The International Capital Markets Review: Netherlands
i General overview
As the Netherlands is an EU Member State, Dutch capital markets law and regulation are heavily influenced by EU law. EU Directives are implemented in Dutch law, generally in time and without substantial deviation, while EU Regulations have direct effect in the Netherlands, including the Prospectus Regulation.2 Most of the EU Directives relevant to the capital markets (including the Capital Requirements Directive3 and the Transparency Directive)4 have been implemented in the Dutch Financial Supervision Act, which sets out the main licensing and other requirements for participants in the financial markets. Legislative acts, such as the Dutch Financial Supervision Act, are adopted by the Dutch parliament and often delegate the power to stipulate detailed rules to ministers of the government by way of decrees and regulations.
ii Regulatory authorities
The Dutch capital markets are supervised by the Dutch Authority for the Financial Markets (AFM), which focuses on supervision of the financial markets and its participants, and the Dutch Central Bank (DCB), which focuses on the prudential supervision of financial institutions, with certain (intervention) powers reserved to the Minister of Finance. Since the introduction of the EU Banking Union, certain large Dutch credit institutions are under the direct supervision of the European Central Bank regarding prudential matters, whereas other Dutch credit institutions remain under the direct supervision of the DCB (with the European Central Bank conducting indirect supervision through the DCB).
The supervisory authorities may conduct industry-wide or institution-specific investigations and may impose administrative sanctions, including administrative fines and the publication of findings and fines. The authorities may also refer (suspicions of) criminal offences or crimes to the public prosecution service, which may then conduct its own investigation and bring criminal charges through the criminal court system. Where areas of Dutch or EU capital markets law are not clear, the AFM in particular may issue guidance in the form of guidelines applicable to the market generally, or interpretations applicable to a given case. It will generally not provide the latter on a no-names basis.
Ultimately, the Dutch courts interpret and enforce Dutch capital markets law, which may overturn decisions of the supervisory authorities (which they do on occasion).
The Netherlands has a reputation for an independent, high-quality and generally efficient court system that operates on the basis of a pragmatic code of civil procedure. Litigation before the courts is based on the principle of party autonomy where, subject to certain exceptions, the jurisdiction of the courts is limited to the claims, arguments and defences submitted to the courts by the relevant parties. Judges play an active role in case management and fact finding. Court proceedings do not allow for US-style discovery, with the exception of a few, narrowly defined instances only.
Litigation is generally conducted before the courts of first instance, with the possibility of appeal as to both fact and law to the courts of appeal, and a further possibility to appeal – on the grounds of law, but not fact – to the Supreme Court of the Netherlands. Dutch courts may refer doubts about the correct interpretation or application of EU law to the EU courts or questions about the correct interpretation or application of Dutch law to the Supreme Court.
For the Dutch equity capital markets in particular, an important specialised court is the Enterprise Chamber of the Amsterdam Court of Appeals, which may, for example, conduct internal investigations in respect of Dutch companies at the initiative of certain shareholders holding a de minimis shareholding, for example in the context of takeover bids.
In recent years, the Netherlands has positioned itself as a hub for the resolution of international civil and commercial disputes, in the fields of both arbitration and litigation. The Netherlands Commercial Court (a division of the Amsterdam courts) was created on 1 January 2019, allowing court proceedings to be conducted in English before the Dutch courts in Amsterdam.
The year in review
There have been extensive social, legal and regulatory changes affecting capital market transactions and market participants during 2019 and 2020. Some of the most significant developments affecting the capital markets generally, the debt capital markets specifically and the equity capital markets in particular are described below. This overview concludes with legal and regulatory developments affecting financial institutions active in the capital markets.
i Legal developments affecting capital markets generally
In 2019 and 2020, the European and Dutch capital markets were affected by the entry into force of the Prospectus Regulation,5 the continuing effects of the Benchmarks Regulation and benchmarks reform and the economic and societal impact of covid-19 and Brexit.6
The Prospectus Regulation
The Prospectus Regulation was published in the Official Journal of the European Union on 30 June 2017, entering into force on 20 July 2017. All the provisions of the new Regulation have had effect since 21 July 2019, with certain provisions having taken effect at an earlier date.
Revisions to the exceptions to the obligation to publish a prospectus
Under the Prospectus Regulation, the obligation to publish a prospectus is still triggered when securities are offered to the public or admitted to trading on a regulated market situated or operating within an EEA Member State. However, certain exceptions to this obligation already existed under the Prospectus Directive, some of which have been expanded or restricted under the Prospectus Regulation.
