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Mergers and Acquisitions (M&A)

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Welcome to Penrose M&A

Penrose specialises in Dutch corporate law and mergers and acquisitions (M&A). We advise and assist entrepreneurs, directors and shareholders, i.a., with mergers and company takeovers. On this web page, we briefly explain the steps to be taken and the contracts to consider in connection with corporate mergers and company takeovers.

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Discussions regarding the merger or company acquisition often begin on an informal and exploratory basis with an exchange of initial ideas about the price and the other main terms. In providing a structural basis for these informal discussions and initial ideas, the range of contract types that tend to be availed of are:

  • a Non-Disclosure Agreement (NDA); (Non-Disclosure Agreement);
  • a Letter of Intent (LOI); (Letter of Intent);
  • a term sheet, Memorandum of Understanding (MOU) or Heads of Agreement.

A company acquisition following the death of a shareholder is not dealt with here as this is primarily an inheritance matter. In addition to the law of inheritance that generally applies, situations such as these are generally subject to a variety of other procedures contained in the Articles of Association or provisions that apply under the shareholders’ agreement, such as the right of first refusal.


Non-Disclosure Agreement (NDA)

In a Non-Disclosure Agreement (NDA) the negotiating parties agree to share (confidential) information with each other, for example in the area of due diligence. This information is used when assessing whether a purchaser is interested and prepared to (continue to) negotiate. It usually also relates to the relevant financial documentation (such as the financial statements, profit and loss accounts, forecasts) and organisational information (e.g. business plans, salary paid to management, staff employment contracts as well as the developed and copyrighted or other registered rights in respect of intellectual property). Under the terms of an NDA, the parties are generally prohibited from disclosing this information (to third parties) and may not use it for any purposes other than the negotiations. The NDA may provide for sanctions to be imposed in the event that the confidential information (nevertheless) is made public or comes into the wrong hands. This is usually in the form of a hefty penalty.


Letter of Intent (LOI)

In a Letter of Intent, the vendor and proposed purchaser both express their intention to further explore the relevant issues regarding the sale and/or purchase in order to (ultimately) effect a signed purchase agreement and takeover of the company. Arrangements such as these are also called (on the international front) a Memorandum of Understanding (MOU) or for example a non-binding offer letter. A proper LOI will first of all set out the manner in which the sale process is to proceed. Therefore, the arrangements will concern the time frame, the making available of information in the data room for use by the proposed purchasers in their due diligence investigation, the evaluation of the company and the formation of the company purchase agreement. Under discussion is a proposed intention only and for this reason, the negotiating parties include provisions outlining when either party may terminate the negotiations unilaterally. If the sale involves other potential buyers, the proposed purchaser will want to be granted exclusivity in the sale process. In such cases, it will be prohibited for the vendor to negotiate simultaneously with third parties, for example in an effort to secure a better price or otherwise a superior offer. The LOI may also include provisions that have already been discussed by the parties and agreed upon.


Termsheet of heads of terms

The terms of agreement, term sheet or Head of Terms (HoT) is a usually non-binding document in which the vendor and purchaser have outlined the items on which the parties have already come to a (conditional) agreement. This term sheet is then used as a rough sketch of what will be contained ultimately (and in full detail) in the purchase agreement. Draft arrangements such as these are often so specific that the question arises whether they already amount to a binding agreement in Dutch legal terms. It could give rise to liability even though this had not been the original intention. It is recommendable therefore in such instances to carefully specify that these arrangements are not definitive and will only be binding on the parties once they have signed the final agreement.


Dutch lawyer for mergers and acquisitions

In practice, agreements as outlined above are not clear-cut concepts as they usually make provision for combining contracts and legal principles. This means that the content of the Dutch legal documentation will depend on the type and size of the target company, the type of advisor(s) involved in the sale process (legal, financial and/or tax consultants) and the connection between the relevant parties prior to the proposed acquisition or sale. Are they competitors? Had they cooperated before? Are they strategically related parties? It is recommended that an experienced mergers & acquisitions (M&A) lawyer be engaged at an early stage in order to structure the sale process, likewise to advise and assist in the drafting and assessing of the agreements.


Dutch legal advice regarding mergers and acquisitions

Penrose has a team of lawyers that specialise in corporate law and business law. To contact our Dutch legal team, click here.

