BELGIUM: An Introduction to Corporate/M&A
Overview of the Belgian M&A Market
Belgium is mainly an open SME-driven economy with many solid family-owned companies. As a result, the M&A landscape is slightly different from other (especially larger) European countries. Given the size of the Belgian economy and companies, the majority of M&A transactions are small or mid-size transactions.
Following a record breaking 2021, 2022 has experienced a significant slowdown in the global M&A market with a 39% decrease in total deal value (USD3,600 billion in 2022 compared to USD5,900 billion in 2021). The Belgian M&A market has not been spared with a total reported deal value for 2022 amounting to EUR26 billion (compared to EUR30 billion in 2021).
Although the M&A market had a strong first half of the year, it was mainly during the second half of the year that transaction volumes dropped, especially in the higher end of the market. In general, macroeonomic factors such as the interest rates rise, the inflationary pressures and the related cost-of-living crisis, the supply chain disruptions and, obviously, the geopolitical situation in Ukraine, have put pressure on companies and financial investors. Nonetheless, it is worth noting that in terms of impact, despite these factors, the market activity has returned to its pre-pandemic level.
Among the most important transactions in 2022, the acquisition by Bain Capital of House of HR and the corporate joint venture of Umicore and PowerCo SE, the Volkswagen AG (Volkswagen) battery subsidiary may be mentioned. In terms of sectors, the technology, industrials, real estate and consumer sectors remained key sectors.
M&A Trends and Developments
Private equity (PE) and venture capital (VC) firms facing changing economic conditions
Over the past couple of years, the Belgian M&A market has seen increased activity of venture capital and private equity firms. Also worth noting is that many entrepreneurial families and/or captains of industry have organised their estate in a family office. The latter are very active in the segment of small to mid-size deals and accountable for an important part of the Belgian VC/PE deal activity. However, as a result of the changing economic conditions, it seems that private equity and venture capital firms are in no hurry to invest despite the large amount of cash at their disposal. In particular, the interest rates rise and the more stringent conditions in obtaining bank financing can explain the more prudent approach of these actors. From a sellers’ perspective, due to lower valuations resulting from the current economic conditions, shareholders seem less inclined to initiate sale processes.
In early 2023, the economic uncertainty still remains and the level of activity in the maket has not yet rebounded to 2021 levels. However, this situation could lead companies to look for new financially stronger partners, which would lead to new transactions in the course of the year.
Generation shift and taxation
Given Belgium’s SME-driven economy with plenty of strong and well-performing family-owned companies, the owner’s retirement is one of the most important reasons for selling a company. The second most important reason, and in a way related to the first one, is that the owner feels that the company has more potential under a new owner.
In addition, business owners are afraid of the taxation of the surplus valuation of shares. At present, capital gains are not taxable for individuals in Belgium, provided they are realised within the framework of the normal management of the individual’s private estate. However, the Belgian government is working on a tax reform. Although things are still uncertain at this point, the much-debated favourable tax regime applicable to the sale of shares by a private individual might change in the future. This uncertainty further drives the M&A market with many sales processes being initiated, and typically with a rush towards year-end, by company owners approaching their retirement.
As a result of the taxation regime described above, almost 90% of the M&A deals in Belgium are structured as the sale of the shares in the company. For the same reason, an asset deal is less common in Belgium.
Less competitive auctions, slightly longer overall process
If the use of competitive auctions in seller-initiated transactions increased in Belgium during the past three to five years, a recent survey shows that the changing economic conditions resulted into less classic bidding processes.
Even though many steps of the transaction process nowadays take place virtually, previous surveys concluded that the overall time laps between the start of the negations (ie, the signing of the non-disclosure agreement) and the closing of the transaction amounted to eight to nine months. However, this timeframe may be impacted for certain transactions with the future introduction of the new FDI screening mechanism (see further below).
As regards purchase price mechanisms, and just as in many other European countries, locked-box pricing mechanisms are very popular (more than closing accounts) in all deal categories.
Breakthrough of W&I insurance
If W&I insurance facilitates clean exits for sellers by replacing contractual claims under an SPA with an insurance policy, it is clear that W&I insurance is still not the norm in Belgian M&A market, albeit still growing, even in the mid-market.
In recent years, however, W&I insurance policies have been adopted in 27% of Belgian transactions valued at over EUR100 million. In smaller transactions, W&I insurance is more rarely used, which may also be related to the fact that the cost thereof may be too high and that there is less appetite among W&I insurers to provide insurance for smaller transactions.
However, it is expected that this trend will continue to grow and that W&I insurance will become, just like in many other surrounding jurisdictions, more and more prevalent in Belgian M&A transactions, including in the mid-market.
Fast-growing (bio)tech start- and scale-ups
Belgium has built a name for itself in the world of tech with many fast-growing start- and scale-ups developing innovative solutions. The market for funding these companies has gained maturity over the past couple of years and an entire eco-system has emerged. Consequently, many Belgian and international venture capital funds are active in Belgium and providing capital to these fast-growing companies. The funding market is growing rapidly, with record investments being announced regularly.
It has been reported that for the year 2022, Belgian fast-growing companies crossed the EUR2 billion investment threshold (compared to almost EUR1.4 billion in 2021). On the podium of fundraisers in 2022 are Kpler (USD200 million), Deliverect (USD150 million) and Cohabs (EUR100 million). Biotechs are also successful with Precirix (EUR80 million), Univercells (EUR43 million) and Etherna (EUR39.9 million).
Some of these companies have been doing extremely well and got the so-called "unicorn" status (ie, a privately held company with a value of over EUR1 billion). The first Belgian unicorn (Collibra) was reported in 2019. In January 2022, Belgium saw its fourth unicorn (Deliverect), and another handful of fast-growing "soonicorns".
FDI screenings
On 9 January 2023, the Belgian legislature proposed a draft legislation introducing a new ex ante screening of foreign direct investments (FDI) in sectors of importance for security, public order and the strategic interests of the regions and communities.
The proposed screening mechanism will impact M&A transactions, making the deal processes longer and more complicated since a non-EU investor considering obtaining a certain percentage of the voting rights in a Belgian entity would need to notify an inter-federal screening committee before completing the transaction. The transaction documents will have to provide appropriate FDI-related condition precedent.
The adoption of this regime and its entry into force is to be followed closely in the coming months. As things stand now, the new regime is set to enter into force as from 1 July 2023 (but still to be confirmed).
ESG
Through the environmental, social and governance (ESG) criteria, it is possible to assess how companies exercise their responsibility for the environment and their stakeholders (employees, partners, subcontractors and customers).
In light of the objectives of the Paris Agreement and pursuant to the European Green Deal, the EU adopted a number of far-reaching reforms to ensure that companies play a significant part in achieving the objectives and contribute to sustainability. In this context, ESG requirements applicable to Belgian companies are continuously evolving, creating new obligations and increasingly providing sanctions for non-compliance, targeting companies and their directors. Companies will be more thoroughly scrutinised on ESG aspects, not only by governments and regulators but also by investors.
In particular, ESG is expected to remain a priority in 2023. In this regard, non-financial undertakings will start disclosing the full Key Performance Indicators (KPIs) pursuant to the Taxonomy Regulation. ESG due dilligence will also make its entry with the EU proposal for the Corporate Sustainability Due Diligence Directive (CS3D) which will require companies to take into account the human rights, climate and environmental impacts of their businesses.