As of 20 July 2017, the requirement to publish a prospectus does not apply to the admission to trading on a regulated market of securities fungible with securities already admitted to trading on the same regulated market, provided that the securities represent, over a period of 12 months, less than 20 per cent of the number of securities already admitted to trading on the same regulated market.7 (This exception is up from 10 per cent under the equivalent exception under the Prospectus Directive.) In addition, contrary to the equivalent exception under the Prospectus Directive, the exception under the Prospectus Regulation applies to all securities and not only to shares, meaning that tap issues for listed notes (that are not being offered to the public) may now benefit from the exception, provided that the issuer remains compliant with the aforementioned 20 per cent limit.
As of 20 July 2017, additional restrictions are imposed on the exception to the obligation to publish a prospectus for admission to trading on a regulated market in connection with shares resulting from the conversion or exchange of other securities or from the exercise of the rights conferred by other securities. Under the Prospectus Directive, this conversion exception was not subject to any sort of quantitative limit, whereas under the Prospectus Regulation, the exception only applies where the resulting shares represent, over a period of 12 months, less than 20 per cent of the number of shares of the same class already admitted to trading on the same regulated market (subject to certain exceptions, notably where a prospectus was published for the securities that had been converted, and where the conversion shares qualify as certain types of capital instruments under the Capital Requirements Regulation8 or the Solvency II Directive9).10
Small offers of securities
As of 21 July 2018, the Prospectus Regulation prescribes that the Prospectus Regulation shall not apply to an offer of securities to the public with a total consideration in the EEA of less than €1 million, which shall be calculated over a period of 12 months.11 In addition, the new Regulation provides for the option of allowing Member States, at their discretion, to exempt offers in the EEA of up to €8 million over a period of 12 months. The Dutch legislature has made use of this Member State option, setting the maximum amount at €5 million (up from €2.5 million), meaning that offers of securities to the public with a total consideration in the EEA of less than €5 million over the past 12 months does not require the publication of a prospectus under Dutch law. For the purposes of calculating the maximum amount, the offerings of the issuer and its affiliates shall be aggregated.
For offerors to make use of this exception, Dutch law prescribes that the offeror must notify the AFM of the offering prior to its commencement, and simultaneously provide the AFM with certain information regarding the issuer, the offeror and the offering, and an information document in the form prescribed by law.12 In addition, if the offer is not solely made to qualified investors, additional standard exemption disclosure language is required to be included in documents regarding the offering for offerors to make use of this exception.
Summaries and risk factors in prospectuses
With many issuers taking advantage of the transitional rules of the Prospectus Regulation, which allowed base prospectuses updated prior to 21 July 2019 to be effective for one year, 2020 was the first year in which a wave of prospectuses were brought in line with the new requirements of the Prospectus Regulation. The main changes to prospectuses were in relation to summaries and risk factors.
Under the Prospectus Regulation, it is no longer required for a base prospectus to include a programme-wide summary in the base prospectus itself (although requirements for issue specific summaries remain for retail offers).
The new rules of the Prospectus Regulation in relation to risk factors13 (as further developed by ESMA in its guidelines14) require issuers to be more specific in the description of the risks attached to their business and the securities issued by them (including a quantification of the risk where possible) and to group and sort (on the basis of materiality) these risk factors in their prospectuses. These new rules were introduced to make prospectuses more comprehensible and comparable and to combat what the regulator deemed to be 'disclaimer language', where risks were described broadly and in general terms in an effort to avoid (prospectus) liability if any adverse developments were to take place. Throughout the EEA, regulators have been strict in applying the new rules on risk factors. Although most programmes and prospectuses should now be up to date with the new rules, the disclosure of risks will remain high on the agenda of regulators in the immediate future and increased attention will continue to be given to the description of risks in prospectuses.
With the introduction of the Prospectus Regulation, the AFM no longer offers the option of same-day supplements (i.e., supplements to prospectuses that are approved on the same day as the filing of the documents). Same-day supplements were available for prospectuses approved under the Prospectus Directive, where the relevant supplement was solely prepared to disclose published press releases and published semi-annual or annual reports. In line with the increased attention to the contents of prospectuses, all supplements are now subject to a more demanding review process, although it is generally still possible to have (in particular, simpler) supplements approved on short notice.
The Benchmarks Regulation and benchmarks reform
The Benchmarks Regulation
In the wake of various benchmarks-related scandals, the Benchmarks Regulation was introduced in 2016, with the majority of the provisions applying from 1 January 2018 onwards (subject to certain transitional provisions). It applies to the provision of benchmarks, the contribution of input data to a benchmark and the use of a benchmark within the EEA.
