A Q&A guide to venture capital law in The Netherlands.
The Q&A gives a high level overview of the venture capital market; tax incentives; fund structures; fund formation and regulation; investor protection; founder and employee incentivisation and exits.
To compare answers across multiple jurisdictions, visit the Venture Capital Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to venture capital. For a full list of jurisdictional Q&As visit www.practicallaw.com/venturecapital-mjg.
The venture capital (VC) market is part of the private equity market. VC focuses on risk-bearing, mid-term investments in the equity of relatively small or medium-sized private companies. These companies usually undertake ventures requiring external investment in one of the following phases:
Seed phase.
Start-up phase.
Other early stage.
Maturing phase.
These ventures usually have the following characteristics:
High growth potential.
Innovative business.
New business or product development ventures within the company itself.
Inability to acquire sufficient bank financing, due to the venture's high risk profile, and the banks' risk-averse policies and securitisation requirements, including the Council Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), and the agreement reached by the Basel Committee on Banking Supervision on the new bank capital and liquidity framework (Basel III).
VC is an important contributor to innovation, employment and growth, mainly looking at mid-term investments (such as a proper exit, initial public offering (IPO) or other divestment):
Including some sort of contribution by the VC investor to venture management skills, knowledge and network and strategic expansion.
Not expecting short-terms returns, but potential high-yield or strategic advantage.
VC funding comes from all types of sources, such as equity, network and know-how contributions by:
Venture capital firms.
Regional development agencies.
High net-worth individuals (HNWI).
Companies.
Universities.
Institutional investors.
VC investors look to invest in ventures with specific characteristics (see above, Venture capital and private equity). These include companies in the following industries:
Information technology.
Internet and communications.
High-tech.
Healthcare, biotech and pharma.
Cleantech, energy and environmental.
Niche players in other, existing markets.
The past period has been better than the period before; in 2010, this has resulted in an almost 100% increase in private equity investments. Almost 50% of the total investment amount in 2010 came from outside The Netherlands, which indicates that VC investors from abroad are interested and active in investing in Dutch ventures.
The economic situation in 2010 has led to many more buyouts compared to previous years. The transactional value has increased by 300%, totalling almost EUR800 million (as at 1 November 2011, US$1 was about EUR0.7). At the same time, the total amount of growth in capital investment has been almost halved compared to 2009, which is thought to be caused by some existing funds' inability or unwillingness to provide further growth capital to its existing ventures.
According to the Dutch Private Equity & Venture Capital Association (Nederlandse Vereniging van Participatiemaatschappijen) (NVP), in 2010 the average investment in VC was about EUR4.4 million per venture, up from EUR2.5 million in 2009. As in 2009, in 2010 almost 70% of all investments were below EUR1 million. Funds raised in 2010 (EUR1.3 million) reached 300% of the 2009 level, for the following reasons:
Increase in fundraising activities.
Buyout funds have raised more funds to invest.
Pension funds and VC funds have invested significantly more in VC than in 2009.
In 2010, the total amount of divestments has increased by about 28%, from EUR515 million in 2009 to EUR655 million in 2010. For 2011 and 2012, more divestments and other VC activities are expected. This includes VC investors focusing on strengthening, supporting, increasing and securing value and growth of their ventures in the future.
To support the development of VC, the Dutch government continues to provide several special subsidy arrangements to promote innovation and other business activities. The allocated budget will be further increased in 2012.
Certain upcoming legislative changes may render the VC industry more efficient and attractive. For example, it is proposed to enable one-tier boards (combining the non-executive board with the executive board) for all private companies with limited liability (BV) and public companies (NV). The change is anticipated to enter into force on 1 January 2012. The most significant benefits of the choice between one-tier board and the current obligatory two-tier board are that:
A one-tier system is more comforting and easy to understand for international investors and stakeholders.
The non-executive board members can communicate with the executive board members more efficiently, and vice versa. The information exchange improves as a result.
The executives will find it easier approach and involve the non-executives in the decision making concerning major business matters.
Remuneration of the executives will be determined by the non-executives.
In addition, since 1 July 2011, the threshold to incorporate a BV or NV has been lowered, by the abolition of the requirement to obtain a Ministerial statement of no objections to incorporate a venture.
