Published on 7th Dec 2018
Why is the reform important for start/scale-ups?
The new Belgian Code on Companies and Associations (BCCA) aims at making Belgian corporate law simpler and more flexible. Belgian company forms will therefore become more attractive to start/scale-ups and investors. Both new and existing start/scale-ups can benefit from these new rules and enjoy more options regarding governance and funding, amongst other things.
Private Limited Liability Company (BV/SRL): standard company form for start/scale-ups
The previous rules governing the BVBA/SPRL were often perceived as being overly complicated or too rigid. The reform aims to make the new BV/SRL a far more flexible company form (like the Flex BV in The Netherlands).
Hence, the private limited liability company (BV/SRL) will become the most suitable company form for start/scale-ups. This simplifies the current situation and it can be expected that this will lead to a better understanding by (foreign) investors of Belgian company law and eventually a greater willingness to invest.
BV/SRL: key features relevant for start/scale-ups
No minimum capital (requirements)
The minimum capital requirements which previously applied to BVBAs/SPRLs are abolished and replaced by the requirement to have sufficient funds upon incorporation. This must be determined taking into account the type of activities of the BV/SRL. The funds must originate in principle from the shareholders, although the BCCA states that other financial sources such as subordinated loans may also be taken into account.
The obligation to prepare a financial plan remains in place and becomes more stringent. Due to the increased importance of the financial plan, it is recommended (although not mandatory) to draft the financial plan with the help of an external financial expert (e.g. an accountant).
Under the new BCCA it is not only be possible to contribute cash or assets (in kind) to a BV/SRL. It is also possible to contribute labour. This has been a hot topic among founders for quite some time. Specific provisions determine how the rules applicable to contributions in cash/kind are applied to contribution of labour. Some situations will, however, require further clarification. For instance, all contributions must in principle be entirely paid up upon incorporation. Yet, this is not possible when the contribution consists of future labour performance. The explanatory note (Memorie van Toelichting/Exposé des Motifs) stipulates that the Articles of Association (AoA) will need to determine the pace at which the labour will be performed. This way it can be determined when this contribution of labour will be considered paid up.
Funding: more categories of securities allowed
According to the previous Belgian Companies Code ("BCC"), private limited liability companies could only issue categories of securities that were explicitly permitted by the BCC. The BCC provided that in a private limited liability company only shares and (regular) bonds could exist (art. 232 BCC). Hence, profit certificates, warrants and convertible bonds could not be issued.
The BCCA overturns this rule. With the entry into force of the BCCA, it became possible for a BV/SRL to issue any category of security as long as such issuance is not prohibited by the BCCA.
Shares – Caveat Emptor (Shareholder beware)
Previously, there was a link between the value of the contribution and the rights attached to the shares. The new BCCA entails an entirely new way of governing the economic and membership rights attached to BV/SRL shares. The default rule remains that all shares have equal economic and membership rights attached to them. Yet, as of the reform, the shareholders may deviate from this default rule in multiple ways. A minimum requirement is that every share has at least economic rights attached to it.
All rules that relate to the concept of “capital” have been abolished or modified. Since there is no longer any share capital, the shares of a BV/SRL will no longer represent such capital. There is no longer any nominal or par value of BV/SRL shares. It is even prohibited for a BV/SRL to use these concepts or refer to them in any way.
There is no longer any connection between the value of the contribution (upon incorporation or afterwards) and the rights attached to the BV/SRL shares. Therefore, it is possible to grant different rights to shares that have been issued in return for a similar contribution, and conversely to grant similar rights to shares that have been issued in return for different contributions. It is also possible to exempt a shareholder from participating in any loss of the company. This removes any doubts related to lion's share (leonijns beding/clause léonine) when granting put options for a fixed price. However, a shareholder may not be excluded from any participation in the profits. Furthermore, this increased flexibility means it is possible to agree freely upon a liquidation preference in a BV/SRL.
As a result of this increased flexibility, (potential) shareholders have to be informed thoroughly about the rights attached to shares, especially with regard to the voting rights attached to the shares and the rights with regard to profit distribution and any rights upon (deemed) liquidation. The board has a duty to duly inform (potential) shareholders and justify the issuance price in light of these rights attached to the shares.
According to the new BCCA, it is possible for a BV/SRL to issue the same types of bonds as were previously restricted to only public limited liability companies (NV/SA), including perpetual bonds and convertible bonds. This change aligns with the general intention to increase the flexibility of the BCCA. In countries such as the Netherlands and the United Kingdom, these types of instruments have proven to be useful tools for start/scale-ups.