The key term is 'benchmarks', which for the purposes of the Benchmarks Regulation is defined as:
- any index15 by reference to which:
- the amount payable under, or the value of, a financial instrument for which a request has been made for admission to trading, or that is traded, on a regulated market, multilateral trading facility or organised trading facility, or that is traded via a systematic internaliser is determined;16 or
- the amount payable under a consumer credit agreement within the scope of the Consumer Credit Directive17 or a consumer credit agreement relating to residential immovable property within the scope of the Mortgage Credit Directive18 (each being a financial contract as defined in the Benchmarks Regulation) is determined; or
- an index that is used to measure the performance of an investment fund, an alternative investment fund (AIF) or an undertaking for the collective investment of transferable securities (UCITS) with the purpose of tracking the return of the index or of defining the asset allocation of a portfolio or of computing the performance fees.19
For the purposes of the Benchmarks Regulation, benchmarks are further divided into critical, significant and non-significant benchmarks. The type of benchmark determines, for example, the regulatory framework within which an administrator must operate: the administrators of non-significant benchmarks are subject to fewer mandatory provisions of the Benchmarks Regulation than administrators of critical and significant benchmarks. The Benchmarks Regulation also provides for certain provisions to ensure the continuity of certain critical benchmarks (such as EURIBOR, EONIA and LIBOR),20 going as far as to enable the competent authorities to require the mandatory administration of such benchmarks where the relevant administrator intends to cease the administration thereof; or, where a competent authority believes that the representativeness of a critical benchmark is put at risk, require supervised entities21 (such as credit institutions, investment firms and certain investment funds and investment fund management companies) to contribute input data to the critical benchmark (regardless of whether the supervised entity has previously provided input data to the benchmark).
As of the end of 2019, additional rules were also introduced in respect of EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks (with detailed regulatory technical standards adopted by the European Commission in July 2020).
Provision of benchmarks
The Benchmarks Regulation governs the provision of benchmarks, which is defined as administering the arrangements for determining a benchmark; collecting, analysing or processing input data for the purpose of determining a benchmark; and determining a benchmark through the application of a formula or other method of calculation or by an assessment of input data provided for that purpose.22
Any person who has control over the provision of a benchmark is considered an administrator for the purposes of the Benchmarks Regulation.23 This includes parties such as ICE Benchmark Administration Limited in relation to LIBOR and the European Money Markets Institute in relation to EURIBOR and EONIA. Administrators are subject to various transparency, governance and conflicts of interest requirements under the Benchmarks Regulation, and will need to be authorised by the competent authority of the Member State where the person is located (or in the case of the (intended) provision of non-significant benchmarks or non-critical benchmarks (provided by supervised entities other than administrators) and registered with the competent authority. The names of the administrators so authorised or registered will be included in a register for benchmarks and administrators maintained by the European Securities and Markets Authority (ESMA) pursuant to Article 36 of the Benchmarks Regulation.
A provider of a benchmark that is not located in the EEA is, in principle, not bound by the provisions of the Benchmarks Regulation. However, subject to the transitional provisions of the Benchmarks Regulation, supervised entities will only be able to use the benchmarks (including non-EEA benchmarks) provided by the non-EEA person within the EEA if the person and the benchmark are included in the register maintained by ESMA as referred to above or, pending an equivalence decision by the European Commission, the benchmark has been recognised by the relevant competent authority in the Member State of reference in accordance with the Benchmarks Regulation.24 Alternatively, an EEA administrator may request the endorsing of a non-EEA benchmark to make it available for use by supervised entities within the EEA.25
Contribution of input data to a benchmark
The Benchmarks Regulation governs the contribution of input data to a benchmark, which is defined as the provision of any input data not readily available to an administrator (or to another person for the purposes of passing to an administrator) that is required in connection with the determination of a benchmark and is provided for that purpose.26
The Benchmarks Regulation requires administrators to prepare a code of conduct regarding the provision of input data – specifying, among other things, the contributor's responsibility in relation to the input data it provides – and administrators are required to satisfy themselves (continuously) that contributors comply with the code of conduct.27 However, direct obligations are imposed on supervised contributors (i.e., supervised entities that contribute input data to an administrator located in the EEA) under the Benchmarks Regulation, making them, among other things, subject to adequate governance and control requirements, specifically to avoid conflicts of interest.28
Use of a benchmark
The Benchmarks Regulation governs the use of benchmarks, which is defined as:29
- the issuance of a financial instrument that references an index or a combination of indices;
- the determination of the amount payable under a financial instrument or financial contract by referencing an index or combination of indices;
- being party to a financial contract that references an index or combination of indices;
- the provision of a borrowing rate calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference for a financial contract; or
- the determination of the performance of an investment fund through an index or combination of indices for the purpose of tracking the return of the index or combination of indices, of defining the asset allocation of a portfolio or of computing the performance fees.30
Pursuant to the Benchmarks Regulation, supervised entities may only use benchmarks that are provided by EEA administrators that are included in the register of benchmarks and administrators maintained by ESMA or included in the aforementioned register. However, certain transitional provisions apply pursuant to which supervised entities may continue to use existing benchmarks (as used prior to 1 January 2018 – the date of application of the Benchmarks Regulation) provided by non-registered or authorised EEA administrators, and which are not included in the aforementioned register:
- in the case of benchmarks provided by index providers until 1 January 2020 or where the index provider submits an application for authorisation or registration, unless and until authorisation or registration is refused;
- in the case of critical benchmarks provided by index providers until 31 December 2020 or where the index provider submits an application for authorisation or registration, unless and until authorisation or registration is refused; and
- in the case of benchmarks provided by non-EEA index providers: as a reference for financial instruments, financial contracts or for measuring the performance of an investment fund that already references the benchmark in the EEA, or that add a reference to benchmarks prior to 31 December 2021, unless the European Commission has adopted an equivalence decision or unless an administrator has been recognised, or a benchmark has been endorsed.
