The Acquisition and Leveraged Finance Review

Editor Christopher Kandel

Law Business Research The Acquisition and Leveraged Finance Review

The Acquisition and Leveraged Finance Review Reproduced with permission from Law Business Research Ltd.

This article was first published in The Acquisition and Leveraged Finance Review - Edition 1 (published in September 2014 – editor Christopher Kandel).

For further information please email [email protected] The Acquisition and Leveraged Finance Review

Editor Christopher Kandel

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THE ACQUISITION AND LEVERAGED FINANCE REVIEW

www.TheLawReviews.co.uk PUBLISHER Gideon Roberton BUSINESS DEVELOPMENT MANAGER Nick Barette SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee, James Spearing ACCOUNT MANAGER Felicity Bown PUBLISHING COORDINATOR Lucy Brewer MARKETING ASSISTANT Dominique Destrée EDITORIAL ASSISTANT Shani Bans HEAD OF PRODUCTION Adam Myers PRODUCTION EDITOR Anne Borthwick SUBEDITOR Janina Godowska MANAGING DIRECTOR Richard Davey Published in the United Kingdom by Law Business Research Ltd, London 87 Lancaster Road, London, W11 1QQ, UK © 2014 Law Business Research Ltd www.TheLawReviews.co.uk No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of September 2014, be advised that this is a developing area. Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected] ISBN 978-1-909830-20-2 Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112 ACKNOWLEDGEMENTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

BHARUCHA & PARTNERS

BINDER GRÖSSWANG RECHTSANWÄLTE GMBH

GILBERT + TOBIN

GOODMANS LLP

HANNES SNELLMAN ATTORNEYS LTD

LATHAM & WATKINS LLP

MORI HAMADA & MATSUMOTO

NAUTADUTILH NV

OGIER

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WASELIUS & WIST

i CONTENTS

Editor’s Preface ��vii Christopher Kandel

Chapter 1 INTRODUCTION �� 1 Melissa Alwang and Christopher Kandel

Chapter 2 AUSTRALIA �� 11 John Schembri and David Kirkland

Chapter 3 AUSTRIA �� 22 Emanuel Welten and Stephan Heckenthaler

Chapter 4 BRAZIL �� 34 Fernando R de Almeida Prado and Fernando M Del Nero Gomes

Chapter 5 CANADA �� 51 Jean E Anderson, David Nadler, Carrie B E Smit and David Wiseman

Chapter 6 ENGLAND AND WALES �� 67 Christopher Kandel and Karl Mah

Chapter 7 FINLAND �� 79 Timo Lehtimäki and Maria Pajuniemi

Chapter 8 FRANCE �� 90 Etienne Gentil, Hervé Diogo Amengual, Thomas Margenet-Baudry and Olivia Rauch-Ravisé

Chapter 9 GERMANY �� 105 Andreas Diem and Christian Jahn

iii Contents

Chapter 10 GUERNSEY �� 118 Christopher Jones

Chapter 11 INDIA �� 130 Justin Bharucha

Chapter 12 ITALY �� 139 Riccardo Agostinelli, Andrea Taurozzi, Daniele Migliarucci and Marta Pradella

Chapter 13 JAPAN �� 149 Naoya Shiota and Yusuke Murakami

Chapter 14 JERSEY �� 159 Bruce MacNeil

Chapter 15 NETHERLANDS �� 172 David Viëtor and Diederik Vriesendorp

Chapter 16 RUSSIA �� 183 Mikhail Turetsky and Ragnar Johannesen

Chapter 17 SPAIN �� 194 Javier López Antón, Iván Rabanillo, Fernando Colomina and Isabel Borrero

