The European Lawyer

Netherlands Banking/Finance

4 Sep 2010

International Acquisition Finance - The Netherlands

Editors: NautaDutilh N.V. - Arjan J.J. Pors and Jaco C. Belder

1. MARKET
The main players in the Dutch market are large commercial banks such as Fortis (including its recent acquisition of ABN AMRO Bank), ING Bank, Rabobank, Deutsche Bank, Goldman Sachs and Morgan Stanley. More and more frequently private equity firms play an important role: Alpinvest, Bain Capital, Blackstone, Cinven, HAL Investments, KKR, NPM, Silver Lake, Warburg Pincus and others were involved in Dutch deals.

According to the information published on www.overfusies.nl, in 2007 over 780 deals were closed with a transaction value in aggregate of over €280 billion. The number of deals and the transaction value in aggregate in a year is steadily increasing. It being noted, however, that the worldwide credit crunch will have an adverse effect in the Netherlands market as well.

In 2007 most deals were closed in the services sector, the industrial sector and financial/insurances sector. An important part of the industrial sector is food processing, chemicals, petroleum refining and electrical machinery.

2. DOCUMENTATION
The governing law of facilities agreements in relation to acquisition finance in the Netherlands is usually Dutch law or English law. The governing law will depend on various factors, but acquisition financing transactions involving only or predominantly Dutch banks or mandated lead arrangers are more likely to be governed by Dutch law than multi-jurisdictional deals involving banks in many jurisdictions.

The facilities agreements for larger club deals or syndicated loans broadly follow the LMA standard documentation.

Facilities agreements in relation to acquisition finance are almost always in English, including the Dutch law governed facilities agreements.

3. ACQUISITION/FINANCING STRUCTURES
The typical financing structure for acquisitions in the Dutch market is a combination of senior debt, mezzanine debt and/or second-lien debt and equity and/or investor debt.

The senior lenders will take less risk and the senior debt will have a lower pricing (in terms of interest margins and fees). The senior debt will be secured by means of guarantees and in rem security rights and rank ahead of the other acquisition debt. The senior facilities agreement may provide for term loan facilities, revolving facilities and/or guarantee and letter of credit facilities. Often, one or more of the senior lenders will provide banking facilities and overdraft facilities and/or guarantee/letter of credit facilities.

The mezzanine lenders will take more risk and mezzanine debt will have a higher pricing. Traditionally, mezzanine debt will be unsecured and rank behind the senior debt (but ahead of equity and/or investor debt) and pari passu with other unsecured and unsubordinated debt. Interest can involve a cash pay interest portion and a payment in kind portion. The terms and conditions of the mezzanine facilities agreement often mirror the senior facilities agreement amended to reflect the commercial agreement between the parties.

In situations where the assets value of the target group is in excess of the amount of the senior debt, second lien debt may form part of the financing structure. Second lien debt can be an additional type of debt, but it may be difficult to raise second lien debt and mezzanine debt because the mezzanine debt would rank behind both the senior debt and the second lien debt. More often, mezzanine debt is replaced by or takes the form of second lien debt. Second lien lenders will take less risk than traditional mezzanine lenders and the pricing of second lien debt will be higher than traditional mezzanine debt. Second lien debt will be secured, but rank behind the senior debt and the senior lenders will usually have the right to make decisions on enforcement and otherwise in respect of the security interests.

An important part of the financing structure will be the equity or investor debt part. The equity part will naturally rank behind any other debt, but as far as investor debt is concerned, the senior lenders, mezzanine lenders and/or second lien lenders will usually require the investor debt to be unsecured and rank behind the senior debt, the mezzanine debt and/or the second lien debt.

Typical issues
The ranking of various types of debt and the taking of security as described above plays an important role in a financing structure and will be one of the issues to be dealt with. See sections 8 and 16 for the common security structures and packages and section 6 for intercreditor arrangements and subordination. 

Corporate benefit issues (see section 8) and financial assistance rules (see section 10) also play an important role in structuring a financing.

If the time available for an acquisition financing transaction is limited, the facilities agreements may be entered into on short notice to allow the acquisition to take place. The day one security interests may be limited to a parent guarantee and a pledge over the shares in the capital of the target. Furthermore, the facilities agreements may provide for a period, usually between one and six months, for target companies to accede, a debt push down to occur and the remainder of the security package to be put in place. Alternatively, bridge financing may be used following the acquisition.
 
4. REGULATED TARGETS
If a transaction involves a regulated target such as banks, investment institutions, investment firms or insurance companies, various issues must be addressed that would be less relevant in other transactions.

The purchaser/borrower will have to give certain additional representations and warranties and undertakings. For example, that it has obtained and will continue to obtain all regulatory approvals or licences required in connection with the acquisition and the target’s business, it has always complied and will comply with ongoing compliance requirements and that the target has not received any notices from any regulator or other governmental body in respect of the revocation or non-renewal of any licences or non-compliance with ongoing compliance requirements. 

The purchaser/borrower will have to provide as condition precedent documents, among other things, copies of all required regulatory approvals or licences required in connection with the acquisition of the target’s business.

