Spotlight: real estate M&A transactions in Belgium

All questions

Transactions

i Legal frameworks and deal structures

In deals involving Belgian PERE funds (FIIS), the regulations are extremely limited and are meant to protect the institutional character of the FIIS:

1. the articles of association of the FIIS and all documents related to the issue or transfer of its shares or partnership interests must provide that only eligible investors can acquire such shares or partnership interests;
2. each investor that acquires or subscribes shares or partnership interests confirms in writing its quality to the FIIS and commits to only transfer to an eligible investor who shall undertake the same commitment;
3. the FIIS shall suspend the payment of any dividend to a non-eligible investor; and
4. note that in cases where the FIIS is self-managed and is subject to the full set of provisions of the AIFM Law, then any transfer of a holding of 10 per cent or more must be approved by the FSMA prior to completion.

In public M&A, two typical deal structures can be envisaged: a share purchase and a merger. Relevant regulations and constraints are described below.

Share purchase

A potential buyer can purchase shares of Belgian REITs either on the market or through private sales. Two compulsory requirements will then apply:

1. disclosure of important participations (see ‘Disclosure requirements and duties of the board’, below); and
2. a mandatory public takeover. As from the crossing of the 30 per cent threshold, on a stand-alone, group or consortium basis, the shareholder is obliged to launch a public takeover on all the shares issued by the REIT.

A mandatory public takeover requires a prospectus approved by the FSMA.

Voluntary public takeover

A public takeover is subject to the observance of a strict (disclosure) procedure and requires the involvement of the FSMA and of the target.

The bidder must file its announcement and a draft prospectus with the FSMA, which shall announce the bid and notify the target one business day after receipt. This is merely an announcement, and is not yet an approval of the prospectus.

The period of review of the prospectus by the parties starts with the comments of the board of the target filed with the FSMA and the FSMA approving the prospectus. After formal approval of the prospectus, the board of the target must file a draft response memorandum, also to be approved by the FSMA.

As from this last approval, the acceptance period starts, during which the board of the target shall also inform the works council. The acceptance period often lasts for two to 10 weeks.

Parties wishing to launch a counter bid have until two calendar days before the end of the acceptance period to announce their intent. It must, however, be noted that a counter bid shall only be accepted provided that the price per share offered is 5 per cent higher than the price of the initial offer.

The results of the offer are published five business days after the closure of the acceptance period, with the price being paid 10 business days after this publication, followed by a five to 10 business day period for the potential reopening of the takeover bid.

In practice, shareholders owning an important participation often enter into (soft) undertakings to tender their shares to the offer.

There are two important aspects to note within this process:

1. the bidder must provide certainty to the FSMA with respect to the availability of funds (and therefore its capacity to close). The full price (i.e., for the purchase of all shares) of the offer must be guaranteed, most of the time by a bank guarantee; and
2. in cases where the bidder expects a de-listing, he or she must reach the squeeze-out threshold of 95 per cent, which will allow a reopening of the takeover bid and the compulsory tendering of the remaining shares to the offer.

Merger or other type of contribution

Belgian mandatory takeover legislation provides for certain exemptions, of which the following are the most relevant. No mandatory bid will have to be launched in cases where the 30 per cent threshold is exceeded:

1. as a result of a merger, to the extent the person (on a stand-alone, group or consortium basis) exceeding the threshold did not cast the majority of the votes in the merger resolutions at the REIT’s general meeting; or
2. as a result of a capital increase in cash resolved by the general meeting respecting the legal preference right of existing shareholders. It is important to note only contributions in cash might be exempted from a mandatory public takeover, not a contribution in kind.

Both transactions are subject to mandatory rules provided in Belgian corporate law, including quorum and majority requirements:

1. quorum: at least 50 per cent of the capital should be present or represented at the first shareholders’ meeting. A second meeting can validly decide irrespective of the portion of the capital being represented; and
2. majority: the transaction must obtain the positive vote of at least 75 per cent of the votes cast, abstentions not being included in either the numerator or the denominator.

In terms of pricing and the exchange ratio, the Belgian REIT legislation also contains strict requirements in the context of a merger:

1. in the case of a merger, the fair value of the REIT’s portfolio must be valued by the independent real estate expert of the REIT. No such valuation is required if the merger proposal is filed within four months of the latest valuation and to the extent that the expert confirms that, considering the general economic status and the state of such assets, no new valuation is required. This new valuation is not binding, but the issue price must be justified based on this valuation; and
2. the issue price of the shares of the REIT should not be less than the lower of:
   • the last published net asset value per share dating back to up to four months prior to the date of the filing of the merger proposal or, if the REIT so decides, the date of the merger deed; and
   • the average stock price of the 30 calendar days preceding that same date.

