Acquisition Finance 2019

Last Updated November 07, 2019

Netherlands

Law and Practice

Authors



De Brauw Blackstone Westbroek N.V. has a banking and finance department with a broad financing practice, but is especially strong in highly complex and multifaceted financing transactions. The department consists of approximately 30 lawyers, based in Amsterdam and London. It focuses on high-end innovative matters of a cross-border and cross-departmental nature (including tax, litigation, M&A and insolvency), where it can act as the client's trusted adviser, providing global strategic and legal advice from start to finish and co-ordinating local law firms as lead counsel, such as "bet the farm" financings, high-yield financing, emergency funding, restructurings, leveraged and M&A financing, and project finance. The firm's recent work includes assisting Takeaway.com on the financing of the acquisition of a couple of European competitors (including the offer for the shares of JustEat), the state-owned gas transport company Gasunie in relation to the Nord Stream pipeline, and Akzo Nobel on the (staple) financing options and aspects relating to the divestment of its speciality chemicals business.

The largest part of the financing for private and public acquisitions in the Dutch market is still provided by banks. Depending on the size of the acquisition and the facilities required, corporate borrowers may rely on their (Dutch) relationship banks to provide the funding (up to an amount of approximately EUR40-75 million per bank). However, given the limited number of sizeable banks in the Netherlands (large players include Rabobank, ABN AMRO and ING Bank), the larger credits are mostly provided by a club (for mid-market deals between EUR40-75 million and EUR250 million) or an international syndicate of European or US banks (for financing packages of more than EUR250 million), commonly involving one of the Dutch banks as lead arrangers or co-coordinator. In addition, corporate borrowers with business or subsidiaries in other jurisdictions often try to arrange their financing in those jurisdictions as well.

As a result of the increasingly strict capital and risk management requirements imposed on banks and a strategic refocusing by the traditional banks, financing provided by alternative credit providers is also increasingly used. Such non-bank financing includes a broad range of alternative financing solutions, ranging from equity financing, to debt capital markets and private placement transactions, to structured financing (including securitisations) and facilities provided by private debt, mezzanine and special situation funds. 

As indicated under 1.1 Major Lender-side Players, acquisitions by Dutch listed and non-listed corporate purchasers are often financed through its relationship banks or as part of the wider corporate financing arrangements of the group. Typically, existing legal entities will be used as purchaser for the acquisition of the target assets or shares.

In addition, there is a lot of private equity activity in the Dutch markets, including from both Dutch and non-Dutch financial sponsors. Such private equity transactions are typically financed through customary acquisition financing structures, including funding provided by alternative lenders, and include unitranche structures. Financial sponsors tend to incorporate a new special purpose vehicle, mainly in the form of a private limited liability company (besloten vennootschap, or BV). For tax reasons, it may be attractive for non-Dutch purchasers to use Dutch co-operatives as an alternative to a BV. However, the tax treatment is subject to regular changes and therefore non-Dutch purchasers are advised to always obtain tax advice.

Most financing arrangements for Dutch borrowers are governed by Dutch law. This applies to both corporate loans as well as acquisition financing structures. However, financing arrangements governed by English law are also used on a regular basis, particularly in the case of funding provided by international alternative lenders.

Financing provided by banks and alternative credit providers is typically based on negotiated documentation using market standard models. The most appropriate models differ depending on the size of the facilities, the credit profile of the borrower group and the identity and composition of the lender group.

Bilateral facilities up to an amount of approximately EUR30 million will generally be documented using the lender's own template format, which is sometimes in the Dutch language. For larger facilities, lenders often wish to keep open the possibility of syndication. Such facilities are generally based on Loan Market Association (LMA) standard form documentation for facilities and intercreditor agreements. For stronger borrowers, the investment grade template is used, even if their debt is unrated. The LMA leveraged templates are often used for the more leveraged borrowers and for pure acquisition financing structures used by private equity sponsors. Loan documentation is usually drafted by a lender's external counsel (generally acting for the entire syndicate) and commented on by external counsel to the borrower(s).

LMA templates for term sheets (including term sheets attached to commitment letters) also follow a standardised approach and are drafted by a bank's legal department or outside counsel.

Mostly, financing documentation is in the English language. However, as indicated above, for smaller financing arrangements, banks sometimes use their own template in the Dutch language.

Also, security documentation can be in the English language, provided that rights of mortgage should be created by a notarial deed in the Dutch language.

In the Dutch acquisition financing market, banks and other debt providers routinely require that legal opinions are provided by external legal counsel. If borrowers or guarantors are incorporated under the laws of a jurisdiction other than the Netherlands, local counsel will be engaged to assist on the legal opinion process. Customarily, external counsel to the lenders will issue legal opinions, although situations in which the counsel to the borrower group issues legal opinions on the capacity of the borrower group to enter into the transaction and the counsel to the banks issues legal opinions on the enforceability of the finance documents are also seen.

