and international buyout funds were also increasingly active in mid-market buyouts.

ii Financing

Private equity-backed vehicles in Belgium usually obtain financing through a traditional secured term loan facility. Non-leveraged acquisitions by private equity investors are uncommon. Typical structures often involve mezzanine investors.

Instruments often used to attract equity investors include subordinated convertible bond loans, preference shares, profit certificates and warrants (equity kickers).

Large acquisitions are increasingly financed through the issuance of high-yield bonds (often in combination with a traditional secured term loan facility, which may raise intercreditor issues). The public issuance of high-yield bonds used for acquisition financing solely on the Belgian market is not very common. They are usually issued on larger markets.

In Belgium, loans are syndicated either before or after the deal is done. Regarding post-closing syndication, the key issue is establishing a method of

transfer of the loan that will not require any formalities or extra costs, and that will result in the new lenders being secured in exactly the same manner as if they had been the original signatories to the loan.

In this respect, it should be noted that Belgian material law does not recognise the common law concept of a security agent (except for financial instruments and cash)2. Security can thus only be vested in favour of a creditor, and each original lender needs in principle to be a party to the security agreement.

In view of the above, it is largely accepted in Belgium that multiple lenders benefit from a security through a parallel debt structure (which remains, however, untested before Belgian courts).

Finance documents are usually drafted in accordance with the Loan Market Association standard.

Regarding finance structuring, it should be noted that the new debt-to-equity ratios introduced by the Belgian legislator in 2012 have had an important impact on the financing of buyout transactions. Since 2012, Belgium now has a five-to-one debt-to-equity ratio, which (contrary to previous debt-to-equity ratios) is now applicable to all loans provided to a company by companies related to it.

2 As the granting of a security interest on movable assets is concerned, this will change upon the entry into force of the new Act on Security Interests on Moveable Assets of 11 July 2013, as the new law also allows the granting of a security interest in favour of a security agent, acting on behalf of the secured parties. The new law will enter into force on a date to be determined by Royal Decree, but no later than 1 December 2014.

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iii Key terms of recent control transactions

While deal terms varied substantially from case to case, the following trends (some of which reflect the strong positions of sellers in competitive auction processes) in share purchase agreements were noticeable in 2013: a purchase price determination – in auction processes, there has been a trend

towards ‘locked box’ pricing, where protection for the purchaser is limited by leakage provisions and warranties. To the extent price adjustment clauses are accepted, there has been a trend towards limited (net assets or working capital, or both) adjustments based on closing accounts, and a contractually agreed-upon procedure whereby disputes are submitted to an independent expert for a binding decision’. Certainly in transactions relating to small and medium-sized enterprises, vendor loans and earn outs are reviving again.

b representations and warranties and disclosure – there has been a trend towards: • more limited representations and warranties (limited to fundamental issues

such as title to shares and capacity to transfer the shares) being given by the seller, recent transactions again included broader representations and warranties; and

• acceptance of full data room disclosure, subject to a notion of ‘fair disclosure’ to be agreed on a case-by-case basis. As a result, the purchaser will have to rely on ‘specific indemnities’ covering issues discovered during its due diligence rather than on general representations and warranties.

These trends have also increased the importance of an extensive and thorough due diligence for the purchaser;

c conditionality – there has been a trend towards accepting only limited conditions precedent, such as regulatory approval. To the extent that a regulatory approval is required, sellers often insist heavily on ‘hell or high water’ clauses, whereby the purchaser undertakes to accept any condition or remedy to which the approval is subject without a termination right or the right to renegotiate part of the transaction. Condition precedents relating to financing are exceptional; and

d company-specific material adverse change (MAC) clauses. MAC clauses going beyond specific events and covering, for example, general economic events or acts of God, are exceptional.

iv Exits

As mentioned previously, most private equity exit transactions in 2013 were structured as trade sales or secondary buyouts, with the exception of CVC’s exit from the Belgian Post Group through an initial public offering (See Section I.i, supra).

Iv reGULATOrY DeveLOPMeNTS

i Fund structures in Belgium

In Belgium, many private equity houses operate through foreign law entities (often Luxembourgish or Dutch entities). To the extent private equity houses use Belgian vehicles, they are usually structured as:

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a a silent partnership;b a partnership limited by shares; orc a public limited liability company.