The refusal of a regulator to give further approvals or licences, the revocation or non-renewal of licences and the violation of ongoing compliance requirements will constitute an event of default under the facilities agreements and entitle the lenders to cancel their commitments and to accelerate any outstanding loans.

Regulatory aspects are very important to the business of the target. Only a minor violation may have a material adverse affect on such approvals or licences and the business of the target. For this reason, lenders will be reluctant to include materiality tests or qualifications in representations and warranties or undertakings or allow remedy of defaults in respect of regulatory issues.

Examples
On 1 January 2007 the Financial Supervision Act (‘FSA’) entered into effect. The FSA replaces and consolidates practically all rules and regulations in effect prior to 1 January 2007 that applied to the financial markets and financial institutions and their supervision.

The Minister of Finance is the conduct and prudential supervisor. He has transferred his conduct duties and authorities to the Netherlands Authority for the Financial Markets (‘AFM’) and his prudential duties and authorities to the Dutch Central Bank (‘DCB’). Licences for institutions that are largely subject to conduct supervision, ie investment firms and investment institutions, will be granted by the AFM. Licences for institutions that are largely subject to prudential supervision, such as banking institutions and insurance companies, will be granted by the DCB. The FSA lays down rules for cooperation between the AFM and the DCB.

Subject to exceptions and exemptions, the FSA prohibits acting as a bank or insurance company in the Netherlands without a licence. A licence to act as bank or insurance company will be granted by the DCB if the applicant satisfies certain rules laid down by the FSA.

As mentioned above, the FSA provides for certain ongoing compliance requirements, including for example duties to disclose information periodically and occasionally.

The holding or acquisition of, or increase in, a ‘qualifying shareholding’ (ie ten per cent capital interest or voting rights) in a bank or insurance company established in the Netherlands and the exercise of any control connected with a qualifying shareholding shall be prohibited, unless a declaration of no objection has been obtained from the DCB.

Furthermore, depending on the balance sheets and amounts paid, it may be required for a bank to obtain a declaration of no objection to acquire, or increase, a qualifying shareholding in another bank, an investment firm, a financial institution or an insurance company, or in any other undertaking.

If a transaction involves a regulated target other than a bank or insurance company, similar laws and regulations will apply.

5. LISTED TARGETS
If a transaction involves a listed target, various issues must be addressed that would be less relevant in other transactions.

Subject to certain exceptions and exemptions, the FSA prohibits a public offer for securities or units in an investment institution admitted to trading on a regulated market in the Netherlands without an offer document. The FSA and further regulations pursuant to the FSA concerning public offers set out in detail the issues or information which need to be included in the offer document and the rules of conduct which, subject to possible dispensations, have to be complied with by the bidder, the target company and their executive directors, supervisory directors and other officers. The rules include, among other things, rules on how and when to make public announcements, disclosure duties in respect of shares and voting rights on shares and rules relating to insider trading and market manipulation. The offer can be made subject to certain conditions, provided that the fulfilment of such conditions may not be dependent on the will of the bidder.

On 28 October 2007, the new rules for public offers came into force, thereby implementing the EU Directive on takeover bids (2004/25/EC). The new rules introduced, among other things, a mandatory offer, an EU passport offer document and a certain funds rule.

Furthermore, the rules set by Euronext may be relevant if a listed target is involved. For example, certain notice or disclosure duties may be applicable and Euronext has issued an announcement regarding the policy on delisting.

If a facilities agreement relates to financing for the acquisition of a listed target, a number of provisions will be included in the facilities agreement to address the issues above. The purchaser/borrower will have to give additional representations and warranties and undertakings on compliance with the various laws and regulations and will have to provide certain additional condition precedent documents. For example, the offer document and  various announcements and notices will be included as condition precedent documents.

In situations of an unfriendly public offer or other situations in which no or only limited due diligence is possible, a facilities agreement may provide for a ‘clean up period’ of a couple of months in respect of circumstances in relation to the target which would otherwise constitute an event of default and which are capable of being remedied.

As mentioned above, the new rules for public offers introduced, among other things, a certain funds rule. No later than the time the bidder requests the AFM to approve the offer document, the bidder must be able to produce any cash consideration necessary to give effect to the offer or must have taken all reasonable measures to be able to produce any other type of consideration.

In practice the certain fund rule already applied because private equity investors and other market parties insisted on certainty of funds before they would make a public offer. Certainty of funds may be achieved by excluding or restricting the conditions precedent to the availability of the rights to terminate or suspend obligations of the lenders to participate in, or the rights to accelerate, the facilities used to finance the acquisition. The exclusions and restrictions normally will apply for a limited period of time only.

6. MEZZANINE DEBT AND INTERCREDITOR ARRANGEMENTS
Intercreditor arrangements typically deal with ranking various types of debt, the holding and enforcement of security rights, the differences between the terms of various facilities agreements and generally the position of various lenders among themselves and in relation to the borrower or the borrowers.

