SME merger-acquisition: how to secure your external growth operation?

Did you know that more than 60% of M&A deals fail due to avoidable legal errors? Faced with this alarming observation, SME managers are seeking to secure their external growth projects while avoiding legal and tax pitfalls. Maître Innocent TWAGIRAMUNGU, an experienced lawyer in Brussels, has been supporting companies in these complex operations since 2005 with a rigorous and human approach.

• It is essential to check the valid economic reasons for your transaction according to article 183 bis of the CIR (sine qua non condition to avoid tax reclassification)
• Negotiate asset-liability guarantees between 10% and 50% of the sale value, with deductibles of 0.5% to 2% depending on the assessed risk
• Anticipate the limited transfer of tax losses according to article 206 § 2 of the CIR (calculation based on the net tax assets of the absorbed company)
• Take advantage of the silent parent-subsidiary merger if you hold more than 90% of the shares (light procedure without additional reporting)

SME merger-acquisition: distinguishing the two approaches to better choose

Before embarking on your external growth project, you must understand the fundamental difference between merger and acquisition. Theremerger by absorptionconsists of completely integrating one company into another, with the absorbed company legally disappearing. L’acquisition of securities, for its part, maintains the legal existence of the target company which simply becomes a subsidiary. This distinction directly impacts your strategy and the steps to take.

Since the May 2023 reform transposing the European directive on corporate mobility, new opportunities have become available to Belgian SMEs. You can now opt for thesimplified merger between sister companiesor thesplit by separation, mechanisms particularly suited to the restructuring of family groups. The silent parent-subsidiary merger constitutes a particularly advantageous simplified procedure when the absorbing company holds at least 90% of the shares of the absorbed company, making it possible to dispense with the additional report.

Legal and financial risks vary considerably depending on the option chosen. A poorly prepared merger can lead to devastating tax adjustments, conflicts with minority shareholders or the calling into question of tax neutrality. To avoid these pitfalls, here are the crucial steps to follow.

Please note:As part of acompany restructuring in Belgium, legal support is essential to navigate between the different legal options available and optimize the resulting corporate structure.

Securing the preparatory phase of your SME merger-acquisition

Structuring legal due diligence adapted to your SME

The first step consists of forming a multidisciplinary team subject toprofessional secrecy. This team must cover legal, tax, social and financial aspects. For an SME, adapting this team to the size of the operation is crucial to control costs (note that a social audit exemption applies if the target SME has no employees, thus significantly reducing costs and time).

Establish a personalized checklist based on your industry. For example, an industrial SME will need to pay particular attention to environmental authorizations, while a service company will prioritize customer contracts and intellectual property. Thereoptimal durationof this phase is 4 to 6 weeks maximum to maintain the negotiation dynamic.

The use of a secure document platform, called a virtual data room, makes it possible to centralize sensitive documents while tracking consultations. This precaution protects the confidentiality of the information exchanged and facilitates the work of your advisors.

Negotiate preliminary agreements methodically

Drafting the letter of intent marks the formal start of negotiations. This document must include aexclusivity clause of 4 to 6 weeksto secure your procedures. At the same time, a bilateral confidentiality clause of at least 24 months protects the interests of both parties in the event of failure of negotiations. It is essential to include a non-employee clause, contractually prohibiting solicitation of the target company’s staff during the negotiation period and 12 months after the end of negotiations.

Break-up fees, these break-up compensations of between 1% and 3% of the transaction value, must be negotiated with caution. They protect against unjustified abandonment while preserving the necessary flexibility.

The negotiation ofasset-liability guaranteesconstitutes a crucial moment. The amount generally varies between 10% and 50% of the transfer value, with deductibles of between 0.5% and 2% of the transfer value depending on the level of risk assessed. The duration extends from 24 to 36 months for general declarations and from 36 to 60 months for specific tax, social or customs declarations. A technological SME could, for example, negotiate a guarantee of 30% over 36 months for intellectual property aspects, while a commercial company will be satisfied with 15% over 24 months.

Advice :To guarantee the effective execution of asset-liability guarantee commitments (GAP), favor their implementation by conventional escrow or bank guarantee. These practical arrangements offer legal certainty greater than simple contractual commitments and reassure the buyer about the solvency of the transferor post-transaction.