Except in cases where the subsisting entity intends to go public or one of the restricted exemptions applies, a prospectus approved by the FSMA is required to issue or list the new shares, or both.

Disclosure requirements and duties of the board

As from the crossing of a 5 per cent threshold, on a stand-alone, group or consortium basis, the shareholder is obliged to disclose its participation to the REIT, with such disclosure being published. The threshold is often lowered to 3 per cent in the articles of association of most REITs.

The law implementing the Shareholders’ Rights Directive II allows listed Belgian companies to request certain information from intermediaries to identify their shareholders.

Assuming that there is no hostile bid, the board shall most probably collaborate on a regular due diligence exercise over the REIT. The board decides which information will be disclosed taking into account various factors such as the corporate interest of the target, confidentiality duties, equal treatment of shareholders, as well as EU Market Abuse Regulation (MAR) and competition aspects. The Belgian takeover legislation requires that the same information is provided to any competing bidder. Confidentiality agreements with the target or reference shareholders, or both, are common practice to ensure confidentiality of negotiations and information obtained within the context of the due diligence.

MAR and insider list

Since the REIT is listed on a regulated market, the information about a potential transaction and its financing may be inside information for the purposes of the MAR. The parties involved will usually acknowledge being familiar with the statutory prohibitions and restrictions for holders of inside information established under the MAR, and the supplemental rules enacted thereunder, as well as with the legal and regulatory consequences relating to the misuse or improper circulation of inside information, including sanctions and penalties associated with serious or very serious offences under the MAR, and with criminal offences regarding insider trading on the securities markets, and undertake to comply with said prohibitions and restrictions.

The parties involved will also have the obligation to maintain ‘insider lists’ The FSMA can request the communication of such list.

The FSMA may require the parties to a potential bid to make a public announcement, for example, if there are rumours in the market (the ‘put up or shut up’ rule).

If the bidder receives inside information on the target, it must disclose such information in the prospectus, and it cannot acquire or sell target securities until this information is no longer sensitive.

ii Acquisition agreement termsPublic M&A

In public M&A, with a REIT as a target, the consideration depends on the type of deal structure: in a share purchase and (mandatory) public takeover, the consideration will consist in cash, while the consideration in a merger will consist in shares.

In the case of a voluntary public takeover, the bidder can subject its bid to conditions, most of the time referring to the level of participation he or she wants to acquire. Mandatory public takeovers cannot be conditional.

Because of the high level of transparency that is imposed on REITs, the practice shows that representations and warranties, indemnification and covenants are not usual, and any risk is usually factored into the offered price.

The situation is quite different when the REIT acts as seller or purchaser. In such a case, the deal terms are quite similar to any other real estate transactions, with usual conditions precedent, representations and warranties, indemnification clauses and covenants. One specific deal structure to mention when a REIT acts as purchaser: in practice we often see that such deal is structured as a contribution in kind in the capital of the REIT and remunerated in shares (subject to the 30 per cent threshold not being exceeded). The ‘seller’ then places the REIT’s shares on the market shortly after the acquisition, subject to a lock-up period applicable to 5 to 10 per cent of those new issued shares. This type of deal guarantees an acquisition without cash contribution for the REIT concerned.

If the public M&A takes the form of a voluntary public takeover, the bid must relate to all securities issued by the target. The bid may be conditional on the approval of competition authorities, or any other regulatory approvals, and is often subject to conditions, such as an acceptance threshold, or the non-occurrence of a material adverse event beyond the bidder’s control. In practice the FSMA refuses to approve any condition that is likely to limit the success of the bid.

PERE transactions

PERE transactions are similar to other real estate transactions, with usual conditions precedent, representations and warranties, indemnification clauses and covenants. When being a target or a party to a transaction, PERE funds are used to take out insurance to limit, or even reduce to zero, their own exposure.

The most widely used insurance, imported from the UK market, is warranty and indemnity (W&I) insurance, which covers undisclosed risks for the period prior to closing. Parties usually negotiate their terms of acquisition and then provide the purchase agreement to an insurance broker. The insurance company usually reviews the agreed representations and warranties to, as the case may be, exclude some from the insurance coverage. Usual exclusions concern the condition of properties, certain environmental matters and transfer pricing.

On a few occasions, we have seen purchasers also buying title insurance to guarantee title to the underlying real estate asset. Indeed, Belgian mortgage registers have a ‘negative’ value: they will only mention disputes over the ownership when such litigation has started. The absence of such mention therefore does not mean that the ownership is not disputable.

