This HVG Corporate/M&A Update will inform you on recent developments in Dutch corporate law and the transactions market.

Transcription

1 Update December 2014 HVG Corporate/M&A Update This HVG Corporate/M&A Update will inform you on recent developments in Dutch corporate law and the transactions market. Contents: 1. Bickering over goodwill after an acquisition 2. Legislative proposal on employee participation in cross-border mergers 3. Warranty and indemnity insurance 4. Voluntary liquidation or bankruptcy 5. The group financing company in 2015

2 1. Bickering over goodwill after an acquisition Goodwill is a difficult topic for businessmen, attorneys and the courts alike as appears from this case. Nevertheless, goodwill does play an important role in businesses. When accounting for goodwill in acquisitions, it is not only necessary to understand goodwill from a civil law point of view; the meaning of goodwill from a tax law point of view is equally important. Recently, legal proceedings were initiated with regard to the explanation of a clause in an acquisition contract and the tax effects thereof. This has resulted in a judgment of the Dutch Supreme Court. In 2007, Escura and Catalia enter into a share purchase agreement. Catalia (the vendor) sells 90% of its shares in subsidiary Catalia Farma to Escura (the purchaser). Pursuant to the sale purchase agreement, the purchase price for the shares consists of (i) the net asset value on a certain balance sheet date, and (ii) goodwill compensation. The goodwill compensation in this case consisted of an amount of 2,725,000 minus a 23% deferred corporation tax deduction. Subsequently, parties disagree about the prepared balance sheet, which forms the basis of the purchase price. In the company s balance sheet, goodwill is already included. It refers to activated goodwill related to a prior acquisition by Catalia Farma. Despite objections expressed by the vendor, Escura deducts the amount of the activated goodwill from the net asset value. Escura states it does not want to pay twice for the goodwill. Both the District Court of Utrecht and the Amsterdam Court of Appeal agree with Escura. Catalia argues that in the event that a deduction for the activated goodwill is called for, 23% should be deducted from the goodwill activated in the Catalia Farma balance sheet for deferred taxes which will raise the purchase price. The Amsterdam Court of Appeal agrees with Catalia in this instance. Escura persists and appeals to the Dutch Supreme Court. The Dutch Supreme Court disagrees with the ruling of the Amsterdam Court of Appeal. The Supreme Court concludes that no taxes are due on the activated goodwill. The rationale behind the 23% deferred tax deduction on the grounds of the purchase agreement is that this goodwill refers to future profits. This profit will be liable for corporation tax in the future, justifying the deduction. This is different for activated goodwill. Although this ruling does not provide any new insights, it is of importance for our practice. Make sure to prevent that a simple arrangement leads to legal discussions and costs. Pay attention to clear formulation of provisions and consult the right specialists at the right time. That is our job. And thanks to our cooperation with the tax advisors of EY, we have a thorough understanding of the tax aspects of acquisitions. 2. Legislative proposal on employee participation in cross-border mergers In 2013, the European Court of Justice decided that the Dutch authorities did not correctly transpose EU rules on cross-border mergers. Consequently, on 1 September, the Dutch government introduced a bill in order to change the legal rules on employee participation in cross-border mergers. The main characteristic and advantage of a legal merger is that all assets and liabilities of the disappearing company are acquired by the newly formed company under universal transfer of title, avoiding the need to HVG Corporate/M&A Update December

3 comply with any specific local transfer requirements. In principle, the same goes for any contract entered into by the disappearing company, meaning that all employees will transfer to the newly formed company by operation of law. Since the implementation of the Tenth Company Law Directive (the Cross-border Mergers Directive or CBM Directive) in 2008, Dutch limited liability companies (BVs or NVs) have been permitted to enter into statutory mergers with limited liability companies set up under the laws of another Member State of the EU or European Economic Area. The purpose of Article 16 of the CBM Directive is to safeguard the employee participation rights already acquired by employees of the parties involved in a cross-border merger. Employee participation is defined as the right of employees (or their representatives) to influence company management through the right of appointment, recommendation or objection in the composition of the supervisory or management board. In principle, the national rules on employee participation of the law governing the newly formed company will apply. Exceptions to this rule apply only in the event that: 1. at least one of the merging companies has employed an average of over 500 employees in the six months prior to publication of the draft terms of the cross-border merger, and is operating under an employee participation system, 2. the national law applicable to the newly formed company does not provide for at least the same level of employee participation as provided for before the merger (subject to employee representation), or 3. the national law governing the newly formed company does not provide the same entitlement for employees of other Member States to exercise the participation rights enjoyed by those employees who are employed in the Member State in which the newly formed company has its registered office. In the event that one of these exceptions occurs, the applicable employee participation regime will be governed by an agreement regarding employee participation, especially negotiated for the company emanating from the merger. The third exception has not yet been implemented in Dutch law. Consequently, the European Court of Justice reprimanded the Netherlands in 2013 and the law has to be amended in order to avoid State liability. The proposed article includes the third exception and stipulates that all employees of a company, irrespective of the Member State where they work, must have the same participation rights after a cross-border merger. In the event that the national law governing the newly formed company does not provide the same entitlements for employees of other Member States, the described specific cross-border employee participation system will be triggered (an agreement regarding employee participation must be negotiated). The legislative amendment is expected to take effect on 1 July To name an example, as of the effective date, if a company governed by Spanish law merges with a company governed by Dutch law and the newly formed company is registered in the Netherlands, the employees in Spain of the newly formed company will enjoy the same participation rights in the (Dutch) supervisory board as their Dutch colleagues. These rights will be legally enforceable. 3. Warranty and indemnity insurance Acquisitions are inextricably linked with warranties and indemnities. Although in general, purchasers are willing to take risks in an acquisition, they will usually demand security in respect of any warranty or indemnity claims. For example, security can be furnished in the form of a bank guarantee or an escrow HVG Corporate/M&A Update December

