A Q&A guide to venture capital law in Belgium.
The Q&A gives a high level overview of the venture capital market; tax incentives; fund structures; fund formation and regulation; investor protection; founder and employee incentivisation and exits.
To compare answers across multiple jurisdictions, visit the Venture Capital Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to venture capital. For a full list of jurisdictional Q&As visit www.practicallaw.com/venturecapital-mjg.
Venture capital is a subset of private equity and refers to equity investments made for the launch (seed investments), early development (start-up) or expansion of a business. Venture capital provides long-term, committed, risk sharing equity capital, to help unquoted companies grow and compete.
Venture capital investors focus on increasing shareholders' value. However, in general, they differ from other investment sources by:
Taking a minority stake in the venture capital company.
Attending board meetings, mostly as non-executives.
Providing day-to-day management experience, advice and network facilities.
Venture capital transactions usually encompass seed, start-up or expansion capital. Buyouts focus on more mature companies with already developed steady, maintainable cash flows, and the investors usually take a majority or significant minority stake in the target.
The following statistics are from the latest report of the European Private Equity and Venture Capital Association (EVCA).
Fundraising by Belgian early-stage funds in 2010 stayed relatively stable (EUR42.0 million compared to EUR50 million in 2009) (as at 1 November 2011, US$1 was about EUR0.7).
The majority of all new funds raised in 2010 were committed by Belgian investors.
Investments in Belgian companies in 2010 included:
Seed. These decreased to EUR4.8 million (compared to EUR6.0 million in 2009).
Start-up investments. These decreased to EUR59.9 million (compared to EUR85.3 million in 2009).
Later stage venture investments. These decreased to EUR14.9 million (compared to EUR60.8 million in 2009).
The investment amount distribution by sector was:
Life sciences. 26.6% (compared to 28.6% in 2009).
Computer and consumer electronics. 21.7% (compared to 13.5 % in 2009).
Energy and environment. 26.6% (compared to 18.4% in 2009).
Venture capital investments in 2010 in companies based in Belgium totalled EUR79.6 million from 48 transactions (compared to EUR152.1 million from 122 transactions in 2009).
Initiatives to stimulate innovation and entrepreneurship developed by the governments (in particular the regional governments) have a positive impact on venture capital investments.
There are no recent or proposed regulatory changes affecting the venture capital industry.
Apart from the special tax regime applicable to privaks (see Question 6), investors in any Belgian limited liability company enjoy favourable tax treatment on capital gains and dividends.
Capital gains realised by a Belgian company on the sale of shares in a subsidiary are exempt from corporate income tax. A minimum duration of one year of the shareholding is required. However, capital losses on shares are not tax-deductible, except following the liquidation of a company. In this case the capital loss can be deducted from taxable income up to the amount of the investor's paid-in capital.
In general, interest payments are subject to withholding tax of 21% or, most likely, 25%. However, many exemptions exist.
Dividends allocated by a subsidiary to its parent company are exempt from withholding tax to the extent that the parent company is located in another EU member state, or in a state with which Belgium has concluded a double tax treaty. At the time income is attributed, the parent company must have maintained, during an uninterrupted period of at least one year, a minimum share of 10% in the capital of its subsidiary. The extension of this exemption to dividend payments to a tax treaty state (non-EU member state) applies to dividends allocated or made payable from 1 January 2007 (Directive 90/435/EEC on the taxation of parent companies and subsidiaries (Parent-Subsidiary Directive)).
A participation exemption applies in relation to dividends attributable to a Belgian permanent establishment. Dividends are initially included in the taxable income and then 95% of the dividends are subsequently deducted from that taxable income. The participation exemption is not granted to income allocated or assigned by companies which are either:
Not liable to corporate income tax or to a similar foreign tax.
Established in countries offering a legally established tax system which is markedly more advantageous than the Belgian system. A tax regime is considered markedly more advantageous when the normal corporate income tax rate or the effective tax burden is lower than 15%. The common right fiscal provisions applicable to companies in the EU are deemed not to be markedly more advantageous.
To benefit from the scheme, the following conditions must be satisfied:
A holding requirement of at least 10% of the share capital or no less than EUR2.5 million.
