With corporations having increasingly extensive global footprints, a US-based investor, bank or alternative lender looking to reduce or manage risk by taking security over a company’s assets located outside of the US may find themselves unexpectedly navigating different legal systems and processes. In this article we look at some of the practical considerations and formalities for US lenders to be aware, with a focus on some of the cost implications and formalities that apply in relation to England and Wales, Spain, Belgium, Netherlands and Germany.
What assets can be secured and how?
Broadly speaking, security can be created over almost any type of asset. This includes future assets and fungible assets (i.e. assets which are regularly disposed of or extinguished and replaced, for example inventory, cash and customer receivables). However, the type of asset may dictate the nature of the security interest that can be obtained and how this is documented, which in turn has cost implications.
- England: In England, typically a lender will take a combination of mortgages, fixed and floating charges and assignments documented in a form of all asset security – known as a “debenture”. The debenture is comparable to the US security agreement or collateral agreement. It includes a floating charge covering the entirety of the business including future and fungible assets.
- Spain: There is no concept of “all asset” security in Spain and no concept similar to that of the English law floating charge. In Spain, pledges are taken on specific classes of assets. This can mean that multiple security documents may be needed, which has a cost impact and also means a lender must undertake some diligence to understand what assets of value the company has.
- Germany: As with Spain, there is no concept of “all asset” security in Germany and no concept similar to that of the English law floating charge, so security is taken on specific classes of assets. This may impact costs. Receivables tend to be secured by way of security assignment rather than pledge to avoid the need to notify debtors.
- Belgium: There is likewise no concept of “all asset” security in Belgium; security is typically taken over specific assets via separate specific security interests, including mortgages and pledges. Generally, mortgages are taken over real estate and pledges are taken over shares, bank accounts, receivables and IP. There is a concept of a pledge on the business which is similar to the English floating charge in that it captures the entire business and goodwill in a company including tangible and intangible movable assets.
- Netherlands: In the Netherlands, there are three types of security instruments: a notarial deed of mortgage, a deed of pledge and a financial collateral agreement. The deed of mortgage can be used to create security over registered goods, such as real estate, aircraft and ships. The deed of pledge is used to create security over shares, movables, IP rights and contractual rights. In the Dutch market, it is common that one document, an omnibus deed of pledge, is used to create security over several asset types at once. Deeds of pledge can secure future rights if the future rights arise from an existing legal relationship (such as a lease agreement). For future rights arising from legal relationships arising after the date of the original pledge, a supplemental pledge will need to be executed.
With the exception of England, European security documents often need to be ‘notarized’ and sometimes also ‘legalized’ (particularly if the transaction involves a civil law jurisdiction). This should be factored into the deal timeline and steps should be taken early to understand exactly what the relevant notary requires. Often, the notary will require the document to be executed before them, which may mean the lender having to grant a local lawyer a power of attorney to sign on their behalf to avoid having to travel overseas to sign documents.
- Spain: For enforcement purposes it is advisable (and common practice in Spain) that security documents are notarized. Notary fees may be linked to the value of the secured debt or may be agreed between the parties in relation to secured debt in excess of €6 million (approx. $6.7 million).
- Germany: A land charge or a pledge over the shares in a GmbH will need to be notarized. Notary fees will be calculated based on the transaction value of the document, which has to be notarized. For a land charge, the calculations will be based on the amount of the land charge, and for a pledge over shares in a GmbH, the calculation will be based on the lower of (a) the amount of the obligations to be secured or (b) the balance sheet value of the GmbH.
- Belgium: Mortgages must be notarized so notary fees should be expected. There are also registration fees (discussed below).
- Netherlands: Security over registered goods (such as real estate) and shares needs to be taken in form of a notarial deed. There are no separate notarial fees payable aside from professional fees.
In certain jurisdictions, the granting of security over a particular asset may trigger a payment of stamp duty; in some cases, such as Spain, this can be material and may present a cash flow issue for the company if required to be paid on closing. Other jurisdictions impose a nominal stamp duty, such as Belgium, in which a duty of €0.15 (approx. $0.17) per document is charged in relation to certain security agreements.
Certain security interests require steps to be taken to “perfect” the security, meaning to ensure it is valid and enforceable, including against third parties. This can include, amongst other things, registration in a particular registry or with a particular authority.
- England: Security granted by a company incorporated in England must be registered at Companies House within 21 days, otherwise it is void against third parties. Registration attracts a nominal fee of £15 (roughly $18) per charge. Security granted over registered real estate must also be registered against the title of the property at the UK Land Registry. This attracts registration fees of £40-250 (approx. $50-$300) and also requires certain searches to be conducted prior to closing to maintain priority of security.
- Spain: A registration fee of 0.02% of the secured amount is payable in relation to security over real estate. Chattel mortgages over IP and plant and machinery must also be registered at the registry of moveable assets.
- Germany: Land charges have to be registered with the land register. A registration fee based on the amount of the land charge is payable.
- Belgium: Mortgages must be registered with the appropriate local Office of Legal Certainty to be effective against a third party and will be valid for 30 years. An inscription fee of 0.3% of the amount secured by the mortgage is payable, as is a registration fee of 1% of the secured amount. A pledge on moveable assets (including the business pledge), has to be registered with the Belgian national register. A registration fee of up to €500 (approx. $560) has to be paid for the registration and the registration will be valid for a renewable period of ten years.
- Netherlands: Mortgages over registered property (such as real estate) must be registered with the land registry (Kadaster), which attracts some minor administrative fees. Undisclosed non-notarial deeds of pledge need to be registered with the Dutch tax authorities to be effective.
Taking security in Europe can vary significantly from taking security in the US. In addition to the factors discussed above, there are important legal issues to be considered which are common across jurisdictions but which have local law nuances. These include: financial assistance restrictions, corporate assets abuse, corporate benefit issues and issues around insolvency and reviewable transactions. Taking cross-border security may also give rise to adverse tax and/or accounting consequences for the company and/or the lender.
There are also differences across European jurisdictions when it comes to enforcement of security, particularly the question of whether or not court involvement is necessary. Timing can vary hugely with enforcement processes taking anything from one month through to many years in some jurisdictions. Similarly, insolvency regimes vary significantly, with some jurisdictions affording secured creditors more protection than others.
In terms of practicalities, in the US, it is relatively cheap and straightforward to take security with limited formalities. There are no deeds, no need for notarization and legalization and the documentation process is relatively simple. Practicalities in European jurisdictions can be more involved. For example, in addition to the perfection and registration formalities discussed above, special perfection requirements exist for security over IP/IT rights, bank accounts and receivables or shares. Security over registered intellectual property is registrable at the relevant intellectual property office and attracts fees which vary by office.
Legal and tax advisors in all relevant jurisdictions should therefore be engaged as early as possible to identify any pertinent legal and tax issues and advise how best to mitigate any risks. Lenders and companies also need to work with lawyers and other professional advisors to consider:
- The commercial terms and structure of security package and whether this is achievable under the laws of the relevant jurisdiction in which the asset is located
- Any legal issues that may arise as a result of the proposed security package
- The objective of taking the security – is it fit for purpose?
- The cost implications of the proposed security structure
- Any timing implications on the wider transaction