Previously, it was not possible for a BVBA/SPRL to issue warrants. This was again a handicap for the BVBA/SPRL because start/scale-ups regularly use warrants to incentivise employees or to offer protection against dilution to investors (anti-dilution warrants). In the new BCCA, this has changes. The BCCA makes it possible for a BV/SRL to issue warrants, which is referred to going forward as "subscription rights" (inschrijvingsrechten/droit de souscription).
The terms and conditions relating to the right of a holder of subscription rights to exercise his/her right are determined at the moment of issuance of the subscription right. Previously, the period during which subscription rights may be exercised could not exceed ten years as from their issuance (art. 499 BCC). If the issuance of subscription rights is intended mainly for identified persons other than employees, the subscription rights could not exceed a five-year term. Under the new BCCA, the 10-year limitation remains in place. However, the notion of employees has become broader and also includes consultants, ManCo's and members of the board of the company (and subsidiaries), even when these are legal entities with a permanent representative. Furthermore, under the BCCA, the 5-year limitation is not applicable if, upon issuance of the subscription rights, all existing shareholders waive their pre-emption right. This has now been expressly clarified in the BCCA to remove any doubt.
The BCCA also increases the flexibility to determine the exercise price of subscription rights. When the preferential subscription rights are cancelled to issue subscription rights to the benefit of identified persons (other than employees), the BCC had imposed a minimum exercise price. This minimum price has been abandoned under the BCCA, making it easier to issue anti-dilution subscription rights or to set the right exercise price for ESOP subscription rights.
Transfer of shares
A BVBA/SPRL previously had very strict conditions when it came to the transferability of its shares. Free transfers of shares – such as is possible in an NV/SA – was not possible.
Without prejudice to more stringent provisions in the AoA and on penalty of nullity, previously, the shares of a shareholder may only be transferred inter vivos or transmitted by cause of death with the consent of at least one half of the shareholders holding at least three-quarters of the share capital, less the rights in respect of which the transfer is proposed.
After the reform, it became possible for the shareholders of a BV/SRL to determine whether or not the shares are freely transferable. This way, the shareholding of the BV/SRL can be made very “closed” or “open”. It is believed that the BV/SRL will thereby become a far more interesting company form for start/scale-up investors than the (old) BVBA/SPRL.
The Belgian legislator leaves it to the shareholders to adopt rules on the transferability of their shares, in the AoA and/or in a shareholders' agreement. The reform nevertheless provides a clear default rule of closed shareholding, which applies in the event that shareholders fail to adopt rules on the transferability of shares.
Possibility to have a single shareholder
Previously, in principle at least two shareholders were necessary to set up a Belgian BVBA/SPRL or NV/SA. One exception to this rule existed, namely the “EBVBA/SPRL-S”. However, there were various restrictions to this company form as compared to the BVBA/SPRL with two shareholders. For example, the paid up capital had to amount to at least EUR 12,400 instead of EUR 6,200. Furthermore, if the sole shareholder is another company, this shareholder was jointly liable for the BVBA's/SPRL's liabilities.
The new BCCA states that certain company forms such as the BV/SRL and the NV/SA may now be incorporated by one single shareholder. This may be a natural person or a legal person. Previous rules in respect to the liability of that sole shareholder will cease to apply.
Keeping control as a founder with new rules on multiple voting rights
As a start/scale-up founder, it is often difficult to remain in control of “your” company. After having multiple financing rounds, founders can find their shareholding (sometimes heavily) diluted. Of course, the company raised new funds and one might hope that the shares have increased in value over time. This is also to the benefit of the founders.
Yet, the economic rights attached to the shares (dividend rights, liquidation proceeds) are not the only aspects that are relevant to the founding shareholders. Membership rights are often key as well. As a founder, the loss of a majority stake in the shareholding of the company will probably imply a loss of power.
The new BCCA provides for a solution in this respect by making multiple voting rights possible in the BV/SRL. Previuolsy, multiple voting rights were expressly prohibited by the BCC. The principle of “one share, one vote” has been one of the cornerstones in Belgian corporate law. Under the BCCA, a BV/SRL may introduce multiple voting rights. Such multiple voting rights may be granted to certain shareholders irrespective of the amount of time they have held their shares. Assuming that the BV/SRL is not listed, the freedom to tailor these multiple voting rights is nearly unlimited.
The instrument of multiple voting rights can allow founders to better protect their “control” over the company for a longer period of time. Much will, of course, depend on the bargaining power of the founder as he/she will need to manage the expectations of investors in respect of balanced (management) powers and veto rights.
If you have further questions about the impact of the Belgian Code on Companies and Associations on your start/scale-up, please do not hesitate to contact us.