In 2020, the COVID-19 pandemic heavily impacted the M&A market. Most M&A activity in the Netherlands came to a halt in the first half of 2020, shortly after the “first wave” and the subsequent lockdown imposed by the Dutch government. As the Netherlands slowly and steadily moved out of the strict lockdown, M&A activity in the technology sector rebounded quickly and has continued to flourish into 2021.
Compared to 2020, deal flow in the Netherlands has increased significantly. Technology is having a huge impact on this growth, with private equity dry powder driving deals. Valuation and competition are high, with multiples for technology deals being higher than before.
Investments in Dutch climate tech start-ups have significantly increased. Climate tech companies tackle the challenge of decarbonising the global economy, with the aim of reaching net zero emissions before 2050. In 2021, these companies raised over EUR600 million from investors, five times as much as in 2019, before the COVID-19 pandemic.
Technology deal drivers
While all sectors of the M&A market are experiencing significant amounts of activity, the technology sector continues to lead the charge, with deal volumes at record levels. Much of this activity is driven by the fundamentals which have sustained M&A across all sectors for some time – low interest rates, cash rich balance sheets, the boundless appetite of private equity and the ever-tightening squeeze on organic growth – but the technology sector is distinctive in the number of additional deal drivers which power the sector and particular areas of sub-sector activity. Whether that's the need for traditional businesses to pursue digital strategies, the rapid pace of technology innovation in areas such as AI, biometrics and robotics, the increasing awareness of the importance of harnessing technology to meet ESG challenges, the need to strengthen cybersecurity defences, increasing consumer acceptance of novel applications into daily life, the boost to the gaming sub-sector from increased leisure time, or the huge additional capacity demands necessitating more data centres and other infrastructure, at every turn the forces of business and societal change are pushing towards more technology M&A.
The global trend of countries becoming increasingly protective of their national security and strategic economic interests has become even more prominent and pressing with the COVID-19 pandemic and the fear of governments for “corona bargain hunters” eyeing their “national treasures” and/or distressed target (listed) companies.
New start-up companies are typically incorporated in the Netherlands as a limited liability company (besloten vennootschap). Dutch corporate law provides a flexible corporate framework for the organisation of companies. There is no initial capital requirement for incorporation of a limited liability company. Incorporation of a limited liability company requires the execution of a notarial deed before a Dutch notary and usually takes around two weeks.
Entrepreneurs are typically advised to choose a limited liability company (besloten vennootschap) for the initial incorporation. The limited liability company is designed to be a flexible instrument and thus entrepreneurs can tailor the incorporation documents to their needs.
The Netherlands provides for many sources of seed investment. The Dutch government provides for a Seed Capital scheme to support technical and creative start-ups. Private investors (business angels), regional development funds and family offices are also common sources of funding. Crowdfunding is a promising source of funds, especially for companies active in the business to consumer space.
The Netherlands has an active ecosystem with many sources of venture capital. Next to venture capital firms, regional development funds and family offices play an active role. Corporate venture capital is growing, but is still a minor source of funding. The Netherlands is an attractive jurisdiction for foreign venture capital firms due to the start-ups being internationally oriented, especially in the technology sector.
The Dutch Association of Participation Companies (NVP) has not developed standards for venture capital documentation. However, it supports on its website the use of standardised investment terms developed by private organisations.
Dutch corporate law provides a flexible corporate framework for the organisation of companies. It is therefore not necessary for start-ups to change their corporate form as they advance in their development. This is especially so because a limited liability company (besloten vennootschap) can also be listed on a securities exchange. The Netherlands is an attractive home for companies in all phases of their development. It is therefore not common to migrate to another jurisdiction.
A private sale remains the dominant exit route for investors wishing to exit Dutch companies. IPOs carry bigger perceived execution risks. Dual-track processes are generally held by investors opting for maximum flexibility and competitive tension between the M&A and IPO tracks. As dual-track processes require significant internal resources, dual-track processes are generally only considered for companies of a certain minimum size.
Euronext Amsterdam remains a popular listing venue for both domestic and foreign issuers. Post-Brexit, Euronext Amsterdam has seen a substantial increase in trading volume and number of IPOs. Euronext Amsterdam is a front runner for SPACs, with most European SPACs opting for a Dutch listing. For certain sectors, a US listing remains an attractive alternative to a listing on Euronext Amsterdam.
Listing on a foreign exchange does not affect the feasibility of a future sale. Minority squeeze-out rules and other corporate restructuring measures will continue to be governed by Dutch corporate law, irrespective of a foreign listing. However, having to deal with two (or more) jurisdictions does increase the complexity of a future sale.
A sale of a company is typically run as an auction to leverage the competitive tension to the fullest extent possible. Especially in the current market, bilateral negotiations from day-one are the exception. That does not mean that every auction stays competitive until the final phase. In many auctions, only a few bidders will stay engaged until the final phase and sometimes bidders even manage to obtain exclusivity.
A sale of a privately held technology company will typically be structured as a sale of shares. Asset transactions are usually only considered if there is a substantial tax benefit, if the shareholders only wish to sell certain assets or if the acquirer is concerned about legacy liabilities within the company. Legal mergers and demergers are less common.
The vast majority of transactions in the Netherlands are done as a sale of the entire company for cash. We do see transactions whereby a small part of the consideration is settled in stock (ie, shareholders of the company receive shares of the buyer). Entire stock-for-stock transactions are rare.
