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What types of debt securities offerings are typical, and how active is the market?
There has traditionally been a sophisticated and active market for debt securities in the Netherlands.
Dutch-based banks and insurance companies include some of the world’s leading financial institutions, as well as smaller institutions with a more domestic focus but still with a global footprint. Both categories are active issuers in the Dutch and international capital markets across a spectrum of debt instruments, including commercial paper, bonds, structured notes and regulatory capital instruments. These financial institutions are also active in the asset-backed capital markets, including covered bonds and securitisations (which has historically been an important market for the Netherlands, but suffered in recent years).
In addition, the Netherlands has many international corporate conglomerates tapping the Dutch and international capital markets across a variety of debt instruments, including commercial paper, bonds, convertible bonds, exchangeable bonds and high-yield notes.
The Netherlands is also known for its flexibility in Dutch corporate law, generally timely implementation of EU harmonised financial law, favourable regulatory regime for group finance companies, quality of financial regulators and favourable tax climate. This has led to many international financial institutions and global corporates establishing Dutch finance companies, issuing debt instruments across the capital markets spectrum, mostly bonds and structured notes.
At the same time, large Dutch pension funds and other investment funds commit significant investments in debt instruments issued in the Dutch and international capital markets.
Describe the general regime for debt securities offerings.
The Dutch Authority for the Financial Markets (AFM) supervises the Dutch capital markets and its participants, offering guidelines on (capital markets law) issues in addition to those from the European Securities and Markets Authority (ESMA). The Dutch Central Bank (DCB) and, for more significant financial institutions, the European Central Bank (ECB), are tasked with prudential supervision.
The regulatory framework for debt capital markets consists of numerous laws and regulations, both at a national and EU level. EU directives are implemented in Dutch law generally in time and without substantial deviation, mostly in the Dutch Financial Supervision Act. EU regulations have direct effect in the Netherlands.
Financial Supervision Act
The Dutch Financial Supervision Act (FSA) implements, among other things, the Prospectus Directive, the Transparency Directive, the Market Abuse Directive, the Markets in Financial Instruments Directive (MiFID) and other EU directives relevant to the debt capital markets. The FSA sets out licensing requirements, and exemptions, for financial institutions based in the Netherlands, branches in the Netherlands of financial institutions based abroad, cross-border activities, as well as prudential and conduct rules for the financial sector. It also contains provisions in relation to protection of market integrity and investors and clients of financial institutions.
The FSA also sets out powers of the AFM and DCB to supervise the financial markets and impose sanctions where necessary. The FSA is supplemented by several lower level legal instruments.
The Dutch Civil Code
The Dutch Civil Code provides for corporate law, contract law, liability law and consumer protection, all of which affect the documentation and interpretation of instruments governed by Dutch law or issued by Dutch entities.
EU regulations relevant to the Dutch capital markets include the Markets in Financial Instruments Regulation (MiFIR), supplementing MiFID, which introduced changes to the laws applicable to capital market transactions and capital market participants. In particular, the product governance regime has had a significant impact on documentation and the placement and distribution of securities.
The Benchmarks Regulation (BMR) governs the provision and administration of benchmarks, the contribution of input data to a benchmark and imposes additional requirements on supervised entities that use benchmarks. BMR has had a significant impact on documentation and transactions in 2018 and will likely drive further changes to terms and conditions and risk factors in prospectuses relating to the use of benchmarks, fall-back provisions and benchmark administrator risks in 2019, when benchmark administrators and benchmark contributors will be required to seek licences or registration.
The Market Abuse Regulation (MAR) provides an European Economic Area (EEA) wide framework on all forms of market abuse, and contains inter alia prohibitions on insider dealing, unlawful use of insider information, market manipulation and imposes requirements on issuers to disclose price sensitive information to the market, as well as regulating market soundings.
The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation aims to make packaged retail investor products and insurance-based investment products more transparent and their risks and costs more understandable for retail investors. The PRIIPs Regulation imposes various obligations on persons manufacturing, advising on or selling PRIIPs. For example, it requires issuers to compose and regularly review a key information document and provide it to retail investors.