However, certain forthcoming changes may make the life for VC more difficult, although this will also render VC much more transparent. For example, the Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) is expected to come into force on 1 July 2013. The AIFM directive will affect the VC industry in a number of ways, for example:
Financial transparency will be increased.
The fund managers will be subject to more extensive reporting requirements and will have to refrain from any asset stripping during the first two years after a takeover.
Since 2010, a special tax regime known as the Innovations Box has been in force. It aims at incentivising innovation by subjecting certain assets to a reduced corporate tax rate (see Question 3).
From 1 January 2012, the following tax changes will come into effect:
An ability to deduct more research and development (R&D) costs.
A limit on the use of co-operative societies as venture fund vehicle, by restricting unreasonable tax advantages related to these societies.
A limit on excessive debt and related interest, the latter being limited to EUR1 million per year.
The following tax incentive schemes exist:
The Innovations Box. The most significant benefits of the Innovations Box are that:
the effective corporate income tax rate is 5%, instead of the usual rate of up to 25.5%;
there is no maximum amount to which the tax benefit can apply;
if the taxpayer is issued an R&D certificate for its R&D work used to achieve a payroll tax and social security remittance reduction, the economic benefit attributable to the relevant intangible asset (the R&D asset) can be reported in the Innovations Box;
the R&D facility applies to intangible assets created as a result of R&D activities. There is no requirement that an R&D asset must have been awarded a patent. It is normally easier to obtain an R&D certificate than a patent, which means that the lower rate will apply to R&D assets sooner than it will to patented assets; and
losses incurred in relation to R&D activities are deductible at the regular rate of 25.5% (in excess of EUR200,000). However, the losses do raise the threshold that must be met before the lower corporate income tax rate will apply.
The explanatory notes to the Innovations Box confirm that software and certain business secrets fall within the scope of the Innovations Box.
Participation exemption. The profit derived from an investment in a venture company by a Dutch corporate investor may, in certain circumstances, be exempt from Dutch corporate tax under the participation exemption (see Question 5, Participation exemption). A non-Dutch corporate investor in a Dutch company may, in certain circumstances, become subject to Dutch corporate tax. This may occur if both:
the investor is located in a country with which The Netherlands has not concluded a tax treaty; and
the non-Dutch investor does not carry on an active enterprise in the Netherlands to which its investment can be attributed.
Passive investments. Investments by Dutch individuals in ventures are generally considered to be passive investments that are deemed to have a fixed annual yield of 4%. This deemed profit is taxed at 30%. In certain circumstances, deemed income may be exempt from Dutch taxation at the level of the Dutch individual investor for qualifying investments of up to about EUR55,000 into start-up companies. This exemption may apply to an investment by a Dutch individual into a venture, as well as to a venture's qualifying investments.
In addition, investments by Dutch individuals in VC companies may also be taxed at 25%, where the investment is considered to be a substantial interest at the level of the Dutch individual. In essence, this taxation level may apply if the individual holds, directly or indirectly, 5% or more in the capital of the venture. This is why individuals sometimes choose to hold 4,99% in the capital of a venture, in order to not be taxed at 25% but rather benefit from passive investments regime (see above).
Venture capital funds receive funding from various parties such as:
Informal investors.
Family-owned companies (which may have their own VC funds).
Other HNWI.
Universities.
Development finance institutions and other government-initiated bodies.
Institutional investors, such as banks, pension funds and insurance companies.
At present, bank financing is still rather rare (see Question 1, Market trends); less than 15% of the total invested amount is funded by banks. However, there is an increase in VC activities, investments and exits. Also, the number of government subsidy schemes is still extensive. In any event, a VC investor that does not have its own, or other non-debt financing, will be unable to make investments in the current economic climate.
The Netherlands remains a beneficial jurisdiction for establishing holding structures. One of the main benefits is the Dutch participation exemption, based on which profits from qualifying investments can be received tax free. In addition, The Netherlands is an appropriate jurisdiction to upstream profits from investments in jurisdictions with which European countries have not concluded tax treaties, given the extensive and favourable Dutch treaty network.
Although no specific corporate tax rules are in place in relation to investment in ventures, it is advisable to seek tailored professional advice (see Question 2, Tax considerations).
To ensure that a VC fund is structured tax efficiently, the tax matters set out below should be considered at the outset.
