Financing and securities in the Netherlands

Financing a Dutch company means combining two separate legal questions: where the money comes from, and what security the provider of that money receives. Debt from a bank, equity from an investor, a bond issue, crowdfunding and government schemes each carry their own documentation, and each is normally backed by a right of pledge (pandrecht), a mortgage (hypotheekrecht), a guarantee (borgtocht) or a combination. Getting the funding is the commercial exercise; getting the security package right is the legal one, and it is the part that decides what happens if things go wrong.

This guide sets out the financing routes open to a Dutch BV, the documents each route requires, the security rights recognised by Dutch law and how they are created, the rules that apply when securities are offered to investors, and the mistakes that cost companies most. The aim is a working map of financing and securities in the Netherlands, written for entrepreneurs and for international groups financing a Dutch subsidiary.

The financing routes open to a Dutch company

Dutch companies draw on four broad sources of external capital. Bank and other debt finance keeps ownership intact but imposes covenants, repayment obligations and, almost always, security. Equity finance from angel investors, venture capital or private equity brings capital that does not have to be repaid, at the price of dilution and a share in control. Public support, in the form of grants, tax facilities and state-backed guarantees, is comparatively cheap but slow and conditional. Alternative finance, principally crowdfunding, leasing and factoring, fills the gaps at the smaller end.

The choice is rarely either-or. Most growing Dutch companies end up with a stack: a bank facility for working capital secured on receivables and stock, an equity round for the growth investment, a government innovation facility for the research component, and leasing for equipment. What matters legally is that these layers do not conflict with each other. A bank facility with a negative pledge clause can block the security an equipment lessor requires; an investor’s veto rights can prevent the company from drawing down a loan; and a subsidy condition can restrict a change of control that a later investor takes for granted. Reading the existing documentation before signing the next one is not a formality.

Bank finance and what a Dutch lender will ask for

A Dutch credit agreement is a short document that incorporