Dutch Public companies, NVs (Naamloze Vennootschappen), are commonly selected as entities for initial public offerings (IPOs), mostly through conversions of existing Dutch private limited companies (BVs or Besloten Vennootschappen) that are part of the group for the purpose of tax structuring. The purpose of this article is to give in-house counsel a headstart on the preparations of an IPO of a Dutch public company by highlighting a few practical aspects relating to the issuer’s prospectus and corporate governance structure that need to be considered and decided at an early stage of the IPO.
Authority of a regulator to approve the prospectus
The first important issue to be considered is which regulator(s) will be authorised to approve the issuer’s prospectus. Article 13 of the Prospectus Directive 2003/71/EC, as implemented in the Dutch Act on Financial Supervision (AFS) and legislation of other EU member states, sets out that the home member state is authorised to approve the prospectus. Which member state qualifies as the home member state is further set out in the definition of Article 2, paragraph 1, under m, and depends inter alia on what type of securities are offered (equity or non-equity securities) and the registered office of the issuer. If equity securities are offered, the member state where the issuer has its registered office will qualify as the home member state. This means that the regulator of that member state will be exclusively authorised to approve the prospectus for listings and offerings in that member state and/or elsewhere within the EU or within the European Economic Area (EEA). For the Netherland’s Authority for the Financial Markets (AFM) this is set out in s5(6), paragraph 1, under AFS. Approval of the prospectus by the home member state regulator may subsequently be passported into other member states for listings and offerings.
Particularly where equity securities are offered, the regulations on authority for approval seem to leave little room for selecting a regulator because the member state of the registered office is exclusively authorised. There may, however, be a substantial commercial interest for the issuer to opt for the regulator of another member state. For instance, if there is already an issuer within the group that is incorporated in the UK and regulated by the Financial Services Authority (FSA), it might be beneficial to also have the prospectus of a new issuer within the group approved by the FSA, even if this issuer is incorporated in another member state. As the FSA may have gained extensive knowledge of the group and the group may have built up excellent contacts within the FSA, it may be beneficial to the listing process to opt for approval by the FSA. The Prospectus Directive and AFS therefore include the possibility for an authorised regulator to cede its authority to another regulator. Although regulators in general will only cede their authority in exceptional circumstances, it is always important to review and discuss this possibility with counsel because prospectus approval is an essential part of the listing process.
Prospectus content: expert reports for specialist issuers
The Prospectus Regulation 809/2004/EC sets out inter alia the minimum information to be included in a prospectus by using standard schedules and building blocks attached as annexes. However, pursuant to Article 23, paragraph 1 of the Regulation, the relevant authority of the home member state may ask for adapted information in addition to the information items included in the schedules and building blocks where the issuer can be categorised as a ‘specialist issuer’, being a:
- property company;
- mineral company;
- investment company;
- scientific research-based companies;
- companies with less than three years in existence (start-up companies); and
- shipping companies.
This adapted information may include a valuation or other expert’s report on the assets of the issuer.
The rationale for the requirement of an expert report is clear: proper valuation of the complex assets of the categories of companies mentioned above is an essential foundation for any investor making an investment decision. Nevertheless, for the issuer, obtaining an expert report can be very costly and time consuming. It is therefore imperative that the issuer and counsel carefully consider whether an expert report will be required when planning the IPO. As the Prospectus Regulation itself does not provide much clarity on the scope of the categories of companies, the Committee of European Securities Regulators (CESR) has published relevant guidance in its recommendations for the consistent implementation of the European Commission’s Regulation on Prospectuses nº 809/2004 (CESR/05-054b). Although CESR’s guidance is helpful, in practice there is still a great deal of uncertainty regarding the qualification of companies as a specialist issuer, and the content and standards for the expert report. It can therefore be constructive to discuss this with counsel at a very early stage, and with the appropriate regulator, to make sure that all parties agree on whether an expert report will be required, and what the content and standards for the report will be.