The participation exemption exempts profits derived from qualifying investments in other companies for corporate income tax purposes. Profits covered include:
Cash and stock dividends.
Bonus shares and hidden profit distributions.
Capital gains realised on the disposal of the qualifying shareholding.
Capital losses are generally not deductible, although specific rules apply concerning liquidation losses of qualifying investments. Remunerations on qualifying hybrid loans are also often exempt under the participation exemption, provided the creditor also has a qualifying interest in the debtor.
In general, the participation exemption applies to investments of at least 5% in the share capital of an active company with a capital divided into shares. In certain circumstances, an interest of at least 5% in the voting rights also qualifies. An active company is a company that cannot be a low-taxed passive investment company, and has the following characteristics:
More than 50% of its assets consist of non-business related investments.
The profits are taxed at an effective rate of less than 10%.
There is no minimum holding period applicable to the participation exemption. Interest costs concerning the acquisition financing of the participation are tax deductible, if certain conditions are met. Acquisition and disposal costs in relation to the participation are non-deductible.
New rules concerning the participation exemption became effective in early 2010. These have simplified the existing rules for determining whether a subsidiary should be considered a passive investment, in particular by introducing, as an alternative to the existing tests, a subjective condition that the shareholding be not held as a mere portfolio investment.
In addition, the application of the condition concerning an effective taxation of at least 10% has been simplified under the new rules. The other main provisions of the Dutch participation exemption remain unchanged.
Since 2009, a special tax rule on excessive remuneration is in place. In essence, it provides that the proceeds derived from the investment or other lucrative interest may be taxed at regular progressive rates of up to 52%, where those are considered to be related, directly or indirectly, to the working relationship of the individual and the company, or a group company, in which the investment or interest is being held (carried interest).
The Netherlands does not levy withholding taxes on interest payments (except in the case of qualifying hybrid loans) or royalty payments. In addition, no withholding taxes apply to management fees. Dividend payments are, in principle, subject to dividend withholding tax at the regular rate of 15%, but this is often reduced partly or totally on the basis of tax treaties or EU directives. The legal entity known as the co-operative is not subject to dividend withholding tax and as such is often used in holding structures (see Question 7).
The standard value added tax (VAT) rate is 19%. VAT, the main indirect tax, is levied on the net invoice price charged by a business for the supply of goods and services within The Netherlands. VAT is also levied on the intra-EU acquisition of goods and on goods imported into The Netherlands.
The general principle is that the VAT paid by a business to its suppliers (input VAT) can be offset against the VAT it charges to its customers (output VAT). The net amount of VAT is then remitted to, or recovered from, the tax authorities.
Employment income includes all employment income, such as wages, salaries, pensions, share options, benefits in kind and so on. This income is generally subject to payroll tax. Payroll tax is normally credited when determining the final income tax liability, or refunded. Social security and welfare payments are also generally subject to payroll tax.
Certain employees coming to work in The Netherlands may be paid a tax-free allowance, under a provision known as the 30% ruling, equal to 30% of their salary. This facility is subject to various conditions including being able to show that the employee possesses special expertise, which is either not available or is scarce in the Dutch labour market.
The advance tax ruling (ATR) system is a centralised, efficient and transparent procedure. It is a flexible, tailor-made system, in line with international standards. ATRs may be concluded in relation to holding structures using co-operatives.
Taxpayers that want to obtain advance comfort concerning their transfer pricing can apply for an advance pricing agreement (APA). This may be in a unilateral, bilateral or multilateral form, and is regulated by detailed procedural regulations. Special rules apply for group financing and licensing arrangements. Pre-filing meetings may also be requested to help further streamline the process.
VC investors can jointly invest in a venture, for example by co-investing with other investors, or through a VC fund or consortium. This is usually done to:
Add more financial backbone, know-how and value to the venture.
Mitigate risks.
Increase the possibility of a higher return.
VC investors mainly use a combination of the following entities:
BV.
NV.
CV.
Co-operative society, although from 2012 this will become significantly less attractive as per new tax arrangements on trying to restrict unreasonable tax-advantages.
Mutual fund (fund for joint accounts).
If an investment company is a legal entity (either an NV or BV), it is governed by the Dutch Civil Code (DCC), containing provisions concerning, among others, control, distributions and capital.