The shares must be held in full ownership for at least one year.
The shares must be held as financial fixed assets (portfolio investments are not eligible).
In case of lack or insufficiency of taxable profit, the remaining participation exemption can now be carried over to the next taxable periods, due to the Cobelfret judgment of the European Court of Justice (CJEC, 12 February 2009, nr. C-138/07).
A 10% withholding tax is charged on the amounts attributed following the liquidation of the issuing company, following the total or partial distribution of the company's assets or the repurchase by the company of its own shares. The amount liable to withholding tax is the amount chargeable as a dividend under corporate income tax provisions. However, shareholders are exempt under the Parent-Subsidiary Directive.
Interest payable on loans taken out by Belgian companies to acquire Belgian or foreign shareholdings is generally fully deductible.
There are no general thin capitalisation rules and so it is not necessary to observe any debt-to-equity ratio within a Belgian company. Specific thin capitalisation rules can be imposed in special circumstances but only for corporate income tax purposes. Where these rules apply they impose, as of tax year 2013, a debt-to-equity ratio of:
1:1 where the lender is a director or an individual shareholder.
5:1 for intra-group loans.
There is no time limit when carrying forward tax losses.
A holding company that acquires a stake in a business, without intervening directly or indirectly in its management, is not deemed to be paying VAT. Therefore, VAT cannot be deducted by that company.
Capital contributions to a Belgian company are not subject to any registration tax at company formation or at a later date (except, sometimes, for contributions of real estate into the capital of a company).
The NID allows companies to claim a tax deduction for the cost of capital by deducting a notional interest rate calculated on the company's equity (including reserves) (Law on Notional Interest Deduction). It aims to encourage equity funding in small and medium-sized companies. Where there is no (or no sufficient) tax base, the notional interest deduction cannot be carried forward.
In 2010, Belgian investors committed 63% of the total fundraising (private equity and venture capital). Investments in Belgian companies accounted for EUR938 million. Asset managers (including private equity houses other than funds-of-funds) became the main source of capital for Belgian funds, accounting for nearly 50% of the total.
Pension funds also became strong supporters of the Belgian funds, contributing 26.7% to the total amount.
The structure of a venture capital fund can impact on how investments are made (for example, regional funds which only invest in specific geographical areas).
Syndication involves two or more venture capital firms taking an equity stake in an investment, either in the same round or at different points in time. There is a clear trend towards syndication, which has become a common practice in Belgium (for example, for university related funds and funds created by the regional governments).
Venture capital funds engage in syndication to share knowledge and financial risk. In doing so, venture capital firms aim to reduce the volatility of their returns, improve their management capabilities or gain access to deal flow generated by the syndicate. However, venture capital firms may be less motivated to syndicate transactions if they believe that they can generate greater investment returns by investing by themselves. Management of syndicated investments may be less flexible and take more time than non-syndicated investments, as well as making conflict more likely.
Companies can be incorporated in various legal forms (Company Code 7 May 1999 (Wetboek van Vennootschappen or Code des Sociétés)). The structure most commonly used for domestic venture capital funds is a Belgian company limited by shares (naamloze vennootschap (NV) or société anonyme (SA)).
An NV or SA must have at least two shareholders. The shareholders can be corporate entities or individuals, and Belgian or foreign. The minimum share capital is EUR61,500. Shares can be either registered or bearer and can be with or without a nominal value. From 1 January 2008, any issuance of bearer shares is no longer allowed by law. In general, shares are freely transferable. However, company law permits transfers to be restricted by means of either a shareholders' agreement or a statutory clause (Article 510, Company Code).
Two specific types of undertakings for collective investment (instelling voor collectieve belegging or organisme de placement collectif) have been created:
The public privak (publieke privak or pricaf publique). A public privak can be constituted either:
by contract (prifonds). Prifonds take the form of an investment fund (beleggingsfonds or fonds de placement). That is, they are a set of jointly owned assets, managed by a management company (beheersvennootschap or société de gestion) which has no legal personality;
as an investment company (beleggingsvennootschap or société d'investissement). These privaks have their own legal personality and can be incorporated either as an NV or SA, or a limited partnership by shares (commanditaire vennootschap op aandelen or société en commandite par actions). They are subject to company law, with a few specific exceptions.
