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Trends and climate
What is the current state of the M&A market in your jurisdiction?
The Dutch M&A market is currently highly active. Presumably, the M&A market is especially buoyed by a combination of ongoing access to cheap credit, available war chests and generally positive economic data. Further, there is significant competition in the Dutch M&A market for quality assets.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
Following the Dutch parliamentary elections in early 2017, several parties are attempting to form a coalition government (as is usual in the Netherlands). Once a government has been formed, new legislative initiatives are expected.
The Dutch economy grew by approximately 3.5% in the last quarter and is expected to expand further in the coming period.
Are any sectors experiencing significant M&A activity?
The first half of 2017 was characterised by an increase in private equity transactions (particularly in the top end of the market), but private equity investors remain wary of overpaying. Further, there were a number of high-profile potential public takeover bids (eg, AkzoNobel and Unilever).
General M&A activity was particularly robust in the consumer goods, energy and information technology sectors.
Are there any proposals for legal reform in your jurisdiction?
In May 2017 the minister of economic affairs stated that he is in favour of additional legislation which would give directors more time and room to fully assess the effect of public takeovers on all stakeholders. The Dutch Parliament seems to be in favour of a statutory time out – in July it decided that a legislative proposal on a preventive test by a committee similar to the US Committee on Foreign Investment needs to be developed in respect of takeovers of companies that belong to vital infrastructure sectors that are of major importance for national security, the economy or employment in the Netherlands.
Further, legislation on the registration of ultimate beneficial owners is expected in the second half of 2017. The June 26 2017 deadline for the implementation of the EU directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the fourth anti-money laundering directive) has already passed.
In November 2016 the minister of financial affairs published a consultation document regarding the proposed revision of the Financial Supervision Act. The amendments are expected to include a shift from the existing functional layout to a legislative layout based on the type of financial service provider. Moreover, the proposed changes would lead to better alignment with European legislation. The first round of market consultation has been completed. The minister of financial affairs is expected to publish a memorandum this year outlining conclusions and proposed changes. This will initiate a second consultation round that will determine which statutory amendments are required.
What legislation governs M&A in your jurisdiction?
Private M&A transactions are not governed by specific rules (other than legal mergers for which strict specific rules apply). Instead, private M&A transactions are governed by general Dutch law, particularly general contract and corporate law and certain provisions of property law. Further, the Works Council Act and the Competition Act are relevant in the context of private M&A transactions.
Public M&A transactions are governed by the Financial Supervision Act (particularly Part 5) and subordinate regulations (particularly the Public Offers (Financial Supervision Act) Decree). These regulations implement, for example, the EU Takeover Directive and the EU Market Abuse Directive.
How is the M&A market regulated?
In addition to generally applicable regulations under law, M&A transactions are regulated by:
- the Competition Act (or, if the relevant thresholds are met, the relevant EU competition regulations);
- the Works Council Act and the Merger Code of the Social Economic Council; and
- sector-specific regulations (briefly described below).
Are there specific rules for particular sectors?
Yes. For example, transactions in the defence, energy, financial and healthcare sectors can be subject to specific regulations and prior regulatory review.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
A non-listed company can be acquired through:
- a share transaction, whereby the shares in the company are sold and transferred to the buyer;
- an asset transaction, whereby assets and liabilities are sold and individually transferred to the buyer; and
- a legal merger, whereby the company merges into the acquiring company (or a new company) and ceases to exist.
A listed company can be acquired, for example, through a public takeover bid or, for all practical purposes, an asset transaction.
Generally, the deciding factors for choosing a particular transaction structure are:
- the nature of the assets and liabilities of the company; and
- the company's shareholder structure.
Due diligence requirements
What due diligence is necessary for buyers?
Due diligence is not strictly mandatory under Dutch law. However, acquisitions are generally preceded by a due diligence investigation into, for example, financial, legal and tax matters.
The purpose of the due diligence investigation is to determine, among other things:
- whether to proceed with the transaction;
- the appropriate valuation;
- the optimum transaction structure; and
- any required warranties, indemnities or consents.
Under long-established Dutch case law, a buyer has a duty to investigate the object of its purchase and, in the absence of such investigation, may be limited in its potential claims on the seller. However, the buyer may rely on statements made by the seller and has no specific duty to verify such statements.