Founders and VC investors are generally expected to stand behind representations and warranties and a general indemnity for tax. The same applies to specific indemnities for major liabilities discovered during due diligence (eg, pensions, litigation and environmental). Escrow and holdback mechanisms are often required from founders, just as capital maintenance statements. VC investors are less likely to accept such mechanisms. Representations and warranties insurance is customary in the Netherlands and easy to obtain at a good price. The use of representations and warranties insurance is usually limited to larger transactions.
Spin-offs are especially used by large corporates to divest their non-core businesses. Some corporates have used spin-offs as part of their journey to become a tech company, by divesting their more traditional business. However, the number of spin-offs in the Dutch market is limited.
Spin-offs can be structured as a tax-free transaction at the corporate level provided that certain requirements are met, even though a spin-off is, in principle, deemed to be a taxable transfer of assets and liabilities by the company that is conducting the spin-off. Gains derived from a spin-off are exempt from corporate income tax if all companies involved in the spin-off are subject to the same tax regime, have no losses available for carry-forward, are not entitled to a credit for the avoidance of double taxation, do not apply the innovation box regime, are not entitled to a credit for low-taxed investment participations and the future imposition and collection of corporate income tax is safeguarded.
If a company cannot comply with one or more of these conditions, the tax inspector may, upon request, still grant the exemption. In such case, additional conditions are imposed to safeguard the future imposition and collection of corporate income tax.
A spin-off must finally be based predominantly on valid commercial motives for the exemption to be available. A spin-off is deemed not to be based predominantly on valid commercial motives if the shares in the company that is conducting the spin-off or the shares in the spun-off company are sold within a period of three years, unless the taxpayer demonstrates otherwise. Spin-offs can therefore generally not be structured as a tax-free transaction if the main reason for the spin-off is to achieve a tax free sale of one or more assets or business units. A spin-off could furthermore also be structured as a tax free transaction at the corporate level for Dutch VAT, real estate transfer tax and dividend withholding tax purposes, subject to certain conditions being met.
In line with the treatment of spin-offs at the corporate level, gains realised by shareholders of a company that is conducting a spin-off may be exempt from tax, even though the spin-off is, in principle, deemed to be a taxable transfer of shares. Certain conditions should be met, including that the spin-off should predominantly be based on valid commercial motives.
A spin-off immediately followed by a business combination is technically possible under Dutch law. However, this is certainly not a customary transaction in the Netherlands.
Statutory time periods allow for a spin-off to be completed within a few months. In practice, spin-offs require detailed preparations and a typical timing for a spin-offs is at least a year.
It is not required to obtain a ruling from the Dutch tax authorities prior to completing a spin-off if all conditions for conducting a tax free spin-off are met. Often, one or more requirements cannot be met and in such case a tax ruling should be requested. The period for obtaining a tax ruling ranges from a couple of weeks to several months, depending on the complexity of the case.
Principal Stakebuilding Strategies
The majority of the bidders launch their bids for a publicly traded Dutch company without holding any (equity) interest in that company. In most cases, bidders are unwilling to take the risk that the final offer fails and the bidder’s investment loses value. There is, however, ample precedent of situations in which bidders built a stake in the target company prior to launching an offer.
The benefits of stakebuilding are the strengthening of the negotiation position of the bidder, the increase of the bidder’s chances of success, reduction of the costs of the acquisition and possible protection against competing offers. The strategy of stakebuilding is typically combined with obtaining irrevocable tendering commitments from one or more of the target company's principal shareholders
Material Shareholding Disclosure Threshold
As a rule, any person who (directly or indirectly) reaches, falls below or exceeds any of the statutory thresholds – either in terms of percentage of total share capital or voting rights of a listed company – must promptly notify the AFM (The Dutch Authority for the Financial Markets). The AFM keeps a public register of substantial interest notifications on its website. The relevant thresholds are 3%, 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%.
There is no statutory requirement for shareholders to make known the purpose of their acquisition or their intention regarding control of a company. A company can, however, request the AFM to force a person (eg, a shareholder) to disclose its intentions (whether or not to commence a public bid) if that person has publicly disclosed information that may give the impression that it is contemplating making a public bid for the company. If granted by the AFM, that person must make an announcement, within six weeks of being so instructed by the AFM, that it does or does not intend to make a public bid.
In the latter, the person (and any persons acting in concert) will be prohibited from announcing or launching a public bid for that company for a period of six months from the announcement. If no such announcement is made, a period of nine months applies (commencing at the end of the six-week response period). If a third party subsequently announces a public bid for the company during the six- or nine-month "put up or shut up" period, this restrictive period automatically ends.
A mandatory bid for all the shares in the capital of a target company is triggered where a shareholder, acting alone or in concert with others, acquires an interest of 30% or more of the voting rights in the target company.
A bidder who obtains irrevocable tender commitments from shareholders in anticipation of a voluntary bid is exempted from the mandatory bid rules and will not be deemed to "act in concert" with the shareholders concerned.
The typical transaction structure for an acquisition of a public company is through a public offer on all shares. Mergers of equals are sometimes structured as a legal merger or cross-border legal merger to emphasise parties’ intentions. Dutch law also provides for making a partial or tender offer, aimed at obtaining less than 30% of the voting rights, but these structures are not commonly used. Asset transactions have also been used, but are not common.
