I OVERVIEW OF M&A ACTIVITY
The Netherlands again saw a strong year of M&A activity, with a total increase in transactions of 11.4 per cent as compared to 2017, resulting in the highest amount of transactions in 11 years.2
Most M&A transactions in 2018 were conducted within the service industries branch, but the educational, healthcare and trading sectors also significantly contributed to M&A activity. M&A activity was also high in the technology sector, in which Dutch companies continue to attract the interest of international companies. For the most part, larger corporates acquire tech startups and invest in innovative companies to speed up technological development and keep up with market demands.
The popularity of the use of warranty and indemnity insurance continued steadily in 2018. Notable regarding this years' M&A activity is that it was very much a seller's market in the Netherlands, with a large amount of transactions conducted as auctions.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
Dutch transactions are generally structured as a transfer of the shares or (specific) assets of a company or by way of a legal merger. The main principles governing the legal framework of these transactions are set out in the Dutch Civil Code.
Parties are free to enter into contracts and to negotiate the terms of contracts. According to case law dating back to 1981, not only the wording of the agreement should be considered for interpretation thereof, but also the intentions of the parties and what they can reasonably expect from each other. This means that contractual clauses are to be interpreted in line with the meaning that the parties under the given circumstances could reasonably attribute to them and that they could reasonably expect from each other.3
Over time and because of foreign involvement, contracts have become more extensive and more Anglo-American. An example of this is the use of the entire agreement clause, which is now standard practise in transactions, although case law indicates that the use of an entire agreement clause does not simply preclude the significance of the parties' statements or conduct before the entry into an agreement. Under Dutch law, the actual meaning of the clause still depends on the specific circumstances of a case. 4 Recent case law does indicate that depending on the circumstances, a linguistic interpretation could become increasingly important, for example if it concerns a commercial agreement entered into by professional parties, if the agreement was extensively negotiated, or if the parties were assisted by legal advisers or lawyers.5
Under Dutch corporate law, the stakeholder model is predominant. This model entails the board of a company having a duty to act in the best interests of a company and all the stakeholders involved, thereby focusing on creating long-term value. The Enterprise Chamber, a specialised division within the Amsterdam Court of Appeal, is the court of first instance in disputes involving mismanagement and similar corporate issues, and the appellate court in certain corporate litigation disputes. The Enterprise Chamber is often addressed by foreign shareholders to challenge the parameters of the Dutch stakeholder model, for instance in a recent case in which shareholder Elliott wanted to intervene in the strategy of AkzoNobel in order to enter into negotiations with PPG Industries for the acquisition of AkzoNobel.
i Negotiations and pre-contractual good faith
In the pre-contractual phase, parties are obligated to behave in accordance with the requirements of reasonableness and fairness and, in doing so, they must also have their behaviour determined by the legitimate interests of the other parties. Although in theory all parties are free to break off negotiations, it can be unacceptable to do so because one party may be justified in its expectation that an agreement will be concluded, or because of other circumstances. In that event, that party could be entitled to compensation, or could request an injunction requiring the other party to continue negotiations. The justified interests of the party that breaks off negotiations, the manner in and the extent to which that party has contributed to the other party's expectation, and whether any unforeseen circumstances have occurred in the course of the negotiations, among other things, should be taken into account.6
ii Anti-takeover structures
In the event that a shareholder requests an agenda item that may lead to a change in a company's strategy (such as a takeover), the management board can invoke, pursuant to the Corporate Governance Code, a response time of a maximum of 180 days for further deliberation and constructive consultation. Furthermore, it is possible to place preference shares at a different entity, such as a foundation that is serving the interests of the company and its stakeholders. By granting this entity a call option that can be exercised during an imminent takeover, the equity interest that a hostile party accrues will dilute. Consequently, this entity is able to ensure that the company will continue to focus on creating long-term value. The issuance of priority shares with specific (voting) rights or depositary receipts instead of shares is also a possibility. In the latter case, the votes on the shares will stay with a foundation that is friendly to the board of the company.
