On 15 December 2021, a new four-party coalition government was announced in the Netherlands, which promised to break away from the traditional governmental focus on the small state, paving the way for greater government expenditure. Included in the coalition's new plans for spending is a EUR35bn climate fund, to be built up over the next 10 years and EUR25bn to reduce the Netherland's nitrogen emissions.
In March 2022, the central bank of the Netherlands, made new projections regarding its economy. The Dutch economy was expected to grow by 3.5 per cent this year and next year by 1.5 per cent, with inflation at 6.7 per cent and 2.8 per cent respectively. However, due to the consequences of the war in Ukraine and higher energy prices, the projections have been revised to growth of 2.3 per cent this year and 0.5 per cent next year, with inflation rising to 9.5 per cent this year and falling to 3.4 per cent in 2023.
DUTCH LEGAL SYSTEM
The Dutch legal landscape is based on civil law and characterised by stability and the rule of law. Under Dutch contract law, 'freedom of contract', 'pacta sunt servanda' (agreements must be kept) and reasonable and fairness are some of the leading principles. According to established case law of the Dutch Supreme Court, when interpreting agreements, a court must – in short – consider all relevant circumstances. The intentions and mutual expectations of both parties are significant and may result in clauses being interpreted differently than the literal text. However, the interpretation of agreements will shift more to the literal text, if the text of the agreement (more) accurately reflects the parties' intentions, which can be assumed if the parties e.g., are professional, used legal assistance and/or negotiated the terms of the agreement extensively. These are some of the important elements to consider when drafting commercial contracts governed by Dutch law.
Secured creditors traditionally have a very strong position under Dutch insolvency law (provided that, in light of a Dutch Scheme, the rights of secured creditors could potentially be affected), with the Netherlands considered to be among the most secured creditor-friendly jurisdictions in Europe.
KEY POINTS FOR TRADERS
- Borrowers are prohibited from attracting funds from the public; therefore, many loan agreements require a confirmation that the Lender is a "Professional Market Party". This will generally be satisfied if the loan or transfer is more than EUR100,000 or if the new Lender is a licensed financial institution. Generally, lending to bona fide Dutch professional parties does not trigger a banking licence, unless the loan is to a consumer.
- Security agents / trustees are commonly used in the Netherlands. The security agent holds Dutch security interests based on a 'parallel debt' structure. In most cases, no (joint) security is created in the name of individual lenders.
- Withholding Tax is imposed at the rate of 8 per cent to payments of interest made to "related parties" in low-income tax rate jurisdictions (statutory rate of less than 9 per cent) or in "non-cooperative states". In general, there is no withholding tax on payments of interest made to an unrelated party
BANKING LICENCE REQUIREMENTS
No banking licence is required for lending to bona fide Dutch professional parties (i.e., non-consumers). However, under the Dutch Act on Financial Supervision, it is prohibited for Dutch entities to conduct the business of a 'credit institution' without a licence from the Dutch Central Bank. This activity in short is: (i) borrowing money from persons that are deemed to form part of the public and (ii) granting credit for one's own account. In addition, it is prohibited for entities other than inter alia licensed credit institutions to accept repayable funds from the public.
Although the key terms 'credit institution', 'repayable funds' and 'public' are European law (Capital Requirements Regulation) concepts, there is limited official European guidance as to their meaning. According to the explanatory memorandum to the legislation implementing the Capital Requirements Directive IV ("CRD IV") in the Netherlands, the Dutch law interpretation of these concepts will continue to be taken into account until such European-level guidance is available. This means, inter alia, that the pre-CRD IV Dutch law safe harbour regime allowing parties to accept repayable funds of at least EUR 100,000 (or its equivalent in another currency) will remain relevant until further European guidance has been provided. Consequently, when the initial loan of any lender to a Dutch borrower is at least EUR100,000 or the equivalent thereof, the Dutch borrower will fall within the safe harbour. Other "safe harbours" available under the current Dutch law interpretation allow a borrower to avoid the prohibition on attracting repayable funds from the public. In this context, loan documentation sometimes provides that lenders can only be 'professional market parties' or contains a warning that an incoming lender should 'seek Dutch legal advice' on whether it is part of the public.