Dutch opinion practice closely follows international and European practice. Common legal opinions given include opinions on incorporation and existence, corporate power and valid signing of the agreements, no violation of Dutch law, enforceability of agreements and security documents, recognition of governing law, enforceability of jurisdiction choice and certain tax opinions. Legal opinions will be subject to customary assumptions and qualifications. Dutch opinion givers tend to limit their opinions strictly to legal matters, and therefore tend to assume all facts that cannot be independently ascertained. For the same reason, Dutch opinion givers tend not to give "no breach of agreements" and "no violation of judgments" opinions, which are uncommon in the Dutch market.

Although debt financing structures vary greatly in the Dutch market, acquisition financing generally incorporates a large part of senior bank debt. This includes both term loan structures (including Term Loan B) and working capital facilities. Depending on the type of borrower, senior debt can be provided in the form of customary corporate financing or as specific acquisition financing.

Often, the senior debt package is supplemented by junior/mezzanine loans, either provided by third-party lenders or by shareholders. Such loans are generally subordinated to the senior debt and may, under certain circumstances, receive second lien security rights. Additionally, in some transactions, the seller retains a financial interest in the target company in the form of a (subordinated) vendor loan or loan note. Convertible bonds or other equity-linked arrangements as well as payment-in-kind interest arrangements are relatively rare.

Typically, bridge loans are entered into to bridge the time lag between the completion of the acquisition (or the moment at which certain funds are required) and the moment the long-term financing structure is put in place by way of the issuance of equity or debt capital markets instruments.

Strong Dutch borrowers are increasingly able to tap the corporate bond markets, which provide for a relatively cheap and covenant-lite form of funding. In addition, Dutch financing vehicles of international corporate groups are regular issuers of high-yield bonds, but the high-yield bond market for Dutch corporates is still relatively small.

Private placements and loan notes occur. The popularity of issuing German law-governed Schuldscheindarlehen has increased over the years for Dutch corporates, albeit generally outside the acquisition financing context.

Intercreditor arrangements are customary in Dutch transactions with more than one financier. The complexity of the arrangements depends on the various classes of financiers, but lenders often agree to use the LMA intercreditor agreement template for the more complicated structures. Where the financing structure is more straightforward, the loan documentation itself may also be used to arrange for certain intercreditor arrangements.

The most important reason to enter into these intercreditor arrangements is to establish their relative ranking and entitlements to payments from the borrower group and enforcement proceeds (the "waterfall").

Basic Principle

Unless agreed otherwise and subject to a limited number of statutory exceptions (eg, priority is granted to the claims of the tax authorities and administrators in bankruptcy), claims of unsecured and unsubordinated creditors against a single debtor rank pari passu under Dutch law. This principle applies both in and outside insolvency. In a bankruptcy scenario, all unsecured and unsubordinated creditors have an equal right to be paid from the proceeds of that debtor's assets pro rata the amount of their claims. As a result, in the absence of any security or ranking arrangements, the claims of debt financiers rank pari passu to those of trade creditors, other commercial counterparties and employees. Intercreditor agreements typically follow LMA standard provisions on payment of junior principal, interest and fees, with only minor technical amendments. No specific practice exists in the Netherlands that deviates from this approach.

In order to further increase their recourse position compared to the unsecured creditors of individual debtors (including ordinary trade creditors), debt financiers often obtain the benefit of in rem security rights and (parent or subsidiary) guarantees, possibly with structural or contractual subordination agreed between the secured financiers (to establish further priority within the lending group). Second-ranking security is less common.

In Rem Security

It is common for debt providers in more leveraged transactions to receive the benefit of certain in rem security rights. The subject assets for those security rights are the subject of negotiations (see below). In addition, facility agreements and security documents typically contain positive pledge obligations, as the vesting of security on additional assets without earlier commitment to do so (especially close to bankruptcy) can be annulled on the basis of fraudulent conveyance.

Although the security package gives financiers a preferred claim over the proceeds of the security in enforcement (subject to certain limited exceptions), it does not create priority over the unsecured creditors prior to bankruptcy. As a result, the financing agreements generally contain restrictive covenants as to payments on unsecured debt. However, in view of the fact that secured creditors may enforce their security rights also within bankruptcy without regard having to be had to the fact that the debtor is in bankruptcy, in rem security rights substantially improve the creditors' position nevertheless. Depending on the structure, junior creditors may either get second-ranking security rights or share in the first-ranking security, albeit on a subordinated basis.

Guarantees

Often, a large part of the borrower group (responsible for a certain percentage of the EBITDA, revenues and total assets, or a combination of the three measures) acts as guarantor for the financiers. As a result, the creditors have the possibility to take recourse against a multitude of debtors and their assets, which makes their claims less vulnerable to a decrease of assets or financial position of the original debtor. Subject to certain restrictions (see below), group companies are generally able to guarantee repayment of debts of other members of the group (both upstream or downstream) as long as it is in their corporate interest to do so (see below). The corporate interest in turn is co-determined by the interest of the wider group to which they belong.

Contractual Subordination

In financing situations in which multiple lenders are involved, the intercreditor arrangements typically contain agreements on the contractual subordination of one lender's claims to those of another lender. Subordination can take various forms and can be agreed between the debtor and the subordinated creditors, between creditors themselves or in tripartite arrangements.

