For many companies, 2020 will turn out to be drastically different than expected. The impact of the COVID-19 pandemic is still hard to predict, but there is no doubt that a number of companies will face liquidity constraints, and possibly pressure on financial covenants and/or their rating, as a result of lower revenue, and a tightening of the credit market. Relief, after cancelling dividends and reallocating cash within the group, may require raising new equity or hybrid instruments, possibly on an accelerated basis. This memorandum explores paths to fast-track equity raises and provides a practical guide for boards and senior management of Belgian companies.1
We plot a few legal and strategic parameters based on three scenarios: a "rescuer" set-up; an ABB offering; and a rights issue with a short offer period. The choice for either scenario will be essentially driven by the question of who is willing to fund: one or a few specific investors; a limited group of qualified investors; or a wider investor base including existing shareholders. Time to money will be different in each scenario.
1. The "rescuer" set-up. Think of one or a few identified "rescuers" who are ready to put in money in return for fresh equity, in spite of circumstances. This could possibly be a reference shareholder, a new investor (such as a private equity fund looking to deploy its "dry powder" at attractive valuations) or, in certain sectors, the Belgian State.2 "Rescuer" scenarios can largely be made to measure and provide quick relief. This set-up will, however, require the cancellation of the preemptive rights of existing shareholders to the benefit of pre-identified persons (i.e., the rescuers), which triggers a couple of additional requirements from a Belgian corporate law perspective.
- Size. "Rescuer" equity raises are not limited in size per se. For listed companies, however, the requisite speed and confidentiality of the transaction will indirectly limit the amount of capital they can raise. To avoid having to call a shareholders' meeting, the board will need to be able to issue the equity out of the authorized capital, which may in the meantime have been (partly) used up. 3 For a fast-track "rescuer" equity raise without shareholders' meeting, the provision of the articles of association ("AoA") on authorized capital needs to expressly authorize override of preemptive rights of existing shareholders. In addition, for listed companies, the newly issued shares, which are to be admitted to trading, need to be limited to 20% of the outstanding shares in order to benefit from a prospectus exemption (see "Disclosure" below).
- Type of securities. Acting under the authorized capital, the board can only resolve to issue shares of an existing class (usually ordinary shares) or convertible bonds ("CBs"). Accordingly, should a "rescuer" investor negotiate for preference shares or other securities (e.g., profit sharing certificates), a shareholders' meeting would need to be called.
- Disclosure. This scenario is "disclosure-light". No offering prospectus is necessary since there is no broader marketing. Furthermore, no listing prospectus is needed as long as the new shares do not amount to more than 20% of the outstanding shares of the same class (calculated on a rolling 12-month period) already admitted to trading. 4 Preference shares or CBs would typically not be admitted to trading in this scenario. However, in case of CBs, upon their conversion the underlying ordinary shares can be admitted to trading without a prospectus if they represent less than 20% of the outstanding shares of the same class (calculated on a rolling 12-month period) already admitted to trading.
Any capital increase requires a board report and an auditor's
report5 , but the exact content will depend on the
structure of the capital increase. Although, technically, the
auditor's report is issued based on the final and approved
board report, in practice both are drafted in parallel and adjusted
to one another.
The board report should address, among other matters, (i) the issue price and the impact of the transaction on the shareholders' rights and (ii) the reasons for the cancellation of the preemptive rights of existing shareholders in favor of pre-identified persons (including a justification as to why the transaction and the issue price are in the company's best interest, taking into account its financial situation, the identity of the beneficiaries and the nature and size of the cash injection).
The auditor should in turn consider whether the financial and accounting information included in the board report is true and fair in all material respects and sufficiently informative, and provide a "detailed assessment" of the board's justification of the issue price. 6
- Issue price. As described above, the board and auditor's reports will need to devote significant attention to the issue price. However, the minimum issue price rule of Article 598 of the old BCC (i.e., a floor equal to the trailing 30 day average share price) no longer applies, even if the AoAhave not been aligned to the BCCA. Boards (and auditors) of listed companies may perhaps be tempted, when having to justify the transaction and issue price in light of the corporate interest pursuant to the new requirements, to refer to the old minimum price rule as a benchmark. We would counsel against that: in the current equity market turmoil the recent trading performance will often not be a relevant metric, but there is also no legal basis for it and doing so would amount to reintroducing the abolished rule through market practice.
meeting. The logistics of an expedited board meeting
to resolve on the equity raise (or to convene the shareholders'
meeting) should prove relatively straightforward: the AoA usually
allow board meetings to be convened within a short timeline in case
of urgency (and formalities can be waived if all board members
attend), and to take place via telephone or video conference. The
BCCA also allows board decision making by unanimous written consent
for any type of decision. 7 Several considerations may
nevertheless support the organization of a board meeting rather
than decisionmaking through written resolutions. First and
foremost, written resolutions would prevent a true discussion and
debate around the potentially delicate considerations related to
corporate benefit in the context of a dilutive selective issuance,
and it may perhaps be more difficult to raise the business judgment
defense if there is no record of deliberation and real exchanges on
all the issues. Also, a royal decree aimed at facilitating the
practical organization of board and shareholders' meetings is
expected to introduce additional flexibility.
