Carve-out of assets prior to sale or how to make the bride more attractive

Carve-out of assets prior to sale or how to make the bride more attractive

Carve-out of assets prior to sale or how to make the bride more attractive

« Carve-out » s a way of cleaning up the target company before the sale, and should be applied with caution. 

When a company is preparing to sell, it may be necessary to get rid of certain non-strategic assets before the sale.
This disposal operation is known in jargon as « carve-out ». 

  1. What does the carve-out entail and for what purpose is it carried out?

A carve-out can relate to all types of assets: buildings, machinery or rolling stock, as well as a subsidiary or an industry. It can be used to lower the selling price, to make certain hard-to-market assets more liquid, or simply to present a more coherent whole to the market. 

In some cases, divestment is imposed by the acquirer, who does not want to be burdened with assets that are too bulky. Divestment also allows shareholders with differing views to be satisfied, with some being able to take over a company and others to exit, while the company is sold together. 

  1. Fiscal prudence is key

The principle of dissolution before sale is sometimes challenged by the tax authorities, which may consider that the intended succession of transactions is not compatible with the normal management of private assets (Article 90, 9°, first indent, CIR 1992).
However, a ruling by the Ghent Court of Appeal clarified the situation (1). The case concerned an events company that had sold several assets (shares of a football club and works of art) just before the transfer and had also charged the transferor with managing an ongoing dispute and terminated two employment contracts.
The Court held that the seller had acted normally by clearing the company of anything that was not necessary or useful to achieve its intended purpose (i.e. selling the company). According to the Court, this “clean-up” was simply a way of setting the price for the logical scope of the sale.
This ruling is timely, as in the practice of mergers and acquisitions, scrapping some asset – the director’s car, for example – is commonplace (2).
However, tax caution is still in order, especially when the assets are sold to the seller or to a member of his family, who will obviously have a conflict of interest. Particular care should be given to the valuation of the assets sold, which should be in line with the market value. Preparing a solid file, supported by an independent valuation, is certainly not a luxury. 

  1. What other precautions should be taken into account?

The parties will need to accurately identify the business to be acquired and carefully assess its impact on the company before proceeding with the acquisition.
This analysis can be carried out in 3 ways: 

  1. Legal implications. How will the planned operations affect existing contracts? What agreements need to be concluded (with co-contractors, banks, customers, suppliers, etc.)? Are any assets encumbered? Do pre-emption rights need to be cleared? 
  1. Impact on human resources. Does the transfer of employment contracts comply with labour law (retention of seniority and acquired rights)? What is the impact on collective agreements and joint committee membership? 
  1. Impact of the split-off on finances. What impact does the sale of assets have on the company’s net debt? Have the tax implications of the capital gain been taken into account? 

Of course, these are just some of the questions that may arise and the analysis must be carried out individually and in detail. 

Implementing a carve-out can be complex. It will depend on the structure of the intended transaction (equity transaction or asset transaction, etc.) and the nature of the assets to be divested. In all cases, a clear contractual framework and market valuations need to be established. All stakeholders (especially staff) should be kept fully informed. In many cases, a phased action plan is needed and the necessary time should be taken to deal with unforeseen circumstances.  

(1) Ghent, 17 November 2020, 2019/RG/1364 -.  

(2) This judgment was commented on by Mr Stefaan Van Crombrugge in the Fiscologue (edition 1723 p. 11) of 19 November 2021. 


Article written by M. Tanguy della Faille 

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