4 agreement. In an escrow, part of the purchase price is kept in escrow by an independent third party and payments to the seller only take place on the basis of the agreed arrangements. This has an impact on liquidity or limits the borrowing capacity. However, a trend within M&A is the increasing use of a warranty and indemnity insurance (W&I insurance). Despite the fact that this type of insurance has been around for over 25 years, it seems to have gained popularity in recent years. The W&I insurance covers damages resulting from breaches of warranties and indemnities. It depends on the circumstances of the transaction whether the W&I insurance is taken out by the seller or the purchaser. A buy-side policy is typically purchased by the buyer to cover his risk of loss. A sell-side policy is a contractual liability insurance which protects the seller against claims from the purchaser. The W&I insurance offers several advantages. Both parties benefit from the fact that the risks in connection with breaches of warranties and indemnities are shifted to a third party: the insurer. As the purchaser does not have to withhold a portion of the purchase price, the full purchase price is immediately available to the seller. The target and seller are protected from negative effects that may impact the purchase price (clean exit). Even in the event that a financial investor is involved on the seller s side, such as the case may be with private equity houses, a W&I insurance may offer a solution by shifting the risk to the insurer, as they are often unable to give typical operational seller s warranties. In addition, a W&I insurance can be attractive in distressed transactions. The purchaser does not have to worry about recoverability from the seller. Furthermore, the W&I insurance can be used as an instrument in an auction process. Finally, it can bring relief when parties fail to agree on risk distribution or a security deposit. When considering a W&I insurance, it is very important to go over the policy details. The insurance does not cover everything. It does not cover, for example, future warranties, environmental warranties (in some cases) and fraud or penalty issues. In addition, it provides no cover if the policyholder was aware of any breaches of warranties and indemnities at the time the insurance was taken out. Furthermore, it is important to realize that the same financial thresholds, maximum financial liabilities and time limitations apply to the policy as customarily apply to purchase agreements. The costs of the W&I insurance factor in to the equation as well. The premium may vary per transaction and it will depend on the circumstances who will bear the costs. Although premiums have dropped in recent years, they will usually still amount to approximately 1-2% of the maximum coverage. For this reason, the W&I insurance is not yet a suitable option for smaller transactions. The W&I insurance sounds like a reasonable solution in M&A transactions. It offers several advantages for both the purchaser and the seller. Many negative effects of negotiations are limited by the insurance. Please note, however, that instead of these negotiations, the discussions with the insurer have yet to begin. In addition, the costs of such a W&I insurance have to be weighed against the restrictions of the policy. In some cases, a bank guarantee or an escrow is just not such a bad idea. 4. Voluntary liquidation or bankruptcy A company can be forced into bankruptcy by its creditors, but it is also possible for an insolvent debtor to petition for bankruptcy itself. Legal requirements for bankruptcy are insolvency and the presence of two or more creditors (the so-called plurality requirement). A bankruptcy is sometimes referred to as an involuntary liquidation. The debtor s assets are liquidated by the trustee and the proceeds are distributed among the creditors. Dissolution is the voluntary liquidation of a legal entity. This is an option if the legal entity has no HVG Corporate/M&A Update December

