Contributions in kind, mergers, divisions and equivalent operations can give rise to conflicts of interest on the part of the persons initiating the operation. This is especially the case, for example, for a business combination involving two companies with the same reference shareholder:

In the case of such operations, the future power relations between shareholders in the company that arises from the business combination are determined on the basis of the valuation of the companies involved in the combination. To guarantee the economic interests of the minority shareholders, the exchange ratio used in such operations is of prime importance.

In order to support the decision-making process within the listed companies in respect of operations that involve conflicts of interest on the part of the persons initiating the operation, and in order to enable all those concerned to perform their role to the full, the FSMA deems it important to recall a number of principles that apply to these types of operations[1]. In addition, it wishes to address a number of practical questions and good practices.

1 As regards contributions in kind, this document deals only with operations on which the general meeting takes decisions, and treats these only from the standpoint of the company whose capital is being increased.

  • 1. What is the role of the board of directors?

    A proposal for a contribution in kind, merger, division or equivalent operation is initiated by the board of directors. The final decision about the operation, however, rests with the general meeting of shareholders. With a view to the decision-making by the general meeting, the board of directors and the auditor must draw up a report on the specific aspects covered by law (see FAQ 3).

  • 2. What is the role of the shareholders?

    The board of directors makes a proposal for a contribution in kind, merger, division or equivalent operation, but the final decision rests with the general meeting of shareholders.

    The general meeting can vote validly on such an operation only if the shareholders in attendance represent at least half of the company capital. If this condition is not met, then the company must call a second general meeting that can make a decision on the board of directors' proposal regardless of the proportion of the share capital represented.

    In order to be approved by the general meeting, the board's proposal must obtain three-quarters of the votes cast at the meeting.

    Shareholders are entitled to put questions about the operation to the directors and the statutory auditor regarding the operation and, for example, about its effects on the development of the company and hence on the value of their share. Under certain conditions, they may put additional points on the agenda of the general meeting. They are also free, of course, to vote against the operation in person or by proxy.

  • 3. What are the statutory reporting obligations of the board of directors and the statutory auditor to the shareholders?

    Contents of the reports

    Mergers and divisions

    The reporting obligation in the event of a merger and of a division is very similar.

    First, the board of directors must draw up a proposal for a merger or division. Next, the board of directors must prepare a merger or division report that describes the assets of the companies concerned, providing comments and a justification from a legal and economic viewpoint of the desirability of the operation, the terms on and manner in which it will take place and its consequences.

    The merger or division report must indicate the share exchange ratio and the method according to which it was determined, the relative importance to be attached to these methods and the valuation arrived at (see FAQ 7). If any particular difficulties were encountered when determining the exchange ratio, this must be mentioned in the reports.

    Finally, the statutory auditor must also prepare a written report stating whether or not, in his or her view, the exchange ratio is reasonable.

    Contributions in kind

    In the event of a capital increase via contributions in kind, the statutory auditor of the company receiving the contribution must prepare a report referring to the description of each contribution and to the valuation methods used. Unlike in the case of a merger or division, for contributions in kind, the law does not require the statutory auditor to give an opinion on the reasonableness of the valuation used.

    The board of directors must, in turn, draw up a special report setting out why both the contribution and the proposed capital increase is in the interest of the company and, where applicable, why the conclusions of the statutory auditor's report were not followed.

    Publication of the reports

    A proposal for a merger or division must be filed by each company involved, six weeks before the general meeting, with the clerk's office of the commercial court in the district in which the company has its registered office, and must be published by means of an extract or in the form of a notice in the Annexes to the Belgian Official Gazette (Moniteur belge/Belgisch Staatsblad).

    A proposal for a merger or division and the other legal reports, as well as the special reports relating to a contribution in kind, must be mentioned on the agenda of the general meeting which is to decide on the merger or division proposal or the capital increase as a result of a contribution in kind.

    Listed companies must make the reports available to shareholders on the company website at the latest on the date of publication of the notice of general meeting, that is, at least 30 days before the general meeting.

    Listed companies must submit the FSMA the notice of general meeting, including the documents to be put before the general meeting. They must do so at the latest at the time when the information is made available to the shareholders. The FSMA will publish that information via STORI[1].

  • 4. What is the role of the independent directors and of the statutory auditor of the listed company?