A public bid for all shares in the target company will often be in cash, but all or part of the consideration may also consist of transferable securities (including shares, bonds and convertible instruments).
If the bid consists of transferable securities, additional and extensive disclosure pertaining to the issuer of the transferable securities, in the form of either a prospectus or an equivalent document in the offer memorandum itself, is required.
The consideration for offers qualifying as "tender offers" under Dutch law (an offer aimed at obtaining less than 30% of the shares) must be all-cash, and determined by a reversed book-building process (ie, the consideration will be specified by the tendering shareholder).
The Dutch public offer rules do not provide for a minimum level of consideration, unless in case of a mandatary offer where the bidder must offer a fair price.
Apart from the conditions required by law (eg, merger control), negotiated offers are, in contrast with (unconditional) mandatory offers, typically made subject to extensive conditions. A negotiated bid may contain pre-offer conditions such as certainty of funding, antitrust approval and the non-occurrence of a material adverse change. Once the pre-offer conditions have been fulfilled, the conditions under which the offer (once commenced) will be declared unconditional are typically concluded in the merger protocol between the bidder and the target company. The most frequently negotiated conditions include minimum acceptance thresholds and the adoption of certain corporate resolutions.
It is common for public bid terms to be documented in a "merger protocol", where the bidder and the target company document the main terms and conditions of the bid, such as the conditions for launching and completing the bid, no-shop provisions and, typically, regular and reverse break fees.
The bidder will generally aim to purchase more than 95% of the shares in a target company to acquire full control through the statutory squeeze-out mechanism. In recent years it has, however, become increasingly common to pre-wire alternative restructuring options to be able to acquire full control if the 95% threshold is not satisfied in the public bid. Such restructurings are normally pre-agreed between a target company and the bidder in the merger protocol. In these cases, the bidder is typically willing to lower the acceptance level to 75%-80%.
A shareholder who holds at least 95% of the shares of a company may institute proceedings before the Enterprise Chamber at the Amsterdam Court of Appeal towards the other shareholders jointly for the transfer of their shares to the majority shareholder. The claim will be rejected if, notwithstanding compensation, one of the shareholders would suffer serious tangible loss by such a transfer. Further, such proceedings cannot be started if there are shares with special voting rights outstanding. The price offered for the shares in the proceedings is usually equal to the bid price (offered in a recently completed public bid).
A different squeeze out proceedings may be invoked when a shareholder holds 95% of the shares and voting rights in a public company as consequence of a public offer. In that case the price for the shares is set at the offer price (unless less than 90% of the shares were acquired through the offer). The shareholder must file such squeeze-out claim with the Enterprise Chamber within three months of the expiry of the term for acceptance of the public offer.
Alternatives squeeze-out mechanisms (ie, back-end restructurings) are normally also included in the merger protocol, such as a pre-wired asset sale, which entails that the bidder purchases all assets of the company shortly after declaring the public bid unconditional. The bidder in this scenario pays a part of the purchase price in cash and remains due for another part in the form of a loan that is equal to the stake of the bidder in the company. As a result of the asset sale, the target company will essentially become a "cash box" and all remaining shareholders will receive cash for their shares upon liquidation of the target company. An asset sale will only be permissible if certain conditions are met.
Bidder Transparency and Choices
For the bidder, it is important to ensure sufficient transparency about their intentions in this respect during the bid process and to have a business motive (typically integration) for the post-bid asset sale and liquidation of the target. Further, the target executive board and (independent) supervisory board members may only approve an asset sale after careful consideration, especially where minority shareholders' interests are concerned. Finally, the asset sale may not lead to a disproportionate disadvantage of minority shareholders and the price should be fair.
Also, a bidder may choose to squeeze out remaining shareholders via a triangular merger. Here, a bidder will establish an acquisition vehicle that concludes an agreement with the target company to enter into a statutory merger. As a result of the statutory merger, the target company ceases to exist and the assets of the target company are transferred to the acquiring company.
Under Dutch law, the shareholders of the target company may become shareholders of a group company of the acquisition vehicle. This will normally be a much larger company and will result in the remaining shareholders of the target company having an interest below 5% in this group company. As a consequence, the "regular" squeeze-out mechanism may then be exercised. Naturally, whether this latter mechanism works will be heavily dependent of the nature of the acquirer.
Within four weeks of the initial announcement of a bid, the bidder must confirm whether it will proceed with its bid and when the draft offer memorandum is expected to be filed with the AFM, before which they must have obtained and publicly confirmed the certainty and sufficiency of its funding for the bid. This "certainty of funds" requirement means that the bidder must have received sufficient financing commitments that are, in principle, only subject to conditions that can be reasonably fulfilled by the bidder (eg, credit committee approval should have been obtained). No term sheets, etc, need to be publicly filed.
These conditions may include that resolutions are adopted by the bidders' extraordinary meeting with regard to the funding or consideration offered (eg, the issue of shares). However, the financing of the bid may not be conditional upon the absence of a material adverse effect (for the benefit of a prospective financer), unless the same condition is applicable to the bid itself (for the benefit of the bidder). The bidder’s financial advisers assist with this "certainty of funds" announcement.
