Typical due diligence issues
Typical legal due diligence work streams in the Netherlands (although largely depending on the agreed scope, the business of the target and the structure of the transaction) include commercial contracts (e.g., customer, supplier and distribution agreements), financing agreements (e.g., bank and shareholder loans), real estate (owned and leased), employment and pension matters, IP, IT, data protection, regulatory/public law, environmental law and litigation.
Compliance, particularly relating to anti-bribery, corruption, money laundering and competition law, but also environmental, social and governance matters, receives increased attention in due diligence exercises.
Legal due diligence is typically limited to reviewing documents in a virtual data room, sometimes enhanced by expert interviews. It is common for a seller to provide a vendor due diligence report or a legal fact book as part of the information granted to bidders in auction sale processes.
Issues identified in the due diligence are typically dealt with by: (i) having them rectified by the seller before signing/closing (e.g., obtaining waivers from third parties if change-of-control provisions have been identified in commercial contracts): (ii) drawing up specific indemnities regarding specific known risks identified in the course of the due diligence (e.g., environmental risks or ongoing litigation); or (iii) preparing general representations and warranties (e.g., existence and ownership of title to sold shares).
Pricing and payment
There are generally no restrictions regarding the pricing or the payment of the purchase price from a legal perspective. The purchase price is most commonly (but not mandatorily) paid in euro to the trust account of the civil-law notary in the Netherlands who will execute the deed of transfer of shares in the target company. This civil-law notary will then hold the received funds for the buyer until the deed of transfer of shares has been executed. At that point, the notary will hold the funds for the account of the seller(s), a bank (in the case of debt repayment) and/or other third parties, after which the funds will be wired to these parties, all in accordance with a funds flow or notary letter.
Signing/closing
Share sale
In the Netherlands, a transfer of shares is only effected when executing an official deed of transfer before a civil-law notary in the Netherlands. It is possible to include the share purchase agreement in the deed of transfer (if the agreement is straightforward). However, it is common practice to sign a separate share purchase agreement between the buyer and the seller in which the commercial arrangements between the parties are reflected.
Asset sale
Save for shares, real estate, large vessels and planes, no notarial deed is required to transfer assets. Assets can be transferred by means of an asset purchase agreement, taking into account the specific transfer requirements that apply to a certain type of asset (e.g. physical delivery for physical inventory, counterparty consent for contractual arrangements, etc.).
Foreign investment restrictions
The Netherlands has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed. For further information, see the more detailed section on "Foreign investment restrictions".
Antitrust/merger control
The Netherlands has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed.
It is also necessary to consider EU merger control rules. Mergers involving companies active in several member states and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU member states to obtain clearance for their mergers in one go. For further information, see the more detailed section on "Antitrust/merger control".
EU Foreign Subsidies Regulation
As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint venture.
Method of transfer under local law
Share deal
In a share purchase, all rights, duties and liabilities owed by, or to, the target company's employees continue to be owed by, or to, the target company, also after the acquisition. For the employees of the target company, nothing will change as a consequence other than an ownership change of their employer. In a share deal, all benefit contracts (e.g., pension, insurance and payroll) will need to be reviewed to assess whether such benefits remain applicable after closing or need to be renewed or replaced from closing.
Asset deal
If the asset transfer qualifies as a transfer of an undertaking within the meaning of the Dutch transfer of undertaking legislation (Sections 7:662 and further of the Dutch Civil Code), the employees of the seller's business will automatically transfer to the buyer by operation of law under their current terms and conditions of employment. Exceptions may apply to pensions and group-specific employment conditions, like equity plans, that by nature cannot be transferred to the acquiring entity.
Terminations "due to a transfer of business" are prohibited by law. Terminations for non-performance or economic reasons remain possible. If the asset transfer does not qualify as a transfer of undertaking, the employees will only transfer with their consent.