Additional requirements for users of benchmarks that are supervised entities
Under the Benchmarks Regulation, supervised entities are required to produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided.31 If feasible and appropriate, such plans are required to feature the nomination of an alternative benchmark to be used, indicating why it would be suitable. In practice, however, there are no readily available commonly used benchmark alternatives to LIBOR and EURIBOR, let alone an alternative that can readily be determined in advance.
Supervised entities are required to reflect their written plans, as referred to above, in their contractual relationships with clients (so not necessarily in all documentation with counterparties). In terms of existing documentation, ESMA requires supervised entities to amend their existing contractual relationships on a best-efforts basis.32 An amendment can, in practice, often be executed by updating the applicable general terms and conditions, but in many circumstances supervised entities will need to contact their clients to amend certain contractual documentation in place between themselves and their clients.
Changes to prospectuses
Where the object of a prospectus to be published under the Prospectus Regulation33 relates to transferable securities or other investment products that reference a benchmark, the issuer, offeror or person asking for admission to trading on a regulated market is required, under the Benchmarks Regulation, to ensure that the prospectus includes clear and prominent information stating whether or not the benchmark is provided by an administrator included on the register for benchmarks and administrators maintained by ESMA.34
Market participants commonly include risk factors in prospectuses dealing with the risk of termination of, and material amendments to, benchmarks and associated risks.
The transition away from quoted benchmarks to risk-free rates has also been a hot topic in the Netherlands throughout 2019 and 2020. The termination of LIBOR as of the end of 2021 and the amendment of EURIBOR, EONIA and other benchmarks has led to scrutiny by the regulators of the transitioning plans of financial institutions. Following the Dear CEO letter of the UK FCA and the Bank of England to UK financial institutions,35 the AFM and the DCB sent a Dear CEO letter to Dutch financial institutions36 requesting them to provide detailed information on their benchmark transition plans by 17 June 2019. The European Central Bank sent a similar letter to EU financial institutions on 3 July 2019.37
Bond market documentation now commonly features terms and conditions that include fallback scenarios in line with the requirements of the Benchmarks Regulation and best practices formulated by the European Central Bank and industry bodies, such as the inclusion of an adjustment spread mechanism meant to bridge any differences between an original benchmark and its replacement so as to avoid a value transfer upon the occurrence of a replacement event. Throughout 2019 and 2020, we have seen more specific fallback provisions being included in bond documentation, with each significant major benchmark having its own specific fallback clause, often based on best practices published by regulatory authorities. Although generally such specific fallback language provides more certainty to investors (as a more defined fallback process is contemplated), the specific fallback provisions have further complicated documentation and, particularly in respect of non-EEA benchmarks, cause certain issues for EEA supervised entities as the best practices of foreign regulatory authorities may not always take into consideration EEA regulatory requirements (such as those arising from the Benchmarks Regulation).
Despite continued developments regarding fallback provisions, a lot of uncertainty remains. Market participants are still struggling with the issue of how an adjustment spread is to be calculated (which despite some convergence of thought having arisen continues to be open to debate) and questions continue to be raised as to which market participants would be willing to act as an independent third party benchmark replacement agent.
We expect a lot of activity regarding benchmark reform in the years to come, with existing bond documentation being amended and continued refinement of interest provisions dealing with interest calculations using risk-free rates as well as the potential development of forward-looking risk-free rates. It is now common for issuers to have risk-free rates included as an option in their issuance programmes (although EURIBOR is still widely used for euro-denominated floating rate bonds) and we have seen continued efforts by regulators to push towards the transition to risk-free rates. In this context, a particularly welcome development has been the effort by central banks to publish term compounded risk-free rates and continued efforts to develop forward-looking risk-free rates as a potential alternative to the now commonly used forward-looking IBOR rates.
Throughout 2020, markets have been in the grip of the continuing covid-19 pandemic, which has had an unprecedented global general health, social and economic impact. In response to this continued crisis, various legislative proposals and initiatives have been prepared in an effort to protect the economy and the stability of the financial sector against the adverse impact of the pandemic and to pave the way towards recovery. At the European level, the most significant legislative packages have been the Banking Package (granting relief to credit institutions to continue lending to businesses and individuals) and (for the purposes of this chapter) the Capital Markets Recovery Package.