The bidder and the target company are free to agree on any deal security measures (as long as the target company's board deems it to be in the best interest of the company). The deal security measures that a bidder seeks normally concern the possibilities of a fiduciary out by the target board in light of intervening events. In Dutch practice, a bidder mainly seeks to limit the possibilities of a target company to respond to a superior bid.
Dutch deal protection mainly concerns the exclusivity obligation of the target company and that of the management and the supervisory board to continue to support and recommend the offer (ie, the limitation to examine and bind itself to a potential superior bid). Consequently, the conditions that constitute a superior bid are laid down, eg, the minimum price threshold for a competitive bid to be considered a superior bid (in practice the bid has to be between 7.5% to 10% higher), a matching right of the bidder and a break fee (typically around 1% of the transaction value).
In addition, other elements of the transaction may be classified as deal protection, such as support from major shareholders through irrevocable tendering commitments, whether information is provided to and due diligence is allowed by other potential bidders, whether a standstill agreement is concluded with the bidder and special agreements such as the provision of a convertible loan by the bidder or a top-up option.
All potential deal security measures must be assessed by the board of the target company in light of the interests of the company and its business.
It is quite common for major shareholders in Dutch listed companies to obtain further governance rights, eg, additional information rights and the right to nominate one or more members of the supervisory board. Such rights are typically structured through a relationship agreement between the shareholder and the company. A bidder who does not seek 100% ownership of the target may seek to obtain such governance rights.
Before announcing the bid, during negotiations with the target company, it is common for a bidder to also enter negotiations with the target company's principal shareholders. These negotiations often lead to irrevocable tender commitments from one or more of the target’s principal shareholders, requiring them to tender their shares if the bid is launched (and subject to its completion) and to vote in favour of the bid at the (Extraordinary) General Meeting.
The existence of such irrevocable commitments, as well as their main terms, must be disclosed in the offer memorandum. Typically, such commitments will contain an escape (out) for the committing shareholder in the event of a subsequent (financially) superior offer (usually subject to a minimum hurdle requiring the competing bid to be a minimum percentage higher to qualify as superior offer).
Irrevocable tendering commitments from shareholders are exempted from the mandatory bid rules.
With regard to the acquisition of public companies, a bidder intending to launch a full or partial bid for a public company will need to prepare an offer memorandum and submit it to the AFM for review and approval.
In a public M&A scenario, the process for acquiring/selling a business is generally regulated by statutory law once the bidder makes its (actual or deemed) initial announcement. In the period before the initial announcement, however, the timing depends on various circumstances, such as the duration of negotiations, the scope and duration of due diligence and whether the offer is friendly or hostile.
Within four weeks of the initial announcement, the bidder must either confirm that they will proceed with the bid or announce that they do not intend to make an offer. When confirmed, the draft offer memorandum must be filed for approval by the AFM within 12 weeks of the initial announcement.
When filed with the AFM, the draft offer memorandum will not yet be made publicly available. In practice, the review period will typically take at least three to four weeks before the AFM notifies the bidder of its decision. Once approved, the bidder must publish its offer memorandum within six working days, triggering the tender period of eight to ten weeks, which begins within three working days of publication.
After the expiry of the tender period, the bidder must either declare the bid unconditional or lapsed, or extend the tender period, within three working days.
The tender period may be extended once for a period of two to ten weeks. If the bidder declares the bid unconditional, they may, within three working days, invoke a two-week post-acceptance period to give non-tendering shareholders a last chance to tender their shares.
A supplier of telecom services may need to register to the Dutch Authority Consumers and Markets (ACM) in case of public electronic communication network services, public electronic communication services and ancillary services.
Other than antitrust scrutiny by the European Commission (EC) and the ACM and sector-specific supervision, the acquisition of privately owned companies is not a regulated activity in the Netherlands.
With regard to the acquisition of public companies, a bidder intending to launch a full or partial bid for a public company will need to prepare an offer memorandum and submit it to the AFM for review and approval.
Sector-specific supervision is conducted by:
Since 1 October 2020 the telecommunications sector is subject to a sector specific screening regime.
Furthermore, a bill regarding general FDI for national security is pending (but has not yet been enacted) called the Investment Screening Act (Wet Veiligheidstoets investeringen, fusies en overnames), which is expected to enter into force in 2022. The Investment Screening Act does not cover a specific industry but focuses on the screening of transactions regarding sensitive technologies and vital processes which are relevant for the Netherlands national security. If an obligation to notify is established, the intent to acquire control / significant influence must be notified with the Minister (Bureau of Investment Screening).
Any acquisition of a controlling interest in large power plants and LNG facilities requires a prior notification to the Minister of Economic Affairs and Climate Policy by the parties involved. The Minister may, on the grounds of considerations of public safety or security of supply, prohibit the change of control or attach conditions to such change of control.
Furthermore, the Dutch government adopted, on 19 May 2020, the Act Against Undesired Control in the Telecom Sector that protects important Dutch telecom companies against takeovers that risk Dutch national security or public order. Pursuant to this, the Minister of Economic Affairs and Climate Policy has the power to intervene by prohibiting (fully or under suspensive conditions) the acquisition of a controlling interest in a Dutch telecom company (eg, by holding 30% of the voting rights in that company or the power to appoint more than half of its board members), by ordering a shareholder to reduce their controlling interest in the telecom company to under 30%, or by prohibiting a shareholder from exercising its voting rights, amongst other means.
