This article is an extract from TLR The Private Equity Review - Edition 12. Click here for the full guide
i Deal activity
The year 2021 was a record one for private equity in the Netherlands as well as globally; 2022 was slower as macroeconomic uncertainty resulted in fewer processes being initiated and certain processes being put on hold before signing. That said, deal activity was certainly not paused, with both domestic and international sponsors continuing to pursue investments and exits during 2022. Significant transactions in the Dutch market involving international sponsors included the acquisition of Dutch SaaS provider Bynder by US sponsor Thomas H Lee Partners from multiple sellers, including Insight Partners (announced in December 2022), and the acquisition of a majority stake in Rotterdam-headquartered beverage solutions provider Refresco by KKR, in which existing investors PAI Partners and British Columbia Investment Management Corporation maintained a minority position (announced in February 2022). For Netherlands-headquartered sponsors, the sale by Rivean Capital of micro-precision specialist Muon Group to IDEX Corporation (announced in September 2022) and the acquisition of European lingerie retailer Hunkemöller by Dutch sponsors, including Parcom, alongside reinvestment by existing shareholder Carlyle (announced in March 2022), were two of the most noteworthy 2022 transactions.
Auctions continued to be more prevalent than one-on-ones for private equity transactions, even though sponsors again managed to find proprietary deals outside auctions. In contrast to 2021, when pre-emptive bids and pre-auction tracks were common in the fiercely competitive market, auctions moved slower in 2022. This was not only due to the more challenging financing environment. Buyers generally required broader and more detailed due diligence (DD) and relationship building to back up 'go or no go' decisions.
Private equity sponsors continued to invest in a broad range of sectors, including regulated sectors (such as financial institutions and healthcare), with sponsors getting increasingly comfortable with the regulatory aspects.
The number of minority investments continued to increase in 2022. One example announced shortly before year end was the acquisition of a minority stake in Dutch secondment and recruitment agency YER by Inflexion Partners alongside ongoing majority ownership by YER's founder (announced in December 2022).
As in other parts of the world, there was increased interest in continuation funds during 2022, representing an alternative to exits in a volatile market and allowing for continued investment in trophy assets. As public market valuations plummeted at the start of 2022, the denominator effect meant that many limited partners were overallocated to private equity and – amid limited distributions – placed a premium on liquidity. The market for continuation funds and associated market practice is expected to continue to develop during 2023.
The majority of exits by private equity sponsors during the past year took the form of a private sale to one or more other sponsors or to a strategic buyer (possibly backed by a sponsor). In the Netherlands as elsewhere, initial public offering activity was close to non-existent during 2022, given the difficult and uncertain macroeconomic backdrop.
A total of 492 private equity deals2 were announced (58 per cent of these during the first half of the calendar year and 42 per cent in the second half) in the Netherlands during 2022.
ii Operation of the market
Standard sale process
During the past couple of years, sale processes in the Netherlands were most often structured as controlled auctions. Such auction processes generally consisted of the following phases.
- The preparatory phase (around four to 12 weeks): determination of the deal structure (whereby share sales are the default and asset sales are used in specific circumstances), setting up of the data room, preparation of marketing materials (teaser and information memorandum) and sell-side DD reports (financial; tax; legal; and possibly commercial; environmental, social and governance; insurance; and IT), negotiation of non-disclosure agreements and market testing. Potential bidders are invited to further investigate the sale opportunity in the next phase.
- The non-binding offer phase (around four to six weeks): sharing of the first-round process letter and information memorandum with potential bidders, possibly fireside chats with the CEO or introductory management presentations, and ending with the delivery of non-binding offers to the seller. Also, continued sell-side preparations include finalising of an auction draft share purchase agreement (SPA) and exploration of the possibilities of warranty and indemnity (W&I) insurance, typically resulting in a non-binding indications (NBI) report as prepared by the W&I insurance broker. Education of debt financing providers may also be conducted during this phase.
