Private Equity 2024 Comparisons

The indicators suggest that the private equity (PE) market will keep its momentum during the remainder of 2024. With inflation appearing to slow down in the eurozone (although still problematic in the US), the European Central Bank started cutting interest rates in the course of 2024. This has had a positive effect on the lending capacity and investment case of, in particular, private equity funds. In addition to the dry powder still available in the market, it is expected that this will drive the willingness of private equity funds to go after targets in a way that will gain traction on the sell-side.

This development is combined with a relatively full heritage sell-side pipeline (both for private equity as well as strategic parties), as the relatively long slowdown of the M&A markets in 2022/2023 delayed the start of many sales processes. For private equity, this has increased pressure on returning capital to investors. Assets relating to energy transition and the artificial intelligence solutions space have become particularly highly sought after, and valuations in these spaces have been on the rise.

Although the market is certainly improving, it is expected that deal-making will remain more challenging than in the peak year 2021 for a while. Private equity funds require more thorough due diligence and relationship building, which has made sell-side timelines stretch out. This is also caused by the more challenging financing environment and (looming) geopolitical tensions.

While the Dutch and international M&A landscape in 2024 presents promising opportunities, there are obvious challenges that the market will face. Geopolitical factors, such as ongoing conflicts and tensions, related restrictive measures and sanctions, supply chain disruptions and export controls, will impact businesses and their valuation, and thereby M&A strategy. This impact will be felt in – among other sectors – advanced semiconductor manufacturing and, more generally, in the (deep) tech sector.

On the other hand, the drive to secure supply chains is expected to act as a catalyst for M&A activity across various industries in 2024, from automotive to healthcare to electronic components and chemicals. Bolt-on vertical acquisitions, strategic alliances and joint ventures are expected to ensure access to scarce resources and stability in supply chains for portfolio companies.

It is noteworthy that 2024 saw increased interest on the part of PE funds in medium-size accounting firms. On the other hand, PE’s involvement in the Dutch healthcare sector has become the subject of public scrutiny and this has likely led to various exits in 2024.

Changes in the regulatory landscape have impacted PE funds the most during the last few years and transactions have been more heavily scrutinised by competition regulators. In addition, the new foreign direct investment (FDI) legislation that has come into force (see 3. Regulatory Framework for more details) is impacting the structuring of deals, and the Corporate Sustainability Reporting Directive could soon have an impact on PE-held large portfolio companies as from reporting for FY 2024 onwards.

In the Netherlands, the Authority for Financial Markets (Autoriteit Financiële Markten or AFM) is the primary supervisor for investment fund managers that are licensed or registered under the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD captures private equity managers. The AFM is responsible for the initial licensing process and ongoing supervision in respect of conduct and compliance. The Dutch Central Bank (De Nederlandsche Bank or DNB) is involved in prudential supervision on ensuring the soundness of financial enterprises and the stability of the financial system. Private equity transactions may be subject to merger clearance, foreign direct investment review, EU foreign subsidies review and, possibly, sector-specific regulatory approvals (eg, for financial institutions, healthcare or utilities targets). The most notable and relevant authorities for PE funds are outlined below.

Merger Control

The Netherlands Authority for Consumers and Markets (ACM) is the Dutch competition authority responsible for merger control. A mandatory pre-merger filing in the Netherlands is required for a transaction – whereby a direct or indirect change of control is contemplated – if, in the last calendar year:

• the combined worldwide turnover of the companies concerned was EUR150 million or more; and
• the turnover in the Netherlands of each of at least two of the companies concerned was EUR30 million or more.

In case of a notification, a so-called standstill obligation applies, whereby a proposed transaction may not be effected until clearance has been obtained (effecting a transaction prematurely is called “gun-jumping”).

In addition, the ACM monitors compliance with Dutch competition law. In M&A transactions, parties need to be aware when negotiating certain clauses, such as protective covenants, which may exceed the limits of what is necessary for (the implementation of) the transaction. Furthermore, in the period up to completion of the transaction, the parties should ensure that the transaction is not effectuated, for example, by the purchaser exercising decisive influence over the target, and that the parties do not share commercially sensitive information, in both cases, to protect against the risk of gun-jumping.