An investment fund does not qualify as a legal entity and therefore these provisions of the DCC do not apply.
VC focuses on risk-bearing, mid-term investments in the equity of private companies. On average, a VC investment period lasts about five years, although this is subject to economic, internal and market issues, among other things.
If stakeholders intend to arrange an exit in, for example, three or five years, in practice an actual exit will occur in at least six or eight years, respectively. VC funds and other VC investors should take this into account when investing. The exit period will, however, depend on the market the venture is active in, and should be assessed on a case-by-case basis.
In certain circumstances a licence is required. For example, the management company or VC fund requires a licence, issued by the Authority for the Financial Markets (AFM) under the Act on Financial Supervision (AFS), if it wants to offer a right to participate in a VC fund in The Netherlands (this does not apply to a VC company) (see Question 10). A VC fund must also have a separate management company and a custodian.
No licence is required if a VC fund or company is incorporated and governed by the laws of an EU member state and already holds a European passport.
A licence is required to offer rights to participate in a VC fund in The Netherlands (see Question 7), unless one of the following AFS exemptions applies:
The right to participate is only offered to qualified investors.
The offer is extended to fewer than 100 persons, not being qualified investors.
The units being offered have an individual denomination of at least EUR50,000.
A participant can only acquire the units being offered for a total consideration of at least EUR50,000.
The participation offered is in a fund subject to a special scheme for providing seed capital to technology start-ups.
The units offered are in a collective investment scheme that fulfils the requirements set by the Minister of Finance concerning the supervision of collective investment schemes (that is, the scheme provides sufficient safeguards in relation to the interests that the AFS seeks to protect).
If any of the above exemptions apply, the VC fund must inform the public when making its offer to participate, as well as in marketing and advertising statements, that it does not hold a licence and is not supervised by the AFM. The exact content of the statement depends on whether the VC fund is open- or closed-ended, and the party offering the units. When marketing a VC fund or a venture, a prospectus, such as an information memorandum, is required.
In addition to the licensing requirement, AFM approval of the prospectus is required, provided that similar exemptions as set out above do not apply. This AFM approval requirement does not apply to open-ended funds, or closed-ended funds that do not have transferable participation rights. There is also no AFM approval requirement if the relevant VC fund is incorporated under the laws of an EU member state, and has already met the relevant prospectus obligation in its country of incorporation.
Each VC fund, structure and VC investor is different. However, most investors and funds seek to have their relationship governed and protected by the following documents:
Prospectus.
Partnership agreement.
Investment agreement.
Articles of association.
Shareholders' agreement.
In addition, investors and funds usually seek to determine the:
Purpose of the fund.
Planning and timing.
Duration of the fund.
Limitation of liability.
Corporate governance (such as veto and majority rights).
Investment committee/advisory committee.
Distribution of investment proceeds on divestment.
Management compensation.
Profit sharing arrangements.
Clawback arrangements.
Restrictive covenants, such as:
change of control;
restrictions on the fund manager preventing it from managing another fund until the relevant fund is invested up to an appropriate level;
non-compete;
trigger events granting the right to replace a manager.
Where the VC fund has a prospectus (either mandatorily or voluntarily), the prospectus should demonstrate how the above issues are being managed, or at least how they are proposed to be managed.
VC focuses on risk-bearing investments in equity (see Question 1, Venture capital and private equity). Equity contributions are therefore common, where a cash investment in a private company is made in exchange for shares.
However, in some cases other types of contributions can be made, such as:
Contributions in kind, for example, by being the launching customer or preferred supplier.
Providing equitable debt, most of the timing being (subordinated) convertible loans, which are converted into shares on an upcoming financing round, an exit or other event.
These investments are often provided in a combined form, depending on the wishes and needs of the venture, and the wishes and options of the VC investor and other stakeholders.
Equity and debt investments should be carefully structured from a corporate tax perspective. Various detailed rules apply in relation to the potential denial of interest deduction on related-party loans. In addition, The Netherlands has thin capitalisation rules in place, which may deny interest deductions on related-party loans.
Remuneration on equity funding such as dividends and interest on qualifying hybrid loans are not deductible for corporate tax purposes.