- The binding offer phase (around five to six weeks): sharing of the second-round process letter, sell-side DD reports and the auction draft SPA, and possibly the W&I insurance NBI report with (selected) bidders. The DD process will kick off in this phase with access to the virtual data room and management and expert sessions with management as well as sell-side DD providers. On the transaction documentation, detailed (interim) mark-ups of the SPA are typically exchanged with the seller's counsel and feedback sessions are held. This phase ends with the delivery of binding offers to the seller, as much as possible on the basis of certainty of funds and including 'ready to execute' SPA mark-ups. The sponsor will typically expect to discuss the management incentive plan with the CEO and other key managers in the second half of the binding offer phase, allowing for a management term sheet to be executed simultaneously with the SPA.
- The execution phase (around one day to four weeks): final negotiations of the transaction documentation with the chosen bidder or bidders. This phase ends with the execution of the SPA or signing protocol (in which the parties commit to enter into the SPA after satisfaction of the employee consultation process). Although not preferred by sell-side, this phase may include confirmatory DD on certain specific items that were too sensitive to share earlier. Of course, this needs to be managed carefully to avoid an impact on deal certainty.
- The completion phase (around four to 16 weeks): implementation of the transaction by execution of the notarial deed of transfer of the shares in the target after satisfaction of all conditions precedent (which are typically limited to matters that are legally required to close the transaction) (see Section III.ii, below).
Although the above phases are illustrative of a 'typical' auction process in the Dutch market, this may play out differently based on market or deal dynamics. In certain circumstances, the controlled auction includes an interim phase between non-binding and binding offer. In that phase, certain sell-side reports (or extracts thereof) are shared with bidders, allowing them to firm up their non-binding offer. This will shorten the binding offer phase. Such an interim round was often used in 2021 to allow for a potential acceleration of the process. These types of tactics were common in the sellers' market of 2021 but less so during 2022 as we moved into more of a buyers' market with less competitive tension. In other cases, sellers may run a pre-auction track with a single potential purchaser and agree to negotiate exclusively (typically for a fairly short period with a clear expiry date linked to the start of a broader market approach to create competitive pressure).
The phases, timelines and transaction documentation described above can equally be seen in one-on-one processes. This also holds for the use of process letters, which not only set deadlines and confirm the seller's control of the process but also may serve to (1) impose certain content requirements for submitting a bid (e.g., regarding the form and calculation of consideration, transaction approvals and explanation of financing of the offer); (2) avoid pre-contractual liability (for termination of negotiations while the buyer could reasonably expect that the deal would be signed) by making clear that the seller is not bound to negotiate or continue negotiations with any party and is free to terminate and amend the process at any time; and (3) reduce the risk of reduced competitive pressure or other surprises by expressly prohibiting collusion and consortium arrangements (which would allow the bidders to jointly strengthen their position and divide risks and costs) unless agreed otherwise by the seller.
Circumstances in which one-on-one processes are, in the Dutch market, generally preferred over controlled auction processes include transactions with obvious purchasers (e.g., for reasons of synergetic advantage or a sale to a sector specialist private equity firm that has already advanced its commercial diligence before the start of the process), unsolicited approaches with a knock-out offer, remedy transactions requiring a quick deal, or transactions between sellers and buyers with long-standing relationships. In addition, given the increasingly difficult and unstable market of 2022, sometimes a one-on-one transaction was a strategic choice to avoid risking a failed auction and the related impact on reputation and valuation in the market.
Management equity incentive arrangements
During the past year, in the Dutch market, a broad range of structures was used to set up equity (like) management incentive arrangements, including 'sweet' equity plans, long-term incentive plans, exit bonuses, stock appreciation rights schemes and various combinations thereof. Primarily, sweet equity plans were used, whereby the 'sweet' element may refer to the issuance of ratchet or performance-based shares to management but will typically refer to the issuance of (plain vanilla) ordinary shares to management, entitling them to (potentially substantial) remaining exit proceeds on the ordinary shares after repayment of all higher-ranked debt, shareholder loans and preference shares. This is in contrast to the sponsor, which will receive a combination of ordinary and preference shares, with preference shares delivering a compounding fixed return of, for example, 10 per cent per year and the preference shares making up the largest part of the capital at entry at, for example, 80 per cent, resulting in management investing at an 'envy ratio'.
