There are many differences between the current rules and the new rules, but which of them are truly relevant for private equity investors?
Please find below a number of Questions & Answers regarding Flex BV and Private Equity.
Q&As regarding the Flex BV Act (effective 1 October 2012)
Will the entry into force of the Flex BV Act require existing BVs to amend their articles of association?
The Flex BV Act does not expressly require existing BVs to amend their articles of association, or at least not immediately. However, there are two changes that must be made, where applicable, the next time the articles are amended. If the BV has a supervisory board, the articles of association must provide for the situation where positions on the board become vacant or board members are unable to perform their duties (ontstentenis of belet). Secondly, if depositary receipts for shares have been issued with the cooperation of the BV, the articles of association must grant meeting rights to the holders of these receipts.
Moreover, in order to take full advantage of the flexibility offered by the new legislation, other amendments may be necessary or at least advisable. The articles of association of many existing BVs contain provisions that incorporate or are derived from the current statutory rules (such as in relation to dividends, financial assistance and share buy-backs). An important question is whether these provisions will remain in force or be disregarded when the new statutory rules are introduced. Some of these provisions may, from the date of entry into force of the Flex BV Act, be treated as an election and hence become binding on the company. In those cases, an amendment to the articles of association may be necessary or at least advisable. The brochure 'Flex BV Guide to the BV's articles of association' sets out how the Flex BV Act and One-Tier Board Act will affect a number of important common provisions in a BV's articles of association.
The transitional legislation provides that if the articles of association refer to a statutory provision that was valid before the entry into force of the new law or if they incorporate the substance of such a provision, the articles will be deemed to refer to or incorporate the relevant provision of the new law. As it remains unclear how strictly this 'formal' transitional rule will be interpreted, we would advise you not to rely on it and to therefore amend the articles of association.
Which of the existing capital protection requirements will be abolished?
Among the requirements that will be abolished under the new legislation are the following:
- the minimum capital requirement of EUR 18,000;
- the obligation to provide a banker's capital contribution statement when payment is made in cash;
- the obligation to provide an auditor's statement when shares are paid for in kind;
- the obligation to include the authorised capital in the articles of association;
- the obligation to denominate share capital in euros;
Nachgründung: the additional requirements in respect of transactions entered into by a BV with its founders or shareholders within two years of its initial registration in the trade register; the restriction that dividends and other distributions are permitted only if there are sufficient distributable reserves; and
the financial assistance rules governing the provision of assistance by the BV upon the acquisition of shares.
Is it necessary for existing BVs to amend their articles of association in order to take advantage of the abolition of the financial assistance prohibition?
If the financial assistance rules have been set out in the BV's articles of association it would be advisable to remove them (by amending the articles of association) in order to be able to take advantage of the new flexibility, although based upon the transitional legislation this is perhaps formally unnecessary. The abolition of the financial assistance prohibition means that when acquiring a BV you need no longer resort to expensive and time-consuming devices (such as on-lending arrangements and statutory mergers after conclusion of the deal) in order to acquire security from (or have security granted by) target companies and/or subsidiaries thereof.
Caveat: the abolition of the financial assistance prohibition does not mean that in future a BV may provide unlimited financial assistance. In providing such assistance the management board of a BV will have to assess – as with any other transaction – whether the assistance is in the interest of the BV and how it will affect the BV's financial position. If management board members fail to observe due care, they will incur liability.
How will the structuring of management participation in the equity of a BV be made more flexible under the new rules?
The new rules provide more possibilities for structuring management participation in BVs. Moreover, the rules make decision-making within BVs more flexible. For example:
Voting rights can be granted to individual shareholders on a much more tailor-made basis (e.g. certain shares can carry more than one vote).
Shares without voting rights will be possible.
Shares without the right to participate in profits will be possible.
Resolutions can be passed without holding a meeting even if there is no provision to this effect in the articles of association, provided that those with meeting rights have consented to this (either electronically or otherwise).
General meetings of shareholders can be held outside the Netherlands (although this may not always be advisable on account of the substance requirements under tax law).
These more flexible provisions will certainly provide new opportunities for private equity in structuring its BV investments.
Will the possibility of shares without voting rights put an end to the use of depositary receipts?