The Securitisation Regulation provides for a general framework applicable to all securitisations and also sets out a specific framework in relation to STS securitisations, which may benefit from favourable capital treatment. The Securitisation Regulation introduces a ban on re-securitisations and harmonises due diligence requirements for institutional investors. Finally, issuers, originators and sponsors are now under a direct obligation to ensure that risk-retention requirements are satisfied and are subject to disclosure requirements.
The Prospectus Directive, implemented in the Netherlands in the FSA, will be replaced by the Prospectus Regulation, which will govern the prospectus requirements relating to public offers and admission to trading on a regulated market. The new Prospectus Regulation will apply in full from 21 July 2019 onwards, further harmonising the European prospectus regime.
Euronext Amsterdam is the main regulated market in the Netherlands for the listing and trading of debt securities. Its Rule Books provide for listing requirements.
Debt instruments are generally cleared through Euroclear or Clearstream and may be cleared through Euroclear Netherlands in which case the Dutch Securities Giro Act and Euroclear Netherlands’ regulations apply. If a clearing member were to become insolvent, in certain circumstances investors benefit from additional protection of their ownership rights in the securities held by such clearing member under the Dutch Securities Giro Act when securities are issued through Euroclear Netherlands.
The International Capital Markets Association (ICMA) is an important forum for Dutch capital markets participants, offering principles and standards facilitating the functioning of the market. There are also several other Dutch industry associations advocating for the Dutch capital markets and its players, including the Dutch Association of Banks, the Dutch Securitisation Association and the Dutch Covered Bond Association. DUFAS is the main Dutch industry association for asset managers.
Filing and documentary requirements
General filing requirements
Give details of any filing requirements for public offerings of debt securities. Outline any requirements for debt securities that are not applicable to offerings of other securities.
The FSA requires a prospectus to be published if securities are to be offered to the public or admitted to trading on a regulated market in the Netherlands. The FSA defines an ‘offer of securities to the public’ as an offer to enter into an agreement to sell and buy securities; as an invitation to make an offer for such securities; and as placing securities with financial intermediaries.
The AFM is the Dutch competent authority with regards to approving prospectuses. Typically, a draft prospectus is sent and any comments from the AFM are then incorporated in the final prospectus that is filed for official approval together with all documents incorporated by reference in the prospectus. The approved prospectus is made available on the AFM’s website. Supplements to the prospectus must be approved by the AFM as well and include additional disclosure in relation to the issuer or the securities, such as incorporation of recent financial results.
If the final terms of the offer of debt securities are not included in the base prospectus, the final terms need to be filed with the AFM, where possible prior to the offer of such securities.
For securitisations, additional disclosure requirements apply, including the making available through a securitisation repository of the prospectus and relevant transaction documents.
In a public offering of debt securities, must the issuer produce a prospectus or similar documentation? What information must it contain?
Unless an exception or exemption applies, an issuer will have to publish an approved prospectus before being able to offer debt securities to the public in the Netherlands. The prospectus must comply with the requirements set out in the FSA and the Prospectus Regulation. An issuer can publish either a prospectus or a registration document, together with a summary and a securities note. The approved prospectus will be valid for 12 months following approval, provided it is supplemented from time to time in accordance with applicable regulations.
The standard of disclosure in a prospectus is that it must contain the information required by an investor to be able to make an informed decision on whether it wishes to invest in the instruments. This includes information about the issuer and the securities, such as:
- the assets and liabilities, profits and losses, financial position, and prospects of the issuer and any guarantor;
- the rights attaching to the debt securities;
- the reasons for the issuance and its impact on the issuer;
- relevant risk factors; and
- the terms and conditions of the debt securities.
Specific requirements relate to specific classes of debt securities. In general terms, the content requirements are more onerous for complex debt securities and those aimed at retail investors.
The PRIIPs Regulation requires issuers to produce a key information document when offering securities to retail investors, which constitute packaged investments (eg, structured notes) and insurance products.
Offering and listing documents generally include recommendations by regulatory bodies such as ESMA and the AFM and industry bodies such as the ICMA to ensure the prospectus is consistent with market practice.
