Netherlands: Dutch M&A Market Overview

1. MARKET OVERVIEW

1.1 Please give a brief overview of the public M&A market in your jurisdiction

The Dutch public M&A market has been relatively quiet in 2011. Takeover activity has still not been restored to pre-financial crisis levels. Uncertainty about the fate of the euro and financial markets, as well as reduced availability of credit, has made potential bidders hesitant. At the same time, depressed share price levels have enabled some bidders to offer significant premiums while still paying relatively low multiples.

The bulk of public takeovers comprise friendly deals, a combined result of bidders generally preferring cooperation by target management and the ability of many Dutch listed companies to protect against hostile bids by taking defensive measures. Still, hostile bids are made from time to time, such as the recent unsolicited offer by Mexichem for tube manufacturer Wavin. Bidding contests are also witnessed occasionally, the 2007 contest for ABN AMRO being the most prominent example. Other high profile contests include the contest for Hagemeyer and, more recently, for cable manufacturer Draka.

The regulatory framework for takeovers is well developed. The Dutch takeover rules generally do not impose overly burdensome requirements on bidders and the regulator is showing an overall willingness to facilitate takeover bids by acting swiftly if necessary. High-profile takeovers and contested takeovers do entail some litigation risk. Indeed, bidders and target boards have easy access to the Enterprise Chamber of the Amsterdam Court of Appeal, which is renowned for its swift and often decisive action. Activist shareholders, too, have shown that they do no shy away from litigation when they believe their interests are being prejudiced. For example, in 2010, activist shareholder Hermes claimed, unsuccessfully, that the post-bid governance structure of Océ, which was subject to a recommended takeover bid by Canon, would not adequately protect minority shareholders. Careful structuring of the deal should greatly reduce such litigation risk, and indeed the bulk of public takeovers in the Netherlands are completed swiftly without litigation.

1.2 What are the main laws and regulations which govern the conduct of public M&A activity in your jurisdiction?

The main law governing the conduct of public M&A activity is the Act on Financial Supervision (Wet financieel toezicht) and decrees issued under this Act.

1.2.1 What entities are covered?

The Dutch offer rules generally apply to public offers for target companies whose securities are admitted to trading on a regulated market in the Netherlands (ie, Eurolist by Euronext Amsterdam).

1.2.2 Who is the regulator?

The Netherlands Authority for the Financial Markets (AFM).

The AFM is in any event competent to supervise the bid if the target company is a Dutch company and its securities are admitted to trading on a regulated market in the Netherlands. If the target company is not Dutch but its securities are admitted to trading on a regulated market in the Netherlands, whether or not the Dutch offer rules apply will depend on the circumstances, in line with the European takeover directive.

1.3 Other than in relation to anti-trust, are there other applicable regulations such as exchange and investment controls?

The listing rules today have minor relevance for public bids, and only in respect of certain issues such as delisting. Certain specific rules apply in respect of financial institutions, such as a requirement to obtain government approval for acquisitions exceeding 10 per cent of the share capital.

2. PREPARATION AND PRE-ANNOUNCEMENT

2.1 What are the main structural means of obtaining control of a public company? If there is more than one, what are the key advantages and disadvantages of each route? Is one route more commonly used than others?

The commonly used means of obtaining control of a public company is a public offer.

As an alternative, acquirers may consider an asset sale followed by liquidation of the target and distribution of the proceeds to the target shareholders. Precedents include the acquisition of network operator Equant by France Telecom in 2005, and more recently the acquisition of retailer Super de Boer by Jumbo. The upside of an asset sale is that the acquisition takes place outside the regulatory framework for public offers. Also, the bidder will not have to deal with minority shareholders following the acquisition and thus obtains immediate and full control of the target. At the target level, the sale will typically be subject to shareholder approval. A simple majority may suffice to approve the transaction, and if the price is right the shareholder approval requirement therefore is unlikely to constitute a hurdle. Some litigation risk exists, as ultimately dissenting minority shareholders are disenfranchised against their will.

