The 1996 year has shown a great deal of M&A activities in the Netherlands. Some major "outbound" transactions by Netherlands' listed companies have grasped the headlines : insurer AEGON's 6.1 billion Dutch Guilders ("NLG") acquisition of Providian Corp, ABN AMRO Bank buying Standard Federal (3,2 billion), KPN (post and telecom) acquiring TNT of Australia at NLG 2,7 billion, Ahold's acquisition of Stop & Shop at NLG 4,9 billion, to name just a few. In the Netherlands itself, one of the major transactions is the acquisition by Dutch/Belgian bank and insurance group Fortis of MeesPierson N.V., from ABN AMRO Bank (at NLG 2.1 billion). Obviously, there were (and there will be) many more transactions following in the wake of these.
Loeff Claeys Verbeke will, in the following months, provide through Business Monitor some twenty chapters on aspects relevant to these type of transactions, with a focus on Netherlands' law. Topics will include deal documentation, acquisition structures, letters of intent, tax planning, environmental law issues, regulatory framework, assets versus shares acquisitions, goodwill depreciation, leveraging and financial assistance, employment law aspects and pensions, competition laws (national and European Community), duties and responsibilities of (managing) directors, and many more.
The first contribution in this series concerns deal documentation for negotiated acquisitions.
There are numerous ways to document a M&A transaction. Depending on the size of the transaction, the documentation may be limited to one agreement with a few annexes, or include letters of intent, term sheets, bid books, closing memoranda and closing agreements, legal opinions, framework agreements, and more. In elaborate transactions one will often find separate ancillary agreements which provide for continued cooperation among the seller and the purchaser, license agreements, management assistance agreements and the like.
No prescribed formats
It is important to note that there are no prescribed formats for deal documentation in the Netherlands. Generally, where the transaction becomes more complex and develops over an extended period of time, there will be a greater need for documentation evidencing the various steps in the transaction (such as where a bid book is followed by a letter of intent, heads of agreement, and finally an acquisition agreement).
Documentation as a negotiations tool
It is equally important to consider, from the different perspectives of each of the seller and the buyer, to what extent and at which point of time documentation is required; this is very much an area where legal aspects are intertwined with, and have considerable influence on, the negotiation progress. It is recommendable that expert legal advice is timely obtained to analyze the ramifications of (in particular) the initial deal documentation. We will further deal with this issue in the coming months.
Dutch law acquisition documents: what form do they take?
To a large extent, acquisition agreements in the Netherlands mirror their counterparts in common law jurisdictions (USA and UK) with respect to the issues covered therein. One will often find that Netherlands' law acquisition contracts, although less elaborate, resemble the Anglo-American contracts, i.e. they will usually include recitals, description of property and consideration, conditions precedent (in the USA "conditions to closing"), escape clauses (i.e. obligations being subject to board approval, financing, entire agreement, due diligence outcome), representations and warranties, claim periods, damages, indemnifications, restrictive covenants, dispute resolution, applicable law, confidentiality, publicity, and other "boiler plate" provisions.
However, generally speaking, the Dutch tradition of drafting is far less detailed and elaborate than the Anglo-American style. There are various reasons which contribute to this phenomenon. To name a few: under common law systems there is no comprehensive plan of codification. A case-oriented approach leads to pragmatic and empirical judge-made law, as opposed to the scholar-made civil law system which for example prevails in the Netherlands. Important features of the common law system which bear upon drafting of transaction documents are the doctrine of precedent tradition (once decided, the Court ruling in a particular case prevails), and the rule that interpretation of contract only occurs where the wording is ambiguous. This in turn has lead to widespread involvement of lawyers and the use of tested language and standard forms.
Quite opposed to this, under Dutch law (being a civil law system) the principle of reasonableness and fairness applies generally to contracts and may limit or expand on the specifically agreed terms of a contract. Also, the courts will, generally, apply this principle if a situation arises which the parties to the contract have not specifically foreseen (and did not therefore deal with) in the agreement concerned. In addition, the courts can supplement, modify or, wholly or partly, set aside, an agreement on the basis of the existence of unforseen circumstances or bad faith. Furthermore, the parole evidence rule is unknown under Dutch law: the wording of an agreement is not decisive; it is the intent that prevails over the wording.
In conclusion, there is a statutory basis to encroach upon the freedom of contract (which otherwise prevails, meaning that within the parameters of mandatory law and public order, the parties to a contract are at liberty to agree on the terms of that contract). Hence, it will generally be sufficient to keep drafting relatively simple and straightforward.
What establishes an agreement under Dutch law?
The basic requirement for the formation of an agreement is an offer and the acceptance of such an offer, i.e. a meeting of the minds. Consideration is not required. The Netherlands does not have a statute of frauds requiring that a contract for the sale and purchase of property be evidenced by a written document identifying the parties to the transaction, the property and the terms of the sale. Under Dutch law, the contract must contain all the 'essential elements' for the type of contract concerned, but this rule is also met if, by interpretation, a specific element not expressly set forth (for instance a purchase price) can be determined.
An oral agreement is binding on the parties (but obviously is advisable to put the agreement in writing to evidence its existence and content).
Risk of Misinterpretation
One should be aware that the use of English terms and Anglo-American contractual formats in Netherlands' law acquisition agreements is not without risk: the non-Dutch seller and purchaser should obtain clear advice on what these terms and formats actually entail under Netherlands law, so as to avoid any misunderstanding. For instance, the distinction between a representation and a warranty has no legal effect under Netherlands law; likewise a separate indemnification for breach of warranties is redundant. This is quite the opposite of Anglo American law contracts.
Another important issue is, that recitals under Dutch law form part of the agreement (as opposed to contacts under common law) and serve to provide evidence of the intent and understanding of the parties at the outset of the transaction.
Furthermore, these are less intent warranties from the Anglo American law parties; Specific warranties should therefore be sought in specific issues.
Finally, the consequences of default under a Dutch law agreement are, in principle, prescribed by statutory law. The freedom of contract rule allows parties to expand on this, but where the contract is silent, one should be aware of these statutory remedies. These include the right to rescind the agreement (with the obligation to reinstate the pre-contract situation to the extent possible); this is typically a right that sellers will wish to have waived by the purchasers.
This concludes the introductory remarks on deal documentation under Netherlands law. Our next issue will be published by the end of January 1997 and will provide information on letters of intent, heads of agreement and similar deal documentation.
For further information please contact Ewout J. Stumphius, Loeff Claeys Verbeke, Rotterdam (phone: +31 10 4034644, fax: +31 10 4149388).
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.