Describe the drafting process for the offering document.
In the Dutch market, counsel to the arranger generally holds the pen on drafting the prospectus and other issuance documentation, while the issuer and its counsel provide review and input on issuer-related sections (although this may be different depending on the particulars of transactions). Further input is provided by dealers, agents, auditors, rating agencies and other third parties involved in a transaction. However, ultimately, the issuer is responsible for all information contained in the prospectus, while other parties sometimes take responsibility for specific parts of the prospectus.
Key documentation issues typically revolve around the risk factors, transaction structure, description of the issuer and, if relevant, assets backing the transaction. In addition, selling restrictions are included in the prospectus to ensure compliance with applicable laws. Local counsel or international law firms are engaged for the purpose of covering relevant offering or listing jurisdictions.
In determining what information to disclose, the issuer needs to consider whether such information is required to be included for investors to understand the investment and the debt securities offered. In reviewing the prospectus, the AFM will also consider whether information contained in the prospectus is sufficiently clear, concise and material.
Private placements are usually structured in such a way that they are exempt from the prospectus requirements, although often an offering circular is drafted for private placements that closely follows the form of prospectuses used in public transactions.
Which key documents govern the terms and conditions of the debt securities? Who are the parties to such documents? How can such documents be accessed?
The terms and conditions of debt securities (and their offerings) are primarily provided for in:
- the prospectus, which must be approved by the AFM (see question 4) and published;
- the underwriting or subscription agreement, which is entered into by the issuer and lead managers or dealers, setting out the terms governing the subscription for the debt security offer. It is usually not publicly available;
- the agency agreement, which is entered into by the issuer and agents (such as the paying agent, calculation agent), setting out the terms and conditions concerning services to be rendered on behalf of the issuer in relation to the notes or the noteholders. It is usually not publicly available;
- the trust deed or deed of covenant, which sets out the rights of noteholders and responsibilities of the security trustee (if applicable). The trust deed or deed of covenant will not be published but the terms and conditions will generally be included in the prospectus; and
- any security documents: when the debt securities are secured, security documents will be entered into by, among others, the issuer and the security trustee.
Note that for securitisations, the transaction documents need to be made available to investors, competent authorities and, upon request, potential investors prior to pricing.
Does offering documentation require approval before publication? In what forms should it be available?
Yes, the AFM must review and approve a prospectus (including supplements) before it can be published and before debt securities can be offered to the public or listed and traded on a regulated market. A prospectus must be submitted to the AFM in pdf format and in a version that can be directly published (including the date, final format and any images). The FSA requires a prospectus to be made public and, in light of this requirement, the AFM will publish approved prospectuses in its Prospectus Register on its website although issuers will generally also publish their prospectus upon approval on their own website. The prospectus may also be made available in printed form, free of charge at Euronext Amsterdam (if listed or traded there). Prospectuses will also need to be submitted by competent authorities to ESMA for inclusion in its register of approved prospectuses.
Are public offerings of debt securities subject to review and authorisation? What is the time frame for approval? What are the restrictions imposed, if any, on the issuer and the underwriters during the review process?
An issuer seeking to offer debt securities to the public, or list them on a regulated market, must submit a draft prospectus to the AFM for approval. The AFM has 10 business days to review the prospectus and notify the applicant of its decision. If the prospectus is for public debt securities to be issued for the first time, the time frame for approval is 20 business days. The AFM can approve the prospectus or request the issuer to incorporate additional information in the prospectus in the form of a response sheet after which it will review the prospectus again within the same time frame. It may be that the procedure is repeated several times before the prospectus is approved. Once the prospectus has been approved, it can only be amended or supplemented via a supplement. Supplements to prospectuses must also be approved by the AFM, within seven business days. Under certain circumstances, the AFM can approve a supplement within one business day. This is possible when the supplement relates exclusively to incorporation by reference of a press release, quarterly report or (semi)annual financial results of the issuer.