What information is available to buyers?
The information available to a buyer depends on whether the target is listed or non-listed.
In case of a non-listed company, certain limited information is available from public registers, including the commercial register (eg, annual accounts and articles of association). More extensive disclosure obligations apply to listed companies under applicable legislation, including the obligation to provide regular trading updates and disclose price-sensitive information; therefore, more information is publicly available.
In the context of a friendly M&A transaction, the seller typically provides information to the buyer on the basis of a due diligence request list prepared by either the buyer or the seller's advisers.
What information can and cannot be disclosed when dealing with a public company?
Any non-public information which if disclosed could significantly affect the price of the securities issued by a listed company (price-sensitive information) must be made generally available immediately. Disclosure of price-sensitive information may be delayed if:
- the delay serves a legitimate interest of the company;
- the delay is unlikely to deceive the public; and
- the company can guarantee the confidentiality of this information.
As a result, extensive confidentiality agreements (potentially including a standstill) are typically entered into pursuant to which price-sensitive information can be provided to the potential buyer. Disclosure of price-sensitive information may no longer be delayed if, despite any measures taken, confidentiality is not guaranteed (eg, a leak becomes apparent).
As long as a potential buyer has price-sensitive information, the potential buyer is prohibited from trading in securities issued by the company.
How is stakebuilding regulated?
Subject to insider dealing restrictions and transparency requirements, a potential buyer may acquire shares in a listed company before the announcement of a public offer and enter into irrevocable undertakings with significant shareholders. However, a potential buyer is prohibited from trading in securities issued by the company as long as it has price-sensitive information. If a potential buyer (either alone or acting in concert with others) acquires 30% or more of the voting rights in a listed company, a mandatory offer may be triggered.
Following the announcement of a transaction, a potential buyer may continue to acquire shares, but each transaction (and the main terms thereof) should promptly be publically disclosed. This information should also be included in the offer document.
If the shareholding or voting rights of a potential buyer cross certain thresholds (currently 3%, 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%), a filing should be promptly made with the Dutch financial regulator. All filings are listed on the regulator’s website and are regularly reported in the media.
Following a public offer, the buyer may not acquire shares on better terms for one year.
What preliminary agreements are commonly drafted?
Commonly prepared preliminary agreements include confidentiality agreements and letters of intent (under a variety of names). As part of these documents or as a separate agreement, exclusivity arrangements are also commonly entered into.
What documents are required?
In addition to the acquisition agreement itself, the transfer of legal ownership of shares requires a notarial deed of transfer executed by a civil law notary and the parties in the Netherlands.
In case of an asset transaction, the transfer of legal ownership of each individual asset should be assessed and may require additional documentation.
Which side normally prepares the first drafts?
In contrast to an auction process where the seller typically provides a draft acquisition agreement, the first draft acquisition agreement is generally prepared by the buyer.
What are the substantive clauses that comprise an acquisition agreement?
The acquisition agreement commonly includes the following substantive provisions:
- the parties;
- the object to the transaction (ie, a description of the target company or assets);
- the purchase price and effective date of the transaction;
- any conditions precedent (eg, merger clearance);
- the pre-closing covenants;
- the closing mechanics;
- warranties and limitations of liability;
- specific indemnities (if any);
- post-closing covenants (eg, non-compete and access to information); and
- miscellaneous provisions (eg, confidentiality, assignment, cost allocation, governing law and dispute resolution).
What provisions are made for deal protection?
In case of an acquisition of a non-listed company, exclusivity arrangements are commonly entered into as part of a letter of intent or separately. Generally, break fees are not agreed as part of an exclusivity agreement, although a breach of the exclusivity can lead to liability. Acquisition agreements generally do not contain break fee or fiduciary out arrangements.
In case of an acquisition of a listed company, deal protection is generally agreed in the form of break fees, matching rights and non-solicitation obligations. As a counterbalance, a fiduciary out for the target is generally agreed.
What documents are normally executed at signing and closing?
The acquisition agreement is signed at signing. In addition, other documents agreed to be entered into in connection with the transaction may be signed at signing. However, these documents are typically signed only at closing.
At closing, the documents required to transfer legal ownership of the shares or assets are executed, together with other documents agreed to be entered into in connection with the transaction (eg, transitional services agreements).