The most common approach is a tripartite agreement between the various classes of senior and junior creditors and the debtor, which covers subordination both in and outside bankruptcy. Such agreement is often included in the LMA template for the intercreditor agreement. The main advantage of this tripartite approach for senior creditors is that they can directly invoke the subordination against the junior creditors.

The enforceability of subordination provisions depends on the wording of those provisions and (when the wording requires further interpretation) the meaning that each of the parties in the given circumstances was entitled to attach to those provisions. The parties to the subordination provisions and the wording of those provisions also determine whether these apply only in bankruptcy (including to the proceeds of enforcement), or also outside bankruptcy and whether they have third-party effect. For the avoidance of doubt, subordination only works between the parties agreeing thereto. In other words, contractual subordination against a certain junior creditor does not give senior creditors any priority over the other creditors of the relevant debtor.

Structural Subordination

In addition to contractual subordination, structural subordination is also a common feature in multi-layered financing structures. Structural subordination can be achieved by attracting the junior debt at a higher holding level in the corporate group than the senior debt or issuing debt with a longer maturity and no or little amortisation over time (Term Loan B). As a result, the senior financiers have a direct claim on the assets and cash flow of the operating entities, whereas the subordinated creditors are dependent on upstream distributions (including repayments on intra-group loans) to a higher level. The loan documentation will typically restrict dividend payments or other upstream distributions and repayments on shareholder loans (effectively making them subordinated) to ensure that the senior debt will always be serviced in priority to the subordinated and intra-group debt.

Shareholder Loans

Shareholder claims for the repayment of equity interests are by law subordinated to all other claims on the estate in bankruptcy, which means that the shareholders will receive no or little repayment on equity.

However, shareholder loans as such do not qualify as equity but are considered debt instruments, which rank pari passu with all other claims on the debtor. However, in most situations shareholders will be required by the outside financiers to subordinate their loan receivables to the financiers of the group and accept restrictions on the relevant group companies to pay principal and possibly even interest, unless certain financial covenants are met.

Although not very common in the Netherlands, bank/bond structures are sometimes used by financial sponsors. The approach taken does not necessarily differ from the common practice for intercreditor arrangements applied in multi-layered private debt transactions, provided that the providers of revolving credit facilities or other working capital arrangements will often have a more senior ranking than holders of the bonds.

In accordance with the LMA templates used, liabilities of the borrower group vis-à-vis hedge counterparties typically rank equal to the liabilities payable by the borrower group to the senior lenders. Accordingly, they share in the transaction security with the same ranking as the senior lenders and have pari passu rights to the proceeds of any enforcement of such security rights.

However, in order to receive this priority treatment, hedge counterparties should become a party to the finance documents. The finance documents impose certain terms for the hedging agreements on the hedge counterparties. Intercreditor arrangements further often provide that hedge counterparties may not take any enforcement action under the hedging documents until all senior liabilities have been repaid, other than in pre-agreed circumstances. Contrarily, hedge counterparties will be obliged to terminate or close out any hedging arrangements in full upon the acceleration of the senior liabilities.

General Terms of Security

Whether security rights are granted in relation to a certain debt financing package depends mainly on the risk profile of the relevant debtor. Accordingly, investment grade financing is generally provided on an unsecured basis. On the other hand, the breadth of the security package in leverage transactions can vary from only a pledge on the shares in material subsidiaries to security on a number of asset classes.

As a general principle, Dutch law requires that the subject of any security right is sufficiently identifiable, even if only in hindsight. This means that Dutch law does not provide for floating charges over all assets of the debtor or similar blanket instruments. A lender's recourse is therefore limited to specifically secured assets (as opposed to all assets) of the relevant debtor. As a result, separate pledges (or mortgages) must be created for the various types of assets, such as Dutch real property, receivables, Dutch inventory, intellectual property and shares in Dutch companies. However, the various pledges can be combined in one deed of pledge (usually referred to as an omnibus deed of pledge). As a deed of mortgage on real property must be in notarial form and be registered in the Dutch public registers, such a deed will generally be a separate document from a deed of pledge over other asset types and will be in the Dutch language.

Security Agent or Security Trustee

In order to avoid difficulties in exercising control over the security rights by parties jointly, the use of a single security trustee is widely accepted in Dutch transactions with more than one secured party. However, there is legal debate on whether common law-type trustee or collateral agent structures are enforceable under Dutch law. Therefore, the Dutch market typically works with parallel debt structures as also used in other civil law jurisdictions, pursuant to which each debtor undertakes, as an additional and separate obligation, to pay to the agent (as an own right of the agent and not as the finance parties' representative) an amount equal to the amount owed from time to time by that debtor to the secured creditors (that undertaking being the parallel debt). The amount of the parallel debt is directly linked to the underlying debt and any increase in the underlying debt leads to a one-on-one increase in the parallel debt. The same applies to a decrease mutatis mutandis. The Security Agent is the sole pledgee/mortgagee for the relevant security right (and, as such, the only secured party that is a party to the relevant security deed), securing the payment of the parallel debt. The agent subsequently agrees to distribute the proceeds of any security enforcement on the basis of an agreed waterfall.