There are no restrictions imposed on the issuer and underwriters during the review process, other than that they are not allowed to offer the debt securities, and changes can be made to the prospectus and transaction documents, although such changes will need to be reviewed and approved by the AFM and could therefore lead to a delay in the approval. In addition, if the offering is marketed to investors, any changes to the prospectus or transaction documents could lead to such investors being entitled to revoke their investment orders. A preliminary prospectus is typically used for marketing purposes and road shows, but no debt securities may be marketed in such a way that this constitutes a public offer of debt securities.
On what grounds may the regulators refuse to approve a public offering of securities?
The AFM will only approve a prospectus once it is satisfied that the prospectus meets all the requirements set out in the FSA and other relevant legislation. The AFM seeks to ensure that the Dutch financial markets function optimally and that investors are adequately protected. It will therefore refuse to approve a prospectus, whether for a public offering or a listing, if relevant requirements are not met.
How do the rules differ for public and private offerings of debt securities? What types of exemptions from registration are available?
The FSA exempts certain public offers of debt securities from requiring an approved and published prospectus, in line with the Prospectus Directive. The exemptions related to, among other things:
- securities offered solely to qualified investors (as defined in the FSA);
- securities offered to fewer than 150 natural or legal persons, other than qualified investors;
- securities that can only be acquired for a total consideration of at least €100,000 per investor, per offer;
- securities of denomination of at least €100,000; and
- securities with a total consideration of less than €5 million in all member states, calculated over a period of 12 months, provided that such offering is notified to the AFM and an information document is provided to the AFM.
Further exemptions concern securities offered in connection with mergers or demergers, replacement of existing securities and those offered to board members and employees.
If an exemption, other than in relation to qualified investors, applies for securities offered to the public, a warning sign in a mandatory form and size needs to be included in the prospectus and other offering and marketing materials.
Describe the public offering process for debt securities. How does the private offering process differ?
The timetable for a debt securities offering depends on various factors. Most importantly, it depends on whether the issuance is done under an existing debt issuance programme, which can be done within a matter of days or weeks, or as a standalone issue, which can take two months or more to complete.
A deal typically starts with the appointment of the (lead) managers and legal counsel to both the issuer and the managers. These parties, together with the auditors, will agree the structural features of the transaction, draft the transaction documentation and, if applicable, the prospectus and liaise with relevant third parties, including the AFM, credit rating agencies and third-party service providers.
The main transaction documents are those set out in question 6.
Once the prospectus is in final form (subject to pricing information) and the transaction documents are either signed or in agreed form, a public offering is launched with a public announcement. Marketing usually consists of:
- a roadshow during which the issuer (and sometimes the arranger or managers) speak to investors; and
- an investor information package, which typically include, among other things, an investor presentation, term sheet and a preliminary prospectus.
After launching the deal, the issuer, arranger and lead managers answer questions from prospective investors and fill their order book.
During, or shortly after the marketing period, the transaction documents are signed. The final prospectus is then submitted for approval to the AFM and, following approval, the notes are issued and settlement takes place.
A private placement typically takes less time to complete than a public offering.
What are the usual closing documents that the underwriters or the initial purchasers require in public and private offerings of debt securities from the issuer or third parties?
Closing documents generally include:
- legal opinions in respect of enforceability of the transaction documents and the capacity of the issuer and other transaction parties and tax opinions;
- corporate authorisations and closing certificates;
- comfort letters;
- due diligence reports and reliance letters (if applicable); and
- rating and listing confirmations.
What are the typical fees for listing debt securities on the principal exchanges?
Issuers pay a fee to the AFM for the approval process for a prospectus, information document or supplement. This ranges from €7,500 to €15,000 for the approval process relating to a prospectus (depending on the nature of the issuer, whether or not historical documents are available and the securities to be offered) to €2,500 for a supplement.
To list medium- or long-term debt securities on Euronext, the following fees can be expected:
- annual fee: no fee for straight debt securities, €500 for issuers having more than one category of securities listed;
- admission fee for a standalone debt securities issue: €150 per tranche of €25 million;
- admission fee for an issuance under a programme: €700 per issuance; and
- annuity fee: when accrued with the admission fee, maximum of €16,250 (standalone) or €13,200 (programme).