The managers' sweet equity investment in the context of a Dutch management incentive plan (MIP) is typically made through a foundation (STAK) and a holding company (management holdco). A management holdco will hold all the shares in the capital of the holdco allocated to the managers. A STAK will hold all the shares in the management holdco and issue depositary receipts for such shares in the management holdco to the managers. As a result, the managers will indirectly hold the economic ownership of the underlying shares in the target, while the legal ownership remains with STAK. The voting rights on the shares will be exercised by the STAK and the management holdco. The boards of the STAK and the management holdco will typically consist of the CEO and other key managers and representatives of the sponsor.
Governance rights of the managers attached to their investment will typically be limited to fundamental minority protection rights (e.g., exclusion of pre-emptive rights other than for rescue financing, related-party transactions not at arm's length, amendment of the target's articles of association having a disproportionate detrimental effect, and the target's voluntary dissolution and liquidation, etc.) that are being granted to the management holdco as shareholder in the target. The sponsor will seek to limit (or basically exclude) the possibility for managers to sell their stake to other parties and safeguard drag rights with regard to the managers' participations to ensure a smooth exit process in the future. Management will expect tag rights.
Leaver provisions typically oblige each manager to offer their MIP stake to the sponsor upon the occurrence of a leaver event. The manager will be categorised as a 'good leaver' (generally a leaver for any reason other than a bad leaver ground) or a 'bad leaver' (typically a leaver who is terminated for urgent cause, certain reasonable grounds as defined under Dutch employment law and attributable to the employee as a result of which continued employment cannot reasonably be expected from the employer, voluntary resignation other than for good cause (i.e., serious illness, etc.), material breaches of transaction or employment documentation, committing of crimes or personal bankruptcy, etc.). The relevant purchase price for the leaver shares will typically depend on the leaver type and the timing of the departure. Good leavers will typically receive fair market value, subject to a customary vesting scheme. Bad leavers will typically receive the lower of fair market value and acquisition cost (less interim distributions).
In addition to their MIP investment, certain managers – typically key senior management such as the CEO and the CFO – may also be invited to make an institutional investment alongside the sponsor on equal economic terms. Typically, a lighter version of the MIP terms will be agreed (e.g., different leaver terms), recognising the institutional nature of such investment.
The managers' MIP investment is typically structured in a tax-efficient manner for the managers. To confirm the tax treatment of the managers' investment, an advance tax ruling may be requested from the Dutch tax authority. The ruling will likely not be obtained before completion of the transaction, and managers will therefore typically (1) enter into a commitment letter setting out the terms of their participation and (2) transfer the amount they will invest to the target as a prepayment for their depositary receipts (or alternatively enter into an individual interest-free loan to be converted once the ruling is obtained). It is customary that management is in the lead on the tax ruling process, together with their tax adviser, as it is also for their risk. If no tax ruling is obtained within six to 12 months of completion of the transaction, the original investment structure will be implemented (unless agreed otherwise). Generally, it will be agreed that managers are liable for any tax or social security contributions and other levies relating to their investments based on a tax indemnity. In the context of Dutch MIPs structured through a STAK and a management holdco, non-Dutch managers (e.g., Belgian managers) often prefer to sell their depositary receipts in order to realise a lower-taxed or exempt capital gain instead of a dividend.
II Legal framework
i Acquisition of control and minority interests
Structuring of the acquisition
Most private M&A transactions in the Netherlands are structured as share sales. This is typically the simplest and fastest transaction structure to implement and is therefore preferred by sellers running competitive auction processes.
