Dutch M&A: An uncertain outlook in 2019
During the last few years, the Netherlands has developed into a seller’s market.
A variety of factors underpin this trend, including exceptionally low-interest rates and abundant liquidity available to prospective buyers to fund acquisitions. Prospective buyers have easy access to capital to finance acquisitions, while competition among buyers to acquire private companies has increased.
Due to this trend, buyers find themselves in controlled auctions, which is driving up prices and allowing for less due diligence on negotiated deals. Acquisition agreements have become more seller-friendly and, in the current market climate, sellers are less willing to accept such liability, as reflected in the post-closing liability regime. In turn, buyers increasingly rely on W&I (warranties and indemnities) insurance for recourse.
Although 2018 was a good year and in general the outlook for 2019 is positive, there are concerns that this trend may be waning. Tightening monetary policy, high valuation levels, changing regulations, geopolitical worries, and volatility in capital markets are factors that may contribute to a downturn in deals.
Dutch legislative practices and recent developments
The Dutch government is welcoming and promoting foreign investments, by removing acquisition legislation and promoting an attractive tax environment.
No specific restrictions apply to foreign parties when investing in the Netherlands, but investors should be aware of the principles of reason and fairness and good faith. When entering into negotiations, with a view to entering into an acquisition agreement, parties are considered to be in a special relationship and are expected to take each other’s reasonable interest into account.
Based on this ‘pre-contractual good faith’, parties may not always have the right to unilaterally break off negotiations. Unlike the Anglo-Saxon practice of making negotiations subject to contract, it is advisable to clearly agree upon the terms and conditions to which the negotiations are subject. In addition, the acquisition agreement is always subject to and may, thus, be overridden by the Dutch legal principle of reason and fairness. Although this principle is only applied in exceptional cases, it may result in unexpected or unintended outcomes.
The Dutch jurisdiction is not familiar with the concept of ‘buyer beware’. Therefore, during the due diligence process, the seller is obliged to disclose information that may be of importance to buyers, even when the buyer is responsible for its own due diligence investigation. The relationship is governed by good faith and the specific circumstances of the case will determine the extent and scope of the seller’s duty to disclose and the buyer’s duty to investigate.
For 2019 there are several developments of which foreign businesses need to be aware of when deciding whether to invest in the Dutch market.
In 2019, the Netherlands Commercial Court (NCC) will become operational, with a primary focus on major international commercial disputes. The NCC will be based in Amsterdam and will use Dutch procedural law, which is renowned for its pragmatic approach and efficient operation, while the working language will be in English and evidence may even be handled in French, German or Dutch, without translation being required. The proceedings will be paperless and legal documents will be submitted electronically. Although the court fees for the NCC are relatively high compared to normal Dutch court fees, by making the procedure more effective and efficient, it will ultimately be less costly. The NCC is only competent if the parties have agreed to settle their dispute under the procedural rules of the NCC. This will be a great forum for foreign parties to agree upon in acquisition agreements when acquiring Dutch companies.
In combating financial-economic crime, a legislative proposal has been submitted in the Dutch Senate to introduce a central shareholders’ register for Dutch companies. This register will contain certain details of shareholders and will be kept by the Dutch Chamber of Commerce and updated with share transaction information by Dutch civil law notaries. This means that it will be apparent who the shareholders are of Dutch companies. Although this information will not become available to the public in general, it will be available to the Dutch tax authorities and notaries, as well as other Dutch anti-money laundering/counter-terrorism financing law institutions that are yet to be determined. Foreign investors requiring privacy might be deterred from investing in The Netherlands with the prospect of this legislation becoming reality.