To list short-term debt securities on Euronext, the following fees can be expected:
- admission fee: €150; and
- per million admitted to Euronext market on a pro rata temporis basis: €10.
Special debt instruments
How active is the market for special debt instruments, such as equity-linked notes, exchangeable or convertible debt, or other derivative products?
There is an active market in the Netherlands for special debt instruments, including equity-linked notes, convertible debt and other derivative products, although it is generally less active than that for plain vanilla debt instruments, such as fixed rate notes, floating rate notes, zero coupon notes and so on.
Financial institution issuers (including banks, investment firms and insurers) subject to regulatory capital requirements (such as CDR IV and Solvency II) and bail-in legislation (BRRD), providing for TLAC and MREL requirements, have been actively issuing debt instruments that satisfy such requirements, including Tier 2 notes, senior preferred notes, senior non-preferred notes, subordinated notes, contingent convertible notes and perpetual notes.
Large volumes of structured notes, featuring underlyings, caps, floors, and other embedded derivatives, are issued by Dutch finance companies.
Green or sustainable bonds are being issued by many issuers, including financial institutions and corporate issuers. Such bonds are considered green or sustainable either on the basis of an issuer benchmark or on the use of proceeds of the bonds.
What rules apply to the offering of such special debt securities? Are there any accounting implications that the issuer should be aware of?
The rules that apply to the offering of special debt securities are set out in question 2. Depending on the specific security, however, additional rules may apply, such as the EU Short Selling Regulation.
In addition, specific disclosure requirements may apply to prospectuses drawn up for special debt instruments, such as equity-linked notes or asset-backed notes, and to retail offerings of structured and insurance linked products under the PRIIPs Regulation.
Issuers should be aware of accounting, tax and regulatory implications of debt instruments with equity features. For example, such notes may, depending on the features and circumstances, not qualify as ‘debt’, in which case a given transaction structure could qualify as an investment fund (requiring licensing or registration); give rise to regulatory capital or bail-in issues (if the issuer is a financial institution); create accounting issues; and forfeit beneficial tax treatment applying to debt instruments.
It should be noted that, under the International Financial Reporting Standards, derivatives are reported as market to market and, under Dutch Generally Accepted Accounting Principles, derivatives should be reported for their historical value.
What determines whether securities are classed as debt or equity? What are the implications for instruments categorised as equity and not debt?
In line with the Prospectus Directive and Regulation, the FSA distinguishes between debt and equity securities. Equity securities are defined as shares and other transferable securities equivalent to shares in companies as well as certain convertible instruments. All other types of securities are considered non-equity securities.
This distinction affects, among other things, applicable exemptions from the requirement to publish a prospectus as well as the disclosure and information requirements (with issuers of equity securities generally being subject to more onerous requirements). It may also affect regulatory capital and bail-in issues (if the issuer is a financial institution).
Certain types of perpetual, subordinated and profit-linked debt securities may be reclassified as equity for tax purposes, which in particular may affect the withholding tax analysis in the context of a particular issue.
Finally, regulatory issues may arise where securities do not qualify as debt from the perspective of investment fund regulation (eg, debt structures are generally out of scope of AIFMD).
Transfer of private debt securities
Are there any transfer restrictions or other limitations imposed on privately offered debt securities? What are the typical contractual arrangements or regulatory safe harbours that allow the investors to transfer privately offered debt securities?
There are no general transfer or trading restrictions that apply to privately offered debt securities (unlike in the US), other than usual selling restrictions to ensure compliance with Prospectus Directive rules and regulations.
In addition, typically, limitations are imposed in connection with compliance of the product governance rules under MiFID and to avoid the application of the PRIIPs Regulation (see question 10).
Zero coupon notes may also be subject to Dutch law transfer limitations.
Are there special rules applicable to offering of debt securities by foreign issuers in your jurisdiction? Are there special rules for domestic issuers offering debt securities only outside your jurisdiction?
None, other than those set out in question 19.
Are there any arrangements with other jurisdictions to help foreign issuers access debt capital markets in your jurisdiction?