Valuing a private company with a relatively short history is extremely difficult, whether the company is in the seed-up phase, start-up phase, other early-stage phase, or maturing phase. It is also difficult to value a public company or a private company with a long track record.
While each case is different, valuations are made by reference to the following factors:
Management and key personnel. Competence, experience, commitment and company ethos are all important.
Business plan.
Analyses of business, product and services.
Market conditions.
Competitors.
Cash needs and financial planning.
Exit strategy and planning.
VC investors are usually conservative when valuing ventures, and in the current economic climate, valuations are even lower.
To the extent possible, VC investors make use of, for example, external valuation professionals, comparable companies or valuation mechanisms such as discounted cash flow valuation, or a combination of these, to determine the investee company's value.
On the basis of the investee company's valuation and other factors, such as the desired internal rate of revenue (IRR), the VC investor will calculate what it is willing to contribute, when and in how many tranches, and under what conditions.
VC investors must thoroughly analyse and assess the venture and business, bearing in mind certain important factors (see Question 13). Due diligence is strongly advisable in relation to the following issues:
The business itself.
Intellectual property rights (IPR).
Financials.
Tax.
Technical (such as electronic data process (EDP), auditing of software or other information and communication technologies).
Legal.
Human resources (HR) (including, without limitation, interviews with important members of the venture's organisation, which should not only be management, and reference checks).
In recent years, thorough IPR and technical due diligence has become increasingly important.
Traditional professional services providers often focus only on risks, threats and weaknesses when undertaking due diligence. However, a due diligence exercise is also a good moment to assess opportunities and an agenda for future actions and improvements related, for example, to tax, IPR, information and communications technology (ICT), legal or HR issues.
In addition, due diligence should not be limited to the venture itself, but should also cover the market, competitors, references and other stakeholders.
While each venture, structure, VC investor and investment is different, the following documents are usually used in a transaction:
Teaser, that is, a brief non-binding information memorandum.
Non-disclosure agreement.
Information memorandum or prospectus.
Term sheet or letter of intent.
Approval of VC investor's investment committee.
Investment agreement or subscription agreement.
(Convertible) bridge loan agreement.
Shareholders' agreement.
Articles of association, or deed of amendment to it.
Management and employment agreements.
Employee option plan (on shares, depository receipts on shares, or otherwise).
Post-closing action lists and other execution documentation.
It is important that both the VC investor and the venture take care of their own interests as well as their mutual interest. They should determine and acknowledge:
The extent to which the venture, the VC investor and the other stakeholders participate in the project together and for how long they intend to be involved.
The comfort that each party needs to have to enter into the venture partnership.
In any event, it is advisable to have a clear and well-written investment agreement and shareholders' agreement, and to harmonise the articles of association with those documents.
The articles of association are a corporate law document, and as such prevails over other arrangements between the parties, such as the investment agreement and the shareholders' agreement. However, if one party breaches the investment agreement or shareholders' agreement, the other parties can sue that party for the breach and its related consequences, even if that party's action does not breach the articles of association.
Legal advice is required to assist the VC investor and venture in the drafting of the documents for the investment, including harmonisation of the articles of association with the other documents. For example, it is not always advisable to incorporate too many specific arrangements agreed on in a shareholders' agreement in the articles of association. This is not always permitted by law, nor is it advisable as the articles of association are available to the public through the Trade Register.
Contractual protection depends on the drafting and content of the relevant agreements, such as, for example:
Clear and well-defined clauses.
Proper execution of the agreement.
Contractual ranking between the articles of association and shareholders' agreement.
Explicit obligations, combined with certain penalty arrangements, such as:
financial penalties in the case of breach;
lapse of certain rights in the case of breach;
obligation to offer and sell certain equity in the case of breach.
The form of equity a VC investor is offered depends on the kind of investment and the legal specifics of the venture. Common options include:
The VC investor is accommodated within the existing legal structure and shares of the venture, and such shares are issued to the VC investor in proportion to its investment.
The existing legal structure and shares of the venture are amended to conform to the company's new investment status and the requirements of the VC investor. For example, various classes of shares (such as cumulative preferred shares or letter shares) can be created, so that (for example) certain preferences are available.