There are export control regulations in place for strategic and dual use goods.
Pursuant to the Dutch Competition Act, the ACM must be notified of a potential business combination if the following two (cumulative) thresholds are met:
Different thresholds apply for mergers in the healthcare and pension fund sectors. If the ACM is of the view that the combination will have a negative effect on competition, it must notify the merging businesses within four weeks that it does not consent to the business combination. In such cases, the merging businesses can then put forward proposed remedies to reduce the negative effect of the combination on competition. If the ACM does not approve those proposed remedies, the merging businesses must apply to the ACM for a permit.
EU Merger Control Regulations
According to the EU Merger Control Regulation, the EC is the competent regulator for (larger) business combinations that meet the following thresholds:
Alternatively, other thresholds that must be met are:
The personnel perspective in mergers and takeovers is regulated by the Works Councils Act, the Merger Code and, potentially, in a collective labour agreement (CLA), pursuant to which Works Council advice has to be sought respectively relevant trade unions should be consulted.
Works Council Advice
The prior advice of the Works Councils from both sides of the transaction must be requested timely and within a reasonable timeframe, to allow the Works Councils’ advice to be of meaningful influence on the intended transaction. If there is only a Works Council at a lower or higher level in the respective group, it may not be necessary to obtain any Works Council advice in relation to the transaction.
Works Council advice is typically requested shortly prior to signing the SPA, APA or Merger Agreement. The Works Council may not render its advice until there has been at least one consultative meeting on the subject. During this consultative meeting, a representative of the shareholder(s) must be present. There is no fixed period within which the Works Council must render its advice.
If the decision to enter into the transaction (the "Decision") deviates from the Works Council’s advice or no advice has been requested, any further execution of the transaction has to be put on hold for one month following notification of the Decision to the Works Council. During this period, the Works Council may appeal to the Enterprise Chamber of the Amsterdam Court of Appeal. Whereas parties to a transaction should be careful not to make any procedural mistakes under the Works Councils Act, one can take comfort from the fact that, on the substantive issue, the test is generally a marginal one; entrepreneurs making reasonable commercial judgements should not find themselves unduly blocked by a Works Council.
Labour Union Consultation
Labour union consultation pursuant to the Merger Code is with respect to timing and procedure broadly similar to the Works Council advice procedure. However, the rules of conduct set out in Merger Code are not mandatory, not even formal law, but a quasi-legislative code of conduct, the application of which is regarded as obligatory. Failure to comply is not sanctioned with penalties and as a principle no court proceedings apply.
Severe failure to comply could be sanctioned with naming and shaming. This would be different if the consultation with labour unions follows from a CLA. In that event, labour unions may enforce their consultation rights in court and could claim damages on top.
There are no currency control regulations in the Netherlands.
The Dutch Central Bank (DCB) or the European Central Bank (ECB) will generally be involved for M&A activity involving financial institutions (eg, banks and insurers). The DCB will generally be involved in M&A transactions involving corporate services providers (trust firms).
A public register of Ultimate Beneficial Owners (UBOs) was introduced on 27 September 2020. Pursuant thereto, all newly established legal entities must submit specific information of their UBO(s) for public registration with the Dutch Trade Register, and existing legal entities will be required to submit such information no later than 27 March 2022.
Furthermore, the Act on the confirmation of private restructuring plans (WHOA) came into force on 1 January 2021, which functions as a new global restructuring tool to support business continuity and recovery. With the WHOA a Dutch court can approve a private agreement between a company and its creditors and/or shareholders regarding the restructuring of debts. Court approval will make the scheme binding on all creditors and shareholders that are a party to the scheme. Creditors/shareholders that had not agreed to the scheme can also be bound to the scheme by the court, provided that the decision-making on and the content of the composition meets certain legal requirements.
Statutory waiting period
In an apparent response to the unsolicited takeover bids for Unilever and AkzoNobel, and following broader concern voiced by the representatives of some public company boards, a statutory waiting period of up to 250 calendar days was introduced on 1 May 2021 for listed Dutch companies that are facing either an unsolicited public bid or a shareholder request to make changes to their board composition or to the provisions in the articles of association relating to board composition. The waiting period can be invoked if in the opinion of the board such request or bid is substantially contrary to the interests of the company.
During this waiting period, the rights of all shareholders would be suspended to the extent that they relate to changes to board composition, unless the changes are proposed by the company itself. The intention is to create a period for target boards to duly assess and weigh the interests of the company and all of its stakeholders, and in particular to assess the possible consequences of actions demanded by shareholders (whether or not in the context of a bid) and to prepare an appropriate response to such actions.
The scope and duration of due diligence conducted by a bidder is very much dependent on the type of bidder (eg, strategic or private equity) and the level of detail that the target board is willing to provide. It is typically more limited than due diligence on a private transaction. In its assessment of the level of detail to provide, the board will be guided by what it deems to be in the best interest of the company and its business, while at all times taking into account the potential risk of an unsuccessful bid.
Given the substantial amount of information that the target company will have already made publicly available to comply with its disclosure obligations as a listed company, target company boards may be unwilling to provide more than a few days of due diligence. Elsewhere, in particular where material antitrust hurdles for the proposed combination need to be addressed, the target company's board may need to provide detailed information to allow the bidder to conduct detailed due diligence over a period of several months.