Under the EEA harmonised framework for the approval and publication of a prospectus, a prospectus approved in one EEA country can be passported into another EEA country through a notification procedure without a great number of formalities other than potentially a translation of the prospectus summary.
The Prospectus Regulation (effective in full as of 21 July 2019) further harmonises these rules, where its terms dictate that, as of its entrance into force, the AFM may approve third country prospectuses provided they comply with the information requirements set out in the Prospectus Regulation and provided that the relevant supervisory authority of the issuer has concluded a cooperation arrangement with the AFM. The AFM will not enter into such cooperation with supervisory authorities in a third country where the relevant third country is on the European Commission’s list of jurisdictions that have strategic deficiencies in their national anti-money laundering and counter terrorism financing regimes.
Foreign issuers are permitted to make use of exemptions from prospectus requirements on the same basis as any domestic or EU issuers.
Passporting rights also apply to dealers, agents and other investment services providers that have a licence in an EEA jurisdiction.
As a result of Brexit, the United Kingdom will no longer be part of the EEA, so passporting rights for prospectuses and market participants will be lost, unless and until such time as the EU authorities have designated the UK standards as ‘equivalent’ or a Brexit deal covering the subject is reached.
What is the typical underwriting arrangement for public offerings of debt securities? How do the arrangements for private offerings of debt securities differ?
Across Europe, (investment) banks have been less willing to underwrite corporate debt issuances as a result of increased capital requirements and lower risk appetite.
In the Netherlands, managers of debt securities offerings will typically only underwrite the securities at the end of the book-building process when they are satisfied that there is sufficient demand from investors. A typical underwriting agreement will provide for the managers to underwrite the offered debt securities on a joint and several basis and will, among other things, include provisions relating to each manager’s commitments as well as their fees and commissions, offering restrictions, representations and warranties of the issuer (in respect of itself and the offering documentation) and broad indemnity provisions in favour of the managers.
How are underwriters regulated? Is approval required with respect to underwriting arrangements?
Underwriters of debt securities are principally regulated by MiFID (as implemented in the FSA), as the underwriting of debt securities (on a committed or non-committed basis) constitutes a regulated investment service. Underwriters are further bound by the product governance regime under MiFID.
Accordingly, dealers must ensure that they have a licence for the underwriting of debt securities when acting in the Netherlands, unless an exemption applies. The AFM has formulated an exemption for dealers from third countries with equivalent standards to the extent that their clients include only per se professionals or eligible counterparties in accordance with MiFID.
What are the key transaction execution issues in a public debt offering? How is the transaction settled?
These vary from transaction to transaction and depend, among other things, on market conditions and other commercial factors. Global notes are widely used for debt capital markets transactions.
Transactions are typically settled on a delivery versus payment basis, where the (global) securities and proceeds are exchanged simultaneously. A typical debt securities offering settles within two or three business days after signing.
Debt securities can be cleared through Euroclear Netherlands in accordance with the Dutch Securities Giro Act and Euroclear Netherlands regulations.
How are public debt securities typically held and traded after an offering?
Debt securities are generally held in bearer or registered form and represented by a global note, deposited with the relevant clearing system. If a US offering is made, the offered securities are typically in registered form in order to ensure compliance with certain US law requirements.
End investors typically hold debt securities through a chain of intermediaries and generally are able to transfer their interests by way of book entry transfers.
Outstanding debt securities
Describe how issuers manage their outstanding debt securities.
Generally, liability management in the Netherlands is in line with international practice. Issuer call options are not unusual and Dutch issuers also make use of open market purchases, consent solicitations, tender offers and exchange offers to manage their outstanding debt. As a matter of Dutch law, the purchase of debt securities may, by operation of law, extinguish such instruments as the debt and claim are united in the same person. Specific exceptions to this rule, however, apply in respect of bearer securities.
Market abuse considerations apply and caution should be exercised to ensure that the purchasing of debt instruments does not constitute the preferential treatment of specific security holders. Repurchases should, therefore, insofar as possible be effectuated on a random basis. Additional limitations apply to the purchase of subordinated debt securities, as the repurchase of such instruments may be inconsistent with their subordinated nature.