Foreign Direct Investment

On 1 June 2023, the broad Dutch National Security Investment Act (Wet veiligheidstoets investeringen, fusies en overnames) or NSI Act entered into force, introducing a new screening procedure/foreign investment review framework under Dutch law, in addition to those set out in sector-specific legislation. The notification requirement resulting from the NSI Act applies irrespective of the nationality of the acquirer. The NSI Act applies to certain acquisition activities in relation to a target company established in the Netherlands that is one of the following: (i) a vital provider; (ii) a provider or managers of a corporate campus; or (c) an undertaking active in the field of sensitive technology. A corporate campus is defined as an enterprise that manages terrain on which a combination of businesses is active and where, with co-operation between the public and private sector, innovative technologies are developed. When in scope, the transaction needs to be notified to the Ministry of Economic Affairs, which will, in consultation with the Investment Screening Bureau (Bureau Toetsing Investeringen or BTI), assess the transaction. A standstill obligation applies until clearance has been obtained.

EU Foreign Subsidies

In 2023, the EU Foreign Subsidies Regulation (FSR) entered into force, thereby creating a screening regime aimed at combating distortions of competition on the EU internal market caused by foreign subsidies. The FSR imposes a mandatory pre-notification to the European Commission for transactions involving: (i) a target generating turnover in the EU of at least EUR500 million; and (ii) an acquirer and a target that have, together, received more than EUR50 million in foreign financial contributions in the previous three years in aggregate. Notifiable transactions must obtain clearance from the European Commission before they can close, creating a standstill obligation.

Sector-Specific Approvals

In addition to the above, transactions may be subject to a sector-specific approval. For example, approval may be required from the Dutch Central Bank or the AFM for transactions in the financial services sector. Certain transactions in the healthcare sector may be subject to the approval of the Dutch Healthcare Authority (Nederlandse Zorgautoriteit or NZa). Sector-specific approval or specific notifications may also be required in the utilities and telecommunication sectors.

Potential purchasers typically conduct thorough legal due diligence. This is particularly the case for private equity transactions, which often involve debt financing and more complex deal structures compared to corporate investments. Legal due diligence is aimed at identifying potential legal risks and liabilities that could have an impact on the envisioned transaction, any historic risks and liabilities, as well as any issues that could undermine the value drivers underlying the growth projections of the target business. Typically, buy-side advisers will prepare an issue-based legal due diligence report that outlines material findings and includes recommendations on how to address the identified risks. Sometimes, more descriptive reports are required by PE funds, especially if third parties such as banks, insurers or co-investors are involved.

Legal due diligence is typically conducted by reviewing all the relevant documentation that has been made available through a virtual data room (VDR). The VDR usually provides a Q&A tool which allows the advisers of the potential purchaser to raise questions with the sell-side. Typically, legal expert sessions with key management personnel are conducted to clarify issues and gather insights into the business of the target company. Depending on the nature of the target business, common key areas of the legal due diligence are corporate, finance, commercial contracts, employment and pensions, real estate (title and/or lease), environment, litigation, intellectual property, information technology and data protection.

It is common, although not strictly necessary, to prepare vendor due diligence (VDD) reports or a legal fact book in transactions that are structured as an auction sale and geared towards the successful bidder taking out warranty and indemnity (W&I) insurance coverage. Such VDD reports are typically divided into legal, financial, tax, commercial and sometimes insurance and environmental aspects of the target business, and would be prepared by the advisers retained by the seller. The primary reasons for preparing a VDD report include an increase in transaction speed, as a VDD report can expedite the transaction process by pre-emptively addressing potential issues and providing a potential purchaser with a comprehensive overview of the target company, and improving transaction certainty, by identifying and mitigating risks early. It also helps the selling PE fund to better compare bids. Typically, no reliance would be provided by sell-side legal advisers to W&I insurers, although reliance is sometimes provided by legal advisers on the VDD reports to the lenders providing acquisition financing.