Chapter 18 SWEDEN �� 207 Paula Röttorp, Carl-Magnus Uggla and Viggo Bekker Ståhl

Chapter 19 SWITZERLAND �� 218 Lukas Wyss and Maurus Winzap

Chapter 20 UNITED STATES �� 231 Melissa Alwang, Alan Avery, Mark Broude, Jiyeon Lee-Lim and Lawrence Safran

iv Contents

Appendix 1 ABOUT THE AUTHORS �� 243

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ��255

v EDITOR’S PREFACE

Acquisition and leveraged finance is a fascinating area for lawyers, both inherently and because of its potential for complexity arising out of the requirements of the acquisition process, cross-border issues, regulation and the like. It can also cut across legal disciplines, at times requiring the specialised expertise of merger and acquisition lawyers, bank finance lawyers, securities lawyers, tax lawyers, property lawyers, pension lawyers, intellectual property lawyers and environmental lawyers, among others. The Acquisition and Leveraged Finance Review is intended to serve as a starting point in considering structuring and other issues in acquisition and leveraged finance, both generally but also particularly in cases where more than just an understanding of the reader’s own jurisdiction is necessary. The philosophy behind the sub-topics it covers has been to try to answer those questions that come up most commonly at the start of a finance transaction and, having read the contributions, I can say that I wish that I had had this book available to me at many times during my practice in the past, and that I will turn to it regularly in the future. Many thanks go to the expert contributors who have given so much of their time and expertise to make this book a success; to Nick Barette, Gideon Roberton and Shani Bans at Law Business Research for their efficiency and good humour, and for making this book a reality; and to the partners, associates and staff at Latham & Watkins, with whom it is a privilege to work. I should also single out Sindhoo Vinod and Aymen Mahmoud for particular thanks – their reviews of my own draft chapters were both merciless and useful.

Christopher Kandel Latham & Watkins September 2014

vii Chapter 15

NETHERLANDS

David Viëtor and Diederik Vriesendorp1

I OVERVIEW

The leveraged buyout market in the Netherlands can be roughly divided into three segments, each with its own characteristics. The ‘small’ market segment includes transactions of up to around €50 million in enterprise value. The vast majority of transactions fall into this group. Financing for small-market deals is usually provided by a single Dutch bank, with local branches often playing a dominant role. Mid-market deals range from around €50 million to €400 million in enterprise value. These are usually financed by a club of Dutch or Dutch- based banks (i.e., ABN Amro Bank, Deutsche Bank, ING Bank, NIBC and Rabobank). The maximum deal size in this market segment is roughly determined by the maximum amount of debt (approximately €200 million) that these banks together can provide. For deals valued at or above €400 million, the involvement of foreign financial institutions is usually required and larger banking syndicates must be formed. Greater debt structuring may also be necessary through the introduction of multiple layers of debt (e.g., mezzanine and high yield). Equity financing (either as contribution on shares or subordinated shareholder loans) is part of any deal, irrespective of the market segment. Senior debt usually accounts for 40 to 60 per cent of the total debt and the leverage ratio is commonly around 3.5 to 5 (total debt) or 3 to 4.5 (senior debt), but this very much depends on the relevant market segment. Funding gaps are commonly bridged by features such as vendor loans, earn-outs and the retaining of minority stakes for sellers. Recent financing developments include the use of asset-based lending, allowing banks to increase the amount of acquisition financing they can make available, and direct lending by institutional investors.

1 David Viëtor and Diederik Vriesendorp are partners at NautaDutilh.

172 Netherlands

II REGULATORY AND TAX MATTERS

No licence, consent or registration requirements in relation to lending exist to professional parties in the Netherlands. Sanction laws and regulations may prohibit lending to borrowers from certain countries. Most such laws and regulations are introduced at EU level. Violations are punishable under the Dutch Sanctions Act 1977 and the Dutch Economic Offences Act. In addition, the Dutch Decentralised Governments Financing Act restricts the ability of certain public bodies to borrow. Other than such sanction and public finance laws, there are no general regulatory restrictions under Dutch law in relation to lending. Under the Dutch Financial Supervision Act, it is prohibited to conduct the business of a credit institution without a licence from the Dutch Central Bank. In addition, it is prohibited for entities other than licensed credit institutions to attract repayable funds from the public. Pursuant to these prohibitions, a borrower may require a licence as a credit institution if it borrows money from lenders that are deemed to form part of the public. The key terms ‘credit institution’, ‘repayable funds’ and ‘public’ are concepts of European law (Capital Requirements Regulation), but there is limited official European guidance as to their meaning. According to the explanatory memorandum to the legislation implementing CRD IV in the Netherlands, the Dutch law interpretation of these concepts, which pre-dated the entry into effect of that legislation on 1 August 2014, will continue to be taken into account until such European-level guidance is available. This means,inter alia, that the pre-CRD IV Dutch law safe harbour regime allowing parties to attract repayable funds amounting to a minimum of €100,000 (or its equivalent in another currency) will remain relevant until further European guidance has been provided. Consequently, as long as the initial loan of any lender to a Dutch borrower is at least €100,000 or the equivalent thereof, the Dutch borrower will fall within the old safe harbour, and the requirement that the borrower obtain a banking licence will not be triggered. We note that other safe harbours are also available under the old Dutch law interpretation, which likewise allow a borrower to avoid triggering the banking licence requirement. As a general rule, interest expenses are deductible for Dutch corporate income tax purposes. Transaction costs incurred to raise debt are generally also tax deductible to the extent they can be allocated to the Dutch borrower. The deductibility of interest expenses is, however, subject to certain restrictions. In the context of leveraged finance, the most important of these are laid down in or result from: a the arm’s-length rules; b the base erosion rules, which apply to certain ‘tainted’ transactions; c the rules applicable to ‘excessively’ leveraged participations; and d the leveraged buyout rules as applied to companies that form part of the same tax group (‘fiscal unity’).