Subordination can be achieved by means of structural subordination and/or contractual subordination. Structural subordination arises where the senior creditors lend to the operating company which will hold the assets and the junior creditors lend to a holding company or finance company which does not hold the assets. The junior creditors as creditors of the holding company or finance company effectively rank behind the senior creditors as creditors of the operating company. If both the senior creditors and the junior creditors lend to the operating company and the senior creditors take the benefit of security over the assets and the junior creditors take no security over the assets, a similar result can be achieved. In that case the junior creditors no longer subordinate their claims to the claims of all creditors of the operating company, but their claims will rank pari passu with the claims of all other unsecured and unsubordinated creditors of the operating company which do not have priority by law. 

Contractual subordination under Dutch law results from an agreement between the senior creditors, the junior creditors and the company and includes: (i) the agreement provided for in the Dutch civil code whereby the company as debtor and the junior creditors agree that the claims of the junior creditors will rank behind the senior creditors or all other creditors; and (ii) all other contractual arrangements purporting to give the senior creditors a senior position and the junior creditors a junior position. The contractual subordination referred to under (i) only relates to the ranking of the claims of the junior creditors in case of insolvency or other situations in which creditors have recourse against assets of the company. The contractual subordination referred to under (ii) is much broader and includes, for example, the undertaking by the junior creditors not to collect or receive any payment on their claims. The term ‘subordination’ does not have an unambiguous meaning under Dutch law and the interpretation by Dutch courts of any intercreditor arrangement (or any other agreement as a matter of fact) will depend on the meaning each of the parties in the given circumstances was entitled to attach to the terms thereof and on the parties’ reasonable expectations in that respect.

The intercreditor arrangement may allow the junior creditors to have the benefit of second-ranking security or the same first-ranking security as the senior creditors. In any event the intercreditor arrangement will include provisions on the holding of security, decisions on enforcement, standstill periods and distribution of enforcement proceeds.

6.1 To what extent are high yield bonds used in these transactions?
Debt finance for acquisitions in the Dutch market generally takes the form of bank loans, but for larger transactions part of the debt may take the form of securities. The issuing of securities should be carefully structured so that it is in compliance with the applicable rules and regulations.

The rules implementing the EU Prospectus Directive (2003/71/EC) are contained in the FSA and further regulations pursuant to the FSA. The FSA prohibits the offering of securities to the public or to have securities admitted to trading on a regulated market without an approved prospectus, subject to exceptions and exemptions (including an exception in respect of an offer of securities addressed to investors who acquire securities for a total consideration of at least €50,000 per investor or whose denominations per unit amounts to at least €50,000).

Subject to exceptions and exemptions, the FSA prohibits:

• acting as a bank without a licence (making its business of receiving repayable funds outside a restricted circle from persons which do not qualify as professional market parties on the one hand and on-lending such funds on the other hand); and
• inviting, receiving or having, in the course of its business, repayable funds from outside a restricted circle from persons who do not qualify as professional market party.

An important new category of professional market parties has been introduced recently: persons who provide repayable funds by way of a loan for a minimum amount of €50,000 or by way of purchasing securities with a denomination of at least €50,000 (in case loans or securities are purchased in a package such package should represent a nominal value of at least €50,000 or be purchased against an aggregate consideration of at least €50,000).

6.2 Specific issues relating to mezzanine and intercreditor agreements
There are no specific Dutch law issues in relation to mezzanine debt and intercreditor arrangements, except that under Dutch law security cannot be created in favour of a person who is not the creditor of the claim which is to be secured and the concept of trust is not known. This means, among other things, that under Dutch law it is not possible for security to be held on trust for various creditors. It is possible, however, to create security in favour of a security agent for the benefit of various creditors by using a parallel debt structure (see section 8).

7. EQUITY KICKERS
An ‘equity kicker’ can be described as an option for lenders to participate in or have the benefit of an increase in value of the equity of a borrower. An equity kicker may be granted to mezzanine lenders or private equity investors to compensate for the junior ranking of the debt and to allow a lower pricing of the junior debt.

Equity kickers commonly take the form of warrants or convertible debt. A plain vanilla warrant is an option to buy existing or newly issued shares in the capital of the borrower at a fixed price. Plain vanilla convertible debt is debt whereby the lenders have the option during a certain period to convert or exchange the debt into equity, commonly at a fixed conversion ratio. If the value of the equity of the borrower increased, exercise of the warrant or conversion option becomes profitable.

There are no specific Dutch law issues in relation to equity kickers, it being noted that requirements in connection with and restriction on the issuance of shares, pre-emptive rights and employee participation rights have to be taken into account.

8. SECURITY
As security for the repayment of the funds provided by lenders in connection with an acquisition finance transaction, the borrower (and certain of its subsidiaries) may grant a security package consisting of guarantees, rights of pledge and/or mortgage.

Under Dutch law, a general distinction can be made between in rem security rights and personal or contractual security rights.

The in rem security rights consist of the right of pledge and the right of mortgage. Personal or contractual security rights include the surety, the guarantee and the joint and several liability. Holders of in rem security rights are entitled to recover against the assets to which such rights attach with a priority over the claims of other creditors. Personal or contractual security rights do not create a right of recovery against certain specific assets but create a liability on a third party for the satisfaction of a claim. The concept of the ‘floating charge’ is not known under Dutch law: only specified assets may be pledged or mortgaged.

In rem security rights can only be vested to secure existing and future claims to receive  payment of an amount of money.