Private equity transactions are typically structured as the sale and purchase of all shares in the target company from the legacy shareholders to a business and industrial development corporation (BidCo) vehicle which is incorporated by the PE fund (as part of a string of acquisition vehicles, depending on structuring). Compared to an asset deal, a share deal may be considered relatively straightforward as all assets (and liabilities) of the target company change ownership through the transfer of the shares in the target company. Sellers of the target and management often (re-)invest part of their proceeds in the BidCo vehicle (or one of its newly incorporated holding companies). This creates an alignment of interests, since the management board is incentivised (through an envy) to achieve future value creation.

Auction sale processes continue to be prevalent in the Dutch market to facilitate an exit for PE funds. These are almost always structured as a clean exit for the seller by aiming for a soft- or hard-stapled W&I insurance policy that is to be taken out by the buyer. W&I is also sometimes used to facilitate one-on-one transactions (typically when these are negotiated on a non-exclusive basis).

Although not as common in the Netherlands compared to the standard private acquisition structure described above in terms of transaction volume, PE sponsors also engage in public-to-private (P2P) transactions which have a vastly different structure and process. For more information on P2P transactions, see 7. Takeovers.

In the Dutch market, several Dutch or non-Dutch private limited companies – for example, a BidCo, holding company (HoldCo) and top company (TopCo) – are typically set up as special purpose vehicles (SPVs) by the PE sponsor. A structure such as this is prevalent for a variety of reasons, among others, for ring-fencing liability, facilitating (re-)investment by the target’s management and the sellers, and for financing purposes. The PE fund itself typically does not become a party to the transaction documents other than the (already existing) shareholders’ agreement at the TopCo level.

A PE acquisition is usually financed with both equity and debt to create the leverage a PE fund requires as part of its business model. In auction processes, the seller will typically require a combination of debt and equity commitment letters to be provided that guarantee payment of the purchase price at closing. A seller would prefer the debt commitment letters to be provided on a fully committed financing basis, implying that any conditionality included therein is under the control of the buyer, which is contractually bound to proceed with the transaction in any event. However, sellers have been forced to appreciate that fully committed financing debt commitment letters have become more challenging for bidders to obtain in the last 12 months due to the macro-economic environment.

Co-investment deals are not uncommon in the Dutch market, and their popularity has increased somewhat over the last few years. Typically, these are limited partners taking passive stakes alongside the general partner of the PE fund, granting these limited partners additional upside on specific investment opportunities selected by the general partner. Sellers also sometimes reinvest in the target company through a combination of investing in the acquiring PE fund as a limited partner and alongside the PE fund as a co-investor. Consortium deals are not uncommon, and are sometimes also carried out for sector knowledge purposes – a certain corporate or PE sponsor may be more familiar with an industry or market compared to its co-investor. In other words, not only capital but also knowledge is pooled.

The predominant form of consideration structure used for PE entries and exits in the Netherlands remains the locked box mechanism (LBM), especially as foreign investors have become more familiar with this concept. A strong PE sponsor may negotiate use of a completion accounts mechanism (CAM) for certain entries, especially if there are serious doubts regarding the (unaudited) financial accounts or if these pertain to (complex) carve-out sales. There may also be valid reasons why a seller would press for a CAM. In a standard LBM a buyer assumes the benefits and risks of the target company as per an “effective date”, typically the date of the last audited financial statements, and the enterprise-to-equity-value bridge is determined as per the selected effective date. In a CAM, the enterprise-to-equity-value bridge is determined as per the closing date (or a date close to the closing date). An LBM fosters greater price certainty and is therefore the preferred mechanism for sellers, especially PE sellers who need certainty on providing returns to their investors, and the timing thereof. A CAM may give a buyer (a sense of) more comfort that the business was conducted in a profitable manner in the period prior to the closing date. Earn-outs, vendor loans, deferred considerations and reinvestment structures are a common feature of PE transactions, and are typically sought after by investing PE funds.

There are roughly two starting points for equity ticker negotiations in the Netherlands: (i) the equity ticker should be a proxy for the cash-generating capacity of the target for the economic interim period; and/or (ii) the equity ticker should reflect the risk-free rate (whether or not with a mark-up) to compensate the seller for the fact that it will receive the sale proceeds after transferring the target’s economic benefits. Sometimes, this is expressed as an interest rate on the equity value for the duration of the period between the effective date and closing. Charging interest on leakage that occurs during the period between the effective date and closing is not typical, but is also not unheard of.

