New Code of Companies and Associations: what is the impact on transactional finance practice?

14 December 2018

The Belgian Parliament is considering the adoption of a new Code of Companies and Associations. The new Code will have a significant (and generally positive) impact on Belgian (transactional) finance practice. Highlights include private limited liability companies without share capital and a simplification of the corporate action process.

Background and timing

The Belgian Government has proposed a new Code of Companies and Associations ("CCA"), which significantly simplifies and modernises Belgian corporate law (see Eubelius Spotlights June 2018). The new CCA was prepared by four experts affiliated with the Belgian Centre for Company Law, including Marieke Wyckaert, a partner in  Eubelius' Corporate and Finance Practice, in her capacity as professor of law at KULeuven.

The draft CCA was approved by the Federal Council of Ministers in a second reading on 25 May 2018 and by the parliamentary commission in a second reading on 27 November 2018. The parliamentary process is ongoing.

The CCA will have a generally positive impact on Belgian transactional finance practice. Some of the key changes in this respect are summarised below.

Flexible private limited liability company

The private limited liability company ("Private LLC") regime will be replaced by a light and more flexible regime. A Private LLC can be incorporated without share capital, with one director and with one shareholder having one voting share. This will make it easier to structure a group of companies in Belgium. Free transfer of shares is possible, but requires amendment of the articles of association. The Private LLC is further marked by a flexible internal approval process.

With this freedom comes a set of responsibilities: the lack of "share capital" in the Private LLC will be compensated for by a different set of creditor protection obligations. For example, the founders have a duty to ensure that the company has sufficient starting funds to carry out the intended activity (a general duty of care which is not very different from the existing regime, as interpreted by Belgian courts), supported by an extensive financial plan. In order to assess the sufficiency of the starting funds for a company, the founders must take into account the envisaged activities and possible additional financing sources (e.g. debt financing). Further, it is possible to "replace" the share capital with restricted reserves that are locked in the articles of association.

In addition, the CCA sets out a new restriction on distributions by Private LLCs, i.e. a liquidity-based distribution test. In summary, distributions may not lead to the company's equity dropping below zero (net asset test), and the company must ensure that it has sufficient cash to comply with its obligations over a running period of at least 12 months (liquidity test). The responsibility to assess the liquidity test lies with the director(s) of the Private LLC, who will be required to draw up a report to justify the distribution. This obligation is aimed at encouraging the director(s) to exercise due diligence when conducting the liquidity test, enabling any lender to ensure that the distribution adequately takes into account the liquidity position of the company, and provides the director(s) with the opportunity to compile evidence in case the legal validity of a certain distribution should be challenged. In addition, a lender might consider negotiating additional contractual limitations on distributions.

Impact on share pledges

Under the CCA, the default rule remains that shares in a Private LLC can only be transferred with the consent of at least half of the shareholders holding 75% of the shares (minus the shares which are to be transferred), but it will now be possible for companies to deviate from the default rule in their articles of association. If a free transfer of shares is not allowed in the articles of association, an amendment to the articles will still be required to pledge the shares of a Private LLC.

There are no major changes to the transferability of shares in a public limited liability company ("Public LLC").

Further, non-listed companies will be able to issue classes of shares with multiple voting rights. In principle, the pledgee will retain these multiple voting rights upon enforcement of the pledge. Given that the voting rights "stick" to the share, they are not lost upon a transfer.

The situation will be different for listed companies that have introduced double voting rights. While listed companies will – under certain conditions – be able to award a double voting right to "loyal shareholders" who retain shares for more than two years, they will be awarded this right in their capacity as shareholders and the voting rights will not "stick" to the share. As a result, the double voting right will, as a rule, be lost upon a transfer, such as the enforcement of a pledge.


There is greater flexibility for structuring share participations under the new CCA.

A Private LLC can issue all types of securities that are not prohibited by law. In addition, the CCA provides for almost maximum flexibility in structuring the rights of shares (e.g. preferred dividend rights, multiple voting rights, conditional voting rights or no voting rights).

Further, it will also become possible to contribute additional capital without issuing new shares, and thus without requiring amendment of the articles of association.

Flexible internal approval processes – written deliberation

Although the directors of Public LLCs were already allowed to pass resolutions by way of written deliberation, this was often difficult to apply in practice as it required (i) explicit authorisation in the articles of association and (ii) urgency. Further, there was no explicit legal basis for written deliberation in Private LLCs.

The new CCA allows written resolutions in both Public LLCs and Private LLCs and removes the (difficult-to-assess) requirement for urgency. Given that written decision-making is increasingly common in companies of all types, this is a welcome change for many companies.