For the creation of in rem security rights, Dutch law contains the following general requirements: (i) the execution of a deed; (ii) a valid legal ground for the creation of the right of pledge (usually an agreement between the parties obliging the pledgor or mortgagor to create the right of pledge or mortgage); and (iii) the pledgor or mortgagor must have the power to dispose of the asset to be pledged or mortgaged. In addition, the asset to be pledged or mortgaged must be transferable and sufficiently identifiable. Finally, the secured debt must be sufficiently defined. This requirement is met if the secured debt can be identified on the basis of the description of the secured debt included in the relevant security document.  

In addition to the general requirements described above, the specific requirements applicable to certain commonly used types of in rem security rights are, in short, discussed below.

Shares
Shares in a Dutch private limited liability company are pledged by means of a notarial deed to which each of the shareholder (as pledgor), the pledgee and, preferably, the company of which the shares are pledged, is a party. After the execution of the deed, the board of directors of the company is required to make an entry of the right of pledge in the companies’ shareholders register. Normally, a deed of pledge of shares provides that the voting rights attached to the shares will be transferred from the pledgor to the pledgee under the suspensive condition that: (i) an event of default under the finance documentation has occurred; and (ii) the event of default has been notified to the pledgor and the company. If a (conditional) transfer of the shares is intended, a resolution of the shareholders of the company is required. The company’s articles of association must allow the right of pledge and the conditional transfer of voting rights.

Real property
A right of mortgage on real property is created by means of a notarial deed, to which each of the owner of the real property (as mortgagor) and the mortgagee is a party and registration in the mortgage register. The notarial deed should contain the maximum amount for which the right of mortgage is vested. Furthermore the mortgagee is obliged to elect an address for service in the Netherlands. A right of mortgage cannot be created in the future, ie real property not existing at the moment of execution of the deed of mortgage.   

Movable assets
Movable assets such as inventory, stock and equipment can be pledged by means of either a registered private or a notarial deed to which each of the owner of the inventory (as pledgor) and the pledgee is a party. Both existing and future movables can be pledged. The right of pledge on movable assets may take the form of a possessory or a non-possessory pledge.

In case of a possessory pledge, the movable assets are pledged by bringing them under the control of the pledgee or within the control of a third party which will keep them on the instructions of the pledgee.
In case of a non-possessory pledge, the pledgor is obliged to declare that: (i) he is capable of pledging the movable assets; and (ii) the movable assets are not subject to limited rights, or, in case the movable assets are subject to limited right, which limited rights are applicable. Where the debtor or, in case of a third party pledge, the third party fails to perform its obligations or if the pledgee has good reasons to fear that there will be such a failure, the pledgee is authorised by law to require the pledged movables be brought under its control.

Receivables
A right of pledge over receivables such as intercompany, trade, bank account or insurance receivables can be created by means of either a registered private or a notarial deed to which each of the owner of the receivables (as pledgor) and the pledgee is a party. 

The foregoing is sufficient for an undisclosed right of pledge. In case of a disclosed right of pledge, the debtor of the receivable must be informed in order to create a valid right of pledge. Disclosed pledges are generally used to pledge bank accounts, insurance and intercompany receivables. Undisclosed rights of pledge are generally used to pledge trade receivables.

Under Dutch law it is not possible to create an undisclosed right of pledge on receivables which are acquired by the pledgor after the date of the deed of pledge and are not acquired pursuant to a legal relationship in existence on the date of such deed. It is not completely certain whether under Dutch law a valid disclosed right of pledge can be created on such receivables. Consequently, normally, receivables (in particular trade receivables) have to be pledged on a periodic basis, for instance every month. This can be done by a shortened pledge agreement, which must be registered with the relevant Dutch tax authorities.

In case of the creation of an undisclosed pledge, contrary to a disclosed pledge, the debtors of the receivables are not notified of the creation of the pledge. As long as the right of pledge has not been notified to the debtors of the pledged receivables, the right to collect the receivables remains with the pledgor. Commonly, a deed of undisclosed pledge of receivables provides the pledgee with a right to notify the debtors of the receivables of the right of pledge and to state that the pledgor is no longer entitled to receive and collect payments upon the occurrence of an event of default, whereas a deed of disclosed pledge of receivables will stipulate that the pledgor has been granted permission by the pledgee to receive and collect payment of the receivables until such permission has been withdrawn by notice to the pledgor and the debtor, which notice, generally, shall only be given upon the occurrence of an event of default.   

Intellectual property rights
Intellectual property rights governed by Dutch law can be pledged by means of either a private deed or a notarial deed to which each of the owner of the intellectual property rights (as pledgor) and the pledgee is a party. The creation of a right of pledge on intellectual property rights is somewhat complex, since: (i) the precise procedure depends on the kind of intellectual property right that is pledged; and (ii) the applicable rules are not always clear. For instance, a copyright can be pledged by means of a private deed without any need for further registration, whereas, for instance, for trade marks, registration of the right of pledge is necessary in order to be protected against claims by third parties.

8.1 Are there any limitations on security?
Under Dutch law, there are no specific restrictions applicable to a Dutch company granting security rights, except that the granting of security rights should not contravene (i) the corporate objects of a Dutch company and (ii) the Dutch rules regarding financial assistance (see section 10).