In a national context, legal merger is an alternative, although infrequently used, method for obtaining control. As is the case for asset deals, mergers require shareholder approval and a simple majority suffices. A recent example is the merger between Nieuwe Steen Investments and Vastned in 2011.

The EU cross-border mergers directive has recently been implemented in the Netherlands, facilitating mergers between Dutch limited liability companies and companies from other European member states. To date, there has been very limited cross-border merger activity in the EU. The same is true for the SE (the European Company), which can also be used to effectuate cross-border mergers, primarily due to strict (and time-consuming) rules on employee involvement. A high profile cross-border merger dating from before the implementation of the cross-border mergers directive is the Arcelor-Mittal merger, which involved Dutch and Luxembourg companies.

Proxy solicitation and replacement of the boards through a shareholder vote, although not impossible, are not a common means of obtaining control of Dutch public companies.

Activist shareholders occasionally make demands for governance changes, and sometimes for changes in the company's management or strategy. For example, in 2010, activist shareholders Hermes and Fursa initiated a shareholder vote at semiconductor manufacturer ASMI to compel the board to divest a significant asset. Legal proceedings ensued, and ultimately the Supreme Court of the Netherlands, in a landmark decision, held that the company's strategy is management's prerogative. This decision was widely perceived as dealing a blow to activist shareholders generally.

2.2 What secrecy and disclosure obligations are placed on bidders and target companies ahead of any formal announcement of a bid?

The bidder and the target will typically enter into a confidentiality and standstill agreement prior to entering into negotiations.

Pursuant to the Dutch offer rules, disclosure of the discussions between the bidder and the target may be postponed until conditional agreement on the offer is reached, provided that the information is treated as strictly confidential. If confidentiality can no longer be guaranteed, disclosure will have to be made. The AFM takes a hard line when it comes to timely disclosure. Indeed, it has imposed fines on bidders and targets alike for failing to promptly disclose the fact that merger negotiations were taking place once it had become clear (for instance, from a sudden, otherwise inexplicable increase in the share price) that information about the negotiations had leaked. Such fines were imposed in several recent public offers, including Randstad/Vedior and Danone/Numico. They are typically followed by civil damages claims by investors.

2.3 Are there any constraints over the ability of a bidder to carry out due diligence on the target?

There are no statutory constraints on the ability of a bidder to carry out due diligence on the target. However, once the bidder obtains, through its due diligence, non-public information regarding the target, the bidder will be prevented from trading in the target's shares. To the extent there is already a standstill agreement in place this should not matter, but it does imply that bidders wishing to build a stake in the target should in any event do so prior to conducting due diligence.

2.4 Is it possible for a target company to grant a bidder exclusivity and/or a break fee? Are there any other steps which can be taken to provide greater certainty to a bidder that its bid will be successful?

The confidentially and standstill agreement will typically include a provision preventing the target company from actively soliciting competing offers. In the merger protocol the target company will usually go one step further and grant exclusivity to the bidder. If exclusivity is granted the merger protocol should still contain a fiduciary out enabling target management to support competing offers that are deemed superior (see paragraph 9 below).

The merger protocol will often provide for a break fee up to about 1 per cent of the transaction value, payable under such circumstances as the parties may agree upon. While break fees that are intended as reimbursement of the bidder's out of pocket expenses are generally accepted, there remains some uncertainty as to the legality of break fees of such magnitude that they effectively deter other bidders by substantially reducing the post-acquisition value of the target.

2.5 Are there any restrictions on a bidder obtaining commitments from a target company's shareholders ahead of the announcement of a bid?

Although there is a general prohibition on sharing non-public price sensitive information (including information regarding a contemplated offer), the AFM has issued a guideline pursuant to which potential bidders are allowed to reach out to major shareholders whose support is deemed crucial for a successful bid.