The first and second of these are limited to related-party debt, while the third and fourth can also apply to third-party debt. For the purpose of these restrictions, the creditor and Dutch borrower are considered to be related parties if either has a one-third direct or indirect ownership interest in the other.

173 Netherlands

Under the arm’s-length rules, if the creditor and Dutch borrower are related parties, the terms and conditions of the debt must all be at arm’s length, including the interest rate. If the interest rate is found to be too high or too low, the Dutch tax authorities can, inter alia, adjust the borrower’s taxable income accordingly. The arm’s- length rate is the rate that the borrower would have paid had the loan been granted by a third party, with a guarantee by the group. The second restriction is laid down in the base erosion rules. These base erosion rules provide that if related-party debt is used to finance certain ‘tainted’ transactions, the interest expenses (and related costs) are not tax deductible if the Dutch borrower cannot show either that the transaction and debt financing thereof are based on sound business motives (‘motives test’), or that the interest income is subject to tax at a reasonable rate, at the level of the lender (‘subject-to-tax test’). As applied in the Netherlands, the latter test is in principle met if the interest is taxed at an effective tax rate of 10 per cent or more. ‘Tainted’ transactions include profit distributions or repayments of capital to related parties; capital contributions to related parties; and an acquisition or enlargement of an interest in a related party. The third restriction on the deduction of interest expenses applies to ‘excessively’ leveraged participations. This restriction was introduced on 1 January 2013 and was intended to replace the thin capitalisation rules. In short, the new restriction applies where a Dutch company has a debt generating interest expenses whose deductibility is not restricted under another tax provision; one or more subsidiaries to which the participation exemption regime applies; and a fiscal equity (i.e., its total equity according to its fiscal balance sheet) that is lower than the acquisition price of the subsidiary or subsidiaries. If the Dutch company meets these three cumulative conditions, there is a formula for calculating the amount of the disallowed deduction, if any (‘excessive participation interest’). Basically, the acquisition is excessively leveraged insofar as the acquisition price for the subsidiary or subsidiaries exceeds the Dutch company’s fiscal equity. Interest expenses of up to €750,000 (per year) are not affected by the rule, which applies only above that threshold. There is, however, an important exception for operational expansions: that is, if a participation is acquired within the context of increasing the group’s operating activities. In such cases, the amount attributable to financing related to the expansion is not taken into account when calculating the disallowed deductions. The fourth restriction applies to companies that form part of a tax group for Dutch corporate income tax purposes. In principle, such companies are treated as a single taxpayer and, as such, the interest expenses of one group company can be offset against the profits of another such company. However, the leveraged buyout rules limit the deduction of interest on debt used to acquire shares in companies that are subsequently included in a tax group with the acquirer for Dutch corporate income tax purposes. Pursuant to this restriction, interest on the acquisition debt is not deductible if and to extent the acquisition debt exceeds 60 per cent of the purchase price for the acquired company, and the amount of interest expenses exceeds €1 million per year. This 60 per cent limit will be reduced to 25 per cent over a period of seven years, 5 per cent each year following the acquisition. This restriction applies to both third party and related-party debt used to fund acquisitions in the same financial year. Please note that this restriction cannot be circumvented by opting for a different structure through, for example, a legal merger, demerger or liquidation involving the acquirer and target.