As regards the first subject, under Dutch law any transaction entered into by a legal entity may be nullified by the entity or its trustee in bankruptcy if the corporate objects of such entity would be transgressed by the transaction and the other party to the transaction knew or should have known this without independent investigation. The Netherlands Supreme Court has ruled that in determining whether the objects of a legal entity are contravened, not only the description of such objects in the articles of association of such legal entity is decisive, but all relevant circumstances must be taken into account, in particular whether the interests of the legal entity were served by the transaction. 

In relation to the question whether the granting of security for obligations of other group companies is in the corporate interest of a Dutch company and its subsidiaries, the following should be noted. In principle, the transaction a company intends to enter into should be in its own corporate interest. In relation to financing transactions, it can be argued that, if the financing is in the interest of a group of companies, as a whole, the granting of security rights by companies belonging to that group is not regarded to be ultra vires, provided that, among other relevant circumstances, all or substantially all subsidiaries grant guarantees or in rem security rights. It is generally assumed that a transaction is ultra vires if it is to be foreseen that the consequences of entering into the transaction will directly endanger the continuity of the company.

8.2 Are there any other issues that might cause difficulties with the granting of security?
Parallel debt
It is generally assumed under Dutch law that a security right cannot be validly created in favour of a person who is not the creditor of the claim that is purported to be secured. In practice, certain legal structures are available to remedy this problem. The most common and market practice structure is parallel debt.

The parallel debt structure is designed to be used in financing transactions where two or more lenders make funds available under a facilities agreement and one or more Dutch companies are to provide security for the payment obligations under such facilities agreement. In this structure, a ‘parallel debt’ is created in favour of one lender (normally the security agent in the transaction structure), which mirrors the claims of the lenders under the facilities agreement, and the security granted by the Dutch obligors secures such parallel debt. The parallel debt provisions can be included in the facilities agreement, the security documents governed by Dutch law or in a separate agreement.

Although there is no case law on the validity of parallel debt structure, the vast majority of legal writers and all major law firms in the Netherlands agree that this structure should work and the Dutch Banker Association has recommended the structure to its members as the safest available structure.

Corporate action
Under Dutch law corporate action is, in principle, an internal process of a company. However, in finance transactions it is common practice that the Dutch borrower and its Dutch subsidiaries provide the lenders with written resolutions of the managing board, shareholders and, where relevant, the board of supervisory directors. One of the reasons for this practice is that it can be argued that insufficient internal corporate action of a company may, under certain specific circumstances, have external effect to third parties dealing with such company. Insufficient corporate action of a borrower could, for instance, have the effect that such borrower is not bound towards the lenders under the facilities agreement. The foregoing is usually reason for the lenders to ask: (i) the relevant parties to the transaction to provide  written resolutions; and (ii) a legal opinion from a lawyer confirming that all required corporate action by the relevant companies has been taken.

When a managing director has a conflict of interest with a Dutch public or private limited liability company, Dutch law provides that none of the managing directors is authorised to represent the company. In such situation, unless otherwise provided in the company’s articles of association, the company shall be represented by its supervisory board, if established. The company’s shareholders’ meeting is at all times authorised to appoint a person to represent the company in situations of conflict of interest. The articles of association of a Dutch company may provide that even in a case of conflict of interest the managing directors, including the managing director with whom the conflict exists, may represent the Dutch company. In addition, the Dutch corporate governance code (the Tabaksblat Code) provides that the managing director of a Dutch public company who has a conflict of interest shall not participate in the internal decision of the management board. Generally, in finance transactions in the Netherlands lenders will require shareholders’ resolutions in which the shareholders have appointed each of the managing directors of a Dutch company to represent such company in case of a possible conflict of interest.  

Works Council consent
Pursuant to the Dutch Works Councils Act, a company is obliged to establish a works council if a company has over 50 employees. It is also possible for a company to establish a works council voluntarily.

A works council has the right to provide advice regarding, among other things, a company’s intention to: (i) enter into an important facilities agreement, (ii) grant security rights for debt obligations of third parties; or (iii) enter into a deed of pledge pursuant to which the shares in its capital will be pledged and the voting rights attached to the shares are (conditionally) transferred to the pledgee.

A company should consult its works council at such a point in time that the advice of the works council can influence the proposed resolution. Furthermore, a company has to provide its works council with sufficient information about the proposed transaction, and grant sufficient time and opportunity to render its advice.

If the works council does not render a ‘positive advice’ (ie does not consent), the company is not allowed to enter into the facilities agreement or give the guarantee/security or to lend its assistance to the pledging of the shares in its capital, unless a month has lapsed after the date on which the company gives notice to the works council that it intends to proceed as originally intended. During this time period, the works council can appeal against the decision of the company with the Enterprise Chamber of the Court of Appeal in Amsterdam. If the works council does so appeal, it can petition the court to prevent the company from proceeding as originally intended, pending the appeal.

9. CORPORATE THIN CAPITALISATION RULES
Dutch corporate law does not provide for any thin capitalisation rules or restrictions on debt financing. Dutch tax law, however, does provide for thin capitalisation rules which may deny the deduction of interest on debt between group companies which are not within a fiscal unit to the extent such debt exceeds the debt allowed pursuant to the applicable debt to equity ratio.