Types of Security

Under Dutch law, two forms of in rem security rights exist:

  • right of mortgage, which can only be vested on registered assets (registergoederen) such as real property, real property rights, ships and aircraft, and on limited rights to those registered assets; and
  • right of pledge, which can be vested on all other assets (including rights) provided that they are transferable or assignable and is, as such, the most used in practice.

In the context of financing transactions, the most common types of Dutch law security are as follows:

  • pledge on the shares in the capital of Dutch companies;
  • pledge on receivables (for example, trade receivables, intercompany loan receivables, cash in bank accounts, insurance receivables);
  • mortgage on real property and affiliated rights; and
  • pledge on other contractual rights, stock, inventory and intellectual property.

Shares

A pledge on shares in a Dutch private limited liability company (BV) is typically created by a tripartite notarial deed of pledge between the shareholder (as pledgor), the security agent or other secured party (the pledgee) and the company whose shares are being pledged. The main reason for including the pledged company as party to the deed is that it is required to notify such company of the pledge. A pledge on registered shares in a Dutch public limited liability company (naamloze vennootschap, or NV) that is not listed on any stock exchange is created in substantially the same way, although the articles of association and technical formalities may differ slightly. Pledges on other types of shares (such as bearer shares and shares included in a clearing system) are relatively rare in the context of acquisition financing.

Typically, the voting rights on the shares remain with the pledgor, until the occurrence of an identified condition precedent (such as an event of default and/or the delivery of a notice to the pledgor and the company). Only thereafter will the pledgee be entitled to exercise the voting rights on the shares. The articles of association or Dutch law can prohibit the transfer of shares to the pledgee without prior approval of a designated corporate body (a customary transfer restriction). In such a case, exercise of this voting arrangement requires the approval of that designated corporate body. The same applies to the approval for a transfer in a foreclosure scenario. The articles of association of most BVs contain further requirements on how the shares may be pledged. In order to avoid such approval rights (especially in a foreclosure scenario), lenders may require borrowers to amend the articles of association prior to the creation of the right of pledge to remove these limitations.

Inventory and movable assets

Under Dutch law, movable assets (including stock and inventory) can be pledged in two ways: by way of a possessive pledge and by way of a non-possessive pledge. In order to allow the borrower group to continue its operations in an unaffected manner, typically movable assets are pledged without the pledgee taking possession. In such case, the assets can be sold or disposed of in the ordinary course of business of the pledgor. The creation of such non-possessive pledge is effectuated by a deed between the pledgor and the pledgee, and, unless the deed is a notarial deed, registration of the deed with the Dutch tax authorities.

Receivables

One of the most common elements of a security package is security on receivables, including on trade receivables, intra-group loan receivables, credit balances on bank accounts, contingent insurance claim receivables and contingent claims under other contracts (such as a purchaser's rights under a share purchase agreement).

Dutch law does not provide for floating charges. Rights of pledge over receivables can either be notified to the relevant debtor (disclosed pledges) or remain undisclosed. A pledge of receivables is typically established by deed between the pledgor and the pledgee, and, in the case of a non-disclosed pledge, registration of that deed with the Dutch tax authorities. Registration is not required if the deed takes the form of a notarial deed.

The most important differences between disclosed and undisclosed pledges are the following.

  • Undisclosed rights of pledge attach only to receivables that exist at the date of the deed or that originate directly from an agreement or other legal relationship existing at the date of the deed. In practice, multiple ways have been devised to address this gap. Case law has sanctioned structures in which financiers or security agents regularly refresh the rights of pledge on the basis of continuing powers of attorney granted by the relevant security providers.
  • Although undisclosed rights of pledge on receivables constitute a valid right of pledge between the pledgor and pledgee, they can only be invoked against the debtor of the receivable after the pledge has been notified to that debtor. The main risk for the secured creditor is that the relevant debtor satisfies its payment obligations towards its creditor. In the case of payments to a bankrupt creditor, Dutch case law provides that the debtor will no longer be held to pay to the pledgee and the pledgee will only have a claim against the bankruptcy estate rather than against the debtor.
  • Other reasons for lenders to request a disclosed pledge (see below) are that the holder of an undisclosed pledge does not have the right to collect payment of the pledged receivable, negotiate or settle a receivable, or exercise any of the other rights attached to the pledge vis-à-vis the debtor, and will first have to notify the debtor of that receivable of the pledge before he can exercise these rights.

For commercial reasons, a pledge on trade receivables and other rights under contract is generally not notified to the relevant counterparties, whereas a pledge on intra-group loan receivables, credit balances on bank accounts and contingent insurance claim receivables is generally notified.