Are there formalities for the execution of documents by foreign companies?
The requirements for foreign companies when executing documents are the same as those regarding Dutch companies. However, counterparties may request confirmation that the foreign company is duly represented when executing the transaction documents (eg, through extracts from commercial registers or legal opinions).
Civil law notaries are subject to specific and strict regulations concerning the execution of documents. Consequently, notaries typically ask that any powers of attorney are notarised, apostilled and accompanied by confirmation from a local lawyer (or other person with similar standing) that the power of attorney has been signed by an authorised representative.
Are digital signatures binding and enforceable?
Most agreements can be entered into without any formal requirements (although a signed document is preferable from an evidentiary perspective) and agreements can be (and regularly are) entered into through exchanging scans of signed signature pages.
Agreements can also be entered into by means of a true digital signature as long as certain requirements are met, including with respect to the uniqueness of the digital signature.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes. Transaction documents may be (and regularly are) governed by non-Dutch law. However, any notarial documents will be governed by Dutch law.
What provisions and/or restrictions are there for foreign ownership?
There are no specific restrictions on foreign ownership. However, investments in certain sectors require prior regulatory approval – both for Dutch and non-Dutch companies – where the nationality of the buyer may be relevant. For example, the Dutch Central Bank will consider whether foreign ownership of a financial institution will still allow it to have effective supervision of the operations of the financial institution.
Valuation and consideration
How are companies valued?
Commonly used valuation methods include discount cash-flow calculations, earnings before interest, taxes, depreciation and amortisation multiples and net asset value calculations. In case of an acquisition of a listed company, a premium to current and historic trading is also taken into account.
What types of consideration can be offered?
There are no specific restrictions on the types of consideration which can be offered, although exclusively non-cash consideration is uncommon.
What issues must be considered when preparing a company for sale?
When preparing a company for sale, it is recommended to carefully prepare the company and define a clear strategy to achieve the optimum result.
Further, preparation of an internal valuation and potentially vendor assistance documents (eg, a legal vendor assistance or due diligence report) may be considered.
Finally, an honest assessment of the company's strengths and – perhaps more importantly – weaknesses and potential issues for a buyer is recommended. Such assessment would allow the remediation of any issues or, at a minimum, allow the seller to prepare good counterarguments and anticipate potential negotiating issues.
What tips would you give when negotiating a deal?
A clear understanding of the commercial drivers, objections and key topics for each party are important, as well as knowledge of the target’s business, industry and regulatory framework.
Are hostile takeovers permitted and what are the possible strategies for the target?
Yes. However, hostile takeovers are rare in the Netherlands, mainly due to information asymmetry and the fact that most listed companies in the Netherlands have defence mechanisms in place. These defence mechanisms include friendly foundations, which have an option right to acquire 50% minus one share of all shares and special appointment rights for directors granted to friendly parties.
However, as an answer to recent hostile takeover activity (eg, PostNL, Unilever and AkzoNobel), in May 2017 the minister of economic affairs stated that he is in favour of additional legislation which would give directors more time and room to fully assess the effect of the takeover on all stakeholders. The Dutch Parliament seems to be in favour of a statutory time out – in July 2017 it decided that a legislative proposal on a preventive test by a committee similar to the US Committee on Foreign Investment needs developed in respect of takeovers of companies that belong to vital infrastructure sectors that are of major importance for national security, the economy or employment in the Netherlands.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties typically cover a broad spectrum of the target's operations (eg, financial information, legal compliance, intellectual property, information technology and material contracts) and the seller's ownership of the shares or assets and its authority and capacity to enter into the transaction. Further, a warranty on the accuracy and completeness of the information provided is generally given.
Indemnities are typically provided only for specific issues identified as part of the due diligence investigation (eg, environmental issues). Further, a tax indemnity or covenant is typically agreed with respect to any pre-closing or pre-effective date tax.
Limitations and remedies
Are there limitations on warranties?
Although general Dutch law contains certain limitations applicable to claims generally, specific limitations of liability are typically heavily negotiated in the context of an acquisition agreement.
Specific negotiated limitations of liability commonly include an overall maximum liability for warranty claims as a percentage of the purchase price, de minimis, thresholds and baskets, time limitations and other limitations (eg, the duty to timely notify and pursue a claim sanctioned by a loss of claim and no double recourse provisions). Further, full data room disclosure is common in the Netherlands.