There are two debt to equity ratio tests and companies can choose which one they wish to use. The first test is 3:1 and will be determined by reference to the financial statement for tax purposes and allows receivables and loans to be set off. A €500,000 threshold applies to the 3:1 debt to equity ratio test, ie the deduction of interest will only be denied to the extent that the excess debt exceeds €500,000. The second test refers to the debt to equity ratio of the company’s group. If the debt to equity of a company does not exceed the debt to equity ratio of its group, the deduction of interest will not be denied. This second test is to be determined by reference to the commercial financial statements and does not allow receivables and loans to be set off. The €500,000 does not apply to this second test.
Top holding companies are not affected by the thin capitalisation rules because by definition they will meet the second debt to equity ratio test.

Specific rules and restrictions on debt financing may apply to certain regulated companies.
There are no specific shareholder liability issues in relation to thin capitalisation or restrictions on debt financing.

10. FINANCIAL ASSISTANCE
10.1 What are the main rules on financial assistance?
A Dutch company may not grant loans, provide security interests, give a price guarantee or otherwise bind itself, whether jointly and severally or otherwise with or for third parties with a view to the subscription or acquisition by third parties of shares or depository receipts of shares in the capital of that company, except that a private company with limited liability (but not a public company) may grant loans under certain conditions. The financial assistance prohibition also applies to its subsidiaries. It is generally assumed that a transaction entered into in violation of the financial assistance prohibition is null and void.

The financial assistance prohibition does not apply if shares or depositary receipts are subscribed or acquired by employees of a public company or of a group company of a public company. Furthermore, the financial assistance prohibition does not apply to licensed banks insofar as such banks act in the normal conduct of its banking business.

10.2 To what extent are target assets/cash flows accessible?
The financial assistance prohibition does not necessarily mean that the lenders will have no access at all to the assets or cash flow of the target. The financial assistance prohibition does not prevent a Dutch company and its subsidiaries to provide guarantees or grant security interests for debt other than acquisition debt, for example, debt in respect of working capital facilities.

A generally accepted way to deal with this is to a separate facility for the acquisition debt or to include general limitation language to the effect that the guarantees and/or security interests are not given or do not operate as security for any acquisition debt. 

A debt push-down will also allow lenders to have access to the assets or cash flow of the target.

10.3 Are debt push down structures allowed?
For the purpose of creating a debt push-down, the so-called ‘on-lending structure’ is  generally accepted in the Netherlands. Under this structure, the lenders make funds available to the target and/or its subsidiaries, and the target company and/or its subsidiaries give guarantees and/or grant security interests as security for the amounts borrowed by them. Subsequently, the amounts borrowed by the target and/or its subsidiaries are up-streamed one way or the other in order to repay the acquisition debt. There are several ways to up-stream amounts which include: (i) distribution of dividends or interim dividends; (ii) loans; (iii) repurchase of shares and cancellation of shares; and (iv) repayment of existing intra-group debt (if any). It should be noted that these ways to up-stream amounts are all subject to restrictions and conditions.

Another generally accepted structure in the Netherlands for the purpose of creating a debt push-down, is the structure whereby the target and/or its subsidiaries (as disappearing entities) merge with the purchaser (as surviving entity). It is generally assumed that following the merger or mergers the purchaser as surviving entity will be allowed to give guarantees and grant security for the acquisition debt.

10.4 Are there any other issues to consider?
Pursuant to the currently pending Private Company Law (Simplification and Flexibilisation) Act, it is intended that the financial assistance prohibitions relating to Dutch private limited liability companies will be abolished. It is expected that the act will enter into force in the course of 2009.

11. DIRECTORS’ LIABILITY
Managing directors of Dutch companies may be held personally liable by either the company itself (internal liability) or third parties (external liability) for several reasons. Liability may arise in contract or in tort (both civil law and criminal law). This paragraph contains a summary of the most important, but not all, categories of directors’ liability.

In general, the management of a Dutch company is under a general duty to act in good faith and in the interests of the company with appropriate skill and care. Managing directors may be personally liable to pay damages to the company in respect of any acts which are contrary to the interests of the company, or if they conduct the business in a careless, negligent or fraudulent manner.  A clear misuse or abuse of power would expose the director in question to civil (and potentially criminal) liability.

If a Dutch company has a supervisory board, the members of such board may also be held liable, if, in short, they supervised the business in a careless, negligent or fraudulent manner or have determined the policy of the company as if they were managing directors or if the company’s annual accounts are misleading.

Managing directors may be held personally liable if they have improperly performed their duties towards the company, for instance, in situations where managing directors have contravened the objects clause of the company in the performance of their tasks. In addition, Dutch law provides some specific legal provisions which create potential liability for managing directors.

External personal liability of managing directors may result from general Dutch law legal provisions, like reasonableness and fairness or tort, but also from more specific provisions. Managing directors may be held personally liable by a third party if they enter into an agreement for and on behalf of the company, and, at such time, they knew (or should  have known) that the company could not meet its obligations under that agreement. In addition, managing directors may be held liable if the company acquires shares in its own capital in breach of the Dutch financial assistance rules. In bankruptcy situations, managing directors may be liable if the company’s annual accounts are misleading or if they have manifestly performed their duties improperly and if it is plausible that this is an important cause of the bankruptcy. The provisions in respect of managing directors’ liability in bankruptcy situations apply equally to persons who have determined the policy of the Dutch company as if they were managing directors.

