When a company prepares for a sale, it may prove necessary to strip it of certain non-core assets prior to closing. This divestment process is referred to in M&A terminology as a "carve-out."
1. What elements are covered by a carve-out, and what is its purpose?
A carve-out can apply to all types of assets: real estate, machinery, rolling stock, or even a subsidiary or business division. It helps reduce the overall purchase price, liquidate assets that are difficult to negotiate, or simply present a more coherent business model to the market.
In some cases, the carve-out is required by the buyer, who does not wish to take on burdensome or non-essential assets. Carve-outs can also satisfy shareholders with divergent views, allowing some to retain a specific activity and others to exit, while selling the core company together.
2. Tax caution is required
The principle of a pre-sale carve-out is sometimes challenged by tax authorities, who may view the series of planned transactions as incompatible with the normal management of private assets (Article 90, 9°, first bullet, CIR 1992).
However, a ruling by the Ghent Court of Appeal clarified this situation (1). The case involved an event-planning company that had sold several assets (shares in a football club and artworks) just before its sale, while also assigning the management of an ongoing dispute to the seller and terminating two employment contracts.
The Court held that the seller had acted normally by divesting the company of everything that was not necessary or useful to achieve the intended goal (which was the sale of the core business). According to the Court, this "cleaning up" was merely a way to establish the purchase price for a logical deal scope.
This ruling was welcomed with relief because, in M&A practice, carving out specific assets—such as the owner's company car—is customary (2).
Tax caution remains essential, however, especially if assets are transferred to the seller or a family member, creating an obvious conflict of interest. Particular care must be taken regarding the valuation of the transferred assets, which must strictly reflect fair market value. Preparing a solid documentation file backed by an independent appraisal is certainly not an unnecessary luxury.
3. What other precautions should be taken into account?
Before proceeding with a carve-out, the parties must precisely identify the elements to be separated and carefully assess the operational impact on the business.
This analysis can be conducted along 3 key dimensions:
Legal implications: What are the consequences of the planned transactions on existing contracts? What consents must be obtained (counterparties, banks, customers, suppliers...)? Are the assets encumbered? Are there rights of first refusal to be cleared?
Human resources impact: Does the transfer of employment contracts comply with labor laws (maintenance of seniority and acquired rights)? What is the impact on collective agreements and joint committee affiliation?
Financial consequences of the carve-out: How will the asset disposition impact the company's net debt? Has the tax impact on capital gains been accounted for?
Naturally, these are just a few examples of the questions that may arise, as the analysis must be conducted individually and in detail.
Executing a carve-out can prove complex. It will depend on the transaction structure (share deal vs. asset deal) and the nature of the assets being transferred. In all cases, it is essential to establish a clear contractual framework and market-based valuations. All stakeholders (particularly staff) must be properly informed. A step-by-step action plan is often necessary, and sufficient time must be allowed to manage any unforeseen developments.
(1) Ghent, November 17, 2020, 2019/RG/1364.
(2) This ruling was commented on by Mr. Stefaan Van Crombrugge in De Fiscoloog (Issue 1723, p. 11) on November 19, 2021.
Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 26/01/2022. Published/updated version on the Fondaris website with the author's permission.
Article initialement publié dans La Libre Économique par Tanguy della Faille, associé de Fondaris, le 26/01/2022. Version publiée/actualisée sur le site de Fondaris avec l’accord de l’auteur.