Acquisitions are done through an investment stack of three or four private limited liability companies established by the sponsor (investco – holdco – (midco) – bidco), mainly for financing reasons (single point of enforcement), limitation of liability, tax structuring and implementation of the exit structure. The bidco will sign the SPA and acquire the shares in the target. Third-party financing is also attracted at the level of the bidco, and share pledges on the shares in the bidco are given to secure financing. For recoverability of Dutch VAT on transaction costs, it is important that the bidco becomes an entrepreneur for VAT purposes. This is often done through moving executives from the target to the bidco with completion of the transaction and having the bidco provide management services to the target.
Where the buyer is a private equity party and the seller is a founder or founding family (but also for corporate sellers), it is becoming increasingly customary in the Dutch market for some or all sellers to retain part of their investment in the target. This is typically achieved through a cashless rollover into the sponsor's holdco entity. Not surprisingly, the shareholders' agreement requires careful consideration to protect the sponsor's rights while also taking into account the founder's shareholding percentage.
Legal framework for a sponsor's control investment
Dutch corporate law for private limited liability companies is flexible and can accommodate specific rights and obligations of the different corporate bodies of the company and, in general, the corporate governance of the company in its articles of association. Nevertheless, shareholders' rights are often contractual in nature and set out in the shareholders' agreement (which may be agreed to be confidential) rather than in the articles of association (which are publicly available through the Dutch trade register).
The corporate bodies of each Dutch private limited liability company will include the general meeting of shareholders and the management board. In addition, a supervisory board is mandatory for certain large companies and is sometimes established on a voluntary basis within other companies. The management board is the main responsible corporate body to run the company's day-to-day operations and set and execute the company's strategy, targets and policies. The supervisory board's tasks include overseeing and advising the management board. Establishing a supervisory board allows for an efficient governance mechanism in which, among others, (1) sponsor representatives can be involved, providing direct access to business information and management and, as such, contributing to the sponsor's control over the business; and (2) (former) executives or other industry experts can be involved, providing added value and relevant experience to the particular business (see Section II.ii, below). As an alternative to the two-tier structure with separate management and supervisory boards, Dutch law also provides for the possibility of establishing a one-tier board comprising both executive and non-executive directors.
Given the management board's key role in the strategy and operations of the company, the power to appoint and dismiss the members of the management board will grant a shareholder an important way to (indirectly) control the business. Under Dutch law, the holder of the majority of the voting rights in the general meeting of shareholders will, in principle, have the power to appoint and dismiss the members of the management board, unless a mandatory supervisory board is established (which will then have such powers unless exceptions apply).
Further, in both a majority and a minority context, the sponsor can ensure control over the business by making important business decisions subject to its veto right in either the general meeting of shareholders or the supervisory board (these may be extensive; examples include approval of the budget and business plan and voluntary deviations thereof, M&A, significant investments, material financing, important HR topics, material litigation, compliance and decisions in relation to large contracts). Relevant for the allocation of veto rights to the general meeting or the supervisory board is that – in short – the shareholders may, to a large extent, pursue their own interests, whereas supervisory board members will need to act in the best interests of the company (see also Section II.ii, below). Veto rights and reserved matters will be addressed in the shareholders' agreement and may also be included in the articles of association.
Exit structuring considerations
Each transaction involving multiple significant shareholders requires detailed discussions and scenario planning to determine the exit rights of each shareholder – for example, the right to initiate any exit process and related drag- and tag-along rights. Each party's rights will, to a large extent, depend on the nature and incentives of the shareholders involved (e.g., majority or minority sponsor, founder and management) and the allocation of equity and voting rights among them. Over the past year, we observed a wide variety of arrangements addressing the requirements of the shareholders in this regard.
In the successful execution of the actual exit process, management plays a crucial role, including by facilitating the DD investigation, giving management presentations, and providing business and tax warranties. As part of the MIP arrangements, participating managers typically commit to cooperate in good faith with the exit process as well as to negotiate in good faith on the rollover (part of) their investment upon an exit if required by the financial sponsor buyer. Management will have no shareholder rights to initiate an exit process.