Corporate Governance of the issuer
Conversion of BV a company into an NV company
The issuer may already be an NV company without a listing, but usually the issuer will be a BV company that needs to be converted into an NV company. The procedure for conversion is similar to amending the articles of association, and requires a shareholder’s resolution and notarial deed. The articles of association will be completely re-established on conversion to meet the corporate governance standards of public companies. Below are some key aspects of corporate governance of the issuer.
One-tier or two-tier board structure
An essential aspect for the governance of the issuer will be whether the articles of association will provide for a two-tier or one-tier board structure of the company. Dutch law currently only provides for a two-tier governance structure, consisting of a management board and a separate supervisory board. However, in practice, many NV companies have a governance structure similar to a one-tier board structure: all members of the board of directors are formally directors (bestuurders), but the articles of association provide that certain directors have tasks and obligations that are similar to those of executive directors, while other directors have tasks and obligations that are similar to those of non-executive directors. The ‘executive directors’ may represent the company, whereas the non-executive directors may not represent the company individually. As a result of the general principle of collective responsibility and liability of directors, the one-tier board structure may still cause issues of liability vis-à-vis the company for directors acting as ‘non-executive directors’. The current text of the relevant statutory provision is not clear on whether a strict division of tasks and responsibilities of directors is an adequate defense for directors acting as non-executive directors in cases of mismanagement. A legislative proposal that provides more clarity on this issue, and a statutory basis for the one-tier board, was adopted on 8 December 2009 by the Dutch parliament and is currently under review of the First Chamber.
Key board committees
Although there is no statutory obligation for board committees, issuers with a registered office in the Netherlands will need to comply with (or explain) the Dutch Corporate Governance Code, even if their securities are solely listed on a foreign exchange. Pursuant to the code, companies with a supervisory board consisting of more than four members will appoint three key committees from among its supervisory board members:
- an audit committee;
- a remuneration committee; and
- a selection and appointment committee.
This also applies to issuers with a one-tier board structure, provided that the committees shall only consist of non-executive directors. The board committee charters should be drafted in accordance with the code.
As a company going public may become subject to hostile takeovers, it is essential to liaise with counsel on setting up protective measures that can be effected when required. Protective measures are only allowed under Dutch law if they are in the interest of the company and its stakeholders, and adequate, proportionate and limited in duration (and therefore reversible). The most common measures are:
- granting an option to acquire preference shares to an independent special purpose foundation that may be exercised on a hostile takeover;
- issuing priority shares to a related party with special voting powers; and
- issuing depository receipts through a foundation instead of shares to the public, to enable restriction of voting rights on a hostile takeover.
Preparing a company for an IPO is complex and requires a great amount of efficiency. To give in-house counsel a headstart on preparing the IPO, this article has highlighted the following aspects regarding the issuer’s prospectus and corporate governance structure:
- The home member state is exclusively authorised to approve the issuer’s prospectus for listings and offerings of shares within the entire EU/EEA, and will be determined by place of registered office of the issuer. However, it is possible that authority is ceded by one regulator to another. It might be interesting to discuss this option with counsel if another regulator is deemed to be more familiar with the issuer’s group.
- Specialist issuers will need to include an expert report in their prospectus on the valuation of their assets. It is essential to discuss with counsel at an early stage whether such a report will be required, because producing reports can be a very costly and time-consuming exercise.
- Important aspects of corporate governance to consider when preparing an IPO include whether the company will have a one-tier or two-tier board, what (supervisory) board committees will be appointed and whether the issuer will incorporate anti-takeover defenses.
- The Netherlands has been the country of choice for tax optimisation of holding and financing structures. To a large extent this is caused by the international focus of the Netherlands, highlighted by its extensive tax treaty network, and its sound and proven beneficial tax regime for international holding and financing activities. Important aspects of the issuers default tax environment include a 100% participation exemption for dividends and capital gains, the absence of withholding tax on interest and royalties, and the possibility to obtain advance tax rulings confirming the tax position of Dutch taxpayers in advance.