Before effecting a transaction in the Netherlands, the works councils of the parties involved may have to be notified and consulted under the Works Council Act and a notification may have to be sent to the Social and Economic Council of the Netherlands (SER) Merger Code Committee and the trade unions in question under the SER Merger Code 2015. Obtaining clearance from the Netherlands Authority for Consumers and Markets and the European Commission regarding possible competition concerns may also be required. Furthermore, sector-specific notifications may be necessary, such as to the Dutch Central Bank.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND
i Ultimate beneficial ownership register
A legislative proposal introducing the ultimate beneficial ownership register (UBO Register) in the Netherlands was submitted to the House of Representatives on 3 April 2019. The proposal is an implementation of the (amended) Fourth Anti-Money Laundering Directive,7 which seeks to prevent the use of financial systems for money laundering or terrorist financing by means of, among other things, introducing an UBO Register. The UBO Register will be part of the Dutch Trade Register, and as such it will be administered by the Chamber of Commerce. Part of the information included in the rRgister will be publicly accessible, but provisions have been made to ensure the privacy of UBOs. The UBO Register must be set up at the latest by 10 January 2020.
ii Act on management and supervision of legal entities
A legislative proposal for the management and supervision of legal entities was submitted to the House of Representatives on 13 June 2016. The aim of the proposal is to achieve greater uniformity among the various Dutch legal entities (i.e., private limited liability companies (BVs) and public limited liability companies (NVs), foundations, associations, cooperatives and mutual insurance associations). This uniformity mainly concerns the applicable board models – so both the one-tier board model and the two-tier board model – rules regarding conflicts of interests of board members, and rules regarding the duties and responsibilities of board members. Two memoranda of amendment were submitted on 8 November 2018 and 15 February 2019, respectively. Originally, the legislative proposal included uniform rules applicable to all legal entities in the general part of Book 2 of the Civil Code. This approach has now been abandoned. In the amended legislative proposal, the provisions are repeated for each legal entity, taking into account the differences between them. In addition, some changes with regard to content have been made. One example is the restriction with regard to multiple-vote rights of management board or supervisory board members. This restriction has been removed from the proposal (since the restriction was already applicable to BVs and NVs, the removal only concerns the other forms of legal entities).
iii Corporate Governance Code 2016
The Corporate Governance Code 2016 entered into effect on 1 January 2017, replacing the first Corporate Governance Code of 2008. The Code of 2016, applicable to Dutch listed companies and also to non-listed companies if they opt for its application, is based on the principle of comply or explain. Directors must report on compliance with this principle in the annual accounts. The most important difference from the Code of 2008 is that long-term value creation is now a central aspect of the Code. The management board has to develop a strategy relating to the creation of long-term value, taking into account, among other things, the interests of all stakeholders. The supervisory board has to monitor the management board in this. In addition, the management board is required to create a culture within the organisation that is focused on long-term value creation, under supervision of the supervisory board. As with the Code of 2008, the Corporate Governance Monitoring Committee will report annually on compliance with the Code.
iv Proposed regulation on hostile bids and takeover activities
Discussion about whether Dutch listed companies are sufficiently protected against hostile bids and takeover activities led to a draft legislative proposal, which was published on 7 December 2018 for consultation until 9 February 2019. The proposal indicates that setting up the policy and strategy of a company is the authority of the management board. In addition, under the proposal the management board has a cooling-off period of up to 250 days if a shareholder proposes the dismissal, appointment or suspension of a member of the management of the supervisory board, or if a non-approved offer on the shares has been announced or made. In the opinion of the management board, these acts must be contrary to the interests of the company. Shareholders may request an early termination of the cooling-off period of the Enterprise Chamber.