174 Netherlands

III SECURITY AND GUARANTEES

Secured creditors traditionally have a very strong position under Dutch insolvency law. Indeed, the Netherlands is among the most secured creditor-friendly jurisdictions in Europe. Insolvency proceedings in the Netherlands (i.e., a bankruptcy or suspension of payments) tend to occur in only two situations, the first being the disorderly (‘uncontrolled’) winding down of a business that has no prospect of a restart or reorganisation, under the supervision of a court-appointed bankruptcy trustee. The second situation is a carefully planned pre-packed restructuring in which a bankruptcy is necessary to significantly downsize a company’s workforce or terminate onerous lease contracts. Although not commencing insolvency proceedings may expose a company’s directors to a risk of personal liability, there is no statutory obligation for them to commence such proceedings under any circumstances. There are also very few situations (other than those mentioned above) in which there is an incentive for them to do so. More importantly, insolvency proceedings make no difference to the debtor’s secured creditors – they do not affect the validity of the security or limit the secured creditors’ enforcement rights. The most important exception is that it is possible for a court to impose a cooling-off period (or moratorium) of up to four months. However, an order to this effect can be challenged under certain circumstances, and specific court permission to enforce the security despite the moratorium can be sought. A secured creditor need not apply for its debtor’s insolvency before it can enforce its rights. A recent development is that an increasing number of large and mid-sized European leveraged buyout financings are set up using a double Dutchco holding company structure, in order to take advantage of the very secured creditor-friendly Dutch insolvency regime. In addition to guarantees by the target and its subsidiaries, a typical security package in the context of an acquisition financing includes a pledge over shares in the target and its subsidiaries as well as disclosed pledges over the bank accounts and certain types of receivables (i.e., intercompany receivables, receivables under the acquisition agreement, receivables under the hedging agreement and insurance receivables) of a bidco and the target group. Trade receivables are usually pledged on an undisclosed basis (i.e., without notification to the relevant debtors). Since taking security over moveable assets is fairly easy and not very expensive, this is invariably also part of the security package. Depending on materiality, pledges over IP rights and mortgages over real property may be given as well. It is customary to use a ‘parallel debt’ structure (sometimes called a ‘covenant to pay’ structure) in financing transactions where security interests governed by Dutch law will be held by a security agent for the benefit of multiple lenders. Under such a structure, each obligor (borrowers and guarantors) undertakes to pay to the security agent in its individual capacity (i.e., acting in its own name and not as the lenders’ agent or representative) amounts equal to the amounts owed by that obligor to all lenders under the finance documents (‘parallel debt’). The Dutch security interests are created in the name of the security agent (and not in the name of all lenders) and secure payment of the parallel debts. Each lender has only a contractual claim against the security agent for payment of an amount to be determined under an intercreditor arrangement from the proceeds of the enforcement of the security interests. The main reason for this structure is that Dutch law does not provide for the concept of a trust. A foreign trust may be