Strictly respect the legal formalities of your SME merger-acquisition

Prepare and submit the merger project in accordance with the rules

The establishment of the merger project by the administrative bodies of the two companies must respect strict formalism. This document details the terms of the merger, the share exchange ratio and the consequences for shareholders.

Filing with the registry and publication inAnnexes to the Belgian Official Gazettemust take place at least 6 weeks before the decision-making general meeting (note: SRLs must establish the project 45 days before the general meeting compared to 6 weeks for other corporate forms). This incompressible legal deadline allows shareholders and creditors to become aware of the project.

The auditor’s special report on the exchange ratio constitutes an essential guarantee for minority shareholders. This document certifies theeconomic relevanceof the transaction and the fairness of the proposed exchange ratio. Minority shareholders must be informed at least 1 month before the general meeting by personalized communication.

Illustrative example:A Brussels SRL specializing in the distribution of electronic products plans to merge with its main competitor. On January 15, the boards of directors established the merger project. Given the status of SRL, filing with the registry must take place before February 1st to allow the general meeting to be held on March 1st. The auditor evaluates the exchange ratio at 1 share of the absorbing company for 1.35 shares of the SRL, based on a multi-criteria valuation including net accounting assets, discounted cash flows and sector multiples.

Organize the decision-making general meeting while respecting the voting conditions

The general meeting can only validly deliberate if50% minimum of shareholdersare present or represented. This quorum condition guarantees the representativeness of the decision.

The SME merger-acquisition must receive aqualified majority of 75% of the votesto be approved. This requirement protects the interests of all shareholders and ensures the legitimacy of the transaction.

• The report must be drawn up by notarial deed under penalty of absolute nullity.
• Minority shareholders holding at least 5% of the capital can request management expertise
• An appeal for annulment remains possible for any interested party in the event of non-compliance with the substantive rules.

Optimize your SME merger-acquisition fiscally while protecting your interests

Verification ofthree conditions of fiscal neutralityof article 211 of the CIR 1992 is mandatory. First, the transaction must concern a Belgian or European resident company. Second, it must not have tax evasion as its main goal. Third, in the event of a cross-border merger, a Belgian establishment must be maintained. The sine qua non condition remains the demonstration of valid economic reasons according to article 183 bis of the CIR to avoid reclassification as an operation for purely fiscal purposes by the administration.

Although optional, requesting prior approval from the FPS Finances is strongly recommended. This approach secures the tax neutrality regime and avoids unpleasant surprises during a subsequent audit.

Planning theaccounting retroactivitymust not exceed 6 months, tax retroactivity being capped at 7 months. This temporal limitation avoids complications in terms of VAT and corporate tax. For example, a merger decided in June can have a retroactive effect from January 1 of the same year, thus simplifying accounting management. It should be noted that the transfer of tax losses remains limited according to article 206 § 2 of the CIR according to the net tax assets of the absorbed company, while the continuity of depreciation is automatically preserved according to article 212 CIR (the tax characteristics of the elements transferred being maintained as if the merger had not taken place).

Please note:The calculation of the amount of transferable tax losses is carried out by multiplying the net tax assets of the absorbed company by the corporate tax rate. This limitation aims to avoid trading in loss-making companies for purely tax purposes. For example, if the net tax assets amount to 500,000 euros, the maximum amount of transferable losses will be 125,000 euros (500,000 x 25%).

Anticipating post-merger formalities greatly facilitates the transition. The cessation of VAT registration of the absorbed company must take place within 30 days. Commercial contracts containing change of control clauses require preventive renegotiation. Human resources management, including mandatory consultations with the works council depending on the size of the entities, must be planned from the start of the process.

SME merger and acquisition operations represent crucial moments in the life of a company. Maître Innocent TWAGIRAMUNGU supports Brussels leaders in these complex procedures by combining in-depth legal expertise and a human approach. His firm offers personalized support from the negotiation phase to the finalization of the transaction, including tax optimization and legal security. If you are considering an external growth operation in Brussels, do not hesitate to seek its expertise to transform your project into lasting success.