In the Netherlands, the General Data Protection Regulation (GDPR) applies. Concepts such as "data controller", "processor", "(special category) personal data", "processing" and "legal basis" play a crucial role in the application of the GDPR in relation to due diligence, since they determine the rights and obligations of the parties involved.
General Due Diligence
Due diligence in general requires the disclosure of personal data from the seller to the buyer. This may include, inter alia, personal data of employees, customer data/lists and e-mail exchanges between employees or the management. Disclosing, storing and accessing personal data are all acts of "processing", which means that a "legal basis" as mentioned in Article 6(1) GDPR is required for such processing activities. If any special categories of personal data, such as ethnicity or medical data, is being processed, an exception as mentioned in Article (9)(2) GDPR should also apply. However, processing special categories of personal data in relation to a due diligence should be avoided, as disclosing such personal data will most likely not be necessary and also imposes more (security) risks due to the sensitive nature of the personal data.
Seven principles of the GDPR
The processing of personal data should always adhere to the seven ‘principles’ of the GDPR, which are:
In regard to due diligence, this would mean that the seller should, among others, only disclose personal data to the (potential) buyer(s) that is inherently necessary for the purpose of carrying out a due diligence. Also, parties should assess whether disclosing aggregated or anonymised data is also possible. If this is the case, sharing aggregated or anonymised data would be preferable, as such data is not "personal data" and falls therefore outside the scope of the GDPR.
Buyers located outside the EU
If personal data will be disclosed with a potential buyer that is located outside the EU, this will be deemed an international transfer of personal data. In such case, special (contractual) safeguards should be taken in order to ensure the protection of personal data and privacy. One of these safeguards that can be used according to GDPR are the "model contract clauses" – also known as standard contractual clauses (SCCs) – that have been "pre-approved" by the European Commission. In addition, due to the judgment of the European Court of Justice in the Schrems II-case on July 16, 2020 and based on the finalised "Recommendations 01/2020 on supplementary measures to ensure compliance with data protection laws when transferring personal data from Europe" of the European Data Protection Board, a transfer impact assessment must also be carried out.
The bidder and the target company are required to announce a public bid, in any case, no later than the time that (conditional or unconditional) agreement has been reached on the bid. This is typically when the bidder and the target sign a "merger protocol", containing the terms and conditions of the bid. In the announcement, the parties must disclose the names of the bidder and the target company and, to the extent applicable, the contemplated price or exchange ratio and any conditions agreed at that time for launching the bid or for declaring the bid unconditional.
In practice, friendly public bids are announced once the bidder and target company have reached agreement on the bid.
The bidder and target company may be required to make disclosures at an earlier than anticipated stage as a result of leaked bid information, if the information qualifies as inside information (within the meaning of the EU Market Abuse Regulation).
A person acquiring a (30%) "controlling" interest in the target company who has not lost their controlling interest during the subsequent 30-day grace period is required to announce the mandatory bid no later than the moment this grace period expires.
If the Enterprise Chamber orders the announcement of a mandatory bid, but the person required to make the bid does not do so, the mandatory bid is deemed to have been announced at the moment the Enterprise Chamber's order becomes irrevocable.
A mandatory bid is also deemed to have been announced if such a bid is required by the rules of another EU member state, and the target company has made a public announcement in this regard in accordance with the EU Market Abuse Regulation.
If the bid consideration (partly) consists of transferable securities, the bidder is required to make available either a prospectus (approved by the AFM or the competent regulatory authority of another EEA member state), or a document containing equivalent information. The prospectus or equivalent document must contain all information necessary for a reasonably informed and careful person to make an informed assessment of the bid.
Bidders are required to include information regarding the target company's financial position in their offer memorandum, prospectus or equivalent document.
The disclosure must include, among other things:
Consolidated financial statements must be prepared in accordance with IFRS.
The approved offer memorandum must be disclosed in full, whereas only the main terms of the merger protocol have to be made public.
The bidder and the target company are generally allowed not to disclose information in case such disclosure would be detrimental to their vital interests, for instance in the event of business secrets or information that is heavily competition-sensitive.
However, when requesting the advice of the Works Councils, the parties will have to provide the Works Council with all information that the Works Council deems necessary to perform its duties. This could mean that the Works Council will have to be provided with transaction documents (or for example a summary thereof). The request for information from the Works Council can be rejected for justified reasons.
Most (large) companies in the Netherlands have a two-tier board system (although the possibility of a one-tier board is laid down by law) consisting of the management board, which manages the company, and the supervisory board, which supervises the actions of the management board. Each director is responsible towards the company for the proper performance of their duties and for the general course of affairs, which includes the day-to-day management, exclusively determining the strategy and outlining, preparing, adopting and executing the policy. The directors therefore have the freedom to structure the governance of a target company and have the possibility of taking protective measures.
In fulfilling their tasks, directors must be guided by the interests of the company and its business, with due regard to the requirements of reasonableness and fairness. These corporate interests are not only given substance by the interests of shareholders; directors owe their duties to all stakeholders, including but not limited to employees, customers, creditors and suppliers.
Directors have an autonomous role in this regard and do not have the duty to behave according to instructions given by the general meeting. Accordingly, shareholder value is relevant but clearly not the only measure driving board decision-making in connection with a business combination. Finally, when assessing a business combination, boards of listed companies have the obligation to create long-term value (when complying with the Corporate Governance Code).
The management board of private (and smaller) companies have similar duties. Dutch law, however, provides for more flexibility to structure the governance of a private limited company, eg, more power can be given to the general meeting by obliging the board of directors to comply with its directions, unless it is contrary to the interest of the company and its business.
It has become more and more common for the board of directors to establish special or ad hoc committees in the context of a business combination. An internal organisation must be established so that the process with regard to the business combination is as effective as possible. Therefore, a transaction or negotiation team or steering group is typically established. The team often forms separate sub-teams for different work streams, such as financial/valuation, due diligence, transaction documentation, disclosures, PR, strategy, integration and synergy.
A special committee of independent non-executives will usually closely monitor and supervise the process. In recent years, establishing an executive committee has become a trend. It consists of the directors and the higher management and often plays an important role in establishing the strategy, managing the company on a day-to-day basis and assessing potential business combinations.
A director with a conflict of interest may not participate in the deliberation and adoption of resolutions and other directors will need to adopt the resolution. The conflicted director is, in practice, excluded from any meeting on the matter concerned. If there are several conflicted directors and no management resolution can be adopted, the resolution will be adopted by the supervisory board, or, if there is no supervisory board, by the general meeting, unless the articles provide otherwise.
The management board has substantial freedom to develop the company's strategy and, when deemed appropriate given the circumstances of a takeover scenario, may take action against hostile bidders. The management board may decide to withhold its support of the offer and take substantial measures to delay or discourage the takeover.
Defensive measures must be proportionate, adequate and allowing the management board to enter into discussions with the bidder, while maintaining the status quo. The defensive measures should be in the company's corporate (long-term) interest, which involves taking into account not only the interests of its shareholders but also of other stakeholders.
The Dutch Supreme Court has held that the interests of "serious" potential bidders, both friendly and hostile, should be taken into account by the management board. Fully valued bids that address broad stakeholder interests will typically be successful as such an offer would be in the best interest of the company's stakeholders. The management board's support is a major influence on the success of an acquisition, but will not necessarily prevent a takeover scenario.
In a business combination, companies usually have assistance from investment banks and lawyers, but sometimes also from consultants and other experts who can advise about the proposed transaction. As part of a due process, the board of directors and supervisory directors further receive fairness opinions from financial advisers about the reasonableness of the transaction price. Seeking advice does not affect the responsibility of the (supervisory) directors, but can be a mitigating circumstance in assessing their conduct later on in court.
While all sectors of the M&A market are experiencing significant amounts of activity, the TMT sector, and in particular the technology sector, continues to lead the charge, with deal volumes at record levels. By some estimates, the TMT sector now accounts for almost 25% of all global M&A activity and, looking at the penetration of technology across all sectors, the apocryphal "all deals are now tech deals" certainly has an increasing ring of truth.
Much of this activity is driven by the fundamentals which have sustained M&A across all sectors for some time – low interest rates, cash rich balance sheets, the boundless appetite of private equity and the ever-tightening squeeze on organic growth – but the technology sector is distinctive in the number of additional deal drivers which power the sector. Whether that's the need for traditional businesses to pursue digital strategies, the rapid pace of technology innovation in areas such as AI, biometrics and robotics, the increasing awareness of the importance of harnessing technology to meet ESG (environmental, social and governance) challenges, the need to strengthen cybersecurity defences, increasing consumer acceptance of novel applications into daily life, or the huge additional capacity demands necessitating more data centres and other infrastructure, at every turn the forces of business and societal change are pushing towards more technology M&A.
And the other unique aspect of M&A in the technology sector is that to a large extent all of these factors apply in a remarkably similar way across all of the world’s developed economies. Taken together with the ease with which new technologies can be adopted and applied across national boundaries, this means that technology M&A deals, and the trends which are influencing and shaping technology M&A, are more international in nature than any other sector.
In the first three quarters of 2021, deal volumes in the Benelux saw a double-digit growth. In 2020, 527 deals were recorded in the first three quarters. In the same period in 2021, 730 transactions were recorded, an increase of 39%. Aggregate deal value slightly increased by 7% to EUR47 billion, as opposed to EUR44 billion in 2020. TMT, and in particular technology, was again one of the most active sectors. Large transactions include the EUR5.1 billion divestment by Deutsche Telekom and Tele2 of their Dutch activities to Apax Partners and Warburg Pincus and the EUR600 million investment in online-only supermarket Picnic by a consortium led by the Bill and Melinda Gates Foundation. Another notable transaction is Siemens Mobility’s acquisition of Sqills, a leading rail software provider for EUR550 million.
The technology M&A outlook for the Netherlands is promising. The thriving Dutch technology ecosystem combined with companies having to build new capabilities and reshape their business, will continue to fuel M&A in the Dutch technology sector.
The transition to a low-carbon economy will likely result in substantial changes to the way companies do business, from the goods and services they offer, to the way in which they interact with their employees, customers, investors and shareholders. The impact of climate change is expected to affect every facet of the economy.
Climate change is driving an innovation revolution in many sectors. The focus is on reducing emissions and mitigating environmental impact. All sorts of companies, including start-ups and established corporates, are working towards achieving a better future by shifting to more sustainable business models.