Regulation and liability
Are there any reporting obligations that are imposed after offering of debt securities? What information would be included in such reporting?
Reporting obligations for issuers of debt securities derive mostly from the Market Abuse Regulation and the Transparency Directive (each to the extent applicable). Issuers will also find themselves bound by the Euronext rules when their debt securities are admitted to trading at Euronext Amsterdam.
The Market Abuse Regulation requires issuers of securities to disclose inside information to the market and to comply with certain procedural requirements.
The Transparency Directive has been implemented in the FSA. Under the terms of the Transparency Directive, issuers of debt securities (other than those issuers that solely issue debt securities with a minimum denomination per unit of €100,000) are required to publish their semi-annual and annual financial statements within three, respectively four, months after the end of the reporting period.
The Dutch Foreign Financial Relations Act imposes reporting on certain types of issuers for Dutch national balance reporting purposes. Specific disclosure requirements apply under the PRIIPs Regulation.
Describe the liability regime related to debt securities offerings. What transaction participants, in addition to the issuer, are subject to liability? Is the liability analysis different for debt securities compared with securities of other types?
Debt offerings may give rise to various types of liability, ranging from claims in tort for negligent misstatement (including misleading advertisement) to mis-selling claims. Dutch case law has introduced the concept of a ‘reference investor’, being an ordinary investor who is targeted by the offering and assuming such investor has taken knowledge of the disclosed information, is reasonably informed and cautious, but does not have any (product) specific knowledge or experience. As such, the question is not whether a statement was misleading for a specific investor, but the expectations of such objectified reference investor need to be taken into account. Liability may attach to the issuer, as well as (in certain circumstances) the managers and distributors of the securities.
The liability regime for debt securities is the same as for other types of securities, although claims for the mis-selling of securities may be more likely to succeed in the case of complex and risky debt securities sold to non-professional investors.
What types of remedies are available to the investors in debt securities?
The remedies available to the investor depend on the ground for liability invoked. Damages in contract intend to place the claimant in the position that he or she would be in had the contract been duly performed, whereas damages in tort seek to place the investor in his or her original state before the tort. Dutch law does not provide for punitive damages.
In recent years, laws have been introduced to increase the effectiveness of collective claim actions, enabling investors to collectively file a claim for damages.
What sanctioning powers do the regulators have and on what grounds? What are the typical results of regulatory inquiry or investigation?
The AFM has the capacity to employ a wide range of sanctions depending on the violation. These include issuing fines, ordering certain actions, prohibiting further issuance of securities or prohibiting specific securities from being issued and making public announcements of failures to comply. The AFM may also refer a matter to the Public Prosecution Service for criminal investigation.
Market participants faced with sanctions imposed by the AFM have recourse to the Dutch courts, which can (and from time to time do) overturn sanctions decisions of the AFM.
In recent years, the AFM has exercised its supervisory powers also by way of awareness and information campaigns, conducting market surveys and investigations, requiring market participants to report on compliance with relevant rules and regulations. As a result, there are few occasions where the AFM imposes formal sanctions.
What are the main tax issues for issuers and bondholders?
Dutch corporate income tax position of a Dutch issuer
A Dutch issuer is subject to Dutch corporate income tax at the statutory Dutch corporate income tax rates (maximum rate of 25 per cent). A Dutch issuer will typically report a taxable profit for an amount equal to 10 per cent of its annual fixed operational expenses, with a minimum of €2,500. The 10 per cent will not be applicable on expenses that are directly related to the issuer’s liabilities. Accordingly, the taxable base will be limited and the amount of Dutch corporate income tax payable by such issuer is limited as well. The Dutch foundation is not subject to Dutch corporate income tax.
Dutch withholding tax
Interest payments by a Dutch issuer under the bonds are exempt from Dutch withholding tax, provided the bonds are not reclassified as equity for Dutch tax purposes. Bonds are reclassified as equity for Dutch tax purposes, where:
- the maturity is in excess of 50 years;
- the interest payments on the bonds are (almost) fully profit dependent; and
- the bonds are subordinated.