METHOD OF TRANSFER
If the loan documentation is governed by Dutch law, a lender can transfer its position by way of a transfer of contract (contractsoverneming) or an assignment (cessie) combined with a debt assumption (schuldoverneming). The loan documentation typically outlines which method(s) are available.
In the following paragraphs, unless stated otherwise, it is assumed that the loan documentation is governed by Dutch law and a security agent holds the Dutch law security based on a 'parallel debt' structure for the benefit of the lenders (see below) while an individual lender transfers its position.
Transfer of contract:
- all or part of the lender's rights and obligations in connection with the loan documents (i.e., the complete or partial legal relationship (rechtsverhouding) of the existing lender) will be transferred to the new lender; and
- co-operation (medewerking) with the transfer from the borrower and/or guarantor(s) required to affect the transfer and, to ensure that this is enforceable against third parties. Such co-operation is usually provided for in advance in the loan documentation.
Assignment combined with a debt assumption:
- this method is rarely used to transfer loans;
- lender assigns its claims (vorderingen op naam) to the new lender and the new lender assumes the existing lender's obligations;
- the borrower and/or guarantor must in principle be notified (mededeling) of the assignment to affect the assignment; and
- consent (toestemming) from the borrower and/or guarantor(s) is required to affect the debt assumption. Such consent is usually provided for in advance in the loan documentation.
If the security agent remains in place and the 'parallel debts' (see below) are embedded in the loan documentation, the Dutch law security will not be discharged by a transfer of commitments or loans by individual lenders. If the Dutch law security right is held by an individual lender, any Dutch law security right will also not be affected following a transfer of commitments or loans by the individual lender, because the Dutch law security rights in rem will follow the secured liabilities in relation to the loan documents by operation of law. However, any contractual rights and obligations of the Dutch law security documents will need to be transferred by way of a transfer of contract separately.
SECURITY AND TRUSTS / AGENCY
It is customary to use a 'parallel debt' structure (sometimes called a 'covenant to pay' structure) in financing transactions where security interests governed by Dutch law, will be held by a security agent for the benefit of multiple lenders. Under such structure, each obligor (borrowers and guarantors) undertakes to pay to the security agent in its individual capacity (i.e., acting in its own name and not as the lenders' agent or representative) amounts equal to the amounts owed by that obligor to all lenders under the finance documents (a "parallel debt"). The Dutch security interests are created in the name of the security agent and secure the payment of the parallel debts. Each lender has a contractual claim against the security agent for the payment of an amount determined by the respective intercreditor arrangement following the enforcement of the security interests. The main reason for this structure is that it is generally assumed that a Dutch law security right cannot be validly created in favour of a person who is not the creditor of the secured liabilities and Dutch law does not provide for the concept of a trust. A foreign trust may be recognised in the Netherlands, but that does not circumvent Dutch security interests only being created in favour of creditors whose claims the security interests are intended to secure. A parallel debt structure has two additional benefits: firstly, it facilitates loan transfers and secondly, if properly drafted, security interests created in favour of the security agent on the basis of a parallel debt will also secure a facility increase by existing or future lenders, or both.
TAX AND STAMP DUTY CONSIDERATIONS
The Withholding Tax Act 2021 requires (since 2021) any company to withhold amounts from payments to any "related parties" in: (i) low tax rate jurisdictions (i.e., jurisdictions with a statutory rate of less than 9 per cent); and (ii) countries on the EU list of non-cooperative jurisdictions (set out here). For 2022, the withholding tax rate will be 25.8 per cent.
Entities (i.e., a payer and payee) are related to one another if: (i) the payer has a "qualifying interest" in the payee or vice versa; or (ii) a third entity has a qualifying interest in both the payer and the payee. Additionally, entities can be related if they are considered a co-operating group that jointly, directly or indirectly, has a qualifying interest in another entity. A qualifying interest is an interest through which directly or indirectly sufficient influence can be exercised, such that the activities of the relevant entity can be determined. In any event, an interest is qualifying if it represents more than 50 per cent of the statutory voting rights in an entity.