The Netherlands is home to a large number of climate tech companies. This trend is reinforced by incubators and accelerators, such as Climate-KIC, Dutch CleanTech Challenge, Rockstart and Yes!Delft incubator, that are helping companies to test the viability of their ideas and to create investor appetite.
The Dutch climate tech ecosystem being attractive resulted in investments in Dutch climate tech start-ups significantly increasing. The Netherlands now ranks 8th globally for climate tech investment since the Paris Agreement in 2016. Amsterdam’s climate tech ecosystem is the fifth largest in Europe.
Amsterdam is becoming a climate tech hub, ranking fifth in Europe for the number of climate tech start-ups created since the Paris Agreement. Since 2016, 167 new climate tech businesses were set up in Amsterdam.
The Netherlands attracted over EUR1 billion in climate tech investments since 2016. In 2021, Dutch climate tech companies raised over EUR600 million from investors, five times as much as in 2019, before the COVID-19 pandemic.
ESG is not just about regulatory issues. It is a board-level strategic issue. Failure to take appropriate steps could leave an organisation exposed to material business risks, particularly as key stakeholders are now requiring change within companies. ESG is thus transforming from check-the-box compliance to a source of value creation. This is reinforced by a growing group of people wanting to work for companies that are sustainable, purpose-driven, diverse, and inclusive.
Furthermore, investors start to focus more and more on ESG risks and opportunities for companies they may want to acquire. A recent survey showed that almost 80% of investors said that ESG is a key factor in their investment making process. Around 50% would consider divesting a company that failed to take action on ESG.
ESG has become an important element of M&A transactions. The key objective is to ensure full visibility of ESG risk areas, evaluate these and assess the impact they should have if any on the transaction structure, terms and pricing. It is true that some existing standard provisions will by their nature cover ESG but they need to go further to ensure that the modelling, structure and documents are ESG fit for purpose and, so far as possible, ESG future proofed.
In addition, ESG has the potential to create value enhancement which may not have been captured at the time of the transaction. Corporate transactional models need to be capable of identifying this and capturing it for future value enhancement. This is a huge opportunity and one which must not be missed.
Finally, whilst the environmental aspect of ESG was put into the spotlight due to the increased emphasis placed on climate change in recent years, the COVID-19 pandemic has seen an increased focus on the "social" element, eg, how companies have supported their employees and wider society through the crisis. There is significant pressure on governments and regulators – and thus on companies – to focus on a green COVID-19 pandemic.
Software is a key driver of activity in Dutch tech M&A. The recent acceleration of digital transformation due to the COVID-19 pandemic, increasing the need for digital solutions for work, socialisation and commerce, is an important driver. It is also fuelled by the increased use of software as a service (SaaS) solutions by small and medium size companies and the change to cloud-based infrastructure and applications.
The Netherlands is perceived as an excellent home for SaaS companies as it has a well-developed infrastructure and human capital. Furthermore, the Netherlands has a unique position as European cloud hub for major international technology companies (including Microsoft and Google).
The investments in SaaS start-ups and scaleups in the first three quarters of 2021 were over EUR2.5 billion. Since companies will have to accelerate their digitization roadmap via M&A to improve efficiency and flexibility, it is expected that investments in software companies will continue to grow in the coming years.
National security screening
The global trend of countries becoming increasingly protective of their national security and strategic economic interests has become even more prominent and pressing with the COVID-19 pandemic and the fear of governments for "corona bargain hunters" eyeing their "national treasures" or distressed target companies.
More and more countries are implementing a system of foreign direct investment (FDI) screening as a matter of national security. The Netherlands recently introduced two FDI-mechanisms, applying to both Dutch and foreign investors.
Since 1 October 2020, investments in the Dutch telecommunications sector have been subject to a sector specific screening regime. Under this regime, the Dutch government can intervene by prohibiting the acquisition of a controlling interest in a Dutch telecom company. The regime does not only capture traditional telecom companies, but also, for example, datacentre providers. A controlling interest is deemed to exist if an investor obtains or has actual control over a telecommunications party. This includes holding 30% of the voting rights or the power to appoint or dismiss more than 50% of management. Failure to report may trigger an obligation to reverse the investment and an administrative fine of EUR900,000 may be imposed.
Furthermore, a legislative proposal introducing a general investment screening on grounds of national security (Investment Screening Act) is pending. This regime is expected to enter into force in 2022. The Investment Screening Act does not cover a specific industry but focuses on the screening of transactions regarding sensitive technologies and vital processes which are relevant for the Netherlands national security.
The proposal defines vital providers in certain sectors, including heat transport, nuclear power, air transport, the port area, banking, financial market infrastructure, extractable energy and gas storage. Sensitive technologies include military and dual use products. Additional categories may be identified by the Dutch government by separate order.
Investments in companies active in vital processes or sensitive technologies are caught when they lead to a change of control within the meaning of Dutch and EU competition law. With respect to companies in the field of sensitive technologies, investments leading to significant influence are also caught. This means that the acquisition of a minority shareholding of 10% or the right to appoint one board member may already trigger a notification obligation.
The proposal has retroactive effect. In-scope investments which took place as of 8 September 2020 could be reviewed ex-post by Dutch government and could be subjected to remedies or under extreme circumstances could even be blocked. It is therefore important for every new investment in the Netherlands to assess whether it may fall within scope of the proposal.