In principle, in the event of a company acquisition process, under Netherlands law, the vendor has a duty of disclosure and the purchaser an obligation to investigate in regard to the relevant company. This means that prior to the business acquisition, the vendor has an obligation to disclose to the purchaser all details known to the vendor (but not to third parties) relating to the company. The purchaser is required to conduct its own investigation in connection with the relevant company. The investigation by the purchaser is generally referred to as the due diligence investigation (or in short, the DD).


Data room for a company acquisition

The vendor will be obliged to facilitate the due diligence by making confidential information on the company available to the purchaser in the so-called data room. This was originally an actual room in which (the advisors acting for) the purchaser could view the information by arrangement. Nowadays, more often than not, this data tends to be made available in an online data room. Access is provided to a digital data room via an encrypted environment. During the sale of a company, the parties generally conducting the due diligence are the legal, financial and tax advisors.


Due diligence during company acquisition

A lawyer in the Netherlands conducting a legal due diligence will usually concentrate on (one or more of) the following aspects:

  • the company’s employees (including the employment contracts, pension conditions, the applicability of collective bargaining agreements (CAO) and sickness absence);
  • the company’s clients and suppliers (including the contractual terms, change of control provisions, retention of title or specific clauses in general terms and conditions;
  • the corporate structure of the company (including the various (types of) shares and shareholders, provisions contained in the Articles of Association, the Management Board and the Supervisory Board);
  • the use of data and privacy (including the appropriate application of the General Data Protection Regulation (GDPR);
  • copyright and other intellectual property rights;
  • the real estate belonging to the company; and
  • the required permits and licenses.


Due diligence report

After conducting the due diligence, the results are compiled in a due diligence report, sometimes also called a red flag report. Depending on what the parties have agreed, the report’s conclusions can then form the basis for the ensuing negotiations, the drafting and amending of the draft share purchase agreement and/or even bringing the sales process to a close. If a particular risk (red flag) happens to be identified by the purchaser, the purchaser may request that this risk be covered by a guarantee or an indemnity by the vendor. Following the due diligence process, the parties will often review the selected type of purchase agreement (an SPA or APA).


Dutch legal advice regarding due diligence

Penrose has a team of lawyers that specialise in legal due diligence in the Netherlands. To contact our Dutch legal team, click here.

A Share Purchase Agreement (SPA) is a purchase agreement drawn up by a Dutch corporate lawyer to legalise the sale of the company shares (wholly or in part). In a sale of shares, the main advantage is that only one asset (i.e. the shares in the target company) has to be transferred by the vendor to the purchaser (as compared with an asset agreement). In principle, the business that is run by the company remains intact. This means that nothing changes as far as the company’s employees (employment contracts), clients and suppliers are concerned. The company in principle retains all its licences and permits (except where change of control clauses apply). The term SPA can mean Share Purchase Agreement or Sale and Purchase Agreement: it refers to the same.


Customary SPA provisions
The standard provisions in the SPA regulate the (composition and payment of the) purchase price, the effective date of the transaction, the locked-box or purchase price adjustments, the conditions precedent and conditions subsequent, the manner in which the parties treat the information obtained as part of the due diligence plus the warranties and indemnities to be provided by the parties.


Signing and closing

Under Dutch law, the signing of the SPA does directly not lead to the legal transfer of the shares. A notarial deed of transfer is required in order to execute the transfer of the shares. The deed is drawn up by the civil-law notary in accordance with the terms agreed in the SPA. This deed of transfer (i.e. the legal transfer of the shares) does not need to be executed on the same date as the signing; in practice this takes place at the final stage of the takeover and is therefore called the ‘closing’ or ‘completion’. Different rules apply for the transfer of shares in a Dutch listed company.


Dutch legal advice regarding Sale and Purchase Agreements

Penrose has a team of attorneys that specialise in drafting share purchase agreements in the Netherlands. To contact our Dutch legal team, click here.

An asset / liabilities agreement (Asset Purchase Agreement or APA) under Dutch law is the purchase agreement drawn up by a lawyer to legalise the transfer of constituent parts and/or activities of the company. The greatest advantage with an APA is that the purchaser can decide to leave aside undesired parts and risks from the past. This is known as cherry picking. The APA differs from the SPA to the extent that the assets and liabilities for each constituent part will have to be transferred individually in conformity with the laws of the Netherlands.