Given the cumulative requirements of both "related parties" and low tax rate / non-cooperative jurisdictions, it is possible that the withholding tax does not apply to persons merely holding debt. However, restructurings containing a debt-for-equity swap should be carefully considered.
Under Dutch law, the transfer of the rights and obligations under the loan documents does not have to be notarised or registered unless, as described above, the transfer of loans takes place by way of assignment without notice to the debtor (stille cessie) in which case, such assignment can only take place by deed which shall be registered with the Dutch tax authorities or an authentic deed (i.e., notarial deed).
As described above, the Dutch law security rights in rem will follow the secured liabilities in relation to the loan documents by operation of law. Therefore, no (notarised) documents are required for the transfer of the security rights. Please note, however, that a right of pledge over shares in a Dutch entity and a right of mortgage can only be created by a notarial deed in the first place. Additionally, in the case of a change of the relevant security holder of Dutch law security rights, the following registrations are typical:
- for a mortgage, this must be registered with the relevant department of the Land Register (Kadaster);
- for a right of a pledge over shares, this typically is registered in the shareholders' register of the company in the capital of which the shares have been pledged; and
- for a right of a pledge over IP rights, this typically is registered with the relevant IP register.
There are no registration or license taxes relating to the transfer of security over real estate or other registered securities. Real estate transfer tax is due by the acquirer of Dutch real estate at a rate of 8 per cent of the fair market value of the real estate, though specific exemptions may apply. Based on the 2021 coalition agreement of the government parties, the real estate tax rate is expected to increase to 9 per cent as per 1 January 2023. Further, in specific cases 21 per cent VAT may be due on the transfer of an asset. The VAT is calculated on the purchase price.
YANDEX N.V. ("YANDEX")
Yandex N.V., Russia's largest tech company and regarded as Russia's 'Google', has had its Long-Term Foreign Currency IDR downgraded by Fitch to CC from B, as consequences from the Russia-Ukraine crisis seeps into Russia's wider economy.
On 22 March 2022, Yandex announced that it had appointed Alvarez & Marshal Inc. as its financial adviser regarding the restructuring of its convertible bonds, with talks proceeding with a group representing 90 per cent of the noteholders. Yandex has USD1.25bn of convertible notes due in 2025. The conditions of the notes permit noteholders to require redemption of the notes at par plus accrued interest if trading of Yandex Class A shares on the NASDAQ is halted for five consecutive trading days. The shares have been suspended since 28 February 2022. On 4 March 2022, Yandex announced that the company "does not currently have sufficient resources to redeem the notes in full." As of 3 March 2022, it was reported that Yandex held USD615m in euro denominated and dollar denominated cash, with 60 per cent of such cash reserves held outside of Russia.
Yandex has been trading on the NASDAQ exchange since 2011 and in November 2021 it had a market cap greater than USD30bn. At present it is less than USD7bn but only last month, Yandex announced that it was projecting USD6.5bn in revenues, an increase of 54 per cent from 2020.
VK CO LTD ("VK")
On 28 March 2022, the Russian social network platform, VK announced that it had appointed financial advisors to develop proposals to be made to the holders of its USD400m 1.625 per cent senior unsecured convertible bonds due 2025. Recently, VK published a company press release stating that, under the terms of its convertible bonds, a delisting event had occurred as the trading of its Global Depositary Receipts on the LSE Main Market had been suspended for a period greater than 10 consecutive dealing days as of 16 March 2022. Therefore, bondholders are able to convert their bonds into equity or redeem them at par plus accrued interest. VK announced that the company will continue to operate as normal and as of 14 March 2021, it had a total of USD170m in liquidity with USD135m held in foreign currency and UD75m held outside of Russia. VK had outlined that it will "start negotiations with all bondholders as soon as possible to discuss possible alternatives" as it seeks to avoid its bondholders exercising their put option under the bond's terms and conditions.
VK senior executives have been faced with Western sanctions as Vladimir Kiriyenko, CEO of VK CO Ltd since December 2021, has been sanctioned by the European Union and the U.S. On 7 March 2022, Prosus, the Dutch technology investor, announced that it will write off its entire 25.9 per cent stake in VK Co Ltd, which it said it had valued at USD700m.