175 Netherlands recognised in the Netherlands, but that does not get around the problem that Dutch security interests can only be created in favour of the creditors whose claims the security interests are intended to secure. If, for example, a syndicate of five lenders has provided a loan totalling €100 million and each individual lender has an obligation to make available €20 million, it is generally assumed that security interests created in favour of the security agent (assuming it is also acting as a lender) can only secure payment of its own claims (i.e., €20 million). A parallel debt structure has two additional benefits. The first is that it facilitates loan transfers and the second is that, if properly drafted, security interests created in favour of the security agent on the basis of a parallel debt will also secure a facility increase by existing or future lenders, or both. When taking guarantees and security from Dutch companies, certain restrictions need to be observed. The first is the financial assistance prohibition, but this only applies where the target is an NV (a company with limited liability that can be listed or unlisted). On 1 October 2012, the financial assistance prohibition for BVs (private companies with limited liability) was repealed in its entirety and has not been replaced by a new prohibition. This means that under the new regime, a target BV and its subsidiaries are free, regarding third parties, to provide financial assistance, such as granting guarantees, security and loans, for financing the acquisition of the target BV’s shares, subject only to the usual restrictions such as ultra vires and voidable preferences (discussed below). The financial assistance prohibition still applies for NVs. An NV is, under strict conditions, allowed to grant loans to third parties for the purpose of financing the acquisition of its shares. This also applies to its subsidiaries. Other forms of financial assistance remain prohibited. The loan may not exceed the amount of the NV’s freely distributable reserves, and the NV is required to maintain a statutory reserve for the amount of the loan. The following additional conditions apply. The terms of the loan (including with regard to interest and collateral) must be in line with fair market conditions. The borrower’s creditworthiness must be carefully investigated. If the loan is granted for the purpose of the acquisition of newly issued or treasury shares from the NV itself, the price to be paid for those shares must be fair. Finally, the granting of the loan is subject to the prior approval of the NV’s shareholders. For unlisted NVs, a two-thirds majority vote at the shareholders’ meeting is required if less than half of the company’s issued share capital is represented at the meeting. For listed NVs, an even larger majority – 95 per cent – is required under all circumstances, irrespective of the percentage of share capital represented at the meeting. The second restriction stems from the concept of ultra vires (often incorrectly referred to as lack of corporate benefit), which entails that a transaction entered into by a company may be annulled by the company itself or its bankruptcy trustee if the transaction exceeded the company’s objects and the counterparty knew or should have known this without independent investigation. In practice, transactions are almost never invalidated on the basis of ultra vires. Counterparties typically protect themselves against a claim that they had the requisite knowledge by requesting confirmation by the management board that it considers the transaction to be in the company’s interest. If such confirmation has been given, and provided that the company’s articles of association explicitly allow it to enter into transactions of the type in question, a claim based on ultra vires will have little chance of succeeding.

176 Netherlands

The third restriction relates to the actio pauliana (voidable preference). If a company is the subject of bankruptcy proceedings in the Netherlands, the actio pauliana enables the bankruptcy trustee to invalidate certain pre-bankruptcy transactions between the company and third parties that have prejudiced the company’s creditors. (Outside bankruptcy proceedings, a similar procedure is available to individual creditors.) Such transactions can include the granting of security and guarantees by the company in the context of a financing deal, where there was no pre-existing obligation to do so. In short, the requirements for invalidating these types of transactions based on the actio pauliana are that the creditors’ possibility of recovery has been prejudiced and the debtor and the counterparty to the contested transaction knew or should have known this (knowledge requirement). The Dutch Supreme Court has ruled that the knowledge requirement is fulfilled if the bankruptcy trustee can demonstrate that, at the time of the transaction, the debtor and the counterparty could, with a reasonable degree of probability, foresee the bankruptcy and the fact that there would be a deficit in the bankruptcy estate. In practice, it is difficult for a bankruptcy trustee to meet this burden of proof. In the Netherlands, there are no rules under which transactions are voidable or void merely because they took place during a particular period prior to bankruptcy. As such, there are no absolute ‘hardening periods’. There is, however, a ‘suspect period’, which is one year prior to the issuance of the bankruptcy order. In certain circumstances the knowledge requirement is presumed to have been fulfilled if the transaction was performed during this period. Such circumstances are, inter alia, a sale for far below fair market value, a transaction with a related party such as a group company or a (direct or indirect) management board member, and the payment of a debt or the giving of security for a debt that is not yet due and payable. It has been unclear whether the suspect period also applies to the granting of guarantees and security by an obligor in the context of a ‘new money’ financing transaction. In a recent decision, the Dutch Supreme Court ruled that the shifting of the burden of proof for transactions performed during the suspect period does not apply to ‘new money’ financing transactions.2 This ruling is obviously good news for secured creditors lending to, or obtaining guarantees and security from, a Dutch obligor, and further improves the already very strong position of secured creditors in the Netherlands generally. Finally, the Works Councils Act (WCA) may have to be observed. Under the WCA, a Dutch company with more than 50 employees is required to establish a works council; a company with fewer employees may do so voluntarily. A works council has the right to be consulted in advance and state its views on a number of important matters in relation to the company. These matters include a change of control over the company, the obtaining or granting by the company of an important credit facility, and the giving of security or guarantees for important debts of third parties by the company, except in the ordinary course of business. In addition, it has been argued, and the general view is, that a company’s works council must also be consulted prior to the creation of a pledge over the company’s shares whereby the voting rights are transferred conditionally (i.e.,