The private privak (pricaf privée). A private privak can only be constituted as an investment company. It can be incorporated as any of the following:
a company limited by shares (an NV or SA);
a limited partnership by shares;
an ordinary limited partnership (gewone commanditaire vennootschap or société en commandite simple).
The most common investment objective is to achieve a maximum return on investment and various techniques are applied to do so. Most investments are structured as straight equity because of the available tax exemptions on the proceeds (whether dividends or capital gains) (see Question 2).
A venture capital fund, structured as a company limited by shares, is unregulated if its shares are not offered to the public in Belgium. However, a private equity fund in the form of a privak (public or private) must fulfil certain legal requirements.
All Belgian public privaks must be registered with the Banking, Finance and Insurance Commission (BFIC). To register, it must prove that it has the technical and financial resources, and accounting and administrative facilities, that are appropriate to its activities. In addition, the board of directors must be sufficiently independent and the board's members must have the appropriate experience to carry out their functions properly.
A venture capital fund can qualify as an institution for collective investment. To do so, a licence from the BFIC must be obtained.
A private equity fund, structured as a company limited by shares, is unregulated if its shares are not offered to the public in Belgium. However, a private equity fund in the form of a privak (public or private) must fulfil certain legal requirements.
A public privak can only be registered if the BFIC has:
Given the management company or the investment company authorisation.
Accepted the management regulations or the contents of the articles of association.
Approved the appointment of the depository.
The essential document for the application is the prospectus. It must include all the information required by potential buyers in order to make a full assessment of the investment policy and the related risks.
The private privak regime is now governed by the Royal Decree of 23 May 2007 (Privak Decree) which has substantially reduced the list of requirements.
A private privak can only be constituted as an investment company in certain legal forms (see Question 6). The private privak must comply with (among other things) the following requirements:
It must have at least six investors. The minimum commitment of each investor is EUR50,000.
Its shareholders' meeting must decide with a majority of at least four shareholders jointly holding at least 50% of the voting rights (subject to any other applicable majority requirements provided by the Company Code and the private privak's bye-laws).
These limitations do not apply if at least one shareholder holds at least 30% of the private privak's voting shares and has a special status, such as:
An undertaking for collective investments (UCITS).
A pension fund.
A company operating under governmental authorisation.
The classes of financial instruments in which the private privak is allowed to invest are limited to financial instruments issued by non-listed (Belgian or foreign) companies, including private loans (such as mezzanine financing). The private privak has no geographical limitation nor is there an obligation to diversify investments.
The private privak is not allowed to control a portfolio company. However, there are certain exceptions to this prohibition, such as in the case of a company incorporated exclusively with a view to holding debt instruments (Privak Decree).
Before starting its activities, the private privak must be registered on the Ministry of Finance's list of private privaks. The statutory auditor supervises private privaks (Privak Decree).
The nature of the offer determines the type of marketing rules and restrictions that apply:
Non-public offers (private placement). There are no specific rules as to who can promote and market shares in a private fund (including private privaks), or to whom the marketing can be directed. Investors in a fund incorporated as an ordinary company limited by shares can be approached using a private placement memorandum, but only if this is not considered to be a public offer (see below, Public offers).
There are restrictions on promoting and marketing products, including rules concerning:
advertising (including prohibiting misleading and comparative advertising);
the obligation to inform consumers;
illegal selling practices (for example, the dissemination of inaccurate or false information);
abuse provisions (for example, tying (koppelverkoop)).
Public offers. The law of 16 June 2006 relating to public offers of investment instruments and the admission of investment instruments to trading on regulated markets (Prospectus Law) implements Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) into Belgian law. These require an approved prospectus to be published for qualifying transactions. However, the Prospectus Law goes further than the Prospectus Directive by including transactions not covered by the directive.
A management company administers investment vehicles such as public and private privaks. The rights of the investors and obligations of the management company are usually set out in the internal rules of the fund. Typical clauses include:
Veto rights for minority investors in relation to specified transactions.