    In order to ensure that a listed company is not managed for the benefit of individual interests rather than in the interest of all shareholders, company law stipulates that it shall appoint independent directors. This means that in the event of conflicts of interest, and independently of the possible application of conflict of interest rules (see FAQ 5) , a critical attitude on the part of the independent directors is of crucial importance for protecting the rights of minority shareholders.

    The FSMA urges independent directors, if it should be necessary in order for them to fulfil their role, to call upon their own legal advisors and/or valuation experts.

    For contributions in kind, mergers, divisions or equivalent operations, the statutory auditor is tasked with a special audit assignment see FAQ 3). In the case of a merger or division, the task of the statutory auditor is to determine whether the information contained in the proposal for merger or division and, where applicable, in the reports by the board of directors, enables the general meeting to take a fully informed decision, and in particular to state the extent to which the share exchange ratio is reasonable from the point of view of the shareholders of the company to which he or she reports.

    In the case of a contribution in kind, the role of the statutory auditor is limited to commenting on the identification and description of the assets being contributed or transferred, as well as on the valuation methods used by the board when determining the consideration (see FAQ 3). Nevertheless, the auditor must pay particular attention to the valuations used in such operations as well. A critical attitude on the part of the auditor as regards the determination of the exchange ratio is of great importance for the protection of the rights of the minority shareholders.

    The FSMA is always prepared to exchange views confidentially with individual directors and/or the statutory auditor, and will in any case contact them if it should consider it opportune.

  • 5. Are the conflict of interest rules for intra-group decisions (Art. 524 of the Companies Code) applicable to these types of operations?

    The various companies within a group sometimes have diverging interests when it comes to an intra-group operation.

    If decisions or operations by listed companies may have an effect on other companies in the group, the law provides for conflict of interest rules. The starting point for this is that intra-group operations are permitted, but are subject to a procedure involving the independent directors and accompanied by an information obligation towards shareholders and third parties via the annual report.

    The majority of legal commentators take the view that these conflict of interest rules apply only to decisions or operations that fall within the competence of the board of directors and do not apply to decisions or operations, such as those addressed in these FAQs, which fall within the competence of the general meeting. The protection offered by the procedure is not necessary, according to the current view, if the general meeting takes the final decision. For if the general meeting judges that an operation proposed by the board of directors is not in the interest of the company, it is free in principle to reject the proposal. In practice, however, this is not always the case, for example in situations where the reference shareholder has sufficient voting rights to approve the operation. For this reason, the FSMA supports the idea that when it comes to operations that give rise to conflicts of interest on the part of the persons initiating the operation, the conflict of interest rules be applied voluntarily or 'by analogy'.

    The FSMA has noted, moreover, that in practice this is often what happens. The board of directors of a listed company applies the conflict of interest rules voluntarily, with the aim of determining whether the operation takes place under conditions that are at arm’s length. This practice deserves to be followed, because the application of the conflict of interest rules allows and at the same time requires independent directors, aided by one or more independent experts, to take an explicit standpoint regarding the operation.

    The FSMA further considers it a good practice for the report drawn up by the independent directors to be made available in full to the shareholders at the time when the general meeting is called.

  • 6. What are the points requiring attention with regard to a fairness opinion?

    Although this is not mandatory, (independent) directors of a listed company often task a financial expert with drawing up a fairness opinion on the proposed exchange ratio (see FAQ 7). This is a good practice.

    For a valuation analysis to be regarded as a fairness opinion, such a report must, in the FSMA's view, meet a number of conditions:

    • The analysis must be delivered by a professional and independent party; special attention needs therefore to be paid to the selection of the financial expert. This means first and foremost that the expertise (financial and technical knowledge as well as familiarity with the activities of the company concerned), resources and professional reputation of the expert should be appropriate for the assignment. Furthermore, the expert appointed must be independent both of the parties involved in the operation and of the operation itself. He or she may not, for example, have any interest in the success of the operation as a result of the way in which he or she is remunerated for the assignment.
      The takeover legislation includes explicit criteria for the appointment of an independent valuation expert in cases of takeover bids launched by a controlling shareholder. The FSMA advises companies to follow similar criteria for selecting the expert who is to prepare a fairness opinion.
    • The valuation made by the expert who provides a fairness opinion must be as broad as possible. Substantial limitations regarding the valuation task are not desirable. Thus, the FSMA takes the view that the expert should also test the reasonableness of the business plans, forecasts and hypotheses underlying the valuation.