Bank accounts

Security on bank accounts is viewed as security on the claim that the account-holder has or may have against the account bank in the event of a credit balance on the relevant account. Accordingly, security on bank accounts is structured as a pledge on the receivables that the account-holder has or may have on the bank. As mentioned above, pledges over bank accounts typically take the form of disclosed rights of pledge, in order to ensure that future credit balances are also covered by the right of pledge. In addition, lenders often require Dutch account banks to waive any priority (including rights of pledge) or set-off rights they have over the borrower's claims on the relevant account bank pursuant to the borrower's credit balance.

Intellectual property rights

Intellectual property rights are pledged like all other rights, that is, either undisclosed and registered with the Dutch tax authorities or disclosed and registered in the public registers. A disclosed right of pledge can be invoked against third parties. Because of the international character often attaching to intellectual property rights, creating security on intellectual property rights is rarely simple and cost-efficient. Therefore, pledges on intellectual property rights tend to be the exception rather than the rule.

Real property

A right of mortgage on Dutch real property (including registered ships and aircraft) is created by notarial deed and registration of that deed with the appropriate Dutch public register. The fact that this registration is a constitutive requirement means that mortgage deeds should be in the Dutch language.

As set forth in 5.1 Types of Security Commonly Used, security rights are vested by notarial deed or in relation to some asset classes only, by simple deed between the pledgor and the pledgee. When an asset is encumbered with more than one security right, the order of vesting determines their ranking. Only notarial deeds contain a non-rebuttable record date. In order to also secure a record date and thus be able to establish the ranking of security rights vested by simple deeds, it is common practice (and, in certain cases, required) to register such deeds with the Dutch tax authorities (but not for taxation purposes).

The drafting and negotiation of notarial security documentation and registration of security rights requires involving civil law notaries, who are commonly part of or work closely with the law firms providing the overall legal advice, and their fees will typically be charged as part of the legal fees. The fees are not dependent on the value of the underlying assets and the creation of security on assets in the Netherlands does therefore not involve significant amounts of time or expense. However, the registration (if any) of pledges on intellectual property rights may involve a registration agency that will charge limited fees and nominal fees for the registration itself.

Before entering a transaction, the management board of a Dutch legal entity should consider whether such transaction is in the corporate interest of that entity. This is most relevant in the context of Dutch entities providing guarantees or security for the obligations of other parties, such as members of their group, as is common in financing structures. Although the concept of "corporate interest" is not clearly defined, it is generally understood to mean the long-term interest of the company and all of its stakeholders (shareholders, employees, creditors). In the context of group financing transactions, the long-term interest of the wider group weighs heavily and may outweigh certain interests of the stakeholders of each individual company within the group.

The management board of companies should make the corporate interest assessment both in relation to upstream and downstream guarantees or third-party security rights. However, the general view is that downstream or parent guarantees will more easily meet the corporate interest test than upstream guarantees or guarantees for the obligations of distant affiliates. That being said, it is common practice in the Netherlands that subsidiaries will also give upstream guarantees, because it is considered that they benefit from the group financing as well.

Since 2012, the traditional financial assistance prohibition has only applied to a public company (NV) and no longer to the more common private limited liability company (BV). The financial assistance prohibition extends to the (i) granting of loans, (ii) provision of security, (iii) provision of a price guarantee and (iv) commitment of the company or any of its subsidiaries with a view to the subscription or acquisition of share interest in the capital of that company by a third party. Violation of the prohibition constitutes a violation of Dutch law and will most likely render the relevant act void (or, if not void, not validly entered into and therefore voidable).

In practice, acquisition financing arrangements have been structured in a manner compliant with the prohibition. Some of the most commonly used structures include the following.

  • The target group only guaranteeing repayment of the facilities used to refinance the existing debt of the target group and, thus, not the funds used for the acquisition.
  • The purchaser pursuing a debt push-down post-completion. Provided that the target group does not commit itself to the debt push-down under the terms of the acquisition financing (that is, prior to the acquisition), this structure will generally not qualify as financial assistance.

For BVs, the financial assistance rules were replaced by capital maintenance rules, including a limited balance sheet test and a liquidity test, pursuant to which the upstreaming of funds may be limited. These rules will have a limited role (if any) in acquisition financing, but may be relevant in the context of a debt push-down transaction in which a second facility is attracted at a lower level in the group (post-completion of the acquisition). The proceeds of such second facility can then be upstreamed to the purchasing entity and used to repay the original acquisition debt.

Further to the transfer restriction (set forth under 5.1 Types of Security Commonly Used) and the "corporate interest" question (set forth under 5.3 Restrictions on Upstream Security), the articles of association of Dutch companies contain an objects clause, stating the objects (purpose) of the company. Any legal act conducted in conflict with the objects clause exceeds the entity's corporate power, violates its articles of association and can be nullified if the other party or parties to the act knew or should have known without research that the act was not in its power. The general view is that there is no objection to a widely and abstractly drafted objects clause, but that for the company to grant security or provide loans, or to provide a guarantee or security for the obligations of a third party (including affiliates), the text of the objects clause should preferably more explicitly mention or refer to the possibility of granting security, loans or a guarantee. It is not uncommon for lenders or legal counsel providing a legal opinion to request an amendment of the articles prior to such security, loans or guarantee being provided.