The market is currently experiencing the development of tax insurance to guarantee identified risks and, in specific circumstances, transfer pricing. In such process, (at least) the purchaser must provide the insurance with a robust defence memorandum stating the arguments in favour of the taxpayer and the likelihood of success in a case of litigation.

iii Hostile transactions

No hostile transaction is to be reported on the public M&A side. The public bid of Brookfield on Befimmo has been supported by the management. This is partly due to the fact that most Belgian public companies are owned by a controlling shareholder or group of shareholders. In addition, Belgian law allows the target’s board of directors to implement measures to safeguard the corporate interest and frustrate a hostile bid.

iv Financing considerations

There are two layers of financing: acquisition financing, typically to acquire the shares of the target (whether the latter is listed or not); and real estate financing or refinancing with the target as borrower.

Acquisition financing is characterised by the legal prohibition of financial assistance, meaning that the target cannot grant security interests over its assets in order to guarantee or facilitate the acquisition of its own shares. Acquisition finance is therefore most of the time an unsecured financing with the following notable exceptions:

1. the investor or shareholder shall pledge the shares they hold in the borrower, and the borrower shall pledge the shares and receivables it owns in the target, and strict subordination agreements and waterfall provisions shall bind the parties;
2. the target company might be converted into an ordinary partnership. Under Belgian law, this type of partnership has legal personality, but it is not subject to capital protection rules. Consequently, the prohibition of financial assistance does not apply; and
3. in a ‘double FIIS structure’, the acquisition financing and the real estate financing are consolidated after the merger, with the assets of the target being also used as collateral. Usually, the acquisition financing takes the form of a bridge loan, refinanced after merger.

Real estate financing will first depend on the leverage capacity of the target company; for both corporate law and tax law reasons, it is indeed not possible to over-leverage a company, or to grant security interests (in a portfolio refinancing scenario) in excess of the company’s own benefits of the transaction unless appropriate justification exists considering the company’s own corporate interest. Up to this leverage capacity, the company acts as borrower and grants a market standard collateral package that includes a mortgage, pledge of receivables (e.g., rent receivables, insurance receivables) and pledge of bank accounts. The shareholder usually pledges the shares of the target company and subordinates intragroup loans. A few points must be kept in mind:

1. a mortgage is subject to 1 per cent transfer tax and 0.3 per cent inscription duty computed on the amount for which it is inscribed;
2. general banking terms and conditions usually include a right of pledge and set-off provisions in favour of the account bank that could interfere with the pledge of bank accounts in favour of the lender. Therefore, it is common practice to require from the account bank a waiver of these rights and provisions. This should be disclosed and discussed with the account bank ahead of the closing; and
3. subordination of intragroup loans is most of the time only partial in the sense that the target company can still use excess cash to reimburse the intragroup loan.

v Tax considerations

The typical deal structure described above does not, as such, have adverse tax consequences for the REIT or the FIIS concerned:

1. share transactions are not subject to transfer tax or other types of stamp duties; and
2. a merger between two REITs or two FIIS, or a FIIS and a REIT, is realised through tax neutrality.

Looking at the Befimmo deal, the switch from the REIT regime to the FIIS regime is also realised in tax neutrality.

The situation is, however, quite different for the investor that will acquire shares in the REIT or the FIIS. Dividends distributed are indeed subject to 30 per cent withholding tax subject to an exemption or reduction based on an applicable tax treaty. The withholding tax exemption as provided for by the EU Parent-Subsidiary Directive is indeed not available. Important to note is the dividend withholding tax exemption provided by domestic law when the foreign investor is a pension fund. To benefit from this exemption, the pension fund must:

1. be a non-resident legal person with the sole purpose to manage and invest funds collected for the purposes of paying statutory or supplementary pensions;
2. engage in these management and investment activities without the aim of making profit and in the framework of its statutory purpose;
3. be exempt from income taxes in its country of residence;
4. be the owner of usufructuary of the income generating assets; and
5. not be obliged to transfer the income of such assets to the beneficial owner by virtue of a contractual obligation.

The pension fund must deliver a certificate to the Belgian payor confirming the fulfilment of the above conditions to benefit from the Belgian withholding tax exemption.

In deal structures where the REIT or the FIIS acts as purchaser, a specific tax regime should be mentioned. In the case of a merger in a REIT or a FIIS, or in the case of a contribution of a real estate asset to the REIT or the FIIS, the latent gain is not subject to the ordinary corporate income tax at 25 per cent, but to the exit tax at 15 per cent.

vi Cross-border complications and solutions

Besides the EU AML requirements and EU sanctions, Belgium does not have entry barriers for foreign investors in real estate, except because of the implementation of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investment in the European Union in the case of operations in a highly sensitive sector or in a sector likely to affect security or public order, like critical infrastructure.

Investors should pay specific attention to EU and local merger control regulations, as practice shows that the group and market definitions can be quite broad (certainly for PERE funds where the asset manager has the control and is part of a large international group), and the Belgian thresholds are quite low.