Be aware that in the "rescuer" scenario, conflict of interest rules apply at the level of the board of directors: any director de facto representing a shareholder who is subscribing for a selective capital increase must abstain from voting at the board meeting.8
deed. Corporate resolutions to increase the share
capital require a notarial deed. The notary must record the board
resolutions to issue capital in the presence of at least one
director; other directors may dial-in remotely. In case it is the
shareholders' meeting that resolves on the capital issuance, at
least one person representing the shareholders will need to be
present. The investors subscribing for the capital increase also
need to be appear. In the current climate, physical presence should
be minimized as much as possible through appropriate proxies (with
power of substitution for maximum flexibility).
Belgian notaries have restricted the scope of their activities since the COVID-19 outbreak, and will only pass deeds in "extremely urgent" matters, including to avoid significant financial consequences. Emergency equity raises should ordinarily fall in that category.
- Reports. Any capital increase requires a board report and an auditor's report5 , but the exact content will depend on the structure of the capital increase. Although, technically, the auditor's report is issued based on the final and approved board report, in practice both are drafted in parallel and adjusted to one another.
Electronic signatures. Electronic signatures are recognized as a matter of Belgian civil law, and can be used for most of the documents required in the context of an equity raise (board resolutions, board and auditor's reports9 , proxies for the shareholders' meeting, etc). The notary, however, will usually require "wet" signatures for investors, i.e., the persons effectively subscribing for the capital increase. In practice, the deed can often be passed based on a scanned copy, with the original being provided later.
- Timing. Expect a timeline of a few days to a couple of weeks, if the issuance is decided by the board. Due diligence would typically be limited to key documents, such as board materials, and calls with management. Contractual documentation involves only NDAs and a bilateral agreement with the investors. Such a bilateral agreement would, for a sizeable investment, take the form of a robust investment agreement, which could potentially include governance provisions (e.g., board representation) and for non-listed companies information rights that the investors will enjoy going forward. The key drivers for timing will be agreeing on the terms of the investment with the fund providers and the drafting of the board and auditor's reports.10
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1. For an overview of the measures adopted in Belgium so far to mitigate the effects of COVID-19, see our alert memorandum Belgium's Response to Mitigate the Effects of COVID-19.
2. The press reported that the Belgian State is considering the possibility to provide capital or convertible bonds through its federal investment vehicle, SFPI/FPIM (or a separate vehicle administered by SFPI/FPIM), for businesses in strategic sectors such as logistics, petrochemicals, infrastructure, food and transport. On State aid implications, see the Communication from the Commission, "Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak", OJ March 20, 2020, as amended, OJ April 4, 2020 and our alert memoranda State Aid Temporary Framework to Support the Economy in the Context of the COVID-19 Outbreak and Amendment to the State Aid Temporary Framework to Support the Economy in the Context of the COVID-19 Outbreak.
3. For listed companies specifically, the authorized capital cannot be higher than 100% of the issued share capital.
4. Another possibility is for the new shares in excess of 20% not to be admitted to trading immediately, and for a listing prospectus to be drawn up for admission to trading within 90 days. See Euronext, Book I, Rule 61002/1 which provides that when there is no public offering, application for admission to trading of the new shares (of the same class as those outstanding) shall be made no later than 90 days after their issuance.
5. This is a mandatory provision of the Belgian Code on Companies and Associations ("BCCA"), which applies even if the AoA have not yet been aligned to the BCCA, unless waived by unanimous consent of all shareholders. Under the old Belgian Company Code ("BCC"), special report requirements were limited to certain types of capital increases.
6. The latter content requirement seems to be a step up from the old BCC, which required that the auditor's report included an opinion "on the elements on the basis of which the issue price has been calculated, as well as on the justification thereof". It will thus be important for the board of directors to timely engage with the auditor to ensure that the auditor feels sufficiently comfortable with the (potentially deeply discounted) issue price.
7. As opposed to the BCC which required urgency and due justification in the corporate interest. Even if the AoA still restate the old BCC, an emergency equity raise would seem to meet these conditions.
8. A similar rule applies at the level of the shareholders' meeting: if the "rescuer" is a shareholder holding more than 10% of the voting rights (alone or in concert/with affiliates), it must abstain from voting at the shareholders' meeting resolving on the capital increase.
9. This has been explicitly confirmed by the Institute of Auditors in a communication of March 20, 2020 on the possible impact of COVID-19 on audit work.
10. Companies issuing CBs for the benefit of pre-identified persons must communicate the board and auditor's reports to the FSMA 15 days before convening the board or the shareholders' meeting (depending on who resolves on the issuance). This could raise issues in case of urgency, unless the FSMA is able to respond swiftly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.