If the sponsor is domiciled outside the Netherlands, a key exit structuring consideration is to implement an investment structure that allows for the sponsor to realise a tax-exempt capital gain through the sale of the Dutch top holding company by the non-Dutch holding company (e.g., a Luxembourg entity). Otherwise, dividend distributions (i.e., the proceeds in excess of the contributed capital) are generally subject to 15 per cent dividend withholding tax. Further, the Dutch top holding company of the group is generally parent of a fiscal unity for corporate income tax purposes. This also allows for selling the whole Dutch corporate group without (1) terminating the fiscal unity and potentially triggering degrouping tax charges, (2) retaining residual tax liability and (3) causing issues around non-insurability of potential secondary tax liabilities arising in connection therewith. This typically requires a sale by the sponsor, potential co-investors and MIP vehicles, resulting in some complexity in the transaction documentation (i.e., more than one seller).
ii Fiduciary duties and liabilities
In a private equity setting, the sponsor plays a significant role in terms of the (financial and operational) strategy of its portfolio companies. It is important to consider the various roles in which the sponsor is involved and what particular responsibilities and risks are associated with these roles.
Duties and liabilities of a shareholder
Under Dutch corporate law, the most prominent statutory obligation of shareholders of a private limited liability company is to pay the subscription price of their shares in the company in full. In specific circumstances, further obligations for the shareholders may arise from the general duty of reasonable and fair behaviour that applies to all parties involved in the company's organisation. This may also result in a duty of care by the majority shareholder towards minority shareholders.
In addition, Dutch corporate law distinguishes three categories of further obligations and requirements that can be imposed on shareholders: (1) obligations of a contractual nature towards the company, other shareholders or third parties; (2) qualitative requirements relating to the shareholding; and (3) obligations to offer and transfer shares in specific circumstances set out in the company's articles of association. Such obligations and requirements cannot be imposed against the will of the shareholder (i.e., if such obligations or requirements are being attached to the shareholding by an amendment of the articles of association, the (current) shareholder who did not consent is not bound).
In principle, shareholders are (in their capacity as shareholder) not liable for debts and obligations of the company in which they hold shares. Limited exceptions to that principle exist, including (1) explicit guarantees given by the shareholders and (2) de facto directorship (if a shareholder assumes rights reserved to management and de facto manages the company). As such, in the context of potential liabilities, shareholders should be careful with giving detailed instructions or exerting undue influence on the management of the company. This applies, in particular, in sensitive areas, such as (1) transactions between shareholders and the company, (2) preparation of annual accounts and (3) the assessment of the financial situation of the company (including on liquidity and any potential filing for bankruptcy, etc.). Of course, the sponsor can be closely involved, advising the company if such a role is sufficiently clear for all stakeholders involved.
Duties and liabilities of members of the management board
As already noted, the management board has a key operational and strategic role in managing the company. Duties and responsibilities include (1) monitoring the company's risks, solvency and liquidity; (2) ensuring that the company complies with applicable laws and regulations; (3) managing the finances of the company; and (4) meeting legal obligations with regard to the company's accounts and any potential duties to publish certain other information. We typically see no sponsor representatives on the management board (but on the supervisory board instead, see further below, or in a one-tier structure, in a non-executive role). However, if they were on the management board, they would have the same fiduciary duties as the other members of the management board.
Managing directors must fulfil their duties in the interests of the company. In the Netherlands, the stakeholder model applies. In accordance with this stakeholder model, the interests of the company – in short – not only are creating (long-term) shareholder value but also encompass long-term value creation for the company and its affiliated undertaking and takes into account the stakeholder interests that are relevant in this context. Stakeholders include groups and individuals who, directly or indirectly, influence or are influenced by the attainment of the company's objectives, such as shareholders, employees, suppliers, customers, the public sector and civil society.
