A company is formed for at least the objective of making profits and distributing them to its shareholders at some point. The rules on profit allocation and distribution, therefore, touch on the very essence of the company. Every company will hence sooner or later encounter the rules governing a distribution of equity. Below, the core principles in profit allocation and distribution are set out once more for the private limited company (hereinafter: BV/SRL) and the public limited company (hereinafter: NV/SA).
1. Right to participate in profits
With the profit distribution objective being so crucial for a company, the Belgian Companies and Associations Code ("BCAC") expressly prohibits excluding a shareholder from any participation in profits (the so-called prohibition of a leonine clause). Each share must therefore have proprietary rights attached to it, in addition to any membership rights. This means that all shareholders should therefore expect a distribution of profits, at the very least at the time of the dissolution and liquidation of the company through a distribution of the liquidation balance.
However, the fact that each share always has proprietary rights attached to it does not remove the fact that a shareholder only has a possible right to profit distribution. It only confers the right - when the company decides to distribute profits - to share in the profits in proportion to the proprietary share as stipulated in the articles of association. The right to distribution of a company's assets only arises at the time the competent body decides on distribution. At that point, the relevant shareholder acquires an individual right and becomes a creditor of the company for the payment of the distribution.
2. The competent corporate body for profit appropriation and distribution
The general meeting is the competent body for, on the one hand, appropriating profits and, on the other, determining distributions. As regards the appropriation of profits, this is an exclusive power, as it is part of the power to approve the annual accounts. Usually, this is done on the proposal of the managing body.
In both NV/SA and BV/SRL, the distribution of profits is also, in principle, an exclusive power of the general meeting. However, both in the BV/SRL and in the NV/SA, this power can be delegated/allocated to the managing body under the articles of association, in accordance with the second paragraph of Article 5:141 BCAC and Article 7:213 BCAC (interim dividend). In the BV/SRL, the payment of an interim dividend is a competing power since the entry into force of the BCAC: the general meeting can always decide to do so, the managing body likewise insofar as provided for in the articles of association (article 5:141 BCAC). In the NV/SA, this is an exclusive power of the managing body, although again only if provided for in the articles of association (Article 7:213 BCAC).
3. The concept “distribution” and types of dividends
The concept of distributions under the BCAC carries a broader meaning than under the W.Venn. As the capital concept in the BV/SRL was formally abolished, the procedure for capital reductions also disappeared, and, in addition to the classic distribution of profits and directors' fees, repayments of earlier contributions in cash or in kind to the shareholders also fall under the same rules for distributions. The original contributions can therefore be repaid (paid out) by ordinary majority resolution of the general meeting without an amendment to the articles of association, except if they were made unavailable under the articles of association. In the latter case, an amendment to the articles of association (which is subject to the statutory majority and attendance quorum) is necessary to make the unavailable assets available again. In the NV/SA, where the capital concept was retained, a capital reduction (i.e. a repayment of a previous contribution) still requires the separate capital reduction procedure to be followed (where creditors have a right of opposition).
The rules on distributions should also be applied to transactions that have the same economic effect as a direct distribution, e.g. financial assistance & the repurchase of own shares. However, the most common application case of a distribution is a dividend. In practice, different types of dividends can be distinguished:
- Ordinary dividend: the decision to pay a dividend by the annual general meeting, following the resolution approving the annual accounts and appropriation of profits.
- Interim dividend: the decision to distribute a dividend from the profit of the current financial year or profit of the previous financial year while its annual accounts have not yet been approved, reduced, where appropriate, by the loss carried forward or increased by the profit carried forward.
- Intermediary dividend: the decision to pay a dividend by a special or extraordinary general meeting based on the last approved financial statements. Available reserves (as opposed to interim dividend) and retained earnings are eligible for distribution here.
4. Restrictions on distributions
Since excessive distributions jeopardise the solvency and liquidity of the company, the legislator has set limits on the possibility of making distributions, in particular the net assets test (in both NV/SA and BV/SRL) and the liquidity test (only in BV/SRL). as well as any statutory provisions to this effect. In addition, the articles of association can also impose limitations.
4.1. Distribution tests: Net Asset Test & Liquidity Test
4.1.1. Net asset test
The net assets test prescribes that no distribution may be made if the company's net assets are negative or would become negative as a result of the distribution. If the company has equity that is unavailable under the law or the articles of association, no distribution may be made if the net assets have fallen or would fall as a result of a distribution below the amount of this unavailable equity (e.g. statutory unavailable reserve or an unavailable reserve due to repurchase of own shares). In the case of the NV/SA, the amount of the capital and the statutory reserve must also be taken into account and the limit below which the net assets may not fall is therefore increased by these amounts.