2 HR 29 November 2013, ECLI:NL:HR:2013:CA3762 (Roeffen qq/Jaya BV).

177 Netherlands upon the occurrence of an event of default) to the pledgee, since the actual transfer of voting rights will result in a change of control. The management board may not adopt a resolution on a matter that is being considered by the works council. If the works council advises against proceeding with a transaction, the company must inform the works council whether it nevertheless intends to do so. Implementation of the transaction must then be suspended for a period of one month. During this one-month period, the works council may lodge an appeal against the decision to proceed with the Enterprise Chamber of the Amsterdam Court of Appeal. Review by the Enterprise Chamber is marginal, and the only available ground for appeal is that the management board could not reasonably have decided as it did had it weighed the interests involved. After the one-month period has lapsed the decision may be implemented, even if an appeal has been lodged. Although a court can order provisional measures (either during the appeal or during injunction proceedings), these are not allowed to infringe a third party’s rights.

IV PRIORITY OF CLAIMS

Under Dutch law, all creditors except preferential creditors (e.g., the tax authorities and secured creditors (i.e., pledgees and mortgagees)) and subordinated creditors have an equal claim on a debtor; such creditors are ‘ordinary creditors’. Dutch legislation makes no exception to the above principle for shareholders’ claims: the concept of equitable subordination as such does not exist in the Netherlands. In Dutch legal literature it is generally assumed that the bankruptcy of a debtor or junior creditor does not in itself affect its obligations under a subordination agreement (if it has been properly drafted and the senior creditor, junior creditor and debtor are all parties to the agreement). The bankruptcy trustee is obliged to make any distributions to the creditors in accordance with the terms of the subordination agreement. As a result, there is no reason per se to require structural subordination. In intercreditor negotiations, release provisions continue to receive priority from mezzanine and senior lenders. Other intercreditor hotspots pertain to, inter alia, valuation principles, the ability of mezzanine lenders to recover the costs of obtaining professional advice in the context of a restructuring, mezzanine payment stops and equity cure rights for mezzanine lenders.

V JURISDICTION

A Dutch company may submit to the jurisdiction of a foreign court or arbitration panel and such submission will be recognised in the Netherlands. A final and enforceable judgment of the courts of an EU Member State will be recognised and enforced in the Netherlands without re-litigation of the dispute in question, subject to the provisions of the Enforcement Regulation.3 Judgments of other foreign courts can only be enforced in the Netherlands if there is a treaty between the Netherlands and the relevant country. The

3 Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

178 Netherlands recognition and enforcement of foreign arbitration awards are subject to the provisions of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards. If there is no enforcement treaty between the Netherlands and the country of a foreign court, a judgment of that court (a non-treaty court) cannot as such be enforced in the Netherlands. To obtain a judgment that can be enforced in the Netherlands, the dispute will have to be re-litigated before the competent Dutch court. This court will have discretion to attach such weight to the judgment of the non-treaty court as it deems appropriate. However, assuming that the party against whom enforcement of the judgment is sought is found to have submitted to the jurisdiction of the non-treaty court, the Dutch court can be expected to give conclusive effect to a final and enforceable judgment of that court without re-examination or re-litigation of the substantive matters adjudicated. This would require that proper service of process has been given, that the proceedings before the non-treaty court have complied with the principles of due process and that the judgment is not contrary to Dutch public policy. In a judgment dated 26 September 2012, the French Cour de Cassation ruled, in short, that a one-sided jurisdiction clause (i.e., a jurisdiction clause that is exclusive for one party only, whereas the other has the right to bring an action in different jurisdictions) is invalid on the grounds that it breaches Article 23 of the Enforcement Regulation. The effect of this judgment on the validity of one-sided exclusive jurisdiction clauses under the Enforcement Regulation in the Netherlands is unclear.