In addition, on 5 March 2019 a legislative proposal on telecommunications parties was submitted to the House of Representatives as a reaction to the attempted takeover of KPN by América Móvil in 2013. The proposal gives the Minister of Economic Affairs and Climate the authority to prohibit the acquisition or exercise of predominant control over parties in the Dutch telecom sector if this would lead to a threat with regard to national security or public order.
v Directive on long-term and transparent engagement by shareholders
Directive (EU) 2017/828 (amending Directive 2007/36/EC) regarding the encouragement of long-term and transparent engagement by shareholders of listed companies had to be converted into national law by the Member States by 10 June 2019. The Directive contains requirements relating to the remuneration of directors, the identification of shareholders, the facilitation of shareholders' rights, the transmission of information, transparency for institutional investors, asset managers and proxy advisers, and related party transactions.
The legislative proposal implementing the Directive was submitted to the House of Representatives on 18 October 2018 and adopted on 2 April 2019. Some provisions with regard to the remuneration of board members also apply to non-listed NVs.
vi Act on the protection of trade secrets
On 23 October 2018, the Dutch Trade Secrets Act, implementing Directive (EU) 2016/943, entered into force. The Act contains provisions to enforce trade secrets and remedies against infringing goods. Under the Act, the court has the authority to award full (reasonable and proportionate) costs to the winning party (similar to intellectual property cases).
vii Regulation on screening of foreign direct investment
At the EU level, a protectionist attitude can be observed as well. On 10 April 2019, EU Regulation 2019/452 establishing the framework for the screening of foreign direct investment officially entered into force. The Regulation will fully apply to Member States from 11 October 2020. The new framework will, among other things, allow the EC to issue opinions if an investment poses a threat to the security or public order of more than 1 one Member State or if it could undermine a project or programme of interest to the EU.
viii Directive on cross-border conversions, mergers and divisions
On 31 January 2019, the EU ambassadors reached an agreement on the Council's position on the draft directive with regard to cross-border conversions, mergers and divisions. The directive will allow companies to benefit from the EU single market. Extensive procedures are introduced for cross-border conversions and divisions, and additional rules for cross-border mergers of capital companies established in different Member States. The directive contains, among other things, procedures that ensure that cross-border transactions are consistent with all relevant national legal systems and that employees and shareholders are properly informed of the effect of transactions. The presidency of the Council will now start negotiations with the European Parliament with the aim of adopting the draft directive.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Although foreign involvement has been present in the Dutch M&A market for a long time, there seems to have been a decrease in the proportion of cross-border deals. This trend cannot be explained by inbound M&A activity (which only decreased slightly). During 2018, there were numerous (both successful and unsuccessful) efforts by foreign companies to take over Dutch businesses. One striking example was the acquisition of the chemical branch of AkzoNobel for €10.1 billion by the American investment company Carlyle and the Singaporean investment company GIC, which generated the highest deal value on the Dutch M&A market in 2018. Carlyle and GIC won a bidding battle against three other parties, including the Dutch company HAL Investments.
Another public bid that has stirred feelings since 2016 is Qualcomm Inc's bid for Dutch chip manufacturer NXP Semiconductors NV. In March 2018, Qualcomm announced it was extending the period of its cash tender offer made pursuant to the purchase agreement of October 2016. However, the deal collapsed after the non-extendable deadline passed for obtaining Chinese regulatory approval.
Other examples include the acquisition of Dutch stroller company Bugaboo by global investment firm Bain Capital Private Equity and Dutch theater company Stage Entertainment by the US media company Advance Publications Inc (both for undisclosed sums).
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
In 2018, M&A activity in the Dutch IT branch continued to grow, attracting the interest of both foreign companies with strategic motives and private equity parties. One notable transaction was the acquisition of the Dutch software company Mendix by Siemens for US$730 million. Mendix is in a position to help Siemens, primarily known for its industrial manufacturing and therefore not a self-evident takeover partym with the digital transformation of the company. It is expected that non-traditional strategic parties will play an increasingly important role in M&A activity in this branch.