The takeover generally leads to few complications where movable property is concerned (e.g. plant and equipment, vehicle fleet and stock). These goods can be transferred relatively easily by placing them in the hands of the purchaser. However, it is a different matter if the takeover incorporates agreements with customers, loans, trade names, copyright and other intellectual property rights, immovable property, bank accounts, debts and debtors. In such cases, additional (legal) actions and documentation will be required. The Dutch tax treatment of an assets transaction also differs relative to a share transaction. An Asset Purchase Agreement may also make provision for the company’s accrued assets and liabilities and for the consequences (if any) for the company’s employees.


Employment contracts

An important issue that arises during a transaction involving the assets and liabilities of a company is whether there are employees of the target business who will automatically transfer to the purchaser. Dutch law provides that following the so-called transfer of undertaking (abbreviated in Dutch as: ‘OVO’), the company’s employees automatically become employed by the purchaser. The employment contracts with these employees remain unchanged, albeit in the name of the purchaser.


Dutch legal advice for drafting an APA

Penrose has a legal team that specialises in business law in the Netherlands. They can provide advice and help you in finding a solution. To contact our Dutch legal team, click here.

Business purchase agreements (SPAs and APAs) generally make provision for the inclusion of warranties and indemnities.


Representations and warranties

The vendor guarantees the purchaser by way of a warranty that the company (or part thereof) is of a certain standard quality. The vendor therefore accepts liability for any inaccuracies in the warranty. Standard lists of guarantees are generally available in this case which tend to be discussed and negotiated and agreed upon during the sales process. Customary warranties generally pertain to the existence of the company, the (prompt) transfer of monies and payment of taxes, premiums and employee contributions, pending or ongoing legal proceedings (if any) and the absence of risks that may affect the survival of the company.


The provision of indemnity ensures that the vendor fully assumes liability for the consequences of a given risk. The purchaser will be unwilling to assume liability for the consequences of such risks and therefore will require the vendor to cover any ensuing costs and damages that may be incurred. Should the risk in question become a reality after the sale, then it is the vendor who is fully responsible for the consequences thereof and the vendor has to hold the purchaser and/or the target company harmless.


Breach of a guarantee or indemnity

A purchaser may discover after the takeover (post-closing) that certain warranties that had been provided by the vendor about the situation before the sale were false or that certain risks covered by indemnities have materialized. If such a breach should arise, the purchaser will want to hold the vendor liable for any loss or damage incurred (or to be incurred) by the purchaser. Whether or not this is possible, and how much it involves, depends in particular on the terms set forth in the purchase agreement, in which case factors such as limitations or liability will be important, not to mention the extent to which the breach had been known (if at all) prior to the takeover (for example from the due diligence documentation) and duly accepted by the purchaser.


Dutch legal advice regarding warranties and indemnities

Penrose has a team of lawyers that specialise in business transactions in the Netherlands including the drafting and negotiating of guarantees, representations and indemnities. To contact our Dutch legal team, click here.

An earn-out provision is regularly made for part of the purchase price only to be released to the vendor in the years following upon the takeover. In such cases, payment of that part of the purchase price is contingent upon the realisation of certain commercial targets.

To guarantee the company’s success following the sale of the of the company (post-closing), the parties sometimes agree that the seller (or its shareholders) will continue to cooperate for a predetermined period (as set forth in the purchase agreement) in order to ensure the successful transfer and continuation of the company. In such a scenario, these persons may continue in the employ of the company and agree to make their expertise and know-how available. Their efforts in achieving such targets may be coupled with the receipt of financial bonusses.

In practice, discussions (and procedures) commonly take place to determine whether or not such targets have been met and who is responsible if these business targets have not been achieved.


Dutch legal advice regarding earn-outs

Penrose has a team of attorneys in the Netherlands who specialise in business law. They can provide advice and help you in finding a solution. To contact our Dutch legal team, click here.

Penrose has a team of lawyers that specialise in mergers and acquisitions in the Netherland. To contact our Dutch M&A attorneys, click here.

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