12. LENDERS’ LIABILITY
Under Dutch law, the concept of lenders’ liability is not known in the sense that there are no specific liability rules. In general, liability for lenders may arise if lenders exercise their rights and obligations against their clients in violation of the general applicable rules under Dutch civil law and Dutch case law.

For example, lenders may become liable towards their clients if they incorrectly use their rights to terminate a facilities agreement. As a consequence of their liability, lenders may have to pay their clients for the damages caused by the termination of the facilities agreement.

Furthermore, it should be noted that lenders should act in accordance with the general banking conditions and, among other things, should exercise their services with due care. In doing so, lenders should use their best efforts to bear in mind the interests of their clients. Failure to act in compliance with the foregoing is another example of a situation in which lenders’ liability may arise. 

13. LEGAL OPINIONS
Opinions rendered in the Netherlands in connection with acquisition finance transactions will, in general and next to the transaction specific tailor-made limitations or qualifications, be limited or qualified in relation to issues like, among other things, ultra vires, parallel debt, corporate action, works council consent (see section 8), financial assistance (see section 10), specific issues in connection with the in rem security rights vested in connection with the transaction (see section 8), insolvency situations and other general applicable rules under Dutch law like, for instance, the rules of fraudulent preference, force majeure and reasonableness and fairness.

Finally, it is standard practice in the Netherlands that the opinion issuer stipulates in the opinion letter that Dutch law and the firm’s general conditions (including a limitation of liability clause) govern the legal relationship between the firm and the receiver of the opinion letter.
 
14. POST- ACQUISITION RESTRUCTURINGS
Post-acquisition restructurings are often driven by the wish to de-list a company, to achieve a debt push down, to squeeze out minority shareholders or more generally by the plans of the purchaser.

Following a successful public offer, the bidder may decide to de-list the company from Euronext. A company can be de-listed at the request of the bidder or the company, provided that the conditions set out in the policy of Euronext with respect to delisting as laid down in an announcement are met.
The restrictions on debt push down mainly relate to Dutch financial assistance rules (see section 10). 

14.1 To what extent are squeeze-outs permitted?
In the event that after a public offer the bidder has acquired at least 95 per cent of the issued share capital of the company and at least 95 per cent of the voting rights, the most common way to acquire 100 per cent of the company’s shares is by means of the statutory buy-out proceedings against the minority shareholders.

Using this procedure, minority shareholders may be forced to transfer their shares to the bidder. The Enterprise Chamber of the Court of Appeal in Amsterdam is the competent authority to render a decision on the claim instituted by the bidder against the minority shareholders to transfer their shares. If the public offer was a mandatory offer, the consideration offered in the bid will be deemed to be a fair price for the purposes of the squeeze-out. If the public offer was a voluntary offer, the consideration offered in the bid will be deemed to be a fair price if shares representing at least 90 per cent of the issued share capital of the company were acquired through the offer.

In the event that the bidder does not buy out a minority shareholder after a public offer pursuant to which the bidder has acquired at least 95 per cent of the issued share capital of the company and at least 95 per cent of the voting rights, such minority shareholder may initiate sell-out proceedings against the bidder in respect of its shares.

In the event that after a public offer the bidder has not acquired at least 95 per cent of the issued share capital of the company and at least 95 per cent of the voting rights, the bidder may seek other ways to squeeze out or dilute minority shareholders. These other ways include: (i) an assets sale followed by a liquidation; (ii) issuance of shares by the company; (iii) a legal merger; (iv) a legal split-off; and (v) open market purchases. It should be noted that these ways to squeeze out or dilute minority shareholders may be challenged by the minority shareholders on the basis of the general rule of reasonableness and fairness.

15.  DEBT RESTRUCTURING
In the Netherlands, generally, debt restructuring is based on two proceedings offered under the Dutch Bankruptcy Act. The first one, suspension of payments, is intended to facilitate the reorganisation of a debtor’s indebtedness and enable the debtor to continue as a going concern. The second, bankruptcy, is primarily designed to liquidate and distribute the proceeds of the assets of a debtor to its creditors. 
A suspension of payments is only effective with regard to unsecured non-preferential creditors.  Secured and preferential creditors (including, among other parties, tax and social security authorities) may enforce their rights against assets of the company in suspension of payments to satisfy their claims as if there were no suspension of payments.  However, the court may order a ‘cooling down period’ for a maximum period of four months during which enforcement actions by secured or preferential creditors are barred. In a suspension of payments, a composition may be offered to creditors. A composition will be binding on all unsecured non-preferential creditors if it is: (i) approved by a simple majority of the meeting of the recognised and of the admitted creditors representing at least 50 per cent of the amount of the recognised and of the admitted claims; and (ii) subsequently ratified by the court.