Directors can be personally liable towards the company if they have not fulfilled their duties as a director and such failure is severely reproachable. In cases of bankruptcy, directors can be personally liable towards the company's estate if they have manifestly improperly managed the company and that is an important cause of the bankruptcy. Not filing the annual accounts on time or otherwise breaching accounting obligations leads to evidentiary presumptions. Managing directors can further be personally liable towards third parties for other types of actions or omissions if such actions lead to breaching of the directors' duties and such a breach is severely reproachable, including if they entered into contracts while they knew or should have known that the company would be unable to meet its obligations and not offer recourse.
Duties and liabilities of members of the supervisory board
The management board is responsible for supervising management and challenging and advising if and when necessary. Where shareholder representatives act as a supervisory board member of a company, a conflict of interest may arise. Supervisory board members should always act – in their role as a supervisory board member – in the best interests of the company. Similar to other supervisory board members, shareholder-appointed supervisory board members may receive information about the company's business and financial situation, etc., provided that any conflicts of interest are addressed properly. Circumstances in which shareholder-appointed supervisory board members should consider their position carefully and possibly refrain from taking part in decision-making in any case include those in which the relevant supervisory board member has a personal conflicting interest (e.g., a transaction between the group and a third party controlled by such supervisory board member), but may also arise if a clear conflict of interest exists between the company and the relevant shareholder (e.g., in distressed situations). Conflicting interests with supervisory board positions in other portfolio companies are generally not conflicts of interest under Dutch law.
General director liability rules also apply to supervisory board members. Given the nature of the supervisory board members' responsibilities, a high(er) threshold for liability applies. If issues arise – for example, those that threaten the company's continuity – the supervisory directors should make sure that they meet sufficiently frequently to be able to monitor the affairs of the company more closely and react adequately and in a timely manner to challenges it faces. To mitigate liability risks, they should document their discussions carefully. We often see a supervisory board committee being established to deal with the specific circumstances at hand on a day-to-day basis.
III Year in review
The financing environment for private equity transactions deteriorated during 2022 due to the ongoing macroeconomic trends and related uncertainties. The increasing interest rates and challenging capital markets led to financing often being the 'long pole in the tent' early in a process. Parties needed to strike a balance between securing certain funds financing at an early stage, often with uncertainty around pricing, and maintaining confidentiality of a transaction. In some cases, larger private equity parties had standby facilities available to tap into.
The Dutch acquisition financing market for private equity deals has traditionally been served largely by Dutch and larger European banks providing syndicated loans, but private debt financing has become more and more relevant in the Dutch acquisition financing market. Traditional banks are still willing to provide club deal financing or underwrite syndicated Term Loan B structures, with private debt facilities often being structured as unitranche, often topped up with a (super senior) revolving credit facility provided by a relationship bank at the target level. There are a limited number of high-yield financings and, although less common, other financing solutions such as mezzanine facilities, preference shares or other structures can be employed depending on the required debt quantum and deal structuring.
Terms for bank financing are highly standardised (Loan Market Association based), and private debt facilities are often based on previous transactions that the sponsor and the relevant credit fund have cooperated on. Most unitranche and Term Loan B financing arrangements are cov-loose (i.e., having at least one maintenance covenant, typically leverage, with substantial headroom over opening leverage), with specific covenants and the requirement for security differing from case to case, based on, for example, the financial position and business of the target company and the size of the debt.
ii Key terms of recent control transactions
Purchase price adjustments
In the Dutch market, the locked-box mechanism is used in the majority of private M&A transactions. Usage of completion accounts tends to be used for complex carve-out transactions, where required by a buyer with a particularly strong negotiation position or where there are concerns about the latest available accounts (non-audited accounts are used regularly for locked-box transactions, though concerns may arise in cases of too many recent changes to the organisation or business, for example). In general, a locked-box mechanism allows for simpler SPA negotiations, price certainty at signing and completion and a lower likelihood of disputes.