In addition, Dutch law provides for certain claw-back/fraudulent conveyance rules that should be taken into consideration if security rights or guarantees are granted when an obligor faces financial difficulties.

Legal acts (including asset transfers, guarantees for obligations of a third party, joint and several liability statements and the granting of security) of any party can be nullified by any of its creditors or its trustee in bankruptcy, if the following cumulative requirements are satisfied:

  • that party entered into the transaction without an obligation to do so (onverplicht);
  • the creditor concerned or, in the case of its bankruptcy, any creditor was prejudiced as a consequence of the transaction; and
  • at the time the transaction was entered into both it and – unless the act was for no consideration (om niet) – the party with or towards which it acted knew or should have known that one or more of its existing or future creditors would be prejudiced.

For that reason, positive pledge obligations are often included in financing documentation, as a result of which an obligation to grant further security rights or guarantees is created and the first requirement is no longer satisfied. It is, however, possible that transactions are nullified nevertheless. This may be the case if the creditor/pledgee knew that the application for the debtor's bankruptcy had already been made or if the prejudicial legal action resulted from consultations between the creditor and the debtor aimed at favouring the creditor over others.

A Dutch right of mortgage or right of pledge can only be enforced in the case of a payment default under the secured obligations. The common way of enforcement is a sale of the encumbered asset by the pledgee by way of a public sale. The sale requires compliance with certain procedural requirements. As an alternative, the pledgee (as well as the pledgor, unless otherwise agreed in the deed of pledge) may request the competent court to approve a private sale or to determine that the assets shall accrue to the pledgee. After a payment default under the secured obligations has occurred, the pledgor and the pledgee may also agree on an alternative manner to enforce the pledge (such as the assets accruing to the pledgee without court approval).

In principle, the enforcement of security rights on each of the asset classes follows this general principle, provided that the following conditions apply.

  • In the case of an undisclosed pledge over movable assets, the pledgee may, subject to any limitations agreed between the pledgor and the pledgee, take control of the pledged property if the pledgor or debtor does not, or if the pledgee has good reasons to fear that the pledgor or debtor will not, meet its obligations. The deed of pledge may provide that the pledgee will have this right at an earlier or later stage.
  • In addition, in the case of a disclosed pledge on receivables, subject to any limitations agreed between the pledgor and the pledgee, the pledgee may at any time exercise the right to collect the receivable, and may apply the proceeds towards satisfaction of the secured obligations as soon as they are due and payable. The same applies in the case of an undisclosed pledge of receivables, provided that the debtor under the receivable must first be notified of the pledge. Generally, the deed of pledge stipulates the moment as of which the pledgee becomes entitled to send such notification. In practice, pledges on receivables are enforced by collecting the receivables rather than by way of public sale and transfer of the receivables to a third party by the pledgee.
  • The sale of registered real estate requires compliance with certain procedural requirements that may be time-consuming. The mortgagee and the mortgagor may request that the competent court approve a private sale of the property.
  • Transfer restrictions in the relevant company’s articles of association must be complied with in the event of the enforcement sale of registered shares, provided that for private companies with limited liability the pledgee may exercise all rights vested in the shareholder with regard to the transfer and perform the latter’s obligations in respect thereof.
  • For certain intellectual property rights, however, specific rules apply, requiring, for example, the involvement of a civil law notary and imposing specific procedural rules.

Corporate guarantees and declarations of joint and several liability are common in financing packages with multiple obligors belonging to the same corporate group and where special purpose vehicles are used.

The same restrictions – relating to corporate interest, financial assistance and claw-back – apply to the issuance of guarantees as to the granting of security rights (see 5.3 Restrictions on Upstream Security, 5.4 Financial Assistance and 5.5 Other Restrictions).

Dutch corporate law does not require the payment of a guarantee fee.

Dutch law does not provide for any particular equitable subordination rules. In a bankruptcy, a creditor – including a provider of a shareholder loan – should submit its claim with the relevant bankruptcy trustee, who will liquidate the estate and pay creditors in accordance with their respective ranking (see 4.1 Typical Elements). In the absence of any contractual or structural subordination, shareholder loans will qualify as pari passu debt. In addition, secured creditors may enforce their security right as if the bankruptcy did not occur (subject to limited exceptions, such as a stay period).

See 5.5 Other Restrictions for the general rules on claw-back/fraudulent conveyance, which apply equally in relation to security rights or guarantees granted in the context of acquisition financing.

In addition, purchasers and their financiers will also need to consider the post-completion financial position of the seller. Should, following the acquisition transaction and the application of the proceeds by the seller group towards payment of (selected) creditors, the seller be declared bankrupt, the bankruptcy trustee will thoroughly investigate the transaction. If the purchaser was aware of the fact that one or more creditors would be prejudiced as a result of the transaction and the application of the proceeds by the seller, a trustee may lodge a successful claim for the nullification of the transaction, leading to an obligation for the purchaser to undo the transfer of the acquired assets. However, the purchaser can only submit its claim for the repayment of the purchase price in the bankruptcy as an unsecured and unsubordinated claim. In general, this risk can be mitigated by (i) conducting an in-depth due diligence to establish whether creditors of the seller may be prejudiced as a result of the transaction (so that evidence is available that no knowledge of any prejudicial effect existed on the side of the purchaser), and (ii) by paying an arm's-length purchase price and generally acting in good faith towards the creditors of the seller.