Under Dutch bankruptcy proceedings, the assets of a debtor are generally liquidated and the proceeds distributed to the debtor’s creditors in accordance with the respective rank and priority of their claims. As in suspension of payments proceedings, the court may order a ‘cooling down period’ for a maximum of four months during which enforcement actions by secured or preferential creditors are barred unless such creditors have obtained leave for enforcement from the supervisory judge. The claim of a creditor may be limited depending on the date the claim becomes due and payable in accordance with its terms. Each of these claims will have to be submitted to the receiver who will determine the value of the claim and whether and to what extent it will be admitted in the bankruptcy proceedings. Generally, in a creditors’ meeting, the receiver, the insolvent debtor and all verified creditors may dispute the verification of claims of other creditors. Creditors whose claims or value thereof are disputed in the creditors meeting may be referred to separate court proceedings. Further, in a bankruptcy a composition may be offered to creditors, which shall be binding on unsecured non-preferential creditors if (i) it is approved by a simple majority of the meeting of unsecured non-preferential creditors with admitted and provisionally admitted claims, representing at least 50 per cent of the total amount of the admitted and provisionally admitted unsecured non-preferential claims, and (ii) subsequently irrevocably ratified by the court. Remaining amounts, if any, after satisfaction of the secured and the preferential creditors are distributed among the unsecured non-preferential creditors, which will be satisfied on a pro rata basis.

Even if a composition in suspension of payments or bankruptcy is not accepted by the creditors, it may, subject to certain conditions, be accepted by a Dutch court or, if appointed, supervisory judge.
Under the European Insolvency Council Regulation, creditors are also entitled to seek opening of secondary proceedings in each member state of the European Union (except for Denmark), where a Dutch company has an establishment. 

16.  ENFORCEMENT OF SECURITY    
If a pledgor is in default with respect to the obligations secured by a right of pledge, the pledgee is authorised to sell the pledged assets and to apply the proceeds in discharge of the secured debt. In case of a pledge of receivables, the pledgee shall be entitled to collect the receivables following notice of the rights of pledge to the debtor. Upon collection by the pledgee, the right of pledge will encumber the amounts collected. The pledgee shall be entitled to have recourse against the amounts collected as soon as the secured obligations become due.

A sale of pledged assets takes place at a public auction. The public sale must be held in accordance with local customs and in accordance with the customary conditions, which will include some form of publicity and the presence of a notary or a bailiff.

Unless stipulated otherwise in the deed of pledge, a court may at the request of the pledgor or the pledgee, order that the pledged assets be sold in a different manner or, at the request of the pledgee, permit the pledgee to keep the asset upon payment of an amount to be determined by the court.
In addition, after a pledgee becomes authorised to sell the pledged assets, the pledgee and the pledgor can agree on a manner of sale deviating from the ways described above. Should the pledged assets be encumbered with a limited right or an attachment, the co-operation of the holder of the limited right or the attachor respectively, is required.

A right of pledge does not entitle the pledgee to retain the pledged asset. A stipulation in the deed of pledge pursuant to which the pledgee is given the right to retain the pledged assets is null and void. A pledgee will be permitted to bid at the public sale.

Under Dutch law the pledgee has certain information obligations regarding the contemplated sale towards the pledgor and, if applicable, the holder of a limited right on the pledged assets or the attachor with respect to the pledged assets. Usually, these obligations are waived by the pledgor in the deed of pledge. 

After paying the cost of enforcing the right of pledge, the pledgee is entitled to deduct from the net proceeds of the sale of the pledged assets the amount which is owed to him and for which the right of pledge was created. The balance is – in the absence of any holders of a limited right on the assets and attachors with respect to the assets – paid to the pledgor.

In general terms, the above also applies to the enforcement of a right of mortgage, except that the public auction is held before a civil law notary. At the request of the mortgagor or the mortgagee, a competent court may determine that the right of mortgage may be enforced by way of a private sale. Furthermore, the mortgagor and the mortgagee may seek the approval of the court to purchase the assets by way of a private purchase. However, in such a situation, other parties concerned have a right to be heard by the court and may make a competing offer.

Bankruptcy
In the event of a bankruptcy of a pledgor or mortgagor, a pledgee or mortgagee may, in principle, enforce its rights on the secured assets as if there were no bankruptcy in accordance with the rules under Netherlands law as described above. In addition, a pledgee or mortgagee is, in principle, not required to contribute in the costs of the bankruptcy.

Please note that the foregoing is subject to certain exceptions, for example:

• Dutch law provides for certain privileges which, under certain circumstances, take priority over the rights of a pledgee or mortgagee;
• furthermore, the trustee in bankruptcy may grant the pledgee or mortgagee a reasonable time in order to sell the secured assets, the trustee in bankruptcy may sell the assets himself, notwithstanding the pledgee’s or mortgagee’s right of priority to the proceeds as a preferential creditor. If the trustee in bankruptcy sells the secured assets, the pledgee will share in the costs of the bankruptcy and receive payment only if a plan of distribution is effective;
• a trustee in bankruptcy is at all times entitled to release a right of mortgage or a right of pledge by paying the pledgee or mortgagee the amount owed by the debtor; and
• a Dutch court may for a maximum period of four months, order a cool down period of all creditors’ actions including foreclosure by secured creditors.