    In order that the shareholders may be able to estimate correctly the scope of the fairness opinion, the FSMA recommends that listed companies provide explicit explanations in the special and/or written reports (see FAQ 3) as regards the independence of the expert, including the structure of the latter's remuneration, the scope of (and any limitations on) his or her assignment and the conclusion of his or her work.

  • 7. What kind of information on the justification of the exchange ratio must be reported in the legal reports?

    The passage in the report (see FAQ 3) which the board of directors devotes to the exchange ratio is of great importance. The exchange ratio determines how many shares of the company resulting from the business combination the shareholders of the existing company/companies will receive, per share held in that company/those companies. The share exchange ratio is based on a valuation of the companies involved in the business combination. It is decisive for the future power relations between the shareholders in the company(ies) resulting from the business company.

    In order to enable the shareholders to form a well-founded judgment on the valuations of the assets and liabilities in question and to assess the fairness of the exchange ratio, the FSMA considers that the most important hypotheses on which the valuations are based must be reported in quantitative form.

    Competition sensitivity is often invoked as a counterargument against providing quantitative information. The challenge is thus to find a balance between the obligation to provide meaningful information to shareholders, on the one hand, and on the other hand, the need to protect the competitiveness of the companies involved in the operation. The FSMA considers that the most important hypotheses used for the valuation must be mentioned at least in general terms. In a number of cases, a solution may be to provide information, for example, in the form of a composite annual growth rate and/or an average over the budgeted period. Furthermore, important deviations from the hypotheses used in the past or from the consensus of the analysts must be justified.

    Finally, the FSMA considers that the shareholders must be informed, via the reports, of the parameters that affect the principal valuation hypotheses and of their extent (sensitivity analysis).

  • 8. Are these type of operations exempted from the prospectus obligation?

    If listed companies request the listing of new shares resulting from a merger, division or contribution in kind, they are not required to publish a prospectus. They do, however, have to provide the public with information that the FSMA considers as equivalent to the information that must be included in a prospectus.

    The publication of a document containing such equivalent information is required, in principle, only at the time when the new shares are listed, i.e., after the approval of the operation by the general meeting.

    However, the FSMA recommends that listed companies make available to shareholders, even before the general meeting, as much relevant information as possible (e.g. pro forma information about the combined entity, historical financial information on the entities concerned drawn up in line with IFRS). This information can be made available via the special reports or via separate documents whose availability is announced in a press release.

    The FSMA also invites the parties concerned to submit to it the relevant additional information (e.g., pro formas) well before its publication. The exemption from the prospectus obligation applies on condition that the FSMA considers the information made available to the public as equivalent, and hence the parties concerned have everything to gain from finding out as soon as possible whether the FSMA has any comments.

  • 9. What are the points requiring attention with regard to communications about the operation?

    The most important sources of information for shareholders of the listed company(ies) in question when it comes to a contribution in kind, merger, division or equivalent operation are the reports required by law.

    These reports must be made available to shareholders and the public at the latest thirty days before the general meeting (see FAQ 3). If the companies concerned or their directors wish to communicate via additional communication channels (press releases, interviews, etc.) about the operation, they must ensure that the information disseminated via those channels is fair, accurate, true and not misleading as regards (certain aspects of) the proposed operation.

    The FSMA expects the listed companies to apply the following guidelines, among others:

    • clearly mention that the proposed operation has yet to be approved by the shareholders in a general meeting, with specific conditions in respect of attendance and majority votes;
    • not give the impression that the operation and/or the information made available has already been approved by the FSMA;
    • ensure that the content of the information is consistent with the information provided in the reports made available; and
    • always refer, for more information, to the reports that have been made available.
  • 10. What is the competence of the FSMA?

    The FSMA does not take a position on the suitability and/or the procedures for the proposed operation. The decision on the approval of the operation is entirely up to the shareholders of the listed company. The FSMA strives to ensure that the shareholders who are to decide on the operation receive as complete and accurate information as possible. The recommendations provided in these FAQs are to be understood in the light of that objective.

    Listed companies are not required to obtain prior approval from the FSMA for the operation or the reports drawn up as part of such an operation.

    The FSMA may, however, publish a warning after the publication of the legally required reports if it is of the opinion that the information that the listed company has made available is inadequate or misleading, or that there could be a threat to the equal treatment of securities holders.

    In order to avoid such an ex post intervention, the FSMA advises listed companies to inform it well in advance of any planned operations that could give rise to conflicts of interest on the part of the persons initiating the operation. So doing will enable the FSMA to convey any comments it may have on the draft documents to the listed company before the latter publishes them.