Netherlands: M&A In The Netherlands - Financial Assistance

1. INTRODUCTION

Netherlands financial assistance rules prohibit a Dutch corporation from providing collateral, guaranteeing the price or otherwise guaranteeing or binding itself jointly and severally with or for third parties "for the purpose of the subscription or acquisition by third parties of its shares or depository receipts issued therefor" (articles 98c and 207c of Book 2 of the Dutch Civil Code).

The financial assistance rules were incorporated into Dutch law to implement the second EC Company Law Directive, which, among other things, aims to secure the interests of third parties (creditors) in relation to the preservation of corporate equity.

The financial assistance rules apply to "Naamloze Vennootschappen" ("N.V."'s, public corporations) and "Besloten Vennootschappen" ("B.V."'s, private corporations). The financial assistance rules are different for the N.V. and the B.V.

By their nature, the financial assistance rules come into play mostly in the framework of a leveraged buy-out. They apply to share acquisitions only.

2. FINANCIAL ASSISTANCE RULES FOR THE N.V.

For the N.V., it is prohibited to issue loans, provide collateral, guarantee the price, otherwise guarantee or otherwise bind itself jointly and severally with or for third parties, for the purpose of the subscription or acquisition by third parties of shares in its own capital or of depository receipts issued therefor. This prohibition also extends to its subsidiaries.
The prohibition does not apply to situations in which shares or depository receipts issued therefor are subscribed for or acquired by, or on behalf of, employees which are either employed by the N.V. or by a corporation belonging to the same group of companies as the N.V.. It is generally held that the term "employees" includes management.
The prohibition does also not apply to banks and similar credit institutions registered in the Netherlands under the Act on the Supervision of the Credit System ("Wet Toezicht Kredietwezen", 1992, as amended) to the extent such transactions are concluded in the normal course of business of these institutions.

3. FINANCIAL ASSISTANCE RULES FOR THE B.V.

For the B.V., it is prohibited to provide collateral, guarantee the price, otherwise guarantee or otherwise bind itself jointly and severally with or for third parties, for the purpose of the subscription or acquisition by third parties of shares in its capital or of depository receipts issued therefor. This prohibition also extends to its subsidiaries.
The B.V. may issue loans for the purpose of the subscription for or acquisition of shares in its capital or of depository receipts therefor, but only up to the amount of the distributable reserves and in as far as such is allowed by its articles of association; in the event of the issuance of such a loan, the B.V. should maintain a non-distributable reserve up to the amount of the loan.

4. GENERAL COMMENTS

As it follows from the above, there are some differences between the financial assistance rules for the N.V. and for the B.V.. Thus, the B.V. is not allowed to issue security in relation to the subscription for or acquisition of shares by or on behalf of employees, whereas the N.V. is. The B.V. on the other hand may issue loans to both employees and non-employees, whereas the N.V. may only issue loans to employees. The B.V. is restricted in respect of the amount of such loans, whereas the N.V. is not. Finally, a credit institution in the form of a N.V. may, in the normal course of its business, issue securities as well as loans without any financial restrictions, whereas a credit institution in the form of a B.V. may only issue loans up to the amount of its distributable reserves.

It is generally held in the legal doctrine that the financial assistance rules, and specifically the expression "for the purpose of the subscription or acquisition ...." should be interpreted rather narrowly. Precisely how narrowly, however, is very difficult to assess, especially since the rules have hardly ever been tested in court.

5. ATTEMPTS TO AVOID VIOLATION OF THE FINANCIAL ASSISTANCE RULES

Through the years, numerous schemes have been proposed to avoid the restrictive financial assistance prohibitions. Although a detailed discussion of these schemes would fall outside the scope of this general overview, below are some examples of the more commonly used schemes. It should be emphasized that any of these, or other, schemes may be challenged on the basis of creditors' fraud ("actio Pauliana"), "ultra vires" or mismanagement.

a. Since the law precludes the target company from providing collateral "for the purpose of" the acquisition of its shares, the target may attempt to raise an amount of cash for a purpose unrelated to the acquisition of its shares, for instance by taking out a general bank loan as part of an overall credit facility. Part (up to the distributable reserves) of the cash thus raised may then be used by the target company to issue a loan to the contemplated purchaser.

b. Alternatively, the target company may use the loan as described under a. to distribute dividends (up to the amount of the freely distributable reserves) to the seller/shareholder. As a consequence, the value of the target company, and hence the acquisition price, may be reduced by the amount of these dividend payments.

c. The target company may commit itself, prior to the transfer of its shares, to the financing bank of the purchaser that it will provide additional collateral following the transfer of its shares. This post-closing collateral should then preferably be provided by the target company to the bank not for the purpose of the acquisition of its shares, but for the purpose of an overall credit facility, including for operational and trading purposes. This should, understandably, be reflected in the subject documentation.

6. POSSIBLE SANCTIONS ON A VIOLATION OF THE FINANCIAL ASSISTANCE PROVISIONS

Although the financial provisions itself do not contain a clearly described sanction, the predominant view in legal doctrine is that a legal act performed in violation of these rules has the effect of voiding the entire transaction, or at least voiding the relevant part of the transaction. Invalidity may be claimed by creditors in general or by a trustee in bankruptcy. Naturally, this theory is very damaging to the position of the banks which may not want to incur the risk of invalid collateral.

A defense to be raised by the bank is that it was not aware of "the purpose of" the transaction. However, the prevailing opinion in the Netherlands is that this argument is likely to fail as banks are deemed to have a reasonable knowledge of leveraged buy-outs.

Our next issue will deal with consultation and notification procedures which are relevant to Netherlands' acquisitions.

The contents of this article are intended to provide a general outline of the subject matter only, and should not be taken or construed as advice in any particular matter. For further information, please contact Ewout J. Stumphius at Loeff Claeys Verbeke, Rotterdam, tel. 31.10.4034777, fax. 31.10.4149388.