New legal vehicles are incorporated to, for example:
restructure and update the whole group structure;
incorporate certain foundations to administer certain shares. This can, for example, be used to provide option rights over depository receipts on the shares to management and key personnel.
Preferred shares give the VC investor separate rights, and ensure that the other parties have separate obligations. These rights can be on issues such as:
Governance. Certain resolutions of the company or management, the supervisory board or the shareholders meeting must be pre-approved by the preferred shareholders (for example, by a special majority of preferred shareholders). Sometimes, certain rights to veto a resolution are included. The preferred shareholder can nominate their own director(s) or supervisory board member(s), and the other shareholders must vote accordingly.
Information rights. Depending on whether a supervisory board is in place, a VC investor will want to be able to access certain information on the venture, for example, updated profit and loss accounts, balance sheet, cash flow and other forecasts, on a monthly or quarterly basis.
Voting rights. A VC investor may require the right to obtain more than the usual one vote per share, by converting the preferred shares into common shares at a ratio greater than one.
Anti-dilution. Anti-dilution protection entitles a particular shareholder to maintain its fully diluted percentage of equity, for example if a subsequent issuance is at a lower price per share than that paid by that shareholder. Examples are (weighted) anti-dilution or full-ratchet clauses, although full-ratchet clauses are currently rarely used. For stakeholders other than that particular shareholder, it is important to at least time-limit these clauses.
Conversion rights. A VC must be able to convert its preferred shares into common shares, for example, if a preferred shareholder would otherwise not share in financial proceeds. An example is a clause on automatic conversion in the case of an IPO.
Pre-emptive rights and right of first refusal. These rights are the basic rights available to a shareholder in a private company such as a BV (see Questions 20 and 22).
Lock-up. Shareholders might agree on a certain arrangement in which particular (or all) shareholders are not entitled to sell equity for a certain period of time. This is used, for example, to retain the commitment of the shareholder, and to ensure sufficient focus on the future.
Liquidation preferences. If any dividend or other financial proceeds are available to the shareholders' meeting, the preferred shareholders may have the right to receive a certain part or whole principal amount first, after which the other shareholders are entitled to the remainder. In the case of cumulative preferred shares, an amount of interest agreed on accrues to the principal, until the interest or principal can be distributed to the preferred shareholder. Over the past decade, the VC market has seen liquidation preferences exceeding significantly the original contribution made by the VC investor (excluding interest), but these are no longer seen very often.
Good leaver or bad leaver. A VC investor may require the incorporation of leave provisions in contractual arrangements, in which it is agreed that certain persons or entities selling their shares must offer them for a certain price to the other shareholders first (see Question 26).
Drag-along or tag-along. A drag-along usually is the right of a certain majority of shareholders who are willing to accept a particular transaction with a third party (such as a 100% trade sale) to oblige the other shareholders to offer all their shares to that third party at the same price and on the same conditions as the majority of shareholders. In some cases, a matching right is incorporated in a drag-along clause, entitling the offering shareholder to match the third party's offer within a certain period. A tag-along typically is the right for a shareholder to proportionally offer its shares to a party at the same price and on the same conditions as another shareholder is offered at that time.
Divestment. As the exit event is vital for a VC investor, it may require certain rights giving it control over the divestment process and the choice of a bank or corporate finance adviser.
A VC investor wants to be certain about, for example, the execution of the strategic and business plan by the venture, and whether the venture spends its contribution wisely and in accordance with agreements made with the VC investor.
In addition to the general rights and obligations set out in the applicable law and articles of association, the VC investor will have certain additional control over the governance of the venture, at both the management and supervisory board level (under the traditional two-tier board system, as well the one-tier board system available from 2012) (see Question 18).
Under Dutch law, the articles of association of a BV must include a restriction on the transfer of shares. The only transfers free of restriction can be to:
Another existing shareholder.
The next of kin of a shareholder.
The company itself.
These legal exemptions are often explicitly excluded in the articles of association and are therefore not often found in VC structures.
Dutch law provides for two types of restriction on the transfer of shares:
The right of first refusal. A shareholder should first offer the shares that he intends to sell to the buyer of his choice to his co-shareholders, on the same terms and conditions.
Prior approval. A body of the BV, as appointed in the articles of association, must grant its prior approval for the intended transfer of shares. This body is usually the general meeting of shareholders, but can also be the board of directors, the supervisory board or the meeting of holders of shares of a certain class.