The most commonly used structure is a public limited liability company directly owning the portfolio investments. However, when the concentration of the control in the hand of the founders or the fund’s managers is an important issue, a silent partnership or partnership limited by shares can be valuable alternatives, as they allow replication of the often-used distinction between ‘general’ and ‘limited’ partners.

The above vehicles are only subject to the provisions of the Belgian Companies Code, and as such are ‘unregulated’.

In order to further and attract private investment activities in Belgium, the government has set up regulated vehicles specifically aimed at facilitating investment in private companies. These ‘regulated’ vehicles are generally derived from any of the three aforementioned forms of companies, to which specific requirements or features are added. One of these vehicles is the private close-ended undertaking for collective investment (PRICAF), which is a closed-ended vehicle that enjoys a specific tax treatment akin to a ‘look through’ for the investors. Due to the burden (although limited) resulting from its regulated status, it is not widely used.

ii Belgian regulatory environment

Most currently existing Belgian funds are ‘unregulated’, and are only subject to the rules of the Belgian Companies Code. In respect of the management of these unregulated funds, no registration, licence or authorisation of the management vehicle is required. This will, however, change following the implementation of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 (the AIFM Directive) (see below).

For regulated funds, the applicable legislation usually imposes the use of a public limited liability company or a partnership limited by shares with a set share capital (which is higher than the minimum provided for in the Belgian Companies Code). In addition, the investment fund’s managers must be authorised by the Belgian Financial Services Market Authority (FSMA) before they can start attracting investments in the regulated vehicles (a similar requirement exists for self-managed regulated funds).

Generally, and with the exception of the above-mentioned limited number of regulated funds, private equity funds can thus be freely marketed and operated in Belgium. No specific approvals or other requirements are therefore required for exit transactions carried out by private equity funds as compared to other parties (such as industrial buyers).

The use of other intermediaries (providing investment advice services or related investment services) to attract public investments is subject to the general applicable Belgian and European financial regulations (which require such intermediaries to be licensed before becoming active on the Belgian market or to provide services on the basis of their European passport).

In respect of fundraising, most players ensure that they do not fall into the ‘public’ field by relying on the easily available safe harbours provided by Belgian legislation (which

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is based on the EU directives regarding financial markets and financial instruments). As a result, they do not have to issue a prospectus approved by the FSMA when attracting funds (although the market practice is to circulate to targeted investors an offering memorandum or similar circular, the content of which is broadly the same as what would be found in a prospectus).

Safe harbours are mainly provided for in the Prospectus Directive. Hence, fundraising is not subject to scrutiny when it: a is not made public (no general advertisement or promotion); b is limited to qualified investors and institutional or professional investors (or is

offered to no more than 150 non-qualified investors per EAA Member State, or no more than 150 non-institutional or professional investors);

c requires a participation with a nominal value of at least €100,000, or a consideration payable per investor of at least €100,000, or both; or

d the offer has a total consideration in the EEA of less than €100,000, calculated over a period of 12 months.

iii Impact of the AIFM Directive and European Venture Capital Regulation

The regulatory regime applicable to Belgian private equity funds will be significantly affected by the AIFM Directive. Like the other Member States, Belgium had to implement the AIFM Directive by 22 July 2013. At the time of writing, no implementing legislation has however been approved by the Belgian parliament, who thus missed the European deadline. Nonetheless, the FSMA has issued a Q&A sheet on the transitional period provided for by the directive and on the Belgian national provisions for transposing the directive. Such Q&A sheet is, however, very limited in scope and cannot be seen as true implementing legislation. The exact changes to the regulatory regime can thus not yet be determined (especially taking into account that the AIFM Directive expressly allows Member States to impose stricter requirements and rules than those included in the AIFM Directive). Based on the general principles of the AIFM Directive, it is, however, clear that there will be important changes for Belgian private equity funds, including:a mandatory registration with the FSMA for managers of funds managing or

marketing private equity funds (subject to de minimis thresholds), whereby information will have to be provided regarding both the manager (e.g., the identity of shareholders with qualifying amounts (10 per cent), information on remuneration policies (e.g., incentives, risk versus control)) and the fund (e.g., information regarding investment strategies, leverage policy, risk profiles);

b new rules on disclosure of information relating to strategy, leveraging, financing, etc.; and

c notification obligations for certain transactions.