VI ACQUISITIONS OF PUBLIC COMPANIES

A bidder making an offer for a Dutch listed company will want to have as much certainty as possible that the financing committed by its lenders will be available for drawdown when needed. Such ‘certainty of funds’ is required not only for obvious commercial reasons, but also for legal ones. However, the Dutch ‘certain funds’ regime is not the same as, for instance, its English counterpart. The Dutch rules only require a bidder to ensure that arrangements are in place for the cash funding of the offer. In the case of an exchange offer, arrangements must be in place for the issuance and delivery of the exchange shares at completion. The bidder must comply with the ‘certain funds’ rules and make a public announcement to this effect no later than at the time of filing the request for approval of the offer document with the Authority for the Financial Markets (AFM). The bidder need only describe the funding and the arrangements it has entered into with its lenders. It is not legally required to produce any credit documentation, but a mere statement that ‘financing is committed’ is insufficient. The AFM does not make an independent assessment of the certainty of funds but only ensures that adequate transparency is provided. The type of credit documentation (e.g., commitment letter and term sheet, committed ‘interim facility agreement’ or fully negotiated credit documents) will generally depend on commercial factors, namely demands made by the bidder and by the target’s management board in connection with its recommendation of the offer and its efforts to obtain as much deal certainty as possible prior to making the recommendation.

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The terms of the credit documentation (including draw-stops and events of default) can vary from case to case, in accordance with prevailing market practice, and can even include ‘material adverse change’ provisions. Having said that, market practice in the Netherlands has for commercial reasons developed in line with English market practice; for example, draw-stops and events of default are limited to ‘major defaults’ that relate exclusively to the bidder and the financing (e.g., non-payment, insolvency, breach of a ‘no further indebtedness’ or negative pledge undertaking). Typically, bidders are only prepared to accept conditions over which they have control or, where this is not the case, conditions that are the same as those in the offer, those agreed upon with the target in a merger agreement, or both. In the financing of an offer for a Dutch listed company, the period between the commitment by the lenders (i.e., when the lending arrangements are in place) (see above) and the provision of financing at the time of closing can be long. The AFM is required to give a first response within 10 business days to the bidder’s request for approval of the offer document. The offer can be launched immediately upon receipt of that approval. The minimum acceptance period for a voluntary offer for all outstanding shares of the target is eight weeks. Therefore, the availability period must be a minimum of 10 weeks. In practice, however, the period between the first announcement of the offer and the filing of the offer document with the AFM may last up to 12 weeks. In addition, the AFM’s approval process often takes up to a month (because the AFM may request additional information) and the acceptance period can be extended to up to 20 weeks, for example to await regulatory clearances. Moreover, it is not unusual that, for commercial reasons, the parties prefer to confirm the certainty of funds earlier, when the offer is announced (e.g., upon the signing of a merger agreement), and the availability period may have to be even longer, for example where additional time is needed for the drafting of the offer document prior to its filing with the AFM or to work on the regulatory approval process. All in all, one should normally expect an availability period of 25 weeks, although it can be longer. The minimum percentage of shares in the target that the bidder will wish to acquire in an offer for a Dutch listed company will depend on the situation and will vary from bidder to bidder. However, apart from general business considerations (including the realisation of synergy), there are various legal and tax reasons for the bidder wanting to acquire at least 95 per cent of the shares. The first reason is that this will allow the bidder to squeeze out the minority shareholders using the statutory squeeze-out proceedings under Dutch corporate law. The second is that this percentage is a requirement for a tax consolidation between the bidder and target. The third is that the target can then be delisted, which in turn will allow it to be converted from an NV into a BV. Conversion into a BV means, inter alia, that the target and its subsidiaries will no longer be subject to the financial assistance prohibition (see above). The 95 per cent threshold has generally been achieved in most deals, but often only in what is called the post-acceptance period (or shortly thereafter). However, for tactical reasons the bidder will generally want to be able to declare the offer unconditional at the end of the regular acceptance period even if the 95 per cent threshold has not been reached, as long as a lower threshold (to be determined on a case-by-case basis but that arguably should not be less than 75 per cent) has been reached instead. A lower threshold also increases deal certainty from the target’s perspective (i.e., it reduces the risk that

180 Netherlands the offer will not be completed, leaving the target ‘in play’ after it may have publicly abandoned its stand-alone strategy). The lenders may, for example, be prepared to accept this: a if there is a step-up of the various margins for as long as the 95 per cent threshold has not been reached; b if an obligation exists for the bidder or the target, or both to implement one or more ‘post-offering restructuring measures’ as soon as reasonably possible in the event that the bidder is subsequently unable to reach the 95 per cent threshold in the post-acceptance period, by open market purchases or otherwise, within a reasonable period (to be agreed upon); and c if an event of default is triggered where guarantees and security have not been created before a certain date (e.g., nine months after the closing date).