In addition, 2018 was a good year for takeovers of Dutch startups. Besides the acquisition of Mendix, notable examples are the acquisition of the Dutch cybersecurity company Security Matters by the Israeli cybersecurity company Forescout Technologies for an amount of US$113 million, and the acquisition of the Dutch gaming server hosting provider i3D.net by French gaming company Ubisoft for an undisclosed amount.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Cash has remained the preferred means of funding M&A deals. Private equity and venture capital funding are runners-up as sources of funding for most transactions. Bank loans are also attractive in view of the low interest rates. A relatively new form of funding is the initial coin offerings,whereby startups using blockchain technology raise capital through coin offerings. The Dutch regulatory authorities are watching these developments closely, as they may trigger money laundering and fraud.
VII EMPLOYMENT LAW
i The Work and Security Act
With the introduction of the Work and Security Act in July 2015, employment law has been amended substantially. The Act regulates most aspects, such as entering into an employment agreement, employment conditions and the termination of employment agreements.
Under the Act, an employer can only terminate an employment contract on a limited number of grounds. In the event of the long-term illness of an employee or if an employer can demonstrate sufficient economic reasons, the Employee Insurance Agency will grant permission for an employer to terminate a contract. If the grounds are more personal (such as inadequate performance or a damaged working relationship), permission to terminate an employment agreement must be obtained from the courts. In all cases (except for a serious imputable act by the employee and summary dismissal), an employee who has been employed for 24 months or longer is entitled to a statutory severance payment (transition fee).
ii The Balanced Labour Market Act
Changes in employment law are forthcoming. The Balanced Labour Market Act will enter into force on 1 January 2020. The Act contains amendments to Dutch employment law with the objective of narrowing the gap between employees with a permanent employment agreement and flexible workers. Some of the most important changes are the following:
- A new ground for dismissal will be introduced in addition to the existing limited grounds for dismissal: the cumulation ground. This ground offers employers the option to combine several incomplete grounds for dismissal into one successful ground. In the case of a cumulation of grounds, the court may award an employee an extra fee to a maximum of half the statutory transition fee on top of the transition fee (and fair compensation, if any).
- Under the Balanced Labour Market Act, employees will be entitled to a transition fee from the first day of their employment agreement (including the probationary period). Currently only an employee who has been employed for more than 24 months is entitled to the statutory transition fee. The way of calculation will also change. For the first 10 years, the statutory transition fee amounts to one-third of a monthly salary. Further, the temporary measures with regard to the transition fees, lower payments for small employers and extended accrual for older employers will lapse.
- The sequence system for successive fixed-term employment contracts will be extended to three years. An employment contract will be deemed permanent in the event of a fourth consecutive contract or if the duration of employment exceeds three years. It will be possible to deviate from this rule through collective labour agreements if the work requires this (for instance, in the case of temporary work).
- Payroll workers will be entitled to the same terms and conditions of employment as employees employed by the hirer, as well as an adequate pension scheme.
iii Pre-packaged insolvencies and transfers of undertaking
In 2017, the European Court of Justice (ECJ) ruled that pre-packaged insolvencies (pre-packs) are not excluded from Directive 2001/23 on the transfer of undertakings (Directive). Based on the Directive – and the implementation thereof in the Civil Code – the employees of a transferring undertaking remain entitled to their employment and all rights and obligations from that employment. In this event, the acquiring undertaking must also take over these employees.
If an undertaking is declared bankrupt, its employees are not protected by the Directive or the Civil Code. A pre-pack is a transfer of the assets prepared before the declaration of bankruptcy with the consent of a prospective insolvency administrator, appointed by the court, and is put into effect by that administrator immediately after the declaration of bankruptcy.
The ECJ has ruled that the Dutch pre-pack procedure does not qualify as bankruptcy proceedings within the meaning of the Directive because its purpose is for the continuation of a company, not its liquidation. Therefore, it is not justified that employees lose the protection of the Directive. The consequence is that all employees will automatically transfer to the acquiring company while retaining the employment conditions of the bankrupt company. To clarify and strengthen the position of these employees after a transfer, the government has proposed measures that are detailed in the Transfer of Undertaking in cases of Bankruptcy Bill. In principle, all employees of a undertaking will transfer to a new undertaking, and they will remain entitled to their employment and all rights and obligations from that employment. Only if jobs become redundant because of sufficient economic reasons will an employee not be obliged to take over employees. The Bill was presented for consultation on the internet on 29 May 2019.
iv Self-employed workers
The government is working on a replacement for the Assessment of Employment Relationships (Deregulation) Act to clarify the position of self-employed workers. It is often the subject of dispute whether a self-employed person is in fact employed by a contracting party.