Generally, the standard LMA provisions on debt buy-back apply without any particular Dutch law-based deviations, pursuant to which buy-backs are either restricted or made subject to certain restrictions that a borrower or its equity sponsor will not disrupt voting arrangements among the lending group by purchasing debt. That said, a buy-back of loans is not as common in the Dutch market as buy-backs of notes or equity securities.

Under Dutch law, no stamp taxes or duties are due in connection with the issuance of debt or the granting of guarantees or security rights.

A lender to a Dutch borrower (resident in the Netherlands for tax purposes) is not subject to any withholding tax with respect to payments due by the borrower under the loan. The only exception to this rule is that a loan qualifies as a participating loan. A loan is qualified as a participating loan if it has no maturity or a maturity over 50 years, is subordinated to all senior debt and is profit participating. Payments under participating loans are treated as dividend payments and are subject to a 15% dividend withholding tax.

The government has, however, proposed a new withholding tax of 21.7% on interest paid to related entities resident in low-tax jurisdictions or jurisdictions that are included in the EU list of non-cooperative jurisdictions, or to related entities that have a permanent establishment in such jurisdiction to which the interest is attributable. The withholding tax is also applied with respect to payments to related entities that are resident in other jurisdictions if there is an abusive situation (eg, an entity interposed in an artificial way between an entity in a low-tax jurisdiction or a jurisdiction included in the list of non-cooperative jurisdictions and the Dutch obligor). The related-party threshold is defined as an interest that allows the holder to exert definite influence over the company and allows it to determine its activities; more than 50% voting power in any event qualifies as related. This withholding tax on interest is intended to be effective from 1 January 2021.

Net interest expense (ie, the excess of interest expense over interest income) in excess of 30% of a taxpayer's EBITDA is not deductible under the earnings stripping rule that was introduced in Dutch law pursuant to EU Anti Tax Avoidance Directive I. Interest that is not deductible may be carried forward to subsequent years. There are other limitations on the deductibility of interest that apply to intercompany loans created in certain specific transactions, but those are generally not relevant in respect of third-party debt.

The government has proposed a thin capitalisation rule that is specifically applicable to banks and insurance companies. Under this rule, interest is not deductible to the extent the equity of the bank or insurance company is less than 8% of its balance sheet total. Disallowed interest may not be carried forward. If enacted, the proposal would be effective for taxable years starting on or after 1 January 2020.

Furthermore, the government has proposed legislation to implement EU Anti Tax Avoidance Directive II. Under this legislation, interest in hybrid arrangements is denied as a deduction. It is not excluded that third-party interest is disallowed under these rules in certain situations (eg, if the borrower seeks to claim a deduction for interest in two jurisdictions).

In the Netherlands, various players in the financial markets (such as banks, financial institutions, investment firms and insurance companies) are subject to regulations. Certain other targets can also be regulated depending on the nature of their business.

Depending on the specific target and assets (eg, non-performing loans) and the regulation applicable to it, the envisaged transaction may require the prior consent of the relevant regulator. Such consent may be required for the transaction itself, for the control obtained by the purchaser, for any licence obtained to continue the target's business or for any instruments that the target will lose when it is spun off from the seller. In the case of the acquisition of a regulated entity or assets subject to regulation, lenders will typically require evidence of any required approvals as conditions precedent for the financing. In addition, loan documentation often contains specific representations, undertakings and events of default in relation to the required licences and approvals.

General Rules Regarding Listed Entities

The Financial Markets Supervision Act (FMSA) is the basis for most of the regulation for financial markets and financial institutions, and imposes certain additional regulatory rules on entities whose securities (shares, debt instruments or otherwise) are listed on a regulated market in the Netherlands. The Netherlands Authority for the Financial Markets (AFM) is the regulatory body supervising the behaviour of these companies and the financial markets. Companies with securities listed on a regulated market elsewhere in the EU but with their registered seat in the Netherlands are equally subject to certain elements of AFM supervision (as set out in the FMSA). Such rules therefore apply to foreign multinationals that for various reasons have their corporate seat (that is, formal head office) in the Netherlands, who – as a result – inter alia have to comply with certain aspects of the Dutch corporate governance code as well as Dutch mandatory rules on non-voluntary public offers.

Methods of Acquisition

The acquisition of listed securities of any company is subject to a set of specific public offer rules provided for by the FMSA.

As a general rule, any public announcement of an intention to make a voluntary offer to holders of securities requires the publication of an offer document that is subject to the approval of the AFM. The FMSA prescribes in detail what information is to be shared with the market and when, including the contents of the offer document. The FMSA imposes strict duties on the potential offeror, the target, its executive and supervisory boards, and the existing holders of securities in relation to disclosure, insider trading and the exercise of voting rights, including clear timelines and milestones. The offer can be made and revised subject to certain conditions, provided that the fulfilment of such conditions is not at the discretion of the bidder.