The AIFM Directive also provides for rules on asset stripping. However, the impact of such rules on Belgian private equity funds should be very limited, as similar (if not more stringent) rules already exist in Belgium as a result of the extensive implementation by Belgium of previous EU directives on capital protection.

In April 2013, the European Parliament and the Council adopted the European Venture Capital Funds Regulation, creating a new ‘European Venture Capital Fund’

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label and including new measures to allow venture capitalists to market their funds across the EU and grow while using a single set of rules. Every fund using the label will have to prove that a high percentage of investments (70 per cent of the capital received from investors) is spent in supporting young and innovative companies.

v OUTLOOK

In view of the uncertain economic and financial climate, developments in the Belgian private equity market in 2014 are hard to predict. Based on the current situation, however, the following trends may be expected:a cautious optimism exists with respect to the evolution of overall M&A activity

in Belgium in 2014. Several economic indicators appear to justify a belief in a further recovery of M&A activity, although any recovery remains fragile and subject to general European and economic worldwide political and economic developments. Industrial players are expected to continue playing an important role in 2014 M&A transactions;

b with respect to venture capital, it is difficult to predict whether 2014 will confirm the improvement in the Belgian market seen over the last two years. The increasing role of wealthy individuals and families appears to be a remaining feature;

c since Belgium is a country with a high number of small and medium-sized (often family-owned) companies, smaller buyout funds are likely to become more active in this market segment, also taking into account the succession problems arising in many of these companies (causing current owners to sell their company). This may lead to an increase in smaller management buyout transactions with deal values not exceeding €20 million;

d with respect to financing, the use of high-yield bonds (either publicly issued or placed with institutional investors through private placements) as a means to partially finance acquisitions is likely to continue and may become even more important. If this trends continues, it may have a positive impact on buyout activity; and

e on the regulatory level, the private equity sector is awaiting the Belgian implementation measures of the AIFM Directive, which, as mentioned above, will lead to several changes in the Belgian regulatory environment. Since these measures are yet unknown, their impact on Belgian private equity funds cannot yet be assessed. The same is true for other, more recent regulatory initiatives taken at EU level (see Section IV, supra).

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Appendix 1

about the authors

StefAAn DeckmynLoyens & LoeffStefaan Deckmyn is a partner in Loyens & Loeff’s corporate and M&A practice group in Brussels. He is also a member of the private equity team.

He has extensive experience in national and international M&A transactions, joint ventures, corporate finance, and private equity and venture capital investments. His clients, which are active in a wide variety of economic sectors, include listed and non-listed corporations and companies, private equity and buyout funds. He also advises on general corporate law matters and deals with corporate restructurings and reorganisations.

Stefaan is a frequent speaker on corporate law topics at various conferences and seminars and is a member of the Brussels Bar, the International Bar Association and the International Association of Young Lawyers. He serves on the board of Voka Metropolitan (the Flemish employers’ organisation in Brussels).

Wim VAnDe VelDeLoyens & LoeffWim Vande Velde is a counsel in Loyens & Loeff’s corporate and M&A practice group in Brussels. He is a member of the Brussels bar.

He has considerable experience in corporate transactions (for both listed and non-listed companies) as well as in general corporate (restructuring) matters, including joint-venture transactions. He has particular experience in the private equity sector. His clients include buyout funds, investments funds as well as listed and non-listed companies.

Wim has acted as a speaker at conferences on corporate and M&A topics, and has written various articles on these subjects and on corporate governance matters. He is member of the International Bar Association and the International Association of Young Lawyers.

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loyenS & loeffLoyens & LoeffNeerveldstraat 101–1031200 BrusselsBelgiumTel: +32 2 743 43 43Fax: +32 2 772 69 55stefaan.deckmyn@loyensloeff.comwim.vande.velde@loyensloeff.comwww.loyensloeff.com