Post-offering restructuring measures that are often considered are a debt pushdown by means of a dividend or, alternatively (e.g., to avoid leakage to minority shareholders), a loan from the target to the bidco that is financed through a bank loan to the target, a legal merger between the bidco and the target, or a sale of the target’s assets to the bidco or to another company within the bidder’s group. The implementation of each of these measures will require the approval of the target’s management board, its general shareholders’ meeting and an independent member of its supervisory board. The requirement of approval by an independent supervisory board member is based on Dutch case law and is typically also anchored in the merger agreement. An independent supervisory board member is customarily appointed upon completion of the offer. The bidder often requires that the target’s management board and supervisory board agree to one or more post-offering restructuring measures at the time of signing the merger agreement (subject to shareholder approval, which will be obtained during the acceptance period). As a result of such ‘pre-approval’, such ‘pre-wired’ measures (including the required formal steps) can be easily implemented after completion of the offer. In agreeing to a pre-wired post-closing restructuring, the target’s boards have an enhanced role and responsibility because they decide for all shareholders, subject to majority approval at the target’s general shareholders’ meeting (whereas in the case of a tender offer, each shareholder decides whether or not to tender). Although there is no case law specifically clearing such arrangements, it will be difficult to challenge a pre- wired scenario: a that in itself is legally permitted; b that has been transparently communicated to the target’s shareholders in press releases and the offer document; c that does not disproportionately harm the interests of the minority shareholders; d in which the bidder has a business rationale for squeezing out the minority through the restructuring; e that is implemented on fair and at arm’s-length terms, substantiated with auditor reports and fairness opinions; and f that is decided upon by the target’s boards after careful consideration adequately taking into account the interests of the minority shareholders, where the decision- making process includes directors who are independent from the bidder.

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As long as the target has not yet been converted into a BV, it remains subject to the Dutch financial assistance restrictions. During that period, the bidder is permitted to provide security over the shares in the target, but the target and its subsidiaries can only provide guarantees and security for the refinancing of existing financial indebtedness, new working capital facilities or general corporate purposes; the financing of a dividend to shareholders if the target has freely distributable reserves (note that the payment of such a dividend will result in pro rata leakage to the minority shareholders, but the amount thereof will eventually reduce the squeeze-out price to be paid to them); and the financing of upstream loans (but only after 95 per cent shareholder approval).

VII OUTLOOK

More activity is expected in the upper end of the Dutch midmarket this year. This may lead to the entry of more foreign private equity players (from the UK and the US) in this market and, perhaps, in their slipstream, traditional or alternative foreign debt providers. We also expect the formation of more private equity club deals. In addition, the level of senior debt in financing structures is expected to increase, as is the leverage ratio. Whether pricing in the Dutch midmarket (which is traditionally low in comparison with other European countries) will increase, for instance as a result of CRD IV and other capital requirements imposed on banks, remains to be seen.

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ABOUT THE AUTHORS

DAVID VIËTOR NautaDutilh David Viëtor is a partner in NautaDutilh’s finance group, which is the largest finance group in the Netherlands. He specialises in advising financial institutions, private equity houses, debt investors and corporate clients in all types of domestic and international financing transactions. His main areas of expertise relate to acquisition finance, restructurings, par and distressed transactions, general corporate loans and structured finance transactions.

DIEDERIK VRIESENDORP NautaDutilh Diederik Vriesendorp is also a partner in NautaDutilh’s finance group. He specialises in advising financial institutions, private equity houses, debt investors and corporate clients in all types of domestic and international financing transactions. He focuses on acquisition finance, restructurings, general corporate lending and real estate financing.

NAUTADUTILH NV Strawinskylaan 1999 1077 XV Amsterdam The Netherlands Tel: +31 20 71 71 464 Fax: +31 20 71 71 111 [email protected] [email protected] www.nautadutilh.com

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