Formation of an investment committee, containing representatives of minority investors, that can veto new investments and exits (dependent on the fund manager's track record).
Protection where transactions involve a conflict of interest (for example, a requirement for approval by independent directors).
Generally, investors buy or subscribe to common shares. Convertible bonds and warrants, giving potential access to the share capital, are also used. Holders of common shares are entitled to the full benefits of a successful exit but have no priority over other shareholders in the event of an unsuccessful exit. The NID abolished capital contribution duty as from 1 January 2006 and, in addition, introduced a risk capital deduction (see Question 2, Notional interest deduction (NID)), which is an attractive system for new equity funded entities and activities in Belgium.
Convertible debt has no priority over other debts in the event that the company is liquidated. If bank finance is involved, the banks are likely to insist that the convertible debt is treated as subordinate to the bank debt.
The advantage of warrants is that there is no need to make any cash outlay before it becomes apparent that the warrants are in profit. The disadvantage is that the company does not receive any immediate injection of funds from the investment. Therefore, warrants are typically only used as an additional equity kicker to a debt or equity investor who simultaneously provides a substantial cash investment to the company.
Venture capitalists basically analyse the existing financial condition of the target company, the developmental stage of its products or services, and the target company's prospects. They also consider the valuations of other comparable companies. However, valuation is ultimately subject to negotiation and subjective.
Sometimes the gap between the company's desire for a high valuation and the venture capitalist's desire for a lower valuation can be bridged. For instance, the venture capitalist might agree on the higher valuation and if certain projected milestones are not met (such as developing a product within a designated time period or achieving a certain level of sales) the venture capitalist becomes entitled to additional shares without extra payment.
For the venture capital investment process, due diligence means a rigorous investigation and evaluation of an investment opportunity before committing funds. This process includes a review of its management team, business conditions, projections, philosophy and investment terms and conditions.
Due diligence is also carried out to verify any business opportunities that survive the initial screening stage. This verification process consists of:
Checking the accuracy of business plans, audited accounts and management accounts.
Getting replies to warranty and other standard questionnaires.
Patent searches.
Technical studies.
Unpublished accounting information and subjective information are equally important. Such data are collected by calling customers, suppliers, lawyers, and bankers, and by checking trade journals.
The principal legal documents produced in a venture capital transaction are the:
Investment agreement in order to realise the venture capital investment.
Shareholders' agreement.
Loan agreements (such as convertible debt).
The investment agreement is comprised of representations and warranties made by the founders and/or shareholders. An investor is not allowed to rely on a representation or warranty if he:
Had actual knowledge that the representation or warranty was false.
Should reasonably have known that the representation was false, based on the information disclosed by the shareholders in the data room before the transaction was completed.
Institutional shareholders are often extremely reluctant to provide any representations or warranties other than confirmation that they own the shares.
The indemnification obligations of the shareholders are usually limited by an amount to be agreed between parties (which varies on a case-by-case basis), threshold and duration, and may be guaranteed by various instruments. Representations and warranties include those given in relation to tax, other financial matters, and social and environmental issues.
Management are often the only people who can make accurate representations and warranties. However, they are usually reluctant to incur personal liability by doing so. Possible solutions include:
Limiting liability to a specified amount.
Requiring management to make representations only on a best knowledge basis.
A non-compete undertaking is usually requested from the shareholders and the management.
Where specific problems are identified in the due diligence, founders and/or shareholders can be required to indemnify against any losses arising out of those problems, regardless of whether the investor had actual knowledge of them.
Venture capital funds usually take their share equity through preferred shares or a mix of ordinary or preferred shares.
Capital shares can be divided into preference shares and non-preference shares. Preference shares are entitled to receive, with priority over non-preferred stockholders, a certain percentage of the net profit. In addition, they may receive, with priority, a part of the liquidation surplus.
If the investee company enters into liquidation and, after payment of all existing creditors, the value of the remaining assets is larger than the capital amount, the company has a so-called liquidation balance or surplus. This surplus is distributed first to the holders of preferred shares, then to the owners of the non-preferred capital shares. The holders of profit-sharing certificates receive a share of the surplus, if specified in the articles.