What are the remedies for a breach of warranty?
Under general Dutch law, a warranty breach may result in the buyer:
- requesting specific performance;
- claiming damages; or
- rescinding the acquisition agreement (in which case the transaction may be unwound).
However, the right to rescind the acquisition agreement is generally excluded in the acquisition agreement. The right to claim specific performance is sometimes also excluded. Generally, the main remedy sought by the buyer will be compensation for any damage it or its group companies have suffered – including the target company after closing – as a result of the warranty breach.
Are there time limits or restrictions for bringing claims under warranties?
Under general Dutch law, contractual claims lapse five years after the buyer becomes aware of the damage and the responsible party. Further, a contractual claim will, in any event, lapse after 20 years.
However, the acquisition agreement generally contains specifically agreed time limitations for warranty claims. The time limitations are generally between one and three years for general warranty claims and between seven years and the expiry date of the statute of limitations for fundamental warranty claims.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Corporate income tax (CIT):
- The Dutch CIT rates are 20% on the first €200,000 (to be increased to €350,000 in the next few years) and 25% on profits exceeding this threshold.
- A Dutch seller is normally exempt on the sale of the shares in the target due to the application of the participation exemption, unless the target is a low-taxed passive investment company. A foreign selling company is in principle not taxed on the sale of shares in a Dutch target, unless specific anti-avoidance rules apply.
- If the target is member of a CIT fiscal unity with the seller, on the sale, the seller may be taxed in case assets have been transferred to the target in the past six years at a consideration below fair value (‘disruption charge’).
- In case of an asset transaction, the difference between the tax book value and the purchase price is included in the taxable income of the seller.
- In case of a legal merger, if a target ceases to exist on a merger, it is deemed to have sold its assets for Dutch CIT purposes. The difference between the tax book value and the fair value of the assets is included in the taxable income of the target. Tax losses will evaporate.
- Generally, deal costs are deductible, except in case of a share deal, where restrictions apply.
Value added tax (VAT):
- The generally applicable VAT rate is 21%. The sale of shares is not taxed with VAT. The sale of assets is in principle taxed with VAT. However, if the assets constitute a universality of goods or a branch of activities of the target, no VAT is levied.
- VAT on deal costs is generally recoverable, except in case of a share deal, where restrictions apply.
Real estate transfer tax and other registration duties:
- Acquisition of Dutch real estate is subject to 6% real estate transfer tax on the fair value of the real estate. This applies in asset transactions and legal mergers.
- On acquisition of the shares in a Dutch company, real estate transfer tax on underlying Dutch real estate is payable by the buyer only if the target’s assets comprise at least 50% real estate and 30% Dutch real estate which is mainly used for real estate exploitation purposes (ie, not in the target’s own operating business.
- No stamp duties or other transfer taxes apply.
- The deductibility of interest on shareholder and other loans is limited under certain circumstances.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
The sale of shares is normally exempt from CIT under participation exemption.
Tax losses of the CIT fiscal unity can be surrendered to the target company.
In case the seller has included the difference between the fair value and the tax book value in its taxable income, the target or buyer may use the higher fair value as the new tax book value (ie, a step-up resulting in higher depreciation). This also applies in case of a legal merger.
Roll-over relief may be available in case of a legal merger. In such cases, tax losses may be surrendered to the acquiring company, resulting in a tax neutral merger.
A real estate transfer tax exemption may also be available in case of a legal merger.
What are the common methods used to mitigate tax liability?
CIT on operating profits of the target can be reduced by forming a CIT fiscal unity between a Dutch acquiring company and the target, which allows – taking into account certain statutory restrictions – interest expenses on acquisition debt to be effectively offset against the operating profits of the target. The disruption charge can be avoided by acquiring the parent of the CIT fiscal unity.
What fees are likely to be involved?
Management and directors
What are the rules on management buy-outs?
There are no specific statutory rules on management buyouts. However, conflict of interest rules and corporate interest and benefit principles should be even more carefully considered in the context of a management buyout.
What duties do directors have in relation to M&A?