In a locked-box transaction, the enterprise value is adjusted up front in accordance with a historical balance sheet date to determine the equity value (in contrast to completion accounts, where the adjustment takes place post-completion). In a locked-box deal, risk and economic benefit transfer as at the date of the locked-box accounts (the 'effective date'). The equity value is agreed at signing (based on the locked-box accounts). At completion, the equity value and locked-box compensation are paid, minus notified 'leakage'. There will be typically significant negotiations around the appropriate locked-box compensation for the period between effective date and completion and the scope of the leakage and permitted leakage.
In certain cases, an earn-out mechanism may be used to adjust purchase price post-completion (via reallocation of shares or proceeds), subject to certain performance-based milestones. Generally, earn-outs are not common in the Dutch market, but usage was higher than typically during 2022, where the tool was helpful to bridge (sometimes significant) valuation gaps in the context of an uncertain market.
Completion conditions in Dutch private equity transactions are typically limited to matters that are legally required to close the transaction. In most cases, this means required merger clearance, any applicable sector-specific regulatory approvals (e.g., for financial institutions or healthcare targets) and possibly foreign direct investment (FDI) approvals in relevant jurisdictions. If applicable, it will also include completion of required work council consultations in the Netherlands and any other relevant jurisdictions. It is less common for other conditions to be included – for example, no material breach of representations and warranties and no material adverse change to the relevant business or buy-side financing condition – although business-related conditions are sometimes seen in more complex or proprietary transactions.
The seller and purchaser will negotiate certain covenants and W&I in the SPA to agree on allocation of liability. Warranties can be divided into fundamental, business and tax warranties. Warranties can also be divided into warranties confirming that certain disclosures have been made, warranties confirming the absence of certain circumstances that are within the control of the company and allocation of risk on unknown matters. In relation to tax matters, a tax indemnity will typically be included, under which the seller will indemnify the purchaser for the company's historical tax liabilities. Such tax indemnity will generally be limited by specific exclusions, caps and time limitations.
W&I insurance is used in a majority of the Dutch private M&A market (mid-market and large market), particularly for sponsor exits where it is used in the far majority of cases. This has led to a 'clean exit' or near clean exit being the market standard approach. Typically, the W&I insurance policy would be a buy-side policy, although the costs are sometimes wholly or partly allocated to sellers (either expressly in the contract or through the equity value).
Where W&I insurance is used, the seller's liability (for business warranties and tax claims) is capped in the SPA at a nominal amount – typically €1. Fundamental warranties (limited either to the target company only or also including all or part of the subsidiaries) will be subject to a higher cap – typically 100 per cent of the consideration. The time limitations for bringing a claim will vary depending on the nature of warranty, the negotiation positions and other circumstances. Typically, 12 to 24 months tends to be market standard for business warranties, with two to seven years (or the relevant statutory period, where applicable) for fundamental warranties and tax claims. Warranties are commonly qualified by disclosure. Typically, a seller will expect at least data room disclosure (subject to the 'fair disclosure' definition). Disclosure against (part of) the fundamental warranties is a negotiation item.
Limitations on liability in the SPA generally also apply to the W&I insurance policy, but certain additional limitations may apply. These include known risks, standard or industry-specific exclusions, and the exclusion or qualification of specific warranties (as negotiated between insurer and purchaser). Fraud and possibly wilful misconduct will be excluded from coverage.
Management warranty deeds (in which warranties are provided by management in a separate deed, rather than by the seller in the SPA) are not common in the Dutch market. However, particularly in exits involving international sponsors, we have seen their usage increase, whereby the deed forms the basis for the W&I insurance policy. Where used, market practice is to limit the liability of managers to fraud and possibly wilful misconduct only.
IV Regulatory developments
There is no specific oversight for private equity transactions in the Netherlands, although fund managers themselves are regulated (see the Netherlands chapter in the fundraising section of this publication). As noted above, merger clearance, FDI and possibly sector-specific regulatory approvals may be applicable in private equity transactions.