GAZPROM MARKETING & TRADING RETAIL LTD ("GM&T")
The U.K. government is preparing to take over Gazprom PJSC's British retail supply arm, Gazprom Marketing & Trading Retail Ltd, as it struggles to maintain operations due to the Western actions on Russia. The retail arm, which trades under Gazprom Energy, supplies 21 per cent of U.K. non-domestic gas volume, with clients such as the National Health Services who GM&T had USD30m of contracts with last year. In an email statement, the energy company reflected: "we are in constant contact with our regulator Ofgem and no decision has been taken to appoint a special administrator or supplier of last resort that we know about". If the takeover is to commence, it is expected that the cost would be approximately USD5.3bn with Gazprom's existing customers paying lower rates than the current market levels and in the event of the U.K. government acquiring GM&T, the company's hedges would not be passed on, requiring the government to purchase gas and electricity at today's high prices.
According to reports, Gazprom Marketing & Retail Trading Ltd. avoided an insolvency in March 2022 after meeting a key monthly payment deadline. However, it is expected that it may struggle to meet its next monthly payment on 20 April 2022 where the group has to settle its trading positions with parties who sell the group natural gas, LNG and power or those who buy contracts from the group.
In GM&T's last strategic report, the company generated a profit of GBP236m, representing a 24 per cent decrease from the year prior with its total equity as of 31 December 2020 standing at GBP628.5m.
CHINA EVERGRANDE GROUP ("EVERGRANDE")
On 22 March 2022, Evergrande declared that its restructuring proposal was on track to be submitted to creditors by the end of July. The embattled property developer has USD22.7bn of offshore debt, including USD3.3bn of project financing and private debt. The group's shares were suspended from the Hong Kong Exchange pending the announcement.
Additionally, the property group announced that its property services unit is investigating how USD2.1bn of its deposits were used as security for pledge guarantees and seized by banks, raising more fears about the corporate governance of the embattled property developer. Evergrande Property Services Group Ltd, considered as among the strongest companies in the China Evergrande Group, discovered the sums seized whilst preparing its annual report. In a statement to the Hong Kong Exchange, Evergrande Property Services remarked: "it was found that CNY13.4bn (USD2.1bn) as security for third-party pledge guarantees had been enforced by the relevant banks. The company will establish an independent investigation committee and arrange for experts to be appointed to investigate the pledge guarantees."
The enforcement of the USD2.1bn is almost equivalent to the entire cash holdings of Evergrande Property Services Group and overall, reduces the Evergrande Group's consolidated cash balance to CNY86bn. Evergrande Property Services Group has a market value of HKUSD24.9bn which is greater than the parent company's market cap of HKUSD21.8bn.
UPDATE – FRENCH NOTIFICATION REQUIREMENTS
French security law was reformed by ordinance n°2021-1192 dated 15 September 2021, with effect from 1 January 2022. Under the reformed French Civil Code (Art. 2325), certain notifications must be made to third-party French security providers and guarantors by 31 March each year.
As was the case before the reform, two notification requirements are imposed on creditors to which a guarantee (cautionnement) has been granted by French natural persons:
(a) An annual notification before 31 March of each year – reporting the principal amount, interest, and ancillary payments remaining due by the Borrower as of 31 December of the previous year. Failure to notify would trigger the loss of the guarantee for the interest and ancillary payments accrued for the period running from the date of the previous notification to the date where such notification is effectively made.
(b) A notification on the occurrence of a first payment default – as a precautionary measure, creditors should notify each payment default to the third-party guarantor and not only the first payment default. Failure to do so would again trigger the loss of the guarantee for the interest and ancillary payments accrued for the period running from the date of the payment default to the date when notification is effectively made.
The Civil Code reform now makes the above notification requirements applicable to any French third-party security provider / guarantor (i.e., no longer limited to French natural person guarantors), subject to limited exceptions depending on the type of security / guarantee granted. These notification requirements apply whether the French third-party security / guarantee was granted before or after the Civil Code reform.
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.