As a general rule, directors should act in the best interest of the company and its stakeholders. These stakeholders include the shareholders, but there is no obligation as such for directors to obtain the best price for the shareholders.
In case of an acquisition of a listed company, the acquisition agreement typically contains a fiduciary out allowing the directors to negotiate with third parties and terminate the acquisition agreement in case a superior offer is made. Further, non-financial covenants addressing matters relevant for other non-shareholder stakeholders (eg, location of headquarters and employee-related matters) are generally agreed.
Consultation and transfer
How are employees involved in the process?
Depending on the specific circumstances and governance structure, the works council of a target may have a right to advise on a transaction. Works council advice should be sought at a time when the advice may still have a substantial influence on the transaction (ie, before signing the acquisition agreement), unless otherwise agreed with the works council. Ultimately and except in extraordinary cases, the works council has no veto right and cannot prevent a transaction from happening, but the works council can significantly slow down the transaction process.
Further, trade unions may have to be consulted pursuant to applicable collective bargaining agreements or the merger code as applied by the Social and Economic Council. Ultimately, and except in extraordinary cases, trade unions cannot prevent a transaction from happening, but they can influence the timing of a transaction process and cause agitation among the target’s employees.
What rules govern the transfer of employees to a buyer?
In case of a transfer of undertaking, the rights and obligations under any employment agreements will also transfer with the undertaking. A transfer of undertaking occurs when an ‘economic unit’ (defined as a complex of organised means established for the pursuit of an activity, whether or not this constitutes its principal economic activity) is transferred to another person by contract or otherwise (ie, legal personality and an economic unit are separate concepts). Examples include asset deals and legal mergers and demergers.
If the identity of the economic unit for which an employee performs its activities and its formal employer do not match (eg, in case of an asset transaction), an employee may demand re-employment by the legal entity which operates this relevant economic unit.
In the event of a transfer of undertaking, amendment of employment conditions or termination of employment are not allowed if the amendment or termination relate to the transfer of an undertaking.
In the event of a share deal, the transfer of an undertaking provisions generally do not apply. The legal entity of the employer does not change. The employee will remain employed by that legal entity on the employee’s applicable terms and conditions.
What are the rules in relation to company pension rights in the event of an acquisition?
In the event of a share transfer, the employee’s pension will be continued. In some cases, this is legally impossible, in which case a similar pension scheme to the previous one must be offered.
If a transfer of undertaking applies, the purchaser can choose to offer its own pension scheme (but only if a pension scheme is already in place for the entity to which the employees are transferred) or to continue the employee’s previous pension scheme. If the purchaser has no pension scheme, it must offer the previous pension scheme (or a similar pension scheme if the previous pension could not be continued).
Other relevant considerations
What legislation governs competition issues relating to M&A?
The competition aspects of an M&A transaction are governed by the Competition Act or, if the relevant thresholds are met, the relevant EU competition regulations apply.
Are any anti-bribery provisions in force?
Yes. Dutch law prohibits bribery and other forms of corruption. In case of bribery, the maximum penalty is a fine of up to 10% of the group's annual revenue and up to six years’ imprisonment for the individuals concerned.
In addition to Dutch law, bribery may be covered by the extra-territorial prohibitions and penalties of non-Dutch law (eg, the UK Bribery Act and the US Foreign Corrupt Practices Act).
What happens if the company being bought is in receivership or bankrupt?
There are no specific provisions in the Bankruptcy Act with respect to the sale of a bankrupt company (or more specifically the assets of a bankrupt company).
If a company is declared bankrupt, a trustee will be appointed by the court. The trustee is responsible for the administration of the company and the liquidation of the company's assets. In this capacity, the trustee also has the power to dispose of the company's assets and any disposal requires the trustee’s agreement. Depending on the circumstances and specific action, the trustee may require prior approval of the court.
When a company is in financial difficulties and may become insolvent, it may be possible (also depending on the relevant court) to agree a pre-pack. In a pre-pack a prospective trustee is designated in agreement with the court (without the same becoming publically known) who then seeks a pre-wired sale of the company as a going concern. Once such pre-wired sale is agreed, the company is declared bankrupt and sold from bankruptcy by the trustee and with approval of the court to the prospective buyer. Several proposals have been made for legislation concerning pre-packs, but currently there is no formal legislation regulating pre-packs.