In the Coalition Agreement 2017–2021, the coalition proposes an alternative to the model agreements that the Dutch Tax Authority is currently approving. The use of these approved models reduces the risk of meeting the requirements of an employment relationship with all its obligations (such as taxes, but also protection under Dutch dismissal law). The proposed alternative contains, for example, a minimum rate for independent contractors and the introduction of a declaration of commissioning. Those elements contribute to security and clarity for independent contractors about their position. With its vote in favour of the Balanced Labour Market Act, the Senate also voted in favour of the motion. The main reason for this motion is the fear that employers will start to use temporary workers and self-employed persons in stead of payroll employees as soon as the Balanced Labour Market Act enters into force. It is not clear yet if a minimum rate will be introduced or if other measures will be taken. The government has announced that new legislation will be in place as per 1 January 2021, so more clarity is expected during the course of 2020.
v Legislative proposal aiming to increase awareness of equal pay for women
On 7 March 2019, the legislative proposal aiming to increase awareness of equal pay for women was submitted to the House of Representatives. This proposal aims to increase awareness of equal pay for women and strengthen the control thereof. The proposal aims to ensure that:
- companies that are required by the Civil Code to publish an annual report are obliged to include figures on the remuneration ratio between men and women, and an explanation for the possible difference in pay between men and women and of the policy they are pursuing to promote equal pay;
- companies that have at least 50 employees are required to apply for a certificate that states they have equal pay for men and women. The certificate is valid for a period of three years. Smaller companies can apply for this certificate on a voluntary basis;
- there will be a public register to check which companies received a certificate and which requests have been declined or withdrawn;
- companies without a certificate are deemed to be paying unequal remuneration for man and women. Employers will be obliged to prove this is not the case;
- every employee has the right to file a complaint with the Netherlands Institute of Human Rights about unequal pay; and
- the Inspectorate SZW will be charged with the supervision of equal payand is authorised to impose fines of up to a maximum of €83,000.
It is unclear whether the proposal will be adopted (in this form). Some employer organisations have already criticised this proposal. If the proposal is adopted, there will be a two-year transition period.
VIII TAX LAW
i OECD Base Erosion Profit Shifting
The public debate on corporate tax planning continued, and on 7 June 2017, the Multilateral Instrument (MLI) proposed following the OECD's Base Erosion Profit Shifting (BEPS) Action 15 was signed by more than 70 countries, including the Netherlands. Pursuant to the MLI, BEPS Actions – such as agreed minimum standards to counter treaty abuse –- can be implemented in bilateral tax treaties without countries having to renegotiate and amend all such treaties. One of the measures of the MLI is the introduction of a principle purpose test (PPT), pursuant to which a treaty benefit may be denied if obtaining that treaty benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting the benefit in the relevant circumstances would be in accordance with the object and purpose of the relevant treaty. Considering that the PPT is an agreed minimum standard against treaty shopping, and that all countries that signed the MLI have opted for at least the implementation of the PPT, it is likely that this anti-abuse rule will be implemented in many of the Netherlands' bilateral tax treaties. In abusive situations, it will then become much easier for the Netherlands to deny treaty benefits to foreign recipients of Dutch source income.
ii Dividend tax
A recent change in tax regulation has had an immediate effect on the structure of M&A transactions. The Act regarding the dividend withholding tax obligation for holding cooperatives and the expansion of the dividend withholding tax exemption came into effect on 1 January 2018. Under previous Dutch law, a cooperative was not subject to dividend withholding tax, unlike a BV and an NV. In light of the increasing importance of cooperatives in international structures (as a possible means for international tax evasion) and the state aid risk, a dividend withholding tax obligation for qualifying membership rights in holding cooperatives has been introduced. A holding cooperative is defined as a cooperative whose actual activity in the year preceding the distribution consisted primarily (i.e., for 70 per cent or more) of the holding of participations or the direct or indirect financing of affiliated entities or natural persons. A qualifying membership right of a holding cooperative is defined as a right that entitles the holder to at least 5 per cent of the annual profit or at least 5 per cent of what is paid out on liquidation. Furthermore, under the new Act, the dividend withholding tax exemption is extended from distributions made to qualifying BV and NV shareholders within the European Union and the European Economic Area (EEA) to distributions made to qualifying BV and NV shareholders and qualifying holding cooperative members located in the European Union, the EEA or in a country with which the Netherlands has concluded a treaty that contains a tax provision for the prevention of double taxation. The exemption is subject to an anti-abuse rule. Although the dividend withholding tax will be abolished altogether in 2020, the government expressly chose to introduce the Act because of the state aid risk and the fact that it can serve as a basis for new legislation.
iii Withholding tax on interest
Under the current law, the Netherlands does not levy a withholding tax on interest. However, the government recently announced plans to introduce a withholding tax on interest in abusive situations as from 1 January 2021 to avoid the Netherlands being used for payments to low tax jurisdictions through Dutch conduit entities. No details of this new withholding tax are yet known. In principle, a Dutch company engaged in financing activities will be taxed on the difference between the interest income and expenses (spread). For intragroup financing companies, there are minimum equity and substance requirements that should be reviewed and discussed in more detail.
IX COMPETITION LAW
On 26 October 2017, the General Court of the European Union annulled the EC's decision dated 10 October 2014 whereby it approved the merger between Dutch cable companies UPC and Ziggo (following the acquisition of Ziggo by Liberty Global, the US parent company of UPC) on the basis of a complaint by Dutch cable company KPN. On 30 May 2019, after reassessing the transaction, the EC, subject to certain conditions, has confirmed its earlier approval. The outcome of this case remains uncertain, as this decision has again been appealed against by KPN.
At the beginning of 2017, Liberty Global and Vodafone combined their Dutch businesses into the joint venture VodafoneZiggo. This merger was approved by the EC on 3 August 2016. KPN appealed against this approval as well. On 23 May 2019, the General Court rejected KPN's complaint and concluded that the EC was right in approving the merger. The EC's approval was subject to the condition that Vodafone would sell its fixed-telecom division in the Netherlands. In December 2016, both the EC and the Netherlands Authority for Consumers and Markets cleared the acquisition of this division by telecom provider T-Mobile Netherlands (for an undisclosed fee), paving the way for the joint venture.
In addition, on 27 November 2018 the EC gave unconditional clearance to the acquisition of Dutch telecom provider Tele2 Netherlands by its rival, T-Mobile Netherlands. The Netherlands Authority for Consumers and Markets supported this decision. In the opinion of the EC, the acquisition would not raise any competition concerns in the EEA or any substantial part of it.
We are cautiously optimistic with regard to Dutch M&A activity in 2019. On the one hand, funds are easily accessible due to a solid economy and low interest rates. On the other, growing protectionism and increasingly complex regulations call for caution. Businesses remain eager to do deals, whether these are transformational strategic deals, technology-driven transactions or initial public offerings. We expect technology to continue to be a key driver in Dutch M&A transactions during this year.
1 Meltem Koning-Gungormez is a partner and Hanne van 't Klooster is an associate at Kennedy Van der Laan.
3 Supreme Court 13 March 1981 (Haviltex).
4 Supreme Court 5 April 2013 (Lundiform/Mexx).
5 Supreme Court 29 June 2007 (Derksen/Homburg).
6 Supreme Court 12 augustus 2005 (CBB/JPO).
7 Directive (EU) 2015/849.