The Capital Markets Recovery Package furthers the European Commission's earlier plans for a capital markets union and aims to relax certain rules to promote funding through the capital markets. The Recovery Package contemplates the introduction of a simplified EU Recovery Prospectus for issuers with a proven track record, various changes to reduce the administrative burden of MiFID II and certain amendments to the Securitisation Regulation to remove regulatory constraints regarding the securitisation of non-performing exposures and to expand the securitisation 'simple, transparent and standardised' (STS) framework to include certain on-balance sheet synthetic securitisations.
The United Kingdom left the EU on 31 January 2020, after which a transition period entered into force until 31 December 2020 (or such earlier date as may be agreed) during which the United Kingdom continues to apply EU laws and regulations. In terms of documentation, several market standards have been developed by industry bodies to take account of Brexit and potential post-Brexit UK legislation replacing the old European laws and regulations, although much uncertainty remains.
In terms of continuity of operations and contracts, London-based investment banks (who traditionally played a pivotal role in continental European capital markets transactions) have largely shifted their placement and other relevant investment services to EU-based group companies so that they can continue to rely on European passports. Dutch issuers with outstanding products based on English law will typically find that the choice of English law remains valid regardless of Brexit, although some uncertainty remains regarding the enforceability of English judgments. Although the common view is that arrangements will be made to facilitate the enforcement of English judgments in the Netherlands, the exact legal framework (i.e., whether that will be through the Lugano Convention, the Hague Convention on Choice of Courts Agreement or through other multilateral arrangements remains unclear at the time of writing). This uncertainty has led to a shift away from English law to Dutch law as the applicable law of financial instruments and contracts.
Dutch scheme of arrangement
Fuelled by the foreseeable economic impact of the covid-19 pandemic, the Dutch legislature has prioritised the long-awaited legislative proposal to introduce a new restructuring instrument38 (akin to the English scheme of arrangement), which enables companies experiencing financial duress to restructure their debts with creditors and shareholders outside formal insolvency proceedings. If approved by the relevant percentage of debtors and the courts, the restructuring plan can be binding on all creditors and shareholders, with potential for horizontal or cross-class cramdowns.
The purpose of the new restructuring instrument is to avoid the bankruptcy of viable businesses. For this reason, certain provisions are included in the legislative proposals to ensure the efficacy of the instrument. For example, as a matter of Dutch law, the preparation and offering of a restructuring plan and other connected events and acts) will not in itself constitute grounds to (1) vary or change any rights or obligations of the debtor concerned, (2) suspend performance of any obligations owed to the debtor concerned, or (3) terminate any relevant agreement with the debtor concerned.
ii Developments affecting (structured) debt capital markets specifically
The Securitisation Regulation
The Securitisation Regulation came into force on 17 January 2018 and has been applicable since 1 January 2019. The main change brought about by the Securitisation Regulation has been the introduction of the concept of STS standards for securitisations, with complying transactions being eligible to benefit from favourable regulatory treatment,39 whereas issuers, originators and sponsors will be responsible for designating a transaction as STS-compliant among themselves.
In 2019 and 2020, we saw more and more originators, sponsors and original lenders getting to grips with the Securitisation Regulation risk retention, due diligence and reporting requirements, as well as several STS securitisations being launched. Various elements (most notably reporting and risk retention elements) continued to be developed through regulatory and implementing technical standards throughout 2019 and 2020.
Alternative Investment Fund Managers Directive and repackaging transactions
Various asset-backed transactions, in particular with a pass-through structure, remain subject to a risk of the issuer or special purpose vehicle qualifying as a manager of an AIF within the meaning of AIFMD,40 exposing it and associated parties to significant fines, other penalties and regulatory intervention.
Scope of the AIFMD
The rules and obligations as laid down in the AIFMD apply to persons who manage an alternative investment fund (an AIFM). An AIFM performs at least risk management or portfolio management for the AIF. An AIF is in turn defined as a collective investment undertaking (including investment compartments thereof) that raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and does not require a licence under the UCITS Directive.41 This definition is quite broad and could apply to a number of entities, including issuers of structured financial instruments that would normally not be considered as investment funds. Further guidance can be found in ESMA's Guidelines on key concepts of the AIFMD,42 to which the AFM adheres.43
The regulatory authorities of several other EU jurisdictions have clarified that certain structured finance vehicles from their jurisdiction are beyond the scope of the AIFMD or have issued guidance that a straightforward exemption applies to the extent that issued instruments qualify as debt. This is not the case in the Netherlands. Although the AFM has made it clear that an entity will not qualify as an AIF if investors provide debt to the issuer, it has also noted that 'capital raised with investors under the sole label of debt, is not regarded as debt, if, taking into consideration the legal and/or economic characteristics of such capital and the rights and obligations belonging to investors, in reality such capital is a form of equity'.44 This has led to market uncertainty for structures where, for example, redemption amounts or other payouts fluctuate according to the performance of a basket of collateral.
