Netherlands: Ceasefire in Dutch Supermarket Wars?

Originally published in the European Lawyer

In 2003 Albert Heijn, the largest food retailer in the Netherlands, began cutting its prices to bring a halt to its declining market share. This move initiated a three year price war that has only recently started to slow down on a national level, with severe price-based competition still continuing locally.

One of the main reasons for the end of the supermarket price war may have been the end of a battle in another related battle: the battle to acquire the best supermarket locations. Obviously, the location of a supermarket is one of the most important factors for success and competition for the best locations has always been fierce. In 2006 an unprecedented number of supermarket locations was offered to the market simultaneously. In January of that year, supermarket operator Laurus announced its intention to sell its Edah and Konmar operations, over 300 stores in total. Laurus had been seriously affected by the price war and was under pressure from its banks to pay back the majority of its outstanding debt. Even though a significant improvement of the sales of the Edah and Konmar stores was predicted as a result of a renewal plan already underway, the envisaged profitability was below Laurus' standard, as a result of the unrelenting pressure on margins as a result of the price war. In addition, the financial position of Laurus made it impossible to make further investments in the renewal of the Edah and Konmar operations and Laurus decided to concentrate on the Super de Boer format, some 400 stores.

As a result of the large number of locations, tenants, subtenants and franchisees involved, the process was a serious logistical challenge. As a result of meticulous preparation, Laurus has been able to successfully carry out the transaction and to split the transaction into three separate manageable parts, which were eventually sold to three purchasers – Albert Heijn, Jumbo and a consortium of Sperwer and Sligro. Boekel De Nerée advised Laurus on the real estate related aspects of the transaction.

In order to make optimal use of the competition between interested buyers, a controlled auction process was set up by ABN AMRO Corporate Finance. In the Laurus transaction, considerable time and effort was spent in order to prepare the dataroom. All relevant financial, technical and legal information was collected and an information memorandum was made available to the potential buyer after the signing of a confidentiality agreement. Interested parties were invited to make a provisional bid on the basis of the information memorandum. ABN AMRO and Laurus invited a limited number of bidders to the second round. At this stage, the prospective buyers were given access to an online virtual data room, in which all relevant information with regard to the supermarkets was made available, as well as a detailed legal vendor's due diligence report. The bidders were asked to make a binding offer based on the information contained in the virtual data room and on the basis of a draft contract of sale prepared by Laurus.

The Laurus transaction was especially complicated as most supermarket locations were not owned by Laurus, but leased from third parties. Assignment of the lease agreements to the eventual purchaser was essential for completion of the transaction. Under Dutch law, the tenant of retail property in which it operates its business can initiate court proceeding to force the landlord to cooperate with an assignment of the lease if the tenant wishes to sell its business. The Court may sustain such a claim if the tenant can demonstrate a considerable interest in the transfer of its business. The Court may deny the claim if the third party cannot offer adequate guarantees that it will fulfil the obligations of the agreement and that it will properly operate the business in the leased premises.

In a controlled auction process of the size and nature as the Laurus transaction, detailed preparation is key, for both commercial and legal reasons. Preparation is essential for avoiding post completion disputes. Under Dutch law, the vendor is under an obligation to disclose material information to a prospective purchaser. Failure to do so may constitute breach of contract or breach of good faith, which may both lead to seller's liability. Generally speaking, a vendor is deemed to know its business, and cannot successfully deny liability if it was unaware of facts that a prudent vendor should reasonably have known about. It is therefore very much in the interest of the vendor to be aware of any matters that could negatively affect the business or properties that are being sold. First, because it enables the vendor to resolve any issues that can be resolved prior to commencement of due diligence by the purchasers. Second, because issues that cannot be resolved quickly can be disclosed to the purchaser at such time and in such manner as the vendor deems best in order to avoid a reductions of the purchase price.

Another reason why the controlled auction process needs to be carefully planned and monitored is that, under Dutch law, the relations between a prospective vendor and purchaser are governed by the concept of precontractual good faith. Unlike in most Anglo-Saxon jurisdictions, this can mean that in negotiations governed by Dutch law, the parties may not be at liberty to discontinue negotiations without compensating the other party for costs incurred or – if negotiations in a very advanced stage are terminated without cause – for loss of profit. The party having discontinued negotiations could even be forced by the court to continue negotiations against its will – without a letter having been put on paper!

For this reason, the larger Dutch property transactions are typically preceded by a due diligence investigation carried out on behalf of the vendor, during which all the legal, technical, tax and financial matters are investigated. This process also serves as the basis for preparation of a data room with all relevant information relating to the target company or the target portfolio and is vital for the preparation of the information memorandum and the draft contract of sale.

A well prepared controlled auction enables the vendor to optimise proceeds by making optimal use of the competition element of the process. The competition element further allows the vendor to have much more influence over the terms and conditions of a transaction than it would have had an ordinary negotiations. In most – if not all – controlled auctions, the vendor drafts the sales documentation and the prospective buyers have reason to be reluctant to make too many changes to the contract of sale as this could mean the vendor could continue the process with another buyer. The success of the Laurus transaction emphasises the value of meticulous legal preparation and strategic planning.

At the time of writing, Laurus announced the intended divestment of a further approximately 50 stores belonging to its Super de Boer format, as part of a program intended to further improve the efficiency and financial situation of Laurus.

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