Corporate Finance/M&A

Corporate Finance/M&A - Netherlands

Cooperatives proving increasingly popular as holding entities Authors

Contributed by Van Doorne Onno Boerstra

February 16 2011

In the Netherlands, the cooperative has become increasingly popular as a holding vehicle in private equity acquisitions. It provides significantly more flexibility than other Dutch legal entities, such as the private limited liability company (besloten vennootschap (BV)) or the public limited liability company (naamloze vennootschap (NV)), leaving it largely up to the incorporators to structure the cooperative's governance. (1) As such, this vehicle is increasingly used by private equity investors when structuring the holding, financing and governance of their acquisitions. Sjoerd Kamerbeek

While traditionally the cooperative was mainly used in the agricultural sector, in recent years the financial sector has embraced this type of vehicle. A cooperative is a legal entity with a structure based on that of the association. This means that a cooperative has members rather than shareholders and that there are no shares, but rather membership interests. In private equity transactions the members of the cooperative are investment companies and possibly management and other key employees of the target. These members will contribute risk-bearing capital to the cooperative to enable it to acquire the shares of the target. By structuring the transaction in this way, investment companies make use of the flexibility of the cooperative and exploit the tax benefits available to it.

In comparison to BVs and NVs, the Civil Code contains few mandatory provisions regarding the governance structure of cooperatives. Consequently, members of a cooperative can tailor it to their individual needs. Nevertheless, the corporate governance of a cooperative can be structured along the same lines as that of a BV or NV. Accordingly, the general meeting of the members of a cooperative can elect a board of supervisory directors, in addition to the mandatory board of managing directors. The responsibilities and liabilities of the members of both boards are similar to those of the board members of a BV or NV.

Furthermore, investors wish to ensure that they will not be held liable for debts of the cooperative once they become a member. To avoid any liability, members can limit or even exclude their liability for debts of the cooperative in the articles of association. On the other hand, a cooperative may, subject to any limitations under Dutch statutory law or its own articles of association, impose additional obligations on its members.

A cooperative offers opportunities that may be of particular interest for private equity investors. There are no general minimum capital requirements and consequently the capital protection procedures do not apply to the cooperative. Thus, the cooperative offers members, in line with the vehicle's goal to make profits through investments, broad freedom to decide how to distribute profits (reserves). Furthermore, provided that each member has at least one vote, the articles of the cooperative can freely determine and allocate their voting rights. In contrast to BVs and NVs, where shares can be transferred only by notarial deed, no such formal requirements exist for the transfer of membership interests.

In practice, the articles of the cooperative are kept short and simple, limited to the minimum requirements imposed by Dutch law. All arrangements between the members are provided for in the membership agreement in the manner and details that they deem fit.

Finally - and this is often a driving factor for private equity investors to choose this entity in their acquisitions - a cooperative may benefit from the participation exemption, the Dutch tax treaty network and the possibility to distribute profits free from dividend withholding tax.

For further information on this topic please contact Onno Boerstra or Sjoerd Kamerbeek at Van Doorne by telephone (+31 20 6789 123), fax (+31 20 6789 589) or email ( [email protected] or [email protected]). Endnotes

(1) Under pending legislation, the BV will also offer more flexibility to its shareholders.

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