Audit committees and structured finance vehicles
Pursuant to the Audit Directive,45 public-interest entities are required to have an audit committee, which is a stand-alone body or a committee of the administrative or supervisory board that performs an internal audit function. For the purposes of the Audit Directive, public interest entities are EEA entities whose transferable securities (including debt securities) are admitted to trading on a regulated market of any EEA Member State, credit institutions,46 insurance undertakings47 and certain entities that are designated as such by EEA Member States.
The Audit Directive includes an option whereby Member States may elect to exempt certain public interest entities from the obligation to have an audit committee, including, among others, those whose sole business is to act as an issuer of asset-backed securities48 (provided the entity explains to the public (e.g., in its annual report) its reasons for considering it inappropriate to have either an audit committee or an administrative or supervisory body entrusted to carry out the functions of an audit committee).49
The Netherlands has made use of the Member State option referred to above. However, the exemption from the obligation of having an audit committee for public interest entities whose sole business is to act as issuer of asset-backed securities has been implemented by means of a decree50 featuring an exemption that refers to entities for securitisation purposes, rather than tracking the wording of the Audit Directive, causing some uncertainty as to the scope of the exemption as laid down in Dutch law.
For these purposes, an entity for securitisation purposes is defined as an undertaking:
- that is not a credit institution;
- that has been established for the benefit of one or more securitisations;
- whose activities are limited to what is necessary for those securitisations;
- whose establishment serves to separate its obligations from the obligations of the initiating party;51 and
- whose owners can unconditionally pledge or sell their participation.
A securitisation, in turn, is defined as a transaction or scheme in which the credit risk of a receivable or collection of receivables is divided into at least two tranches, the payments made in the context of the transaction or scheme depend on the performance of the receivables or the collection of receivables, and the ranking of the tranches determines the allocation of losses during the course of the transaction or scheme.52
As such, the Dutch implementation is significantly more restrictive than the exemption contemplated by the Audit Directive itself. In particular, the requirement that the entity is established for the purposes of engaging in tranched transactions would disqualify straightforward repackaging vehicles from relying on the exemption to have an audit committee.
The relevant explanatory memorandum relating to the Dutch implementation of the aforementioned exemption does not explain why the Dutch legislature has opted for its restrictive approach, instead suggesting that the legislature simply wished to make use of the exemption for certain issuers of asset-backed securities as referred to in the Audit Directive. The Dutch capital markets have dealt with this uncertainty by having repacking vehicles install an audit committee, taking the safe route rather than risking non-compliance.
Environmental, social and corporate governance (ESG): the Taxonomy Regulation
The Taxonomy Regulation53 was published and became effective on 12 July 2020, with provisions relating to climate change mitigation and adaptation objectives applying from 2022 onwards (and provisions dealing with the other objectives identified in the Taxonomy Regulation applicable from 2023).
The Taxonomy Regulation constitutes a key part of the EU's Action Plan on Financing Sustainable Growth and sets out a uniform framework to determine whether certain products are conducive to environmentally sustainable objectives. This uniform framework is intended to enhance investor confidence and reduce greenwashing (i.e., where non-robust standards are used to qualify a certain product as 'green').
iii Developments affecting equity capital markets specifically
Draft bill regarding cooling-off periods for listed companies
In light of recent increased shareholder activism and hostile takeover bids, a bill was submitted to the House of Representatives relating to the introduction of a right for Dutch companies listed on a regulated market or multilateral trading facility to invoke a cooling-off period when faced with a hostile takeover bid, or a request to table a proposal for the appointment, suspension or dismissal of one or more managing or supervising directors (or a proposal to change any provisions in the articles of association relating to the appointment, suspension or dismissal of one or more managing or supervising directors) where this same would not (in the opinion of the board of managing directors) be in the interest of the company and its connected business. Any decision of the board of managing directors to this effect would be subject to the approval of the board of supervisory directors (if present).
Under the terms of the bill, the cooling-off period may last up to 250 days counted from the day of either the bid or the latest date on which the request to table the relevant item has to be received under the applicable rules (or, if one or more shareholders have petitioned the courts for an authorisation to call a meeting of shareholders, the date on which the authorisation was granted). This cooling-off period is intended to give the board of managing directors more time to carefully consider the takeover bid or the proposal and to take stock of the various positions of its stakeholders. For these purposes, the board of managing directors is required to consult shareholders representing at least 3 per cent of the issued shares and the works council during the cooling-off period. In addition, after the cooling-off period, the board of managing directors is required to report on the actions taken during the cooling-off period and the report should be made available for viewing at the company's office and on the company website.
