Private equity

The acquisition structure agreed in week two of a platform investment is usually the structure that governs the next five years and shapes the exit. The instrument mix between shareholder loan and equity, the share classes, the reserved matters list, the board composition, the drag and tag mechanics, and the management participation terms therefore need to be designed for the hold period rather than for closing alone. The shareholders' agreement functions as an operating instrument, and where it is drafted only for closing it tends to be reopened at the first bolt-on, at a point when the negotiating position is less favourable.

The recurring pressure points in Dutch platform transactions are the calibration of reserved matters against a management team that has to run a business, the interaction between the management ratchet and the exit waterfall, and the treatment of a founder who is rolling over and is now both seller and continuing shareholder.

The instrument mix raises the same design question on the funding side. Sponsor structures commonly combine ordinary shares, cumulative preference shares and shareholder loans, and the ranking between them determines both the exit waterfall and the room available for a later refinancing or a dividend recapitalisation. The financial assistance prohibition applies to the NV but no longer to the BV, so on a BV target the constraint on upstream guarantees and security for acquisition debt is the board's own assessment of corporate benefit, the distribution test where the arrangement amounts in substance to a distribution, and the prospect of directors' liability rather than a statutory prohibition. Lenders test that analysis in their conditions precedent, which is why the guarantee and security package is settled alongside the structure rather than in the week before closing.

Management equity is an element of Dutch sponsor transactions that often generates friction, usually two or three years after signing. Three matters determine whether it holds. The first is the tax analysis, since the lucrative interest regime in Dutch income tax can recharacterise leveraged returns as box 1 income, and the structure is best designed with that in mind rather than corrected afterwards. The second is the definition of the leaver categories, and in particular the intermediate category, which is where disputes often arise. The third is whether the drag-along genuinely delivers management on the same terms, with capped and several liability.

The mechanics that carry those points are broadly settled in the Dutch market. The participation is usually held through a stichting administratiekantoor issuing depositary receipts, or through individual management holding companies, so that the cap table stays workable and each movement does not require its own notarial deed. Vesting is measured by time, by performance against an agreed money multiple or internal rate of return, or by a combination of the two, and the ratchet is drafted against the same waterfall in which the sponsor's own instruments sit. Leaver pricing, the valuation method applied on a leaver event, the treatment of a departing manager's instruments between departure and exit, and whether unvested value is forfeited or bought back at cost are the provisions that are read most closely, and they are read at the point at which the parties' interests have already diverged.

Bolt-on programmes reward standardisation, but the standardisation belongs in the architecture rather than in the risk allocation. A house SPA, a standing due diligence scope and a fixed reporting format can save weeks on a transaction. What cannot be standardised is what the diligence has found on the particular target, since specific indemnities, conditions and disclosure have to reflect the actual business. Where the template extends to the risk allocation as well as to the boilerplate, unpriced liabilities accumulate across the programme and surface on the exit.

The programme also has to hold together when it is read from the other side. Successive bolt-ons acquired on inconsistent terms produce a group in which liability caps, survival periods, earn-out measures, escrow or retention arrangements and restrictive covenants differ from one acquisition to the next, and a buyer's diligence on the exit surfaces that as a set of unquantified positions across the platform. Consistency in those provisions across the programme is therefore worth more than the fee saved on any single transaction. Where the programme is funded by a facility, the permitted acquisition tests, accordion mechanics, reporting undertakings and any requirement to accede a new target to the security package impose their own conditions on each bolt-on, and those conditions belong in the acquisition timetable rather than in a separate financing workstream.

• Locked-box pricing is the more common mechanic on Dutch sponsor transactions, so the leakage definition, the permitted leakage list, the covenant period between the locked-box date and closing and the recovery mechanism carry the price protection that a completion accounts mechanism would otherwise provide.
• Distributions from a BV are subject to the board distribution test in art. 2:216 DCC, which constrains dividend recaps and interim distributions, and a director who approves a distribution when he knows, or should reasonably foresee, that the company will be unable to continue paying its due debts is personally exposed, so the test is documented at the time rather than reconstructed later.
• Interest deductibility on acquisition debt is limited by the earnings-stripping rule in Dutch corporate income tax, and the location of the acquisition vehicle, the pricing of shareholder debt and the fiscal unity position are settled with tax counsel before the structure paper is fixed rather than after the term sheet.
• Merger control at ACM or EU level may aggregate a sponsor's portfolio turnover, which catches bolt-ons that look small in isolation, and the standstill obligation applies to the whole concentration rather than to the notified part of it.
• Works council consultation under the WOR applies at platform level and often at bolt-on level, and must be sequenced before final commitment. The WOR also gives an advisory right on the appointment or dismissal of a director, which is relevant where a sponsor intends to change management at or shortly after closing.
• Investment screening under the Vifo Act catches vital providers and designated sensitive technologies. The scope can be extended; we establish case by case which categories apply at the time of the transaction.
• Registration of ultimate beneficial owners applies to the Dutch entities in a sponsor structure. Following a ruling of the Court of Justice, the register is not open to the general public, although the registration obligation itself continues to apply and fund structures with several intermediate vehicles take time to map.
• Share transfers and share issues in a BV or an unlisted NV require notarial deeds (artt. 2:86 and 2:196 DCC), and the notary is part of the closing team from an early stage, since the deed, the shareholders' register and any blocking or offer provisions in the articles have to align before the funds move.