A practical insight for international investors and M&A professionals
International buyers, investors and M&A advisers often assume that negotiations remain fully non-binding until the SPA or APA is signed. In Dutch transactions, that assumption can be too simple.
Under Dutch law, parties are generally free to negotiate and to walk away from a transaction. However, that freedom is not unlimited. The wording of a term sheet or letter of intent, the conduct of the parties, the stage of negotiations and the justified expectations created during the process may affect whether a party can still break off negotiations without consequences.
This is particularly relevant for US, UK and other international investors looking at Dutch targets. A document labelled “non-binding” is not automatically without legal effect. Certain provisions may be binding, and in exceptional circumstances, breaking off negotiations may lead to liability.
For international buyers, sellers, private equity funds, search funds and M&A advisers involved in Dutch M&A transactions, the pre-contractual phase deserves careful attention.
Why the pre-contractual phase matters in Dutch deals
In many Dutch transactions, the legal risk allocation starts before the final acquisition agreement is signed. The process often begins with exploratory discussions, followed by an NDA, a term sheet or letter of intent, due diligence and ultimately a share purchase agreement or asset purchase agreement.
At each stage, parties may create legal expectations. Emails, management presentations, exclusivity arrangements, draft documents, board approvals, financing conditions and repeated statements that the deal is “agreed in principle” can all become relevant if one party later walks away.
The key point is not only what the LOI says. It is also how the parties behave.
NDA and confidentiality
International investors will usually receive confidential information before making a final offer. This may include financial information, customer data, employee information, commercial margins, intellectual property, technology, contracts and strategic plans.
A Dutch law NDA should clearly regulate the scope of confidentiality, permitted use of information, disclosure to advisers and financing sources, non-solicitation, return or destruction of documents and remedies for breach.
A penalty clause is often included, but it should be drafted carefully. It should not unintentionally exclude the right to claim additional damages if the breach causes greater loss.
Term sheet or letter of intent
The term sheet or LOI is often the most important document in the pre-contractual phase. It usually records the proposed transaction structure, purchase price mechanism, due diligence process, exclusivity, financing assumptions, conditions precedent, timing, costs, governing law and dispute resolution.
For international investors, the most important point is that the title of the document is not decisive. A “term sheet”, “heads of terms” or “letter of intent” may contain both non-binding and binding provisions.
Typically, provisions on confidentiality, exclusivity, costs, governing law, dispute resolution, access to information and sometimes break fees are intended to be binding. Commercial deal terms, such as valuation, purchase price, structure and closing conditions, may be non-binding, binding or partly binding depending on the drafting and the circumstances.
If parties want the commercial terms to remain non-binding, this should be stated clearly. If certain provisions are binding, this should also be stated expressly. Ambiguity at LOI stage can become expensive later.
Can a party walk away?
As a starting point, Dutch law respects freedom of contract. Parties are generally free to break off negotiations.
That position may change if, based on the circumstances, the other party was justified in expecting that a final agreement would be concluded or that negotiations would at least continue. Dutch courts apply this exception with restraint, but the risk is real in advanced negotiations.
Relevant circumstances may include the stage of negotiations, the level of agreement on essential terms, the existence of exclusivity, whether due diligence was substantially completed, whether draft SPA or APA documents were nearly final, whether approvals were obtained, whether conditions were still outstanding and how the parties communicated with each other.
Potential consequences may include a duty to continue negotiations, reimbursement of negotiation costs or, in exceptional cases, compensation for loss caused by the broken-off negotiations.
Where a dispute arises, the issue is not limited to the signed documents. Emails, draft agreements, meeting notes, process letters, exclusivity undertakings and conduct during the process may all matter. For disputes in this area, see also discontinued negotiations in the Netherlands.
Practical points for international investors
International investors should not treat a Dutch law LOI as a purely informal document. Before signing a term sheet or LOI for a Dutch target, consider the following points.
First, clearly separate binding and non-binding provisions. A simple general statement that the document is “non-binding” may not be enough if other wording suggests commitment.
Second, include express conditions. For example: satisfactory due diligence, financing approval, investment committee approval, board approval, final transaction documentation and notarial implementation where relevant.
Third, be careful with exclusivity. Exclusivity can be commercially useful, but it may also increase expectations and affect the negotiating position of the seller.
Fourth, avoid language suggesting that the deal is already final if material points remain open. Phrases such as “agreed”, “final deal”, “subject only to documentation” or “we are committed to closing” can create avoidable risk.
Fifth, make sure the LOI aligns with the expected SPA or APA. If the LOI refers to a locked box, completion accounts, vendor loan, earn-out, escrow, non-compete or specific indemnities, those concepts should be translated carefully into the final acquisition agreement.
From LOI to SPA or APA
If the transaction proceeds, the LOI is translated into a definitive acquisition agreement. In a share transaction, this is usually a share purchase agreement. In an asset transaction, this is usually an asset purchase agreement.
For international investors, the final documentation should reflect both the agreed commercial deal and Dutch law execution requirements. Depending on the transaction, this may include notarial share transfer, board and shareholder approvals, works council issues, FDI screening, disclosure schedules, completion deliverables and post-closing obligations.
A well-drafted LOI makes the SPA or APA process more efficient. A poorly drafted LOI can create uncertainty, delay and leverage issues during negotiation.
Key takeaway
In Dutch M&A transactions, the pre-contractual phase is not just a commercial warm-up. It can create legal consequences.
International investors should treat NDAs, term sheets and LOIs as strategic legal documents. They should be clear on what is binding, what is not binding, which conditions must be satisfied and when parties may still walk away.
Early Dutch legal input can help prevent a non-binding document from creating unintended obligations.
Need Dutch law advice on an LOI or M&A process?
Dirk de Waard advises international buyers, sellers, investors and M&A advisers on Dutch corporate law and transaction documentation, including NDAs, term sheets, letters of intent, due diligence, share purchase agreements and asset purchase agreements.
He assists clients with Dutch M&A transactions, private equity investments, venture capital transactions and shareholder arrangements involving Dutch companies.
Contact Dirk de Waard at dirk.dewaard@viottalaw.com to discuss a Dutch transaction, LOI or pre-contractual issue.