Sometimes a combination of both the right of first refusal and the right of prior approval is inserted in the articles of association.
Shareholder agreements often contain the same provisions or an extended and more specific arrangement, based on provisions contained in the articles of association.
In relation to the NV, a restriction on the transfer of registered shares is optional. However, if a restriction on the transfer of shares is chosen, the same types of restrictions as described above must be inserted in the articles of association.
The anticipated changes to legislation governing the BV will make it possible for articles of association not to have a restriction on the transfer of shares in the future (see also Question 2, Legal considerations).
Drag-along and tag-along rights, as well as certain similar rights, are often advisable and agreed on (see Question 18).
Other arrangements that can be incorporated in contractual agreements are:
Put option, giving the VC investor the right to sell a specific quantity of equity at an agreed price.
Call option, giving the VC investor the right to buy a specific quantity of equity at an agreed price.
Investors usually require such pre-emption rights. Dutch law grants BV and NV shareholders pre-emption rights on a pro rata basis. However, these pre-emption rights can be excluded on a case-by-case basis by resolution of the general meeting of shareholders. Exclusion in the articles of association is also possible, but not common.
To approve investment documentation, approval of the following direct stakeholders in an investment is required:
The venture.
The existing shareholders of the venture company.
General meeting of the venture.
The VC investor.
Other stakeholders may need to approve or advise on the investment, such as:
The supervisory board of the venture.
The supervisory board of the VC investor.
The investment committee of the VC investor.
The works council of the venture (Works Council Act).
Each party usually bears its own costs, except for certain contractual cost arrangements. Such contractual costs may include a certain maximum amount of the cost of drafting certain documents such as the investment agreement, shareholders' agreement, (amendment of) the articles of association, or the notarial transaction costs.
To avoid discussions on costs, parties should clearly state who is responsible for the specific (and sometimes considerable) costs, such as corporate finance or other broker fees that may have been incurred.
As each venture is different, incentives for founders, management and (key) employees differ on a case-by-case basis. There may also be differences in incentive arrangements between, for example, founders and other management or employees. However, the following are generally offered or considered:
Salary arrangements.
Annual, medium-term and/or exit bonus arrangements.
Option pool, with a share or depository receipt option plan.
Other tailored call option or other equity arrangements.
See Question 5, Payroll tax and social security contributions.
Each venture is different and there may be divergences concerning commitment arrangements between, for example, founders and other management members or employees. However, the following written clauses are usually agreed on:
Additional investment.
Lock-up.
Clawback.
Good leaver/bad leaver.
Assignment of IPRs.
Non-competition.
Non-solicitation.
Non-disclosure.
If the venture is not successful, certain exit scenarios may be considered, including:
Asset sale. This involves the sale by the venture of (part of) its assets, followed by a dividend payment to the extent allowed, and finally a liquidation or share transfer.
Partial (trade) sale. This entails the sale of a certain part of the shares in the venture to management or to a third party.
Liquidation. This process is governed by the DCC and used to terminate the entire business of the venture. Normally it is the last resort before bankruptcy.
Exit scenarios for a successful venture include:
Trade sale of (all) shares to another (strategic or other) party.
Initial public offering (IPO).
Typically, when considering exit scenarios, a trade sale transaction is considered more advantageous and is the starting point. For example, a trade sale may generate a higher return on investment with less risk than an IPO. However, if a trade sale appears not feasible, an IPO may be conducted. One of the disadvantages of an IPO is that its preparation (as well as keeping shares quoted on the stock market) requires both:
Implementation of a substantial amount of financial, corporate and administrational changes in the organisation of the venture.
Extensive formalities and approvals from the relevant authorities.
As failing to plan is planning to fail, it is important (and common practice in the VC market) for a VC investor, together with the stakeholders in the venture, to set out a clear strategy for a successful exit, including various arrangements to meet the set goals (see Questions 16 and 18).
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Areas of practice. Venture capital; PE; M&A; technology; international transactions.
Recent transactions
T +31 20 305 4955
F +31 20 305 4959
E hemmers@arthurslegal.com
W www.arthurslegal.com
Areas of practice. Corporate governance; M&A and IPOs.
Recent transactions