5 economic value or does not engage in any activities. In a BV, the shareholders decide on a dissolution. They also need to approve a petition for bankruptcy by the board. A petition for bankruptcy needs to be submitted to the court. Upon the declaration of bankruptcy, the court will appoint a trustee. After a voluntary liquidation, the liquidators (in most cases former directors) will liquidate the assets, pay the creditors and pay the surplus to the entitled persons (in case of a BV: the shareholders). In principle, both options are available to terminate a company or other legal entity. If the shareholders opt for dissolution, the law compels the liquidators to file for bankruptcy if the total debts exceed the total assets. However, this does not apply in the event that there are no assets. In the latter case there is no liquidation and henceforth no liquidators. What would be the appropriate course of action in the event that there are no, or hardly any assets? This year, two courts have provided entirely different responses to this legal question. The District Court of Rotterdam allowed an objection to adjudication of bankruptcy by the appointed trustee, thereby nullifying the bankruptcy. Apparently, the court considered the bankruptcy a waste of resources (in case there are no assets, the trustee will pay for the handling of the bankruptcy) if no assets are available to distribute among the creditors. Such distribution is the main purpose of a bankruptcy. The District Court of Rotterdam considered the bankruptcy petition to constitute abuse of power. In a similar case, however, the North Holland District Court found that all legal requirements of the Bankruptcy Act had been met and therefore, under these circumstances, it was indeed possible to accept the bankruptcy petition. What does all this mean for you? You now know that you have recourse to several routes if you want to terminate the existence of a BV. You also know that two courts differ in opinion on the matter. The approach of the District Court of Rotterdam seems mostly practical. The North Holland District Court seems to have stronger legal arguments. All we can do is wait for the judgment of a court of appeal, but even that is not final. Much depends on the specific circumstances of the case and the relationship with the creditors. Does your group structure contain any redundant legal entities? Feel free to contact us. 5. The group financing company in 2015 A group of companies can be funded in different ways. One way is that a group company obtains funds from one or more financiers and subsequently distributes the funds to group companies. Such a financing company may, under circumstances, qualify as a bank within the meaning of the Dutch Financial Supervision Act (Wet op het financieel toezicht, FSA ). If this is the case, the financing company will, in principle, require a banking license. Companies usually try to avoid having to apply for a banking license, as the process to obtain such a license is very time-consuming and intensive. Dutch law offers one important exception from the banking license requirement for group financing companies (concernfinancieringsmaatschappijen, GFC ). The exception rule stipulates that a company that qualifies as a GFC does not require a banking license and is not subject to prudential supervision. Dutch law currently provides that a company that conducts banking activities qualifies as a GFC if: (i) the company receives repayable funds from the public for the issue of securities, with due observance of the obligation to publish a prospectus, (ii) 95% of these funds are used to make distributions to group companies and (iii) security is provided for the benefit of the holders of these HVG Corporate/M&A Update December

6 securities by means of: (a) a parent guarantee, (b) a keep-well agreement with the parent company or (c) a bank guarantee. The Dutch Act Amending the Financial Markets Act 2015 (Wijzigingswet financiële markten 2015, Amendment Act ) tightens the conditions for GFCs. With respect to the keep-well agreement and the parent guarantee, the new rules create an obligation for the parent company to ensure that the GFC will be able to fulfil its obligations arising from the funds at its disposal at all times. For the GFC itself, the new rules create an obligation to ensure that proof can be produced at any time that the GFC meets all requirements to qualify as a group financing company. In the event that a GFC can no longer, or foresees that in the near future it will no longer be able to comply with these requirements, the GFC must notify the Dutch Central Bank (De Nederlandsche Bank, DNB ). However, failure on the part of the GFC to notify the DNB in time will immediately result in the DNB revoking all exemptions for the GFC. Furthermore, the Amendment Act stipulates that if the group of companies to which the GFC belongs is a banking group (meaning that the main activity of the group is to extend loans to non-group companies for its own account), the GFC exception rule will only apply if the parent company, the GFC or another group company to which the funds are distributed has obtained a banking license from the DNB or another supervisory authority as described in the Amendment Act. The Amendment Act is expected to enter into force on 1 January HVG Corporate/M&A Update December

7 HVG Attorneys at Law Civil Law Notaries About HVG Holland Van Gijzen Advocaten en Notarissen LLP (HVG) is a leading Dutch law firm with an outstanding reputation with regard to providing legal services. Our attorneys at law and civil law notaries are active in all areas of law which are relevant to entrepreneurs and their businesses. With offices in Amsterdam, The Hague, Eindhoven, Rotterdam, Utrecht, Brussels and a legal desk in New York, we are able to provide you with fitting answers to all your legal questions. In the Netherlands, HVG has a strategic alliance with Ernst & Young Belastingadviseurs LLP. Information: If you have any questions or if you require any additional information, you are welcome to contact your contact person at hvglaw.nl>>our people. Practice group leaders: Corporate & Commercial Sandra van Loon T: +31 (0) E: sandra.van.loon@hvglaw.nl Holland Van Gijzen Advocaten en Notarissen LLP is a limited liability partnership incorporated under the laws of England and Wales with registered number OC and is registered in the Netherlands with the Chamber of Commerce Rotterdam under number Mergers & Acquisitions Sijmen de Lange T: +31 (0) E: sijmen.de.lange@hvglaw.nl 2014 Holland Van Gijzen Advocaten en Notarissen LLP Disclaimer This publication has been drawn up with the greatest possible care. HVG is not liable for any inaccuracies and/or incompleteness of the information provided in this publication, nor can any rights be derived from its contents. HVG Corporate/M&A Update December