We do not expect that the use of shares without voting rights will supersede the current popular practice of issuing depositary receipts (without the cooperation of the BV) for shares through a trust office foundation (STAK) to managers and other top-level executives, instead of actual shares. In a STAK structure the voting rights are held by the STAK and not by these individuals.
This is because the holders of shares without voting rights obtain meeting rights, and (unlike the holders of depositary receipts under the current practice) their consent is required in order to pass resolutions without holding meetings. It follows that the common practice of passing resolutions without holding a meeting will generally be more time-consuming than the use of a trust office foundation. Moreover, the issuing of depositary receipts is less strictly regulated by law and thus offers more flexibility, more scope for taking into account the parties' wishes and thus a more tailor-made approach.
Once the Flex BV Act enters into force, should arrangements such as lock-ups and other obligations of a contractual nature be included in the articles of association of a BV rather than – as is the current practice – in a shareholder agreement?
Once the Flex BV Act enters into force, parties to BVs will be able to choose whether they wish to record arrangements such as lock-up rules and other obligations of a contractual nature (e.g. the obligation to grant a loan to the BV) in the articles of association or a shareholder agreement. Under current law these arrangements cannot be included in the articles of association.
The advantage of an agreement is that its terms do not become public. By contrast, articles of association must be deposited at the trade register and are thus in the public domain. The advantage of having arrangements in articles of association, particularly for a minority shareholder, is that the protection under the articles of association goes further than protection under a shareholder agreement. Actions that are contrary to provisions of articles of association are void. An action in breach of a shareholder agreement is not void. In such cases the injured party is, in principle, entitled only to compensation. In each situation the parties will have to ask themselves what is more important: secrecy or legal protection.
As regards good leaver/bad leaver arrangements, there is another advantage to including them in the articles of association rather than in a shareholder agreement. Under the new rules it is possible for the articles of association to deviate from the statutory share transfer restrictions that otherwise apply by default. For example, the articles can provide that the price paid for shares need not be equal to their value as established by one or more independent experts. This makes it possible for the articles to contain good leaver/bad leaver arrangements with a deviating price-determination mechanism, provided it is clear. In that event, a transfer in violation of the arrangements is void.
Under the new rules will the inclusion of share transfer restrictions in the BV's articles of association still be mandatory?
No, the new rules will introduce substantial flexibility in this respect. Three expected approaches can be identified:
The BV's articles of association provide that the statutory share transfer restrictions – which otherwise apply by default – are not applicable. The share transfer restrictions, if any, are then set out in a shareholder agreement. Although the legal protection afforded by a provision in the articles goes further than that afforded by a shareholder agreement, the parties may prefer to keep such arrangements secret.
In lieu of the statutory default share transfer restrictions, the BV's articles of association set out alternative share transfer restrictions tailored to the specific circumstances of the case. For example, the articles can contain a price-determination clause that deviates from the statutory rule requiring the share price to be established by an independent expert.
The BV's articles of association continue to include share transfer restrictions in the form of either an offering requirement (i.e. in the event of a proposed share transfer, the shares must first be offered to the other shareholders) or an approval requirement (i.e. a proposed transfer must be approved by the other shareholders or a specific corporate body). In line with current practice, the shareholders can, in addition, enter into a separate shareholder agreement providing for a more tailored arrangement that is binding between themselves.
What tax considerations are of particular relevance to private equity?
A person who holds at least 5% of the issued capital of a particular class of shares is deemed to have a substantial interest. Under the new legislation non-voting shares constitute a separate class. This means that managers who hold non-voting shares will more easily be able to create a substantial interest. This may be a way for them to reduce their tax burden since they would then be taxed in box 2 (at a rate of 25%) rather than in box 1 (at a rate of 52%). Although the legislator has hitherto maintained that nothing will change in this respect, it is possible that in due course it will act to remove this advantage. This is because the situation outlined above may actually result in an increased tax burden for other taxpayers, who would be taxed in box 2 rather than in box 3 (at a rate of 1.2%).
To form a tax group (fiscale eenheid) for corporate income tax purposes under the law as it now stands, a parent company must own at least 95% of the shares in the subsidiary. After the entry into effect of the new rules, it will be possible for a parent company to hold 95% of the shares without voting rights and thus not have control. Consequently, the legislator has already announced that it will amend the rules regarding tax groups in such a way that the parent company will also have to hold 95% of the voting rights in the relevant subsidiary.