A minority investor is usually granted the right to nominate one or more members of the board of directors of the company. This right can be included in the company's articles (a binding nomination), but is much more likely to be found in the shareholders' agreement.
Minority shareholders can also be granted veto rights over specific corporate actions, such as:
Use of authorised capital by the board of directors.
Appointment of managing directors and key managers.
Decisions in relation to certain investments, divestments, borrowing, lending and guaranteeing.
This is often achieved by issuing a separate class of shares to the minority investor and then granting veto rights to that class of shares (or to a director appointed by the investor).
A majority shareholder can remove the company's board of directors virtually at will and, therefore, does not require additional protection.
In general, shares are freely transferable. However, company law permits transfers to be restricted by means of either a shareholders' agreement or a statutory clause (Article 510, Company Code).
A shareholders' agreement or a statutory clause typically contains share transfer restrictions such as standstill, pre-emptive rights as well as tag- and drag-along clauses.
Under Belgian law it is disputed whether shareholders' agreements can be entered into for an indefinite period.
Certain provisions are usually omitted from the articles for reasons of confidentiality.
A shareholders' agreement or a statutory clause typically contains pre-emptive rights as well as tag- and drag-along clauses.
Statutory pre-emption rights only apply to share issues for cash consideration (as opposed to a contribution in kind). Newly issued shares must first be offered to existing shareholders. The same rule applies to issues of convertible bonds or warrants. The holders of non-voting shares have a statutory pre-emption right on any issue of new shares, whether with or without voting rights, except where two tranches of shares, respectively with and without voting rights, are issued.
The articles cannot restrict or exclude the pre-emption rights in a general way. However, if deciding on an increase of capital, and subject to certain documentary requirements, the general meeting of shareholders or the board of directors, acting within the framework of the authorised capital, can limit or cancel the pre-emption rights of shareholders in the interests of the company.
As a result of this, a standard Belgian shareholders' agreement, subject to certain statutory restrictions, generally provides for specific pre-emption rights which protect the investors in relation to any further issues of shares by an investee company.
Subject to specific provisions in respect of certain regulated businesses, no governmental consents are generally required.
The costs of the venture capital funds are generally covered by the fund itself. In some cases venture capital funds receive a (yearly) fee from the investee company for services rendered or as a member of the board of directors.
Founders and employees are commonly incentivised through a combination of shares and options.
Share option plans are also often used because they can receive favourable tax treatment in Belgium. For example, it is possible to pay relatively low upfront tax at the time of the grant of the share options and to realise a tax-free capital gain, provided that the options are not exercised earlier than three years from the date of the grant (Law of 26 March 1999 relating to the 1998 Belgian Employment Action Plan). In addition, a well-designed share option plan can provide for a period of vesting (which determines when the options become exercisable).
Typical clauses to ensure the long-term commitment of the founders to the venture are:
Good leaver/bad leaver provisions. A bad leaver forfeits all or some of his equity (or share options). A good leaver or his estate can keep his equity in the company and will have the benefit of any future upside (if he dies or has to retire due to illness, for example).
Non-compete undertaking. A non-compete undertaking is usually requested from the founders to the venture.
The options for an exit from an unsuccessful company are generally limited. Under certain circumstances, a separate sale (carve-out) of healthy business units can be considered. In extreme situations, a company can be liquidated (on a solvent or insolvent basis) or declared bankrupt.
The advantages and disadvantages of these alternatives can vary widely in each case.
The most commonly used forms of exit are:
Secondary sales (where the venture capital fund sells his interest in the company to a third party).
Trade sales of the company to a third party.
Auctions, which are particularly beneficial if they are organised between strategic third party buyers and investment underwriters contemplating an initial public offer (IPO) for the company.
An IPO of the company on the relevant stock exchange.
Although the IPO remains the most prestigious and profitable exit, current slow-moving worldwide stock market conditions mean that trade sales remain the most popular form of exit in Belgium.
An exit strategy is likely to be found in the shareholders' agreement.
T +32 2 644 0511
F +32 2 646 3847
E luc.wynant@vow.be
W www.vow.be
Qualified. Belgium, 1989
Areas of practice. Private equity, corporate and financial law.
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