In practice, potential bidders often secure irrevocable commitments from major shareholders. Of course, shareholders with advance knowledge of a public offer are prevented from trading in the company's shares, and some (institutional) shareholders may therefore be reluctant to enter into discussions with potential bidders.

Pursuant to pending changes to the Dutch offer rules, a specific exemption from the mandatory bid rule will apply to major shareholders who, as part of their agreement with a potential bidder, have committed themselves to voting in favour of shareholder resolutions to be passed in connection with the offer. Accordingly, major shareholders will be able to enter into detailed agreements with potential bidders without fearing that they will be deemed to act in concert and trigger an obligation to launch a mandatory bid.

2.6 Are the directors of the target company under any particular obligations or duties in the period leading up to a bid?

The general duty of directors is to act in the best interests of the company. As a result, directors are required to assess the merits of a potential offer from the perspective of the company and its various stakeholders (including, for example, employees) and not only from a shareholder perspective. The realities of the market, of course, result in a strong focus on price. If the price is right, it may not be easy for directors to decline an offer solely on the grounds that the offer is not in the interest of other stakeholders, except for special circumstances, such as, possibly, a break up bid with significant negative consequences for employees, or a bid that is likely to result in highly leveraged financing at the target level following completion.

Accordingly, in a multi-bid scenario there is no formal duty for the board to accept the highest offer, ie there is no Dutch equivalent of the US 'Revlon duties'. This has recently been confirmed by the Dutch Supreme Court in a case concerning ABN AMRO, which had entered into a merger agreement with the UK bank Barclays and then became subject to a hostile bid by a consortium of three banks.

3. ANNOUNCEMENT OF A BID

3.1 At what stage does a bid have to be announced?

A contemplated public offer must be announced by means of a press release, at the latest when the bidder and the target have reached agreement on the offer, regardless of whether or not the agreement is conditional. In practice, the agreement may be conditional on for example, merger approval.

3.2 Briefly summarise the information which needs to be announced at this stage.

The announcement should contain, at least, the names of the bidder and the target, and to the extent applicable, the offer price or exchange ratio and any offer conditions that have, at that time, been agreed between the parties.

4. BID TIMETABLE

4.1 Please provide a brief overview of the bid timetable, assuming that the bid is recommended by the board of directors of the target

As of the moment the intention to launch an offer has been publicly announced, the following obligations apply to the bidder and the target company:

• Not later than four weeks after the initial announcement the bidder must announce by way of a press release whether it will prepare an offer memorandum or whether the contemplated offer is renounced.
• The request for AFM approval of the offer memorandum must be filed with the AFM not later than 12 weeks after the initial announcement.
• In principle, the AFM should grant approval within 10 business days, but this period may be extended if the AFM requests additional information.
• The offer is formally launched by making the offer memorandum available to the public and by making a public announcement to that effect. This must be done not later than within six business days after the AFM has approved the offer memorandum, unless the bidder publicly announces the renouncing of the offer within the same period.
• The initial offer period is at least four weeks and at most 10 weeks. The bidder is allowed to extend this period once for a period of at least two weeks and at most 10 weeks.
• At least six business days prior to the end of the offer period, the target company is required to hold a shareholders' meeting to discuss the offer on the basis of a reasoned opinion regarding the offer by the board, which should be available at least four business days prior to the meeting (see also paragraph 4.3 below).
• Not later than three working days after the end of the offer period the bidder must announce, by means of a press release, whether or not the offer is declared unconditional, or that the offer period is extended. If the offer is declared unconditional, the bidder may opt to allow for a subsequent offer period of maximum two weeks.

