NETHERLANDS: An Introduction to Corporate/M&A: Mid-Market
The Dutch M&A Market - Adaptation to a Pandemic
During 2020, the pandemic has been a catalyst of certain trends and developments in the Dutch M&A market. One of the most significant trends has been to further restore the equilibrium between buyers and sellers, coming from a market that was previously predominantly controlled by sellers. This has resulted in auctioned sale processes having become increasingly less popular and sellers taking a different approach towards transactions and focusing on identifying specific potential buyers.
Impact of Covid measures
At the start of the lockdown in March 2020, the vast majority of Dutch M&A processes were paused. The immediate response for most companies has been to focus on the impact of Covid on their businesses, and to take care of human resource aspects and to apply for the variety of governmental support programmes rolled out by the Dutch Government. After that initial pause, many transactions recommenced and eventually completed. However, a significant number of transactions were stopped, resulting in discussions on compensation or alleged breach of contract.
Certain industries, such as food and agriculture, IT, media, logistics and healthcare, have seen M&A activity continuing on at least pre-pandemic levels, and deal activity in these industries is expected to continue or further increase as 2021 progresses. Other industries have been hit historically hard and continue to be in distress. The true impact of the global pandemic on the Dutch M&A market is expected to only really show once governmental support programmes are wound down and cease. This is also underpinned by a significantly lower number of insolvencies during 2020 than in previous years. This is, however, expected to be fundamentally different for 2021 onwards, and during 2021 the Dutch market is expecting an increased volume of insolvency, distressed M&A and structuring activities.
M&A activity continued during Q2 also due to buyers having been creative in finding alternative funding and deal structures to cater to the reduced availability, or sometimes unavailability, of bank financing. The use of earn-outs and vendor loans to bridge expectations on purchase price has risen drastically and kept deal flow continuing. The use of these instruments, combined with governmental support programmes (with potential repayment and audit requirements), also impacted the focus of the legal work in M&A. In deals globally, including the Dutch market, parties needed to address the fact that governmental support has been enjoyed. This topic will continue to be relevant in years to come requiring a thorough understanding of compliance with terms of past and current support packages, and resulting restrictions going forward.
Getting used to a ‘new normal’
Covid has caused virtually all industries to continue or accelerate investments in ICT infrastructure and tooling, to either maintain their edge or in order to survive and continue in what the Dutch have started refer to as the ‘new normal’. The global pandemic has been and will continue to be a disaster for certain industries, and has proven to be a blessing in disguise for other industries. The impact of digitalisation has resulted in transactions in virtually all sectors aimed at taking over competing technology or know-how. Also, the Dutch market has seen an increasing number of transactions in which non-tech companies have been (or are making an attempt at) acquiring tech companies to underpin their future strategies and business cases.
Getting deals done always requires teamwork and alignment between parties, but did even more so during 2020. In certain transactions we have seen a positive impact on the interaction between seller and purchaser, as well as their advisers. On the other hand, the involvement of litigation teams in M&A also increased significantly during 2020. This was especially the case in determining the position during negotiations, as well as in enforcing deal terms, such as pre-completion covenants, material adverse effect and force majeure clauses. We have also seen an increased interest in reviewing deal terms of transactions closed pre-Covid, with a view to determining potential claims and recourse if acquired businesses have fared less well than expected. Having sound M&A contracts has always been important, but the value of a good contract has proven to be extremely valuable in the recent past.
The recently enacted (1 January 2021) Dutch Act on the Confirmation of Private Plans (in Dutch the WHOA) is expected to become an important tool in restructurings and distressed M&A going forward. This Act introduces a formal pre-insolvency procedure in the Netherlands, combining elements of UK and US insolvency schemes, such as the ability to implement a plan outside formal insolvency proceedings, with elements of US Chapter 11 proceedings. The Dutch scheme is compliant with the recently adopted EU Restructuring Directive (EU 2019/1023).
Few had expected 2020 to end on such a strong rise. The outlook for the Dutch M&A market going into 2021 and beyond is believed to be positive, also given the number of high-quality assets and the continued availability of funds in the Dutch market. Private equity and venture capital are particularly expected to become increasingly active. Opportunities will arise mainly in sectors that have proven the least vulnerable, and distressed M&A activity will increase in parties active in aviation, retail, leisure and hospitality.
Lessons learned
Whether or not deal-making through Zoom or Microsoft Teams or similar platforms will continue after the pandemic and current travel bans, it has definitely proven that it can work, and deal processes will continue to benefit from the flexibility this offers, also from a cost and efficiency perspective. Also notaries had to find new ways to identify parties and to certify and notarise signatures and documents. Doing these things through Zoom was something that one would have considered unimaginable in the pre-Covid era.