Dutch VAT and transfer taxes
No Dutch VAT or transfer taxes are payable in respect of the issue of the bonds or in respect of payments of interest and principal under the bonds.
Dutch stamp duties
There is no Dutch stamp duty, registration tax or any other tax or duty, other than court fees in cases of proceedings brought before court, payable in respect of or in connection with the issue, transfer or redemption of the bonds.
Dutch (corporate) income tax position of a bondholder
A bondholder who derives income from a bond or who realises a gain from the disposal or redemption of a bond will not be subject to Dutch taxation on such income or gain, provided that:
- the bondholder is neither resident nor deemed to be resident of the Netherlands for the purpose of the relevant Dutch tax law provisions;
- the bondholder does not have an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment or a permanent representative in the Netherlands and to which enterprise or part of that enterprise, as the case may be, the bonds are attributable;
- the bondholder is not entitled to a share in the profits of an enterprise that is effectively managed in the Netherlands, other than by way of securities and to which enterprise the bonds are attributable;
- the bondholder does not have a substantial interest (an interest of 5 per cent or more) or a deemed substantial interest in the Dutch issuer as defined in the Dutch Income Tax Act 2001; and
- if the bondholder is an individual, the bondholder does not derive benefits from the bond that is taxable as benefits from miscellaneous activities in the Netherlands as defined in the Dutch Income Tax Act 2001, which include, but are not limited to, activities in respect of the bond that are beyond the scope of ‘regular active asset management’ or benefits that are derived from the holding, whether directly or indirectly, of (a combination of) shares, debt claims or other rights which form a ‘lucrative interest’. A lucrative interest is an interest that the holder thereof has acquired under such circumstances that benefits arising from this lucrative interest are intended to be a remuneration for work or services performed by such holder (or a person related to such holder) in the Netherlands, whether within or outside an employment relationship, where such lucrative interest provides the holder thereof, economically, with certain benefits that have a relationship to the relevant work or services.
Under Dutch tax law, a bondholder will not be deemed resident, domiciled or carrying on a business in the Netherlands by reason only of its holding of the bonds or the performance by the Dutch issuer of its obligations under the bonds.
The authors would like to thank Steven den Boer and Floor van Laar for their contributions to this chapter.
Update and trends
Update and trends
The Dutch finance and corporate sectors aim to take their corporate social responsibilities seriously and this is reflected in an increase in ‘sustainable finance’; green or sustainable bonds are being issued by many issuers, including financial institutions and corporate issuers. Whereas green bonds used to be bonds the proceeds of which would be employed in ‘green’ projects or assets, this class of bonds now also includes green or sustainability benchmarking of issuers.
Looking ahead, several major developments are underway:
- the ongoing reform of benchmarks (eg, Euribor, Libor) will have a major impact on debt capital markets. Supervised entities may only use registered benchmarks and may be subject to licensing and registration as a benchmarks administrator in case proprietary benchmarks are provided or they administer or calculate complex benchmarks. Outstanding debt instruments may need to be renegotiated or re-papered in view of benchmark reform.
- the Prospectus Regulation (from 21 July 2019) will have a material impact on prospectuses, both in terms of format and content. In particular, risk factors and summaries will be significantly impacted for prospectuses approved after 21 July 2019. The Prospectus Regulation will leave substantially intact the prospectus requirement, exemptions therefrom, the documentation and the offering process of securities offerings.
- Regulatory capital requirements will ramp up in coming years for financial institution issuers (including banks, investment firms and insurers) pursuant to CDR IV and Solvency II and bail-in legislation (such as the Bank Recovery and Resolution Directive), providing for TLAC and MREL requirements. The EU financial sector will need to issue billions in regulatory capital instruments for several years to come. Dutch financial institutions are well-capitalised and had positive results in EU stress tests. However, Dutch banks will also need to ramp up their regulatory capital positions to meet regulatory targets. The Dutch market welcomed an amendment to the Dutch Insolvency Act, with effect from 14 December 2018, that provides for a creditor hierarchy provision creating ‘senior non-preferred debt’, which is a class of debt instruments eligible for bail-in (MREL and TLAC) purposes.