4.2 Are there any material differences if the bid is hostile (ie unsolicited) and/or if there are competing bidders?

Relevant aspects of hostile offers include:

• Information: in the case of competing offers, there is no statutory obligation on management to share the same information with a hostile bidder as has been shared with a friendly bidder. However, case law suggests that a certain degree of information sharing may be required in order to maintain a level playing field between the two bidders.
• Management's position: in its position statement (see paragraph 4.3 below), management will need to compare the competing offers and explain why it prefers one offer over the other.
• Offer period: If a third party launches a competing offer, the initial bidder may extend the offer period up to the end of the offer period of the competing offer.
• Offer price: pursuant to the Dutch offer rules, a bidder may only raise the offer price once. As a result, the initial bidder is put at a comparative disadvantage, since the competing bidder has the possibility to offer a higher price and then to respond to the initial bidder's offer price increase, if any, by raising the price again, without the initial bidder being permitted to do the same. The Dutch legislator is contemplating removing this rule. As a result of such removal, bidders would no longer be restricted in their ability to raise the offer price multiple times, even though in practice various methods have already been developed to overcome this restriction.

4.3 What are the key documents which the shareholders of a target company would typically receive on a bid?

Shareholders of the target company typically receive two key documents. The first is an offer document, prepared by the bidder, containing substantially the same information that is included in offer memoranda in other EU member states whose takeover rules are also based on the EU Takeover Directive. The second is a document describing management's position on the takeover. In a friendly bid, this position will typically be included in the offer memorandum itself.

5. FUNDING AND CONSIDERATION

5.1 At what stage does a bidder need to have funding in place? Are there any legal or regulatory requirements which the bidder must satisfy to show that its funding is sufficient?

The bidder should make a public announcement regarding 'certain funds' ultimately at the time of requesting the AFM's approval of the offer memorandum.

In the case of a cash offer, the bidder must, at such point in time, have the required amounts at its disposal. However, the AFM will not verify whether this is actually the case, and it is not necessary for the bidder to be able to submit a bank statement. Accordingly, it is left up to the market to judge the solidity of the bidder's funding arrangements.

In the case of an offer consideration consisting (in part) of securities, it suffices if all reasonable preparatory measures have been taken to enable payment of the consideration. Accordingly, if it concerns a share-for-share offer, the bidder will need to have convened a shareholders' meeting for the adoption of a resolution authorising the issuing of shares, assuming such authorisation is indeed required. The resolution itself will need to have been passed seven business days prior to expiration of the offer period at the latest.

5.2 Can the consideration offered by a bidder take any form? Are there any special requirements the bidder must satisfy if the consideration is otherwise than in cash?

The consideration can either be in cash, securities or a mix. If the bidder offers securities as part of the consideration, a prospectus will likely have to be published in connection with the offering and the listing of such securities.

6. CONDITIONS

6.1 Can a bid be made subject to the satisfaction of any pre-conditions? If so is there any restriction on the content of any such pre-conditions?

Yes, provided that the bid cannot be made subject to conditions the fulfilment of which the bidder can control.

6.2 What conditions are usually attached to a bid itself? Other than as a result of law and regulation specific to particular sectors and/or bidders are there any conditions which are mandatory?

The bid is usually made subject to, inter alia, the following key conditions:

• acceptance by a minimum percentage of target shareholders (typically between 70 per cent and 95 per cent of the share capital, the threshold for a squeeze-out);
• no material adverse change having occurred (other than a general market decline);
• the boards not having revoked their recommendation of the offer.

These conditions can be waived by the bidder, and in practice bidders sometimes waive the minimum acceptance condition if at least a majority of the shares have been tendered.

7. IS THE BIDDER ABLE TO RELY ON THE FACT THAT A CONDITION IS NOT SATISFIED AS A MEANS OF NOT PROCEEDING WITH THE BID?

Generally, yes. If a condition is not satisfied, the bidder need not declare the offer unconditional and accordingly may terminate the offer without having to purchase the shares that have been tendered. A public announcement to this effect should be made immediately upon it becoming clear that the condition has not been fulfilled or will not have been fulfilled by the end of the offer period, as the case may be.

The same applies in principle when a material adverse change occurs as a result of which the MAC-condition is not fulfilled. The AFM requires that it can be objectively established whether or not a MAC has in fact occurred. Put differently, the fulfilment of the MAC-condition cannot depend on the subjective judgement of the bidder.