Shareholders, under certain circumstances, may have a right to petition the Dutch Enterprise Chamber to revoke the cooling-off period. However, the Enterprise Chamber will only do so if the board of managing directors could not have reasonably considered that the bid or the proposal was at the time not in the interest of the company and its connected business, where the continuation of the cooling off period cannot reasonably be thought to contribute to careful consideration of the company's position or where certain measures remain in force during the cooling-off period that in terms of nature, purpose and scope are not in conformity with the cooling-off period and have not been terminated after receipt of a written request from the relevant shareholders.
Shareholder Rights Directive II
The law implementing the Shareholder Rights Directive II54 into Dutch law was adopted by the Dutch legislature in November 2019, with most of the rules becoming effective as of 1 December 2019 (and some others in September 2020). The Shareholder Rights Directive II introduces various significant changes to shareholdership throughout the EEA, including the introduction of:
- requirements for listed companies to draw up a remuneration policy that shareholders can vote on, as well as a requirement to prepare an annual remuneration report;
- increased powers of listed companies to request information from intermediaries to identify their shareholders;
- requirements on intermediaries to facilitate the exercise of shareholder rights as well as various requirements relating to the costs levied by them for certain services rendered;
- requirements for listed companies to require approval for material transactions with related parties, other than in the ordinary course of business, from the general meeting of shareholders (if there is no board of supervisory directors) or the board of supervisory directors (if there is one), as well as a requirement to disclose the completion of such transactions;
- requirements for institutional investors and asset managers to formulate and disclose policies on shareholder engagement, as well as a requirement to disclose annually how this policy was enacted in practice;
- requirements on proxy advisers regarding codes of conduct.
iv Developments affecting financial institutions issuing securities
Senior non-preferred debt
On 27 December 2017, a directive amending the Bank Recovery and Resolution Directive (BRRD)55 was published in the EU Official Journal pursuant to which a new rank of debt instruments was introduced in relation to entities subject to BRRD – referred to as senior non-preferred debt – to be redeemed immediately after senior unsecured liabilities (such as deposits and other ordinary senior liabilities) and before subordinated liabilities (such as Additional Tier 1 and Tier 2 capital instruments).56 The bill implementing the senior non-preferred asset class in the Netherlands came into effect on 14 December 2018.
The Dutch legislature has followed what is now commonly known as the French approach, whereby entities subject to BRRD may elect, on a case-by-case basis, whether to issue instruments as senior preferred or senior non-preferred (or even more subordinated, such as Tier 2 instruments), and existing instruments remain unaffected. This can be contrasted with the German approach, in which existing senior debt instruments were immediately and retroactively demoted from their senior status to senior non-preferred status following implementation of the senior non-preferred debt asset class in Germany.
BRRD II and CRR II
BRRD II57 and CRR II58 introduced additional rules regarding eligible liabilities (tying in with MREL and TLAC requirements) and capital instruments, such as Tier 1 and Tier 2 capital of credit institutions. Certain key changes include that Tier 2 capital has to be fully subordinated to eligible liabilities, with changes to national insolvency laws (as contemplated by BRRD II) intended to be implemented at the end of 2020.
Outlook and conclusions
As a result of the UK Brexit vote, many capital market players have been looking to the Netherlands as their gateway to Europe, for a number of reasons, including the attractiveness of Dutch law, Dutch courts, the good reputation of the Dutch supervisory authorities, and the stability and efficiency of the government. We expect the Dutch capital markets also to do well in the years to come subject to general global economic developments.
In general, the Dutch capital markets will be affected by further proposed legal and regulatory changes, including in the context of benchmark reform, the EU Capital Markets Union and a proposal for a revised EU covered bond framework and the EU's continued work on the Action Plan on Financing Sustainable Growth and other ESG initiatives. Of these changes, we would expect the continuing benchmark reform and the proposals for a Europe-wide green and ESG financing framework to have the most significant impact on the Dutch market and on documentation.
1 Marieke Driessen is a partner and Niek Groenendijk is a senior associate at Simmons & Simmons LLP.
2 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017.
3 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.
4 Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 amending Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.
5 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.
6 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.
7 Article 1(5)(a) of the Prospectus Regulation.
8 Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.
9 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
10 The Prospectus Regulation, Article 1(5)(b) and Article 1(5) second Subparagraph.
11 ibid., Article 1(5)(b) and Article 1(3).
12 Exemption Regulation Dutch Financial Supervision Act, Article 53(4). The requirement to provide the information document does not apply to offerors that are subject to the PRIIPs Regulation and managers of investment firms that are required to provide a prospectus to investors on the basis of the Financial Supervision Act, Article 4:37l(1).
