Although there is no provision prohibiting companies with negative net asset values from participating in a merger or demerger, legal doctrine, however, remained divided as to the feasibility of such transactions because of the content included in the explanatory memorandum to Belgian law. The explanatory memorandum explicitly states that, in a situation where a company with no net asset value is taken over by another company, this cannot be regarded as a merger for the following reason:
”in such transaction, the shareholders or members of the company being acquired […] do not become shareholders or partners of the acquiring company since in that case the capital [or contribution] of the acquiring company is not increased.”
The explanatory memorandum applies the same reasoning to demergers and partial demergers.
As the formula to determine the number of shares of the acquiring company to be allocated to the shareholders of the acquired (dividing) company in exchange for the shares they held in the company before the transaction took place, the CBN argues that a merger or (partial) demerger is possible if the net asset value of one participating company is negative, insofar the economic net value or market value of the transferred net assets is positive.
In case the market value of the transferred net assets is positive, a (positive) exchange value can indeed be determined. Consequently, a merger or (partial) demerger, notwithstanding that, for accounting purposes, a negative net asset is transferred, is also possible.
As an example, the CBN refers to start-up or scale-up companies that are not yet profitable. Indeed, such companies that do not (yet) realize profits or perhaps even do not have any turnover yet, might have low or negative equity levels. However, there are clearly other examples of companies having negative net asset value from an accounting perspective while having a positive market value (namely in cases where the value of the company is not expressed on its balance sheet, as certain assets may have been depreciated – e.g. real estate assets – or not capitalized – e.g. intangible assets). In any case, an appropriate assessment of the market value of the company is required. Typically, an income approach using forecasted cash flows is an appropriate approach to determine the market value of the company (compared to the market approach applying market multiples, which is an often-used approach as it is easy to compile and easy to understand, however, given the companies under consideration, the market approach in most cases is not an appropriate valuation approach given that those companies oftentimes are loss-making).
For completeness' sake, it should be noted that, from a corporate tax point of view, there is also no particular objection to transactions in which one of the companies taking part in the merger/division has a negative net value for tax purposes. There are, however, some important considerations, for example regarding the preservation and/or transfer of the fiscal equity (in certain cases, the accounting and tax treatment will differ, resulting in (off-balance) corrections in the tax return).
The guidance can be found on the website of CBN and includes examples on the accounting (and to a limited extent: the tax) treatment of mergers, demergers and partial demergers with entities having negative net asset values.
Please do not hesitate to contact Tiberghien and Tiberghien economics as we can assist in this matter, including the determination of the market value and the accounting and tax treatment.
Kenny Van Tulder – Senior manager Tiberghien economics (Kenny.VanTulder@tiberghien.com)
Yoram Descheemaeker – Associate Tiberghien (Yoram.Descheemaeker@tiberghien.com)
Hanne Eyckerman – Associate Tiberghien (Hanne.Eyckerman@tiberghien.com)
Nevertheless, the prevailing opinion in the legal doctrine at the time would have been that the actual net asset value and thus not the actual accounting value of the acquired company should be taken as reference.