It is common to include an independent expert procedure in the transaction documentation for both leakage disputes arising under LBM deals and for purchase-price adjustment disputes arising under CAM deals. The scope of work for such an independent expert varies accordingly. Typically, an independent firm of chartered accountants is appointed by the parties as the independent expert and the share purchase documentation lays down the mechanics on how such independent expert will be appointed if the parties cannot mutually agree on one specific firm. If part of the consideration is in the form of an earn-out, an independent expert procedure will typically also apply to any disputes in this respect (eg, if there is a discussion on the achievement of certain EBITDA targets).

It is not common to have any conditions to closing other than those conditions which are legally required to consummate the transaction, such as regulatory clearances: merger clearance, sector-specific clearance or foreign direct investment approvals. Financing conditions are not typical, although these have become more sought after by buyers during the recent period of market uncertainty with high interest rates and geopolitical tensions. In certain instances where there is a significant interim period between signing and closing (resulting from regulatory approvals), material adverse change (MAC)/material adverse effect (MAE)-like conditions may be required by PE buyers. Third-party consents are usually not accepted as conditions to closing, although the termination by third parties of (material) supplier or customer agreements sometimes results in a discount of the purchase price or a breach of covenants. These mechanisms are bespoke and tailored on a case-by-case basis.

“Hell or high water” provisions are not uncommon in the Dutch market, albeit these are rarely accepted if the regulatory analysis shows that obtaining approvals may prove difficult. Typically, PE buyers would refrain from accepting these obligations, although competitive processes may force their hands. On occasion, hell- or-high-water provisions are introduced by sellers in respect of obtaining FDI approvals. It will be interesting to see how the market develops in this respect.

A break fee payable by the buyer to the seller (or vice versa) if the transaction does not close is not typical in the Netherlands for private deals, although sometimes break fees are linked to the buyer not obtaining regulatory approvals. In public deals, a break fee of around 1% of the equity value is common, but this can be higher in specific circumstances.

Deal certainty is crucial for all the parties involved in the transaction. To foster deal certainty, parties typically try to contractually limit the termination possibilities as much as permitted under Dutch law (eg, by having a claim for damages be the sole remedy in case of a breach, thereby excluding the right to rescind the transaction documentation) other than for non-satisfaction of closing conditions or failure to meet specific obligations at closing. The sale and purchase agreement (SPA) contains tailored termination mechanics in this respect. The long-stop date is typically linked to the estimated timeframe to obtain regulatory approvals, plus a buffer to cater for eventualities.

PE-backed sellers are typically more determined to achieve a clean exit than corporate sellers. This desire for a clean exit is mainly sought after by PE funds to facilitate the free distribution of the sale proceeds to limited partners without any contingent liabilities. To foster a clean exit, W&I policies are typically used more often in PE-initiated sales processes than those initiated by corporates, although W&I has become a common tool for corporates as well (especially in auctions).

Typically, PE sellers are willing to provide a customary set of warranties (categorised into business, fundamental and tax warranties) and a tax indemnity, provided that these are insured via a W&I insurance policy with no residual liability for the respective seller (sole and exclusive recourse), although PE sellers are sometimes willing to accept an exception for fundamental warranties for which the PE sellers remain (partially) liable.

Depending on the deal size and type of business conducted by the target, the following monetary limitations in respect of business warranties and tax warranties are typically seen: a de minimis threshold of approximately 0.1% of the enterprise value (EV), a tipping basket of approximately 1% of the EV and a liability cap ranging anywhere between 10% and 25% of the EV in respect of the business warranties, and between 10% and 25% of the EV in respect of the tax warranties. Fundamental warranties are typically excluded from any limitation-of-liability provisions, other than a general cap of 100% of the purchase price. Business warranties are typically limited in duration to anywhere between 12 and 24 months after closing, with parties often ending up agreeing on a period of 18 months. Fundamental warranties are provided from anywhere between three to ten years after closing, while tax warranties have a duration of seven years after closing or such later date, being six months after the statutory limitation period for such claims – including the term during which additional assessments can be imposed – has lapsed in respect of a breach of the tax warranties.