8. STAKEBUILDING

8.1 Is a bidder free to buy shares in the target in the period leading up to a bid and subsequently? If so, what are the disclosure requirements? Are there any material consequences for the bidder or target if stakebuilding does take place?

As long as the bidder has no inside information, he is free to buy shares in the target in the period leading up to a bid and subsequently. Notably, any purchases resulting in the bidder controlling, alone or with concert parties, 30 per cent or more of the voting rights would trigger an obligation to launch a mandatory bid.

As of the moment that the intention to launch an offer has been publicly announced, the bidder and the target company must report all transactions in the target securities (except regular trading on the stock exchange, but including stock lending, repos etc) promptly to the AFM. Once the offer is launched, such transactions must be publicly disclosed at least daily.

If, in connection with any of the aforementioned transactions, the bidder pays a higher price than the offer consideration, the bidder will be obliged to pay such higher price to all holders of the relevant securities (the 'best price rule'). In addition, for a period of one year after the offer is declared unconditional, the bidder is not permitted to acquire shares at a price which exceeds the offer price, except in case of regular trading on the stock exchange.

9. RECOMMENDED BIDS

9.1 Where a bid is recommended, does the target board require a 'fiduciary out' (ie the ability to withdraw its recommendation). If so what, typically, is the scope of this right and what are the consequences for the bid?

The exclusivity and recommendation provisions typically included in the merger protocol should contain a fiduciary out enabling management to consider and possibly support competing offers that are deemed superior. The definition of 'superior' is not provided by law and will typically be an item for the negotiations between the bidder and the target board. Thus, the parties may negotiate that an interloper bid may only be deemed superior if the offer price is, for example, 5 per cent higher than the price offered by the bidder. For the target board, obviously it is important that the threshold is not set too high so as to ensure that the board can comply with its fiduciary duty to act in the interest of the company and its stakeholders by supporting a competing offer that the board deems superior from that overall perspective.

10. HOSTILE BIDS

10.1 How can a target company defend a hostile bid?

The most common post-bid defensive measure is the issuing of preference shares to a friendly foundation. Because the preference shares are issued at par value and need not be fully paid up, a large number of shares (and therefore voting rights) can be issued to the foundation at relatively low cost, thus in effect neutralising the hostile bidder's (or activist shareholder's) actual or anticipated voting power.

Another post-bid defensive measure is the sale of a crown jewel, a measure that some argue was taken by ABN AMRO when it sold its US subsidiary LaSalle in the face of a hostile bid by a consortium of three banks in 2007.

Pre-bid defensive measures include the use of priority shares and depository receipts.

In a landmark case concerning the real property fund Rodamco, the Supreme Court held that defensive measures can be justified if such measures are necessary with a view to the (long-term) continuity of the company and its various stakeholders, provided that the measures are taken in order to maintain the status quo pending negotiations between the target and the bidder, and provided that they constitute an adequate and proportional response. The deployment of defensive measures for an indefinite amount of time will, as a general matter, not be justified, even though the Dutch legislator has chosen not to implement the optional restrictions on defensive measures pursuant to the EU Takeover Directive.

11. COMPULSORY ACQUISITION OF SHARES

11.1 Briefly describe any compulsory acquisition or 'squeeze-out' provisions a bidder may be able to take advantage of in order to acquire the shares of non-accepting shareholders.

In addition to the conventional squeeze-out right of shareholders who own at least 95 per cent of the share capital, the implementation of the EU Takeover Directive has resulted in an additional squeeze-out right for shareholders who have acquired at least 95 per cent of the share capital and of the voting rights pursuant to a public offer. The distinctive feature of the latter squeeze-out right is that the law provides that the equitable price that minority shareholders should receive for their shares is presumed to be equal to the offer price. This presumption applies only if the bidder acquired, through the offer, at least 90 per cent of the shares it did not acquire otherwise.