Any party acquiring more than 30% of the voting rights in a company with its registered office in the Netherlands and of which the securities are listed on a regulated market in the EU must mandatorily make a public offer for purchase of the remainder of the shares. Although the process largely follows the rules for voluntary tender offers, the certain funds condition (see below) and the possibility for the offeror to attach conditions to its offer do not apply.

Certain Funds

Each voluntary public offer for the acquisition of securities listed on a regulated market in the Netherlands needs to be accompanied by evidence of certain funds. Although there is no hard and fast rule to determine what sufficiently constitutes certain funds, the offeror is required to make a detailed statement together with the offer document as to the manner in which the cash consideration required to pay the offer price will become available, and/or which actions have been taken to obtain any non-cash consideration (if applicable). As an example, if an offeror requires a general meeting of shareholders (such as for the approval of the acquisition and the issue of new shares required to finance the acquisition), a statement that a convocation of that general meeting has been sent out must be provided. This evidence is tested when the bidder requests the AFM to approve the offer document.

The certain funds rule does not require fully fundable loan agreements to be in place at the moment of the announcement of the offer. Hence, financing arrangements for public offers tend to be documented as a commitment letter with a "certain funds" term sheet attached, with full negotiated documentation following publication of the offer. In addition, bridge facilities are rather common in public offer scenarios, to bridge the period between the announcement of the offer and the implementation of long-term financing arrangements in the form of bonds or equity issuances.

The form of documentation used does not differ from ordinary acquisition financing facilities, provided that long-form financing documentation typically contains "certain funds" wording (in the form of the LMA templates), pursuant to which not all representations, undertakings and events of default are applicable at the moment at which the acquisition should be funded. In addition, financiers will also require a minimum level of acceptance of the offer, to ensure that the funding will only be drawn if the offeror can subsequently exercise a majority of the voting rights in the target and/or commence squeeze-out proceedings (see below). In situations of an unfriendly public offer or other situations in which no or only limited due diligence is possible, a facilities agreement can provide for a "clean-up period" of several months in respect of circumstances in relation to the target that would otherwise constitute an event of default and that are capable of being remedied.

Squeeze-out Proceedings

Dutch law provides for two different, but very similar, squeeze-out proceedings pursuant to which a majority shareholder can acquire the listed shares of the minority shareholder(s).

  • Majority shareholders holding at least 95% of the aggregate issued share capital in the company (irrespective of having multiple share classes) can initiate regular squeeze-out proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal. The majority shareholder needs to hold at least 95% of the shares. The majority shareholder will be required to pay a fair value for the shares, which is determined on a case-by-case basis by the court if necessary in consultation with experts.
  • The second proceedings are only available to a majority shareholder who has completed a public tender offer within the prior three-month period. These proceedings can be more beneficial for the majority shareholder as the offer price is assumed to be a fair price for the squeeze-out, provided that the offer was accepted in respect of at least 90% of the securities (other than shares purchased on-market). It also allows for a squeeze-out of priority shares and of individual classes in which the majority shareholder holds 95%. As a result, these proceedings tend to take substantially less time to complete.

In practice, formal squeeze-out proceedings are sometimes preceded by other activity leading to dilution or de facto squeeze-out of minority shareholders, including liquidation, a sale of assets and legal merger. Case law on those actions has as a common denominator that in principle, the majority shareholder is entitled to use the legal instruments at its disposal, provided that the shareholder takes the interests of the minority shareholders into account.

The regular squeeze-out proceedings and in particular the pricing discussion, possibly with experts, can in practice take six to 12 months, or even longer if the court appoints experts. When negotiating the availability period of the acquisition financing, it is therefore important to consider the timetable of various scenarios, including various squeeze-out scenarios.

De Brauw Blackstone Westbroek N.V.

Claude Debussylaan 80
1082 MD Amsterdam
The Netherlands

+31 20 577 1771

+31 20 577 1775

info@debrauw.com www.debrauw.com
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Law and Practice

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De Brauw Blackstone Westbroek N.V. has a banking and finance department with a broad financing practice, but is especially strong in highly complex and multifaceted financing transactions. The department consists of approximately 30 lawyers, based in Amsterdam and London. It focuses on high-end innovative matters of a cross-border and cross-departmental nature (including tax, litigation, M&A and insolvency), where it can act as the client's trusted adviser, providing global strategic and legal advice from start to finish and co-ordinating local law firms as lead counsel, such as "bet the farm" financings, high-yield financing, emergency funding, restructurings, leveraged and M&A financing, and project finance. The firm's recent work includes assisting Takeaway.com on the financing of the acquisition of a couple of European competitors (including the offer for the shares of JustEat), the state-owned gas transport company Gasunie in relation to the Nord Stream pipeline, and Akzo Nobel on the (staple) financing options and aspects relating to the divestment of its speciality chemicals business.

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