The Mergers & Acquisitions Review: Netherlands
Overview of M&A activity
In 2019, the Netherlands again saw a strong year of M&A activity, with a total increase in transactions of 7 per cent as compared to 2018. Since 2013, this is the sixth consecutive year of an increase in transactions.2
The service industries branch accounted for most M&A transactions in 2019 (270), followed by the trading sector (124) and industry and construction (120). 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 start-ups 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 2019.
The number of merger notifications with the Social Economic Counsel did take a sharp dip in the second quarter of 2020 (103 versus 182 in 2019), presumably due to covid-19 with the total number of notifications up to and including the third quarter at 406 showing an overall decline for 2020.3
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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.4
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.5 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.6
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.7
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 (which is applicable to listed companies) 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.
Strategies to increase transparency and predictability
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Developments in corporate and takeover law and their impact
i Ultimate beneficial ownership register
A new law introducing the ultimate beneficial ownership register (the UBO Register) in the Netherlands came into force on 8 July 2020. The obligation to register newly incorporated entities that are registered for the first time in the Netherlands in the UBO came into force on 27 September 2020. The law is an implementation of the (amended) Fourth Anti-Money Laundering Directive,8 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 is part of the Dutch Trade Register, and as such is administered by the Chamber of Commerce. Part of the information included in the UBO Register is publicly accessible, but provisions have been made to ensure the privacy of UBOs. Existing entities have been granted 18 months after 27 September 2020 to register its ultimate beneficial owners with the UBO Register.
ii Act on management and supervision of legal entities
A legislative proposal for the management and supervision of legal entities was adopted by the House of Representatives on 28 January 2020 and is currently under review of the Senate of the Dutch Parliament. 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 interest of board members, and rules regarding the duties and responsibilities of board members.
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 legislative proposal, which was adopted by the House of Representatives on 8 September 2020. 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 or 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 holding at least 3 per cent of the issued shares may request the Enterprise Chamber for an early termination of the cooling-off period.
In addition, on 19 May 2020 a legislative proposal on telecommunications parties was adopted by the Senate 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 telecoms 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 law implementing the Directive was adopted on 6 November 2019 and came partially in effect on 1 December 2019 and on 3 September 2020. Some provisions with regard to the remuneration of board members also apply to non-listed NVs.
vi 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 one Member State or if it could undermine a project or programme of interest to the EU. On 20 June 2020, a legislative proposal was submitted to the House of Representatives to implement the Regulation.
vii 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. This resulted in the adoption of Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. The directive allows 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 Directive entered into force on 1 January 2020. Member States are required to bring their national laws in line with the Directive by 31 January 2023.
viii Court Approved Restructuring Plan Act
On 6 October 2020, the Senate adopted the Court Approved Restructuring Plan Act (WHOA). This may mean that a swift enactment can take place, perhaps even before the end of 2020. The introduction of the WHOA would be the final piece of a long legislative process, and an important development in the Dutch insolvency practice. Moreover, this is a development that the practice is eagerly awaiting, partly in the light of the economic consequences of the covid-19 crisis.
The objective of the WHOA is to improve the ability of companies to reorganise by being able to offer a restructuring plan to creditors. The WHOA makes it possible for a private composition outside bankruptcy to be ratified (approved) by the court, making it binding on creditors, including those who voted against (or not at all). This is also called a 'cramdown' of the creditors.
In the Netherlands, it is currently virtually impossible to force a creditor, or a group of creditors, to accept a composition outside bankruptcy. In fact, a debtor has to get all its creditors on board in order to be able to restructure effectively. Practice shows that this is virtually impossible, causing many companies to go bankrupt unnecessarily. The objective of the WHOA is, therefore, to protect companies that are fundamentally viable and profitable from this, to make it easier to restructure companies and thus to preserve value of capital and employment. The idea is that a company as a going concern has more value for all creditors than its bankruptcy.
Us antitrust enforcement: the year in review
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Foreign involvement in M&A transactions
Foreign involvement has been present in the Dutch M&A market for a long time. Investors and strategic buyers from the United States of America head the lead tables in M&A transactions, followed by the United Kingdom and Germany.9
The past year has brought various high-value cross-border transactions, whereby the Netherlands played a central role in facilitating the deal, for example, the cross-border merger between Fiat-Chrysler and the Peugeot group (US$50 billion), the Upjohn-Milan combination (US$22 billion), Digital Realty – InterXion (US$8.4 billion), EssilorLuxottica – Grandvision (US$5.5 billion) and Takeaway.com's offer for JustEat (€7.2 billion).