It is customary practice in the Dutch M&A market to make the business warranties and tax warranties subject to a general data room disclosure. Although disclosure letters are used in the Dutch M&A context, such letters usually serve a different purpose compared to those, for example, of the US market. In the US, disclosure letters are often used as the sole means of disclosure while in the Dutch market, they typically serve as a means to ensure proper and undeniable disclosure is made (or in the W&I context, to reduce the warranties and tax indemnity at closing).

It is fairly uncommon in the Dutch market today for the management team to provide warranties separately, whether or not via a separate management warranty deed that is covered by a W&I policy.

W&I insurance policies have become increasingly popular, as these provide flexibility to the PE funds to distribute the transaction proceeds to their limited partners, thereby bringing forward the moment of return on the limited partners’ investment. The liability of the PE seller for a breach of the warranties and the tax indemnity is thereby typically limited to one euro (except sometimes for a breach of fundamental warranties). PE sellers are very reluctant to accept any specific indemnities for known risks (which specific indemnities are by nature uninsurable in principle) that circumvent the W&I policy but, depending on the circumstances, may well prefer a specific indemnity over a debt item in the EV bridge. W&I insurance almost always comes in the form of a buyer policy, and as such has the characteristics of a general insurance contract as opposed to a liability insurance contract. W&I insurance is subject to a certain liability cap typically ranging from between 10% and 30% of the EV (depending on the offer in the non-binding indication report and the risk appetite of the insurers). There have been comebacks of escrow/retention arrangements in PE entries in respect of uninsurable claims such as specific indemnities, any leakage claims (if a locked box is used) or any true-up claims, when determining the equity value post-closing (if completion accounts are used).

Litigation is not a typical aspect of PE deals but of course, disputes occur and these may be litigated. There has recently been an increase in disputes relating to intra-group relationships between the target on the one hand and management-related companies on the other hand. Furthermore, earn-outs are historically considered to be prone to disputes due to the many intricacies involved in such mechanisms. Careful negotiation of any earn-out (including clear key performance indicators and anti-abuse provisions) is very important to mitigate any post-closing dispute in this respect.

Although there is generally a larger volume of private M&A transactions than public M&A transactions, public-to-private deals by PE-backed bidders are quite common in the Netherlands. Given the overall challenging market dynamics for private equity in recent years, there have recently been more strategic take-privates. However, as in the private M&A market, PE does typically have a large share of the market in terms of takeovers of listed targets.

PE is generally dependent on target management and will therefore not normally entertain a hostile offer. Normally, a PE bidder would enter into a merger protocol with the target before announcing its intention to launch a public offer. The merger protocol will include arrangements on the offer process and terms and conditions for the bidder to launch its offer. In addition, a practice has developed in the Netherlands whereby, if the bidder does not achieve an acceptance rate of at least 95% of the target shares at the end of the acceptance period, the target company will co-operate with a squeeze-out of the remaining shareholders. This is a so-called “pre-wired” back-end structure. The common threshold on which the boards feel they have sufficient mandate to co-operate with the squeeze-out is 80%, although thresholds may vary depending on the circumstances.

The AFM must be notified without delay by anyone who acquires or disposes of shares or voting rights that cause the percentage of capital or votes to reach, exceed or fall below certain thresholds of listed companies. Such notification obligation also applies for the acquisition or disposal of financial instruments that represent a short position with respect to shares of a listed company. The relevant thresholds that trigger an obligation to notify are the following: 3%, 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%.

The 30% threshold is particularly relevant for private equity-backed bidders contemplating a tender offer, as this threshold also triggers a mandatory offer on all outstanding shares of the listed companies (see 7.3 Mandatory Offer Thresholds).

A takeover bid is legally required in the Netherlands once a person or entity – alone or in concert with others – acquires control over a listed company, which is defined as being able to exercise at least 30% of the voting rights in the general meeting of a Dutch company on a regulated market. A mandatory offer must be made at a fair price. This means that the minimum price of a mandatory offer must be the highest price paid by the bidder in the year preceding the announcement of the mandatory offer. Any non-compliance with the mandatory offer rules can be sanctioned by the Dutch Enterprise Chamber which may, at the request of the company and others, impose a mandatory offer.