Change of control

The current article 556 of the Companies Code states that only the shareholder can decide to grant rights to third parties which have an impact on the assets or liabilities of the company, or create a debt or obligation to be borne by the company, the exercise of which depends on the change of control of (or a takeover bid for) the company.

This was originally intended as a restriction on protective measures against takeover bids for listed companies that were considered undesirable by the target's board of directors. In view of the possible conflicts of interest of the directors of the target company, this provision required a resolution of the general meeting of shareholders for the transactions listed therein. This provision was interpreted in a very broad manner in finance practice (going beyond the original intention of the provision).

The new CCA aims at returning to the original intention of the legislator. First, by limiting the scope to listed companies. Secondly, by stating that only transactions or agreements which grant rights or create debts or obligations and which have a "considerable" influence on the assets of the company are in scope. In other words, they must concern rights, debts or obligations which are of such a nature that they can reasonably be regarded as protective measures against undesirable takeover attempts. We should note that many "smaller" transactions can also be considered to have a considerable influence when aggregated. The impact for listed companies remains to be seen, but the new provision provides some very welcome flexibility for non-listed companies (a resolution of the shareholders should generally no longer be required in these companies).

Adoption of the registered office connecting factor

In view of the case law of the Court of Justice of the European Union promoting the free establishment of companies, countries which have opted for the real corporate seat system, such as Belgium, are subject to some undesirable consequences. On the one hand, a Belgian company with its real corporate seat in Belgium cannot "emigrate" without a change of nationality, while, on the other hand, e.g. a Dutch company (being subject to the registered office connecting factor), can immigrate to Belgium without having to change its nationality. In order to promote legal certainty and to meet the economic and legal reality, the CCA now uses the registered office connecting factor, which means that Belgian law will apply if a company has its registered office in Belgium.

Conversion of company type

It is not unusual in finance practice to prohibit the conversion of a certain company to another type of company in credit and pledge agreements. Some company types will be converted by force of law, such as the partnership limited by shares ("commanditaire vennootschap op aandelen"/"société en commandite par actions") to a Public LLC, and the current private limited liability company ("besloten vennootschap met beperkte aansprakelijkheid"/"société privée à responsabilité limitée") to a Private LLC. Will this trigger a misrepresentation under a credit agreement (e.g. stating as a repeating representation that the company is a partnership limited by shares), or a breach of the prohibition on conversion from one type of company to another? In our view, these clauses should be interpreted in a pragmatic manner. Given that the change will be by force of law (with no action having to be taken by the company) and will generally have no adverse impact on the rights of creditors, this should not trigger a breach of the credit or pledge agreement.

The situation may be different when the company actively chooses to change its company type as a result of the change in law (e.g. from a Public LLC to a Private LLC, because the two regimes are more similar than ever and the Private LLC allows for more customisation). In that case, it should be assessed on a case-by-case basis whether lender approval is required. Nevertheless, given the fact that lender rights are generally not adversely impacted, it would take a brave lender to assert default under a credit agreement or pledge agreement solely on that basis or to withhold approval for a change of company type.

Financial assistance

Despite the removal of the concept of "capital" in a Private LLC, the CCA has maintained restrictions on financial assistance that enables a third party to obtain shares or depositary receipts in the company. It has been clear for some time that the relationship between these transactions and the concept of the company's equity is rather artificial and that any new rules must prevent the abuses that can arise from the various conflicts of interest which may be present in these transactions.

The new starting point is that – in principle – it is permitted to grant financial assistance, but that this may not, however, be done while disregarding the rights of minority shareholders, nor may it jeopardise the continuity of the company. The proposed provision is a highly simplified version of the current rules, the scope of which remains unchanged, including the interpretation given to it by case law. The most important limitation is that the transaction may only take place using funds which are eligible for distribution. In order to prevent the same available funds being used several times, this rule is supplemented by an obligation to create an unavailable reserve for the value of the financial assistance.

Furthermore, the transaction requires the authorisation of the general shareholders meeting, in compliance with the attendance and majority requirements for an amendment of the articles of association. The transaction is carried out under the responsibility of the management body, which draws up a special report for this purpose.

Conflicts of interest

The new CCA provides for new, stricter rules on potential conflicts of interest. A conflicted director in a Private LLC has the duty to withdraw. Additionally, if the sole director has, or all the directors have, a conflict of interest, then the decision or the transaction is submitted to the general shareholders meeting.

Cap on directors' liability

The directors' liability is limited to specific amounts, linked to the size and therefore to the social impact of the company, varying from EUR 250,000 to EUR 12,000,000 (aggregate for all directors together). On the other hand, there is a prohibition on exoneration and indemnification by the company or its subsidiaries. The legislator hopes that introducing this cap will make it easier to insure the directors' liability risk. The financial risk to which the director is exposed will be more readily assessable and will thus remain insurable.