Information/consultation requirements
A transaction may trigger information or consultation rights toward works councils or the trade unions of both the seller and the buyer. Depending on the circumstances, the works council consultation process will generally take a couple of weeks to months. This involves, in principle, a pre-signing obligation. In practice, a signing protocol or (elaborate) condition precedent is often used to cater for these obligations.
Depending on the transaction structure, a notification to the Merger Committee of the Social and Economic Council and relevant trade unions must also be made. If there is no employee impact, these notifications are usually just a formality.
Pensions
Pension plans and the transfer of any past pension liabilities must be considered carefully in the transaction context because defined benefit schemes still exist in the Netherlands. Indexation obligations concerning past accrued pension entitlements may trigger future liabilities. We also recommend assessing whether a mandatory industry-wide pension fund will become applicable as of closing. If this is not the case, it needs to be assessed if the pension plan can be continued from closing or if the employees need to go to a new pension provider as of closing instead. Such transfer will take time and give rise to certain risks that need to be covered in the transaction documentation.
Share deal
For a buyer, the acquired shares are carried in the books at cost price. If the participation exemption is applicable, acquisition costs will be added to the fiscal cost price of the shares. This is because the acquisition costs relating to the purchase of shares that qualify for the participation exemption are not tax-deductible.
A shareholding in a subsidiary generally qualifies for the Dutch participation exemption regime if the shareholding represents 5% or more of the nominal issued paid-up capital of the subsidiary, unless the subsidiary is (deemed to be) held as a passive investment and its assets comprise 50% or more of low-taxed portfolio assets (e.g., group loans or IP passively licensed within the group).
For a seller, a capital gain realized on the sale of shares in a subsidiary that qualifies for the Dutch participation exemption regime is exempted from Dutch corporate income tax. Otherwise it is subject to corporate income tax.
For value-added tax (VAT) purposes, transactions relating to shares and participations in other companies (e.g., acquisition, holding and sale of shares) only fall within the scope of VAT when certain conditions are met. If the acquisition of shares falls within the scope of VAT, the input VAT incurred may be deducted in accordance with the general rules (i.e., the pro-rata calculation method). If the sale of shares falls within the scope of VAT, then it is, in principle, regarded as a VAT-exempt transaction. However, the deductibility of input VAT on costs in relation to the acquisition and sale of shares depends on each case's facts. The proposed set-up of a share deal should be carefully reviewed to mitigate the risk of non-recoverable VAT.
The acquisition of shares in a company may be subject to real estate transfer tax (RETT) if the assets of the company consist of 50% or more of real estate assets and 30% or more of Dutch real estate. These assets are held with the purpose of exploiting the real estate as such (i.e., a passive investment).
Asset deal
For a buyer, the basis for the amortization of the acquired assets is the acquisition price minus the residual value. Acquired goodwill can be amortized at a maximum rate of 10% per year. Other business assets can be depreciated at a maximum rate of 20% per year. Depreciation on buildings is subject to specific rules.
For a seller, the capital gain realized is typically subject to Dutch corporate income tax at 25.8% (2023 rate).
Under certain conditions, a seller is allowed to temporarily defer the taxation of the capital gain if the seller intends to reinvest in another business asset. Any remaining tax losses remain with the seller.
For VAT purposes, the transfer of assets can qualify either as several distinct supplies of goods and services (where each of which is subject to VAT at the appropriate rate) or as the transfer of a business as a going concern (TOGC).
Whether or not a TOGC applies depends on whether specific conditions are met. A TOGC applies by law and is not optional. In the case of a TOGC, no VAT is due on the transaction. Under the TOGC regime, input VAT incurred on the costs of the transaction may be deducted in accordance with the general rules for general costs (i.e., the pro-rata calculation method). The deductibility of VAT on costs and assets in the case of a non-TOGC asset transfer should be assessed individually.
In general, RETT is levied on the transfer of Dutch real property. Under certain conditions, transfer tax exemptions may apply.
OECD's Two Pillar Solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.
Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.
For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.