Bidders can offer cash or shares, or a combination of both in a public offer. Pursuant to the best-price rule, the bidder must pay the higher of (i) the offer price and (ii) the highest price paid by the bidder to acquire shares on the market, unless the transaction was a regular trade on a regulated market.

A public offer is usually subject to “commencement conditions”, being the conditions that must be satisfied (or waived) for the bidder to launch the offer, and “offer conditions”, being the conditions that must be satisfied (or waived) in order to declare the offer unconditional.

Common commencement conditions include:

• no breach of the (material provisions of the) merger protocol;
• absence of a material adverse change;
• no change in the board’s recommendation;
• compliance with employee consultation procedures;
• no legal prohibition of the public offer; and/or
• no suspension of trading of the target company’s shares.

Similar conditions typically apply as offer conditions. In addition, the following conditions generally apply:

• a condition that all regulatory approvals have been obtained; and
• a condition that a certain minimum acceptance threshold has been met.

Finally, the adoption of certain general meeting resolutions (eg, dismissal or appointment of directors) that will become effective upon settlement of the offer is generally included as an offer condition.

A public offer cannot be conditional on the bidder obtaining financing. The bidder must announce that it has ultimate certainty of funds when filing the draft offer memorandum for approval with the AFM. Additionally, a bidder cannot include conditions which are under the control of the bidder.

In contrast to a voluntary public offer, the completion of a mandatory offer may not be made subject to any conditions.

If a private equity-backed bidder does not obtain 100% ownership of a target but does acquire at least 95% of the shares, it can make use of a squeeze-out mechanism under Dutch law. A shareholder that has at least 95% of the shares may request the Enterprise Chamber, within three months after the acceptance period of the offer has lapsed, to force the minority shareholders to sell their shares. The bidder and target may agree that if the bidder’s shareholding exceeds a lower threshold, in practice often around 80%, the target will co-operate with alternative squeeze-out mechanisms such as an asset sale or a (triangular) legal merger.

If a bidder does not acquire 100% ownership of a target, it may strengthen its governance rights by, for example, entering into a shareholders’ or voting agreement with another major shareholder or concluding a relationship agreement with the target company. Such agreements typically include provisions regarding governance rights, and may include a nomination right for one or more members of the supervisory board. They may also include share transfer restrictions or orderly market arrangements.

The implementation of a debt push-down is not prohibited by Dutch law. However, in order to be able to achieve a debt push-down into the target following a successful offer, the private equity-backed bidder must ensure that it can realise the incurring of debt in the target company. This is often a management board decision which requires the approval of the supervisory board and the general meeting.

Shareholders of the target company may give irrevocable commitments to accept a public offer if and when launched. Shareholders that hold a substantial interest are often approached before an intention to make a bid is made public and therefore inside information is often shared. This is permitted in the Netherlands if the will of such shareholder to tender the shares is reasonably required for the decision to make an offer. The commitments given by shareholders are often conditional (“soft”) commitments, since unconditional (“hard”) commitments do not allow the shareholder to terminate the agreement once a better offer is made.

Equity incentivisation of the management team is a common feature of private equity transactions in the Netherlands. Typically, management may be entitled to a non-voting minority of the share capital. Ownership is typically steered towards only economic upside. Governance rights are typically limited to fundamental minority protection rights.

A broad range of management equity incentive arrangements is available in the Netherlands, including (combinations of) “sweet” equity plans, ratchet/performance shares, long-term incentive plans, exit bonuses, and stock appreciation rights schemes. “Sweet” equity plans typically entitle management to invest in ordinary shares, potentially granting substantially higher exit proceeds as compared to the PE fund’s holding of ordinary shares, after repayment of debt, shareholder loans and preference shares. By contrast, the PE fund will invest in a combination of preference shares and ordinary shares, with the preference shares delivering a compound fixed return making up the largest part of the capital at entry, resulting in an “envy” for management. Certain key managers may also be invited to invest on equal economic terms alongside the sponsor. This institutional strip is generally subject to a lighter regime in terms of leaver provisions.