On 11 October 2020, the Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (the FDI Directive) entered into force. The Netherlands is expected to implement national legislation in the course of 2020, for both foreign and domestic transactions. The upcoming act may affect transactions concluded as of 2 June 2020. For the telecommunications industry, specific legalisation was already introduced. Contemplated acquisitions must be notified to the Secretary of Economic Affairs and Climate, who may block the acquisition, if the acquisition may pose a risk for national security.
Significant transactions, key trends and hot industries
Although investment continued into sectors that benefited from the covid-19 situation, such as delivery services, the Netherlands have seen a significant drop in the overall number of transactions.
Covid-19 related litigation is limited in relation to M&A and investments. Nordian Capital invoked unforeseen circumstances in an attempt to walk away from its acquisition of J-Club (for which a signing protocol had been signed, pending W&I insurance). The attempt failed, because the covid-19 situation was specifically discussed during the negotiation of the signing protocol. Based on this precedent, it is to be expected that similar claims for current and future deals will also be rejected, thus forcing parties to agree on specific conditions under which they can, or cannot, abandon a transaction.
In the field of property law, there is much more covid-19-related litigation, with tenants asking for temporary relief or permanent discounts, or both. For the retail sector, an industry-wide arrangement has been made. For office space, the courts have been very reluctant to award relief or discounts. However, it is to be expected that the real estate market will see the effects of the covid-19 situation in the months to come, with office and retail space facing significant challenges.
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. However, we have seen few ICOs in 2020. The Dutch regulatory authorities are watching these developments closely, as they may trigger money laundering and fraud.
Recent case law (Alpha/Hans Anders; CVC/Autobar) has provided stricter guidance for the deductability of interest on shareholder loans that were used to finance acquisitions through shareholder loans. Interest on shareholder loans will remain deductible. However, if the structure does not appear to be 'at arm's length' (the interest was higher than 15 per cent), the burden of proof will be reversed, forcing the company to prove that a third party would have provided the loan under similar terms.
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 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
The Balanced Labour Market Act entered 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 as follows.
- A new ground for dismissal was 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 were 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-sized employers and extended accrual for older employees 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 (the 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 would an employer not be obliged to take over employees. The Bill was presented for consultation on the internet on 29 May 2019. This consultation had resulted in a lot of criticism, and the Bill has not yet been submitted to the House of Representatives.
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 pay and 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.
i 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.
ii 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. The new law was adopted on 27 December 2019 and introduces a withholding tax on interest payments and royalties to low tax jurisdictions and in abusive situations, effective as of 1 January 2021. This new withholding tax will have a rate of 21.7 per cent. On the same date, the Dutch government introduced additional substance requirements for Dutch intragroup financing and licensing companies related to the exchange of information, again effective as of 1 January 2021. If the additional substance requirements are not met, additional information related to the intragroup financing and licensing activities may be exchanged with tax authorities of the relevant jurisdictions.
In the first half of 2020 notably fewer merger filings were made with the Dutch Authority for Consumers and Markets (ACM), namely 46 compared to 75 in the same period in 2019. It is very likely that covid-19 is the primary cause of this decline. We noted that this year, the ACM is increasingly inclined to decide upon a merger filing after a thorough investigation in the second phase, instead of ruling in the first phase that a permit is not required. Another trend is the position of the ACM that it rules in the first phase that remedies should be observed whilst approving an intended merger. An example of such a decision is the approval of the digital MaaS-platform (mobility as a service) through which mobility providers NS, GVB, RET and HTM can offer travellers the possibility to plan, book and pay for different modes of transport in different regions. The ACM ruled that the platform should be accessible for competing providers of mobility services on similar conditions as the joint venture partners and that innovation should continuously be a driving force, allowing for a level-playing field.
Another case that caught the eye in 2020 was the decision of the ACM to not approve the takeover of Sandd by PostNL. After the ruling by the ACM, the secretary of state for Economic Affairs nonetheless granted the permit on the grounds of public interest. This decision was since overturned by the administrative court, and an appeal is now pending.
Covid-19 has had an enormous impact on the global M&A market. The Dutch M&A market seems to be picking up in the third quarter of 2020, and banks and advisers are keen to underline the Netherlands' continued favourable investment climate and open infrastructure. However, with the current covid-19 pandemic and the uncertainty about when vaccines will be widely available, as well as the upcoming Brexit, the outlook for M&A is a guessing game at present.
1 Fenna van Dijk is a corporate lawyer and partner at Kennedy Van der Laan.
4 Supreme Court 13 March 1981 (Haviltex).
5 Supreme Court 5 April 2013 (Lundiform/Mexx).
6 Supreme Court 29 June 2007 (Derksen/Homburg).
7 Supreme Court 12 August 2005 (CBB/JPO).
8 Directive (EU) 2015/849.