13 The Prospectus Regulation, Article 16.
14 Guidelines on Risk Factors under the Prospectus Regulation, 01/10/2019 ESMA31-62-1293.
15 For the purposes of the Benchmarks Regulation, an index is any figure that is published or made available to the public, and regularly determined entirely or partially by the application of a formula or any other method of calculation, or by an assessment, and on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys. See Regulation (EU) 2016/1011, Article 3(1)(1) and, for further guidance, Commission Delegated Regulation (EU) 2018/65 of 29 September 2017.
16 Regulation (EU) 2016/1011, Article 3(1)(3).
17 Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers.
18 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property.
19 Regulation (EU) 2016/1011, Article 3(1)(16).
20 See Commission Implementing Regulation (EU) 2017/2446 of 19 December 2017.
21 As referred to in Regulation (EU) 2016/1011, Article 3(1)(17).
22 Regulation (EU) 2016/1011, Article 3(1)(5).
23 ibid., Article 3(1)(6).
24 ibid., Articles 31 to 33 (inclusive).
25 ibid., Article 33.
26 ibid., Article 3(1)(8).
27 ibid., Article 15.
28 ibid., Article 16.
29 For these purposes, financial instrument refers to a financial instrument for which a request has been made for admission to trading, or that is traded, on a regulated market, a multilateral trading facility or an organised trading facility, or that is traded via a systematic internaliser and a financial contract refers to a consumer credit agreement within the scope of Directive 2008/48/EC or a consumer credit agreement relating to residential immovable property within the scope of Directive 2014/17/EU.
30 Regulation (EU) 2016/1011, Article 3(1)(7).
31 ibid., Article 28(2).
32 Questions and Answers on the Benchmarks Regulation, ESMA70-145-11 (Version 9), Answer 8.1.
33 Regulation (EU) 2017/1129)) or the UCITS Directive (Directive 2009/65/EC, as amended.
34 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016, Article 29(2). This requirement is without prejudice to outstanding prospectuses approved under the Prospectus Directive prior to 1 January 2018 and prospectuses approved prior to 1 January 2018 under the UCITS Directive. The underlying documents shall be updated at the first occasion or at the latest within 12 months of that date. See Regulation (EU) 2016/1011, Article 52.
35 'Dear CEO LIBOR letter', Financial Conduct Authority, 19 September 2018. See https://www.fca.org.uk/news/statements/dear-ceo-libor-letter.
36 'AFM en DNB wijzen markt op belang overgang naar alternatieve benchmarks', AFM, 25 April 2019. See https://www.afm.nl/nl-nl/nieuws/2019/apr/alternatieve-benchmarks.
37 'Banks' preparation with regard to interest rate benchmark reforms and the use of risk-free rates', European Central Bank (ECB), 3 July 2019. See https://www.bankingsupervision.europa.eu/press/letterstobanks/shared/pdf/2019/ssm.benchmark_rate_reforms_201907.en.pdf?8f331a1bb36298a22adcb65e5c41bc8b.
38 Wet homologatie onderhands akkoord.
39 Note that commercial mortgage-backed securities transactions have been carved out from being capable of qualifying as simple, transparent and standardised transactions.
40 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
41 ibid., Article 4(1)(a).
42 Guidelines on key concepts of the AIFMD, ESMA/2013/600.
43 According to the ESMA Guidelines, if any one of the composite elements of the definition of AIFs as referred to above is not satisfied, a structure would not qualify as an AIF for the purposes of the AIFMD. However, these same guidelines also stipulate that the absence of one or more of the characteristics under each of the elements in the definition of an AIF does not conclusively demonstrate that a structure is not an AIF if the presence of all the concepts is otherwise established. See Guidelines on key concepts of the AIFMD, ESMA/2013/600, page 30, paragraph 5.
44 'Q&A on the AIFMD', AFM, 17 November 2017, page 11 – see https://www.afm.nl/nl-nl/professionals/doelgroepen/aifm/aifm/faq.
45 Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts.
46 Within the meaning of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013, Article 3(1), except those referred to in Article 2 of that Directive.
47 Within the meaning of Council Directive 91/674/EEC of 19 December 1991, Article 2(1).
48 Within the meaning of Commission Regulation (EC) No. 809/2004 of 29 April 2004, Article 2(5).
49 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006, Article 41(6)(c).
50 Decree on the Instalment of Audit Committees.
51 i.e., the (indirect) originator or the undertaking that buys receivables and subsequently securitises them.
52 Decree on Prudential Rules Dutch Financial Supervision Act, Article 1.
53 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020.
54 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017.
55 Directive 2014/59/EU (on the recovery and resolution of credit institutions and investment firms).
56 The aim of these changes to BRRD was to facilitate the issuance of sufficient bail-inable liabilities so that entities subject to BRRD could comply with any applicable global (total loss absorbing capacity) and European (minimum requirement for own funds and eligible liabilities) requirements in relation to minimum amounts of bail-inable liabilities.
57 Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019.
58 Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019.