4.1.1.1. Concept of net assets
Net assets should be understood as the total amount of assets less provisions, liabilities and, except in exceptional cases to be disclosed and justified in the notes to the financial statements, the unamortised amounts of incorporation and expansion costs and research and development costs.
Thus, the maximum distributable amount under the Act can be calculated on the basis of the following formula:
Total amount of assets
- provisions (incl. deferred taxes)
- debts
= Net assets
- amounts of incorporation and expansion costs not yet amortised
- amounts not yet amortised for research and development costs
= Adjusted net assets
- legally/statutorily unavailable own assets, including:
(i) unavailable contributions/capital (NV/SA);
(ii) the unamortised portion of revaluation surpluses;
(iii) Legal reserve (NV/SA) and other unavailable reserves (e.g. financial assistance);
(iv) capital subsidies
= MAXIMUM DISTRIBUTABLE EQUITY
4.1.1.2. reference balance for net asset test
For the purposes of the net assets test, either the last approved financial statements or a more recent statement of assets and liabilities can be used. The use of a more recent statement of assets and liabilities is necessary if one wishes to distribute profits from the current financial year. In the NV/SA, article 7:213 of the Companies Code prescribes that the statement on the basis of which the interim dividend is made may not be older than two months from the date of the decision to distribute. For the BV/SRL, the choice of the closing date of the recent statement is in principle completely free. However, the fact that the statement must be recent does mean that its contents may not yet have become obsolete. After all, in that case, the personal liability of the members of the managing body may be compromised. Although article 7:213 only applies to an NV/SA, in view of its analogous nature, the period of 2 months can be considered a clear guideline if the BV/SRL makes a distribution from the profit of the current financial year. The closing date of the statement of assets and liabilities is best as close as possible to the time of distribution.
Although, when distributing a intermediary dividend, there is no explicit obligation to prepare a more recent statement of assets and liabilities in stead of or in addition to the last approved financial statements, failure to do so may constitute a breach of directors’ the general duty of care . After all, if there are indications that the company in question is doing worse, it is not prudent to apply the net assets test (solely) on the basis of already outdated financial statements.
4.1.2. Liquidity test
In a BV/SRL a liquidity test must then formally be expressed. In particular, the managing body must prepare a report in which it assesses specifically whether, after the distribution, according to reasonably foreseeable future developments, the company will remain able to pay its debts as they become due over a period of at least 12 months from the date of payment of the distribution. The managing body can only proceed with the effective payment of the distribution after this liquidity test has been satisfied. This report is audited by the auditor (if appointed), albeit only as regards the accounting and financial data included in the report.
The BCAC does not impose this test in the SA. However, the absence in the SA of a formal liquidity test does not mean that the managing body should not analyze the company's liquidity at all when deciding on a distribution. The general duty of care incumbent on every director is breached if the directors propose or pay a distribution which, although technically within the limits of the net assets test, in reality puts the company at financial risk.
4.1.3. Other limitations
Finally, any statutory limitation around profit appropriation and distribution must also be taken into account. In principle, the shareholders can, in this regard, only make arrangements that are binding on the company in the articles of association, as the BCAC prescribes that provisions on the establishment of reserves, the distribution of profits and the distribution of the liquidation balance must always be included in the articles of association and published in the Annexes to the Belgian Official Gazette. For example, it can be stipulated in the articles of association that a certain percentage of profits is earmarked for the creation of reserves or must always be distributed. Likewise, the articles of association can deviate from the supplementary rule that each share equally shares in the profits in the BV/SRL or proportionally to the part that this share in the capital represents in the NV/SA.
However, the fact that provisions concerning the creation of reserves, the distribution of profits and the distribution of the liquidation balance must always be included in the articles of association does not prevent shareholders from establishing profit agreements outside the articles of association (in a shareholders’ agreement). Here, however, only the contracting shareholders are bound, around the exercise of their membership rights (voting agreement).
5. Consequences of unlawful distribution
Any distribution in violation of the legal rules can be recovered by the company, from its beneficiaries. However, in the case of the SA, the company must prove that the beneficiary of the distribution was aware of the irregularity. If the company remains silent and the company is insolvent or at risk of becoming insolvent, the creditor can claim repayment by means of the collateral claim in accordance with Article 5.242 of the Civil Code.
The members of the managing body are also jointly and severally liable for violations of the provisions of the BCAC or the articles of association. Making a distribution payable, which does not pass the a distribution test, obviously constitutes a violation of the provisions of the BCAC.
In addition to this civil liability, the BCAC also provides for criminal liability. While any violation of the net assets test is punishable, the legislator has clarified that, with regard to the liquidity test, only the decision of the managing body to make distributions that compromise the company's liquidity is punishable. Just as in the case of a breach of the net assets test, directors who make a distribution that should have been known to compromise the company's liquidity position risk a fine of fifty to ten thousand euros and imprisonment of one month to one year.
