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Equity investment in Dutch emerging company: main legal documents and closing process – New York office Snippet

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12-02-2024

The 'Snippet' series from our New York office regularly offers insights on a range of EU tax and legal topics. A significant part of capital raised by Dutch emerging companies comes from US investors, who are often unfamiliar with the legal documents and the closing process of an investment round in the Netherlands. This is snippet #1 of a series of 2 snippets on this topic. This snippet describes the main legal documents in case of a primary equity investment (“Investment”) in a Dutch B.V. (“Company”). Snippet #2 will address the closing steps and the Dutch civil law notary’s (“Notary”) role.

The main transaction documents are: (i) an investment agreement between the Company and the investor (“IA”) and (ii) a shareholders’ agreement between the Company, the investor and the existing shareholders (“SHA”). The IA contains the terms of the Investment (e.g. investment amount, amount and type/class of shares to be issued, reps and warranties and “disclosure” against these) and describes the transaction process (e.g. pre-closing actions and closing process). The SHA contains the Company’s governance and other terms governing the relationship between the parties (e.g. share transfer provisions, information rights and economic rights).

Shares are in principle issued on the basis of a resolution of the general meeting of shareholders of the Company (“SHR”). Although the IA contains an obligation to complete the share issuance to the investor, the Company can only validly issue shares if a SHR to this extent has been taken. A share issuance requires execution of a deed of issuance (“DoI”) before a Notary. This is the final step of the closing process and the moment that the investor becomes a shareholder of the Company. The IA and DoI are not combined as various IA arrangements cannot be included in the DoI. For example, pre-closing obligations are not suitable for the DoI due to its nature and IA arrangements with a subjective element (e.g. providing “reasonable” evidence of something) cannot be included as notarial deeds need to meet requirements of objectiveness and determinability.

Each Company needs to have articles of association (“AoA”). The AoA contain the Company’s internal rules and procedures (mostly related to governance and decision-making). The SHA is not mandatory but complements the AoA. It is important that the AoA are aligned with the SHA to the extent possible. The AoA are amended based on a SHR and by executing a deed of amendment (“DoA”) before a Notary. The SHA and DoA are not combined due to the requirements for notarial deeds set out above. Another important reason is that the DoA is publicly accessible and the SHA is not.

The most important legal documents for an Investment in a Dutch Company therefore are: (i) the IA, (ii) the SHA, (iii) a SHR for the share issuance and for aligning the AoA with the SHA, (iv) the DoI and (v) the DoA.

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