What measures should be taken to best prepare for a corporate reorganisation?
Parties involved in the corporate restructuring should consider mandatory approvals (see questions 5 and 6) and decision-making in an early stage (see question 15 regarding internal corporate consent and approvals required for the reorganisation). Attention should be paid to the consequences of such approvals and decision-making on the envisaged timetable.
In addition to strategic planning (eg, choosing the optimal type of corporate reorganisation) and conducting valuation exercises (eg, performed by third-party valuation experts), a key measure to prepare for certain types of corporate reorganisations includes the performance of due diligence exercises. In essence, due diligence entails an investigation of the target’s legal, commercial and financial affairs. A virtual data room must provide access to, for instance, material contracts executed by the target, corporate information and pending or threatening litigation. A due diligence report will identify current and potential issues that may arise concerning the target and its implications for the acquiring company or in the event of an internal reorganisation in respect of the company that is the object of the reorganisation (including possible responses to threats). Due diligence exercises may also assist parties in, for example, presale restructuring, tax structuring, identifying disclosure obligations, auction and valuation processes, and planning on how to integrate the target in the business of the acquiring company.Employment issues
What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?
In the case of redundancies involving at least 20 employees within a certain area and within a period of three months, a notification should be made to the Employee Insurance Agency (UWV) and the trade unions involved. If this notification is omitted, all termination agreements entered into with redundant employees are voidable. Employment agreements cannot be terminated (by the employer, through court or in agreement with the employee) until one month after the notification has occurred. The purpose of this waiting period is for the employer to discuss measures with the trade unions to reduce the number of redundancies or agree on a social plan for the redundant employees. Although there is no legal obligation to actually agree on a social plan, the employer should be willing to make an effort should the trade unions be willing to negotiate.
See question 15 regarding the position of the works council in the case of a corporate restructuring.
What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?
Corporate reorganisations have no influence on pensions or other benefits unless the reorganisation also entails a reduction in employee benefits, which, in practice, is very difficult to realise and only possible in limited circumstances. Corporate reorganisations can trigger change-of-control clauses in certain benefits, such as share plans. Further, if employees are moved to other entities, their benefits and pensions may be affected if, for example, their new employer is subject to a different mandatory collective bargaining agreement or mandatory industry-wide pension fund.Financial assistance
Is financial assistance prohibited or restricted in your jurisdiction?
In respect of public limited companies, two main types of financial assistance are subject to statutory restrictions: (i) it is prohibited to provide financial assistance by giving security or guaranteeing the price with a view to a subscription for, or an acquisition of, shares or share certificates by third parties; and (ii) loans provided to support a subscription for, or acquisition of, shares or share certificates by third parties can only be granted up to an amount of the freely distributable reserves, provided that certain requirements are met (eg, the loan is provided against reasonable market conditions and the credit worthiness of the recipient of financial assistance has been properly investigated). Violation of the financial assistance restrictions will likely render the relevant transactions void.
In practice, various methods are available to structure an acquisition without triggering the financial assistance prohibition. For example, the target company may attract secured funding from a bank or a consortium of lenders in order to on-lend the relevant funds to the intended transferee of the shares in the target company. An alternative to circumvent the financial assistance restrictions includes a debt push-down immediately following the acquisition of the target company.
Similar financial assistance restrictions were previously applied to private limited companies, but repealed in 2012. Such abolition of financial assistance restrictions does not disapply general rules on, inter alia, conflict of interest and director’s liability. Hence, it is advisable that the company’s management establishes for itself that any financial assistance is a proper fulfilment of its duties and is not the result of a conflict of interest.Common problems
What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?
Commonly overlooked issues include internal and external corporate approvals, the required involvement of an accountant (for example in restructurings involving a merger or demerger) and the involvement of a works council.
Frequently asked questions typically include questions regarding which value to apply, what legal or statutory reserves must apply in the relevant case and which type of restructuring method is preferred from a timing perspective.
Accounting and taxAccounting and valuation
How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?
As regards the pricing of M&A deals, a ‘closing accounts’ or ‘locked box’ structure is regularly used.
In the case of shares and asset transfers, parties are free to determine the purchase price. In particular, in the case of significant dispositions (eg, going concern sales) or share transfers, valuations are often solicited from third-party experts. In the event of non-stressed asset sales, a going concern premium may typically be included in the purchase price.
In respect of certain types of corporate reorganisation, an accountant will be involved for valuation purposes in certain other stages of the transaction. For example, a merger requires an accountant to determine the fairness of the exchange rate of shares issued by the acquiring company to the shareholders of the merging company, by reference to the value of the estate that is transferred to the acquiring company.Tax issues
What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?
In corporate reorganisations, it is generally relevant to consider tax issues that may arise for Dutch corporate income tax purposes, Dutch dividend withholding tax purposes, Dutch value added tax (VAT) purposes and Dutch real estate transfer tax purposes. Corporate re-organisations can, for instance, result in:
- taxable gains or losses for Dutch corporate income tax purposes being triggered;
- losses available for ‘loss carry forward’ for Dutch corporate income tax purposes no longer being available; and
- the loss of previously claimed exemptions from Dutch corporate income tax.
Further, consolidated tax groups (fiscal unities) for Dutch corporate income tax and Dutch VAT purposes may be broken as a result of corporate reorganisations, which could trigger tax liabilities. Corporate re-organisations can also result in taxable events for Dutch VAT and Dutch real estate transfer tax purposes. The specific tax issues depend, inter alia, on the legal form a corporate reorganisation takes (eg, merger, demerger, sale). Dutch tax law provides for certain roll-over facilities and other facilities (eg, exemptions) that may soften the tax consequences of a corporate reorganisation, typically subject to conditions being met during a specific period following the corporate reorganisation.
In order to prevent tax issues arising, it is important that intra-group transactions occur at arm’s length.