Corporate law in the Netherlands: M&A in 5 steps
As a Dutch corporate lawyer, I am often asked how the process of a merger or company takeover generally works in the Netherlands and under Dutch corporate law. Usually, this question is asked by a founding shareholder who created and started the company by him- or herself with the prospect of selling the company, or a shareholder or director who has suddenly been approached by a party showing interest in the acquisition of the company. In this blog, I will briefly describe the M&A transaction process in the Netherlands in 5 steps.
Step #1: M&A target
The owner of a company who is planning to sell the company often starts months (sometimes even years) in advance with the financial, legal and administrative preparations (in the context of the preparations, I would suggest to also read my blog “7 important tips for a successful M&A process in the Netherlands“). But just as often, the possibility of selling the company arises spontaneously. In those cases, a seller skips this first step (and also the second step ). That is not a real issue. Steps 1 and 2 can be easily skipped in most cases. That said, skipping step 1 and 2 may lead to a more complex acquisition process and/or a lower revenue.
As a first step in a M&A process, the seller often optimizes the revenue model of the target company by increasing the quantity and quality of the revenue streams (for example by entering into fixed term customer contracts and increasing the margin). Furthermore, an attempt is often made to reduce unnecessary costs and to clean up the company’s balance sheet. Examples are: collecting outstanding receivables, paying (intercompany) debts and paying out excess capital. Another important issue is that key people indispensable for (the management of) the company need to be identified. These key people may be taken into confidence and agreements will need to be made or amended to keep them on board post-sale for a certain minimum period. As a Dutch M&A lawyer, I am usually involved in the strategic choices that need to be made in this first phase. This includes the decisions that may influence the further course of the M&A process, or decisions to optimize the legal structure (e.g. inserting intermediate holding companies or restructuring activities that should not be sold).
Step #2: selection of potential buyers
The seller of a company often uses the second step for a valuation of the company and to prepare a teaser. A teaser is a short commercial, strategic and financial description of the company and the market in which the company is active. On this basis potential buyers can quickly get an impression of the company to get them interested. As a Dutch M&A lawyer, I am often involved in the legal part of the teaser in particular (such as a description of the legal structure, applicable disclaimers and any conditions that one wants to communicate in advance).
This teaser is sent to potential strategic and/or financial buyers with the intent that it will create an opening for preliminary discussions. Depending on the response of the potential buyers to the teaser and the first discussions, one or more potential buyers will be selected for the third step. Sometimes it is necessary to facilitate this phase by having the parties to sign a non-disclosure agreement (NDA). In a previous blog I wrote about the example NDA under Dutch law (which can be found on our website under ‘templates’) where I highlighted a number of attention points from a Dutch law perspective.
However, in the Netherlands, the M&A sales process does not always work as systematically as described above. If a potential buyer approaches a target company on its own initiative, the transaction may also become on the seller’s agenda as a spontaneous idea. In that case, the M&A process for the seller accelerates and starts already at step 3.
Step #3: Dutch law letter of intent (LOI) or non-binding offer
The third step of a Dutch company acquisition is often crucial: most acquisitions are made or broken in this third phase. If sufficient mutual interest appears from the preliminary discussions, the main principles of a possible transaction will be discussed. This will include for example, the following topics:
– structure of the acquisition (sale of shares or assets)
– purchase price
– whether or not an earn out will apply
– role of management after the acquisition
– due diligence
– the timeline of the acquisition process
– the transaction fee.
The outcome of these discussions is often laid down in a letter of intent (LOI) or a similar document subject to Dutch law. Everyone uses different terminology for this, also in the Netherlands, such as non-binding offer, heads of terms, memorandum of understanding, LOI or letter of intent. The context and purpose of these documents is always that the buyer and seller want to know at which direction the parties are moving without being immediately obliged to be legally bound.
Step #4: due diligence investigation
As soon as the buyer and seller have entered into a letter of intent, the fourth phase usually starts: the due diligence investigation. For the purpose of the due diligence, the seller sets up a data room, which contains all relevant information relating to the target company. As a Dutch corporate lawyer, I am often involved in setting up such a data room.
For a seller, the due diligence is a way to comply with the duty of disclosure. For a buyer, due diligence is the usual way to investigate the (financial, legal and operational) condition of the company, verifying whether the target’s business case meets the buyer’s criteria in commercial, strategic and legal terms. The buyer often engages external Dutch financial, tax and Dutch legal experts for assistance with the due diligence. More detailed information about the due diligence investigation process can be found on our website.
When I act as a Dutch M&A lawyer on behalf of the buyer, I am the one who examines the documentation in the data room and the one who summarizes it in a due diligence report. Nowadays, data rooms are almost always virtual, which makes due diligence research easier and cost efficient. Nonetheless, most M&A lawyers still remember the time when they spent days at an external location, examining all documents (in hard copy) in an actual data room. This was a time-consuming and costly affair.
Step #5: Dutch corporate law transaction documents, signing & closing
If the due diligence does not produce deal breaking issues for a buyer, it is usually the buyer who provides the first drafts of the Dutch law transaction documents. Sometimes one starts with this fifth step if step four (due diligence) has not yet been completed, which is usually a good sign in terms of the intentions of the buyer. If the company is sold through a transfer of shares, the most important contract is the SPA (the share purchase agreement). If the business acquisition is structured as a transfer of assets/liabilities, then the main contract is an APA (asset purchase agreement). On our website we take a closer look at the differences between a SPA and an APA from a Dutch law perspective.
Many sellers are surprised when they first see the draft transaction documentation, wherein they are asked to provide extensive warranties and indemnities, to provide collateral and to commit to non-competition provisions. As a Dutch M&A lawyer, it is important to give the seller the time and information needed to understand the impact of this and how (im)material or (un)realistic the risks associated with these arrangements are. The Dutch M&A market has developed very strong practices over the years regarding M&A transaction documents, and it would not be helpful for a seller if a deal collapses on the basis of a Dutch law market practice contract, that would most likely will be required by other potential buyers as well.
Once the transaction documents are final and all required approvals have been obtained, buyer and seller may proceed to the signing. In the case of a clear company takeover, the transfer of the shares under Dutch law (generally referred to as the Closing) often takes place at the offices of a Dutch Civil law notary and simultaneously with the signing of the purchase/sale agreement (generally referred to as signing). Just as often it is necessary that after signing first a number of actions must be performed or approvals will be obtained, before the closing can take place. In that case, the signing and closing will take place one after the other, so that the company has been sold but has not yet been delivered in the intervening period. This twilight zone usually requires specific provisions in the SPA or APA that a Dutch corporate lawyer must be aware of.
Other publications by Lukas Witsenburg in these series are:
Law firm Penrose, Amsterdam, the Netherlands.