Where an acquisition relates to the (direct or indirect) acquisition of sole or joint control of an undertaking, it must be notified to the Dutch Authority for Consumers and Markets (ACM) if the notification thresholds are met ((1) combined turnover of the undertakings concerned in the preceding calendar year exceeded €150 million and (2) turnover of each of at least two undertakings in the Netherlands is €30 million). Depending on the facts and the agreed governance structure, merger control approval by the ACM (or, in some cases, the European Commission) may apply to minority as well as majority investments. If a transaction needs to be notified to the ACM, a standstill obligation applies, meaning that it cannot be implemented before having obtained clearance.
Dutch competition law also prohibits anticompetitive agreements, similar to EU competition law. In relation to M&A transactions, this means that non-compete clauses and non-solicitation clauses between the seller or management and acquiring parties have to be limited to what is necessary for the implementation of the transaction. There will also be scrutiny of the purchaser exercising decisive influence over the target and sharing of commercially sensitive information prior to completion, to protect against the risk of 'gun jumping'.
Additionally, sector-specific approvals may be required. In respect of financial services targets, approval is likely to be required from the Dutch Central Bank or, where the transaction relates to a bank, the European Central Bank. Healthcare transactions will be subject to the approval of the Dutch Healthcare Authority. For large transactions in the utilities (including energy transportation and supply) and the telecoms (which is broadly defined, including – for example – data centres) sectors, there are dedicated statutory frameworks, and there may be specific notification requirements.
No overarching legal framework is yet in place regulating acquisitions and investments by foreign nationals to protect the Dutch national interests. However, on 17 May 2022, the legislation for the Dutch FDI screening regime (the FDI Act) was unanimously adopted by the Upper House of the Dutch Parliament after its adoption in the Lower House. The FDI Act is expected to be in force during the first quarter of 2023, with retroactive application to investments made after 8 September 2020. The FDI Act covers sectors that are of national interest. These are grouped into three categories: (1) vital providers (the list is not exhaustive, but this includes providers active in energy, banking and key transport hubs); (2) sensitive technologies (including dual-use technologies and technologies in relation to military goods); and (3) investment in a high-tech campus. Where in scope of the FDI Act, any acquisition of such a party will have to be notified to the Minister of Economic Affairs. In such cases, a standstill obligation applies, meaning that the transaction cannot be implemented before having obtained clearance.
The creativity we saw around deal structures during 2022 is likely to continue through 2023 amid continued volatility and uncertainty in the market. Continued rollover by sponsors upon exit may be used to bridge a value or funding gap, or to retain the possibility of continued upside as a minority shareholder (if fund vintage allows for it) while showing successful exits to investors and the market. Further continuation fund transactions are likely as market practice around topics such as valuation and conflicts of interest grows. Continued minority stake investments are expected to be seen as well, which could also include co-investments alongside another sponsor or a rollover founder. Market conditions (and, in particular, significant downward adjustments in the public markets) may support an increase in take-private activity. At portfolio company level, add-on activity may also increase as a strategic choice for sponsors opting to delay exit until market conditions improve.
Continued uncertainty around debt financing markets is expected in the coming period. Parties will need to strike a balance between securing certain funds financing at an early stage, often with uncertainty around pricing, and maintaining confidentiality of a transaction. Consequently, we expect financing to become an even more prominent aspect in negotiations on private equity transactions and private debt financing to become even more prominent for private equity deals. We also expect the general trend of increased sustainability-linked financing to continue and lead to more sustainability-linked acquisition financings.
In the Netherlands, as well as elsewhere, there is marked political movement towards protectionism. As already noted, the FDI Act is expected to come into force in the first quarter of 2023. Additional resources will be allocated to the Dutch Investment Review Agency (BTI) under the new regime. The BTI is understood to be eager to put screening tools into practice – including retroactive investigations. However, it is also expected that the BTI will be willing to engage with businesses and open to informal discussions. For private equity transactions, the evaluation criteria will likely be developed in the coming period. It is expected that evaluation will take a holistic approach – looking beyond one single investment and considering, for example, the track record of the fund (and related funds) and the identity of the limited partners.