12. DE-LISTING

12.1 What are the requirements for de-listing a target company's shares following a successful bid?

The bidder can request delisting from the stock exchange (ie, Euronext Amsterdam) if the bidder has acquired at least 95 per cent of the shares following a bid (and as a result has the right to squeeze out the minority shareholders, see above). If Euronext Amsterdam decides in favour of the request, delisting will take place in principle 20 trading days after publication of the decision.

13. TRANSFER TAXES

13.1 Are there any transfer taxes which are payable on a bid for a target company incorporated in your jurisdiction, under the various routes described above?

There are no transfer taxes as such. A public offer may, however, have various tax consequences for the target's shareholders. These consequences are typically described in a separate paragraph in the offer document.

A legal merger is generally a taxable event for shareholders. In many circumstances, however, roll-over relief may be available. In an asset sale, liquidation distributions are subject to withholding tax to the extent the distribution exceeds the paid-in capital.

14. EMPLOYEE ISSUES

14.1 Are there any employee notification or consultation requirements on a bid?

In a friendly deal, the works council of a Dutch target company will need to be consulted in connection with the board's decision to facilitate a change in control of the target by supporting the offer. If the works council issues a negative advice in respect of the board's decision regarding the change of control, the board will need to comply with a one-month waiting period during which the works council may initiate legal proceedings and request the competent court to review the board's decision. The scope of the court's review is limited. In practice, the work council's involvement seldom imposes a hurdle, and tends to be more significant at the next stage, if and when the bidder wishes to reorganise the target's business following completion of the offer.

In addition, relevant trade unions may need to be notified of the offer and involved, as appropriate. This involvement is generally less substantial than the works council's involvement.

When the offer is launched, the target board will need to provide its works council with a copy of the offer memorandum. Next, the chairman of the works council has the right to address the shareholders of the target at the informative shareholders' meeting that is to be held during the offer period.

15. CURRENT TOPICAL ISSUES AND TRENDS

15.1 Please summarise any current issues or trends relating to public M&A activity in your jurisdiction

The Dutch offer rules will probably be amended in early 2012 inter alia to include a 'put up or shut up' rule, similar to the rule currently existing in the UK. Accordingly, the AFM will have the right to request a potential bidder to, within six weeks of such request, make a public announcement clarifying whether or not it intends to make a bid. If an announcement is made to the effect that there is no intention to launch a bid, the relevant party will generally be precluded from making a bid in the six months following the announcement.

The decisive criterion is whether it is in the interest of the target company that the potential bidder's intentions are clarified. The AFM will make such a decision at the request of the target company. The target company will have to substantiate its request by arguing that statements made by the potential bidder have resulted in uncertainty in the market as to whether or not an offer will be made and that, for example, this uncertainty is destabilising trading in the company's shares, thereby causing fluctuations in the share price.

Another recent development relates to the ways in which bidders try to obtain full control over the target following completion of an offer. The conventional way to do this is by squeezing-out minority shareholders. As noted in question 11 above, this requires that the bidder holds a 95 per cent stake in the target. If this threshold is not met, bidders will typically explore alternative options such as a legal merger or an asset sale. Such transaction is then negotiated (by the independent directors), approved (by those who at such point in time are the shareholders) and executed subsequent to the offer. Interestingly, recent public offers for NASDAQ listed pharmaceuticals company Eurand and biotech company Crucell were structured such that the asset sale was pre-wired: the asset sale agreement was already negotiated between the bidder and the target board prior to the launch of the offer. As a result, the bidder would be able to swiftly execute the sale following completion of the offer. This is certainly a novel approach. Compared to conventional public offers, it offers the bidder greater deal protection. At the same time, it could be seen as an aggressive approach. Indeed, this structure has not yet been tested in court, and it cannot be excluded that courts would consider minority shareholders to be unfairly prejudiced, just as there is a litigation risk in connection with straightforward asset sales. Against this background, it will be interesting to see whether other bidders will follow suit, and how target boards will respond.

Previously published in European Lawyer Reference Series 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.