Leaver provisions typically oblige each manager to offer their management incentive stake to the PE sponsor (or a person designated by the PE sponsor) upon the occurrence of a leaver event. The manager will be categorised as:

• a “bad leaver” – typically a leaver who is dismissed for urgent cause, certain reasonable termination grounds as defined under Dutch employment law, voluntary resignation other than for good cause (death, serious illness, etc), material breaches of transaction or employment documentation, commission of crimes of personal bankruptcy, etc; or
• a “good leaver” – generally a leaver for any reason other than a bad leaver; or
• an “early leaver”.

The relevant consideration for the leaver shares will typically depend on the leaver classification (good, bad or early) and the timing of the departure (typically linked to the moment on which the leaver event occurred). Good leavers will typically receive fair market value, subject to a customary vesting scheme. Bad leavers will typically receive the lower of fair market value and acquisition costs. Early leavers will receive a tailored discount.

In the Netherlands, restrictive covenants such as non-compete and non-solicitation restrictions, are typically imposed as part of both the equity package and the employment/management contract. The enforceability of non-compete restrictions is limited by antitrust laws and the Dutch law principle of reasonableness and fairness (redelijkheid en billijkheid). A Dutch court can modify or nullify any overly restrictive term.

Governance rights for management are typically limited to fundamental minority protection rights, including in relation to the exclusion of pre-emptive rights other than for rescue financing or add-on acquisitions (at the discretion of the PE fund). Typically, a PE fund will not permit management to have any elaborate operational veto rights, and also not regarding the suspension, appointment or dismissal of directors. A PE fund will, in principle, not accept/steer away as much as possible from any hampering of its discretionary exit rights.

A private equity shareholder will negotiate key rights to maintain (substantial) influence over its portfolio companies to protect its investments and minimise associated risks. Typical provisions relating to control include hire-or-fire mechanics, wherein the private equity fund shareholder has the right to appoint, suspend or dismiss members of the management board. Private equity funds will negotiate an elaborate list of reserved matters which, for example, either require the approval of the private equity fund in the general meeting of shareholders of the company or of a delegated member of the supervisory board of the company. Private equity shareholders require elaborate information rights which include monthly financial reporting and the immediate reporting of key events. Typically, private equity shareholders will negotiate the discretionary right to initiate an exit process, including by means of a drag-along right.

In the Netherlands, a shareholder’s liability is, in principle, limited to its investment and its obligation to pay the nominal value on its shares. Case law shows that there are certain instances where a shareholder can be held liable in respect of the liabilities of its portfolio companies, for instance, where such shareholder has accepted distributions from its portfolio company, which subsequent deficit results in the portfolio company’s bankruptcy. Furthermore, the corporate veil can be pierced in instances where a portfolio company breaches European or domestic competition laws. As part of the intensive monitoring of their portfolio companies, the PE sponsor should be wary if and when the portfolio company enters into financial difficulties.

There are multiple exit strategies for PE funds, including private sales to other private equity-backed investors or corporates, IPOs, management buy-outs and recapitalisations. The most common exit strategy for private equity is a private sale. Dual-track processes happen, but over the last few years have not been common. Triple-track exits – whereby the possibility of a recap is prepared in parallel – are fairly rare. Roll-over situations where a private equity seller reinvests (through a different fund under management) have become increasingly popular.

Private equity investors will negotiate drag-along rights in order to gain a high degree of control over a future sale of the portfolio company. Typically, this drag-along right is matched by a tag-along right negotiated by co-investors and management. Drag-along rights enable selling majority shareholders to force minority shareholders to participate in a sale and offer their shares, whereas tag-along rights offer the minority shareholders the right to participate in a sale and sell their shares at the same price and terms as the selling shareholder(s). In practice, private equity investors are reluctant to accept any hampering of their drag-along rights, including by means of agreeing to a minimum return threshold.

An IPO can be a viable exit strategy for private equity and can provide high returns. An IPO can offer a full or partial exit, but on most occasions a significant minority stake is sold while a majority is retained by the PE sponsor to demonstrate trust and confidence to the market. Private equity sellers conducting an IPO often agree to be bound by a lock-up arrangement that lasts around six months after the IPO, during which they may not sell their shares. In specific instances, the lock-up period can be up to 12 months. If the private equity seller retains a substantial stake in the IPO company, the issuer and seller may enter into a relationship agreement that will govern the private equity investor’s role as shareholder.