The steps leading up to mergers and acquisitions
In this article we will shine a light on the different steps of the process leading to a merger or company acquisition in The Netherlands. One of these steps is the due diligence investigation, that serves to provide insight in the position of the company in question. In this way, potential risks can be assessed to facilitate a well-considered decision on whether to go ahead with the transaction, and to balance the terms of the purchase agreement. Dutch corporate lawyer Hidde Reitsma explains.
Confidentiality agreement / NDA
In negotiations on mergers and acquisitions, parties usually sign a confidentiality agreement (non-disclosure agreement or NDA) first. This way a party who receives confidential information regarding the intended purchase is bound to secrecy. The vendor limits the risk that the provided information becomes public. To limit this risk further one can include a penalty clause in the confidentiality agreement.
Letter of intent
After the confidentiality agreement is signed, the (aimed) purchaser has done research, and after the first negotiations, parties eventually draw up a letter of intent (LOI) in which they lay down under which conditions they will further negotiate on the company acquisition. The LOI usually includes the following (among other things):
- that tentative negotiations are being held between parties on a company takeover;
- whether these negotioations are exclusive or not (including the period of exclusivity);
- on which conditions parties are allowed to cease negotiations;
- when the acquisition shall be finalized at the latest;
- on which conditions the next phase of the acquisition – usually the due diligence – will take place.
In the next phase the buyer will carry out an audit, also referred to as due diligence investigation (“DD”). This process serves to provide understanding in the position of the company in question and the potential risks in order to facilitate a well-considered decision on whether to go ahead with the transaction. The results of the DD usually have influence on the final terms of the purchase agreement and the representations and warranties that the seller shall give.
Subject to due diligence investigations are (among other things):
- HR / (labour) contracts;
- real estate / tenancy contracts;
- threatening and ongoing legal proceedings;
- intellectual property / licenses;
- (tort) claims;
- insurance issues;
This information is vital for a sound assessment of the purchase price and forms the basis for guarantees and indemnities in the purchase agreement. Besides a legal due diligence it is also important to carry out fiscal (tax) and financial due diligence investigations.
Vendor due diligence
It is not uncommon that the vendor carries out his own due diligence (so-called vendor due diligence), even before negotiations on a takeover have started. Concerns in the company can be addressed in time, and thus unpleasant surprises during the negotiation process can be prevented as much as possible.
When the results of the due diligence investigation are ready, parties will enter into negotiations on the terms of the sales contract. In this contract, provisions regarding the distribution of the (financial) risk of uncertain events are included. If, for example, the due diligence investigation shows that claims from tax authorities or a pension fund are expected, the buyer can demand specific warranties or guarantees from the vendor (or adjustment of the purchase price).
Share Purchase Agreement or Asset Purchase Agreement
The acquisition of a company is usually realized via a shares transaction. The buyer buys the shares which the vendor holds in the company. This is also referred to as the SPA, Share Purchase Agreement. Sometimes, the transaction needs to take place in another form, for instance if the company is not conducted by a legal entity, but by a sole trader or a general partnership. In that case, the company can be transferred via a transfer of assets and liabilities. This is called an Asset Purchase Agreement (APA).
Signing the SPA or APA
As soon as parties have agreed on the terms of the transaction (including the date of legal transfer and on the basis on which this transfer will take place) parties will sign the SPA or APA (or a variation of such, f.i. a legal merger agreement); this is often called ‘signing’. For many reasons, legal transfer of title is usually done some weeks or months later, f.i. to grant the buyer a term to collect funding for the transaction. The SPA or APA may also contain conditions precedent or resolutive conditions, that need to be fulfilled, respectively lapse before transfer of title.
Closing the deal
As soon as all the documents are finalized and all conditions are met or have lapsed, the closing of the deal will take place. This is the moment that all the transfer documents are actually signed and, in case of a shares transaction, the shares will be transferred. Usually, transfer takes place against payment of the purchase price (or, in case of a so called earn-out, at least a part thereof). The transfer of shares in a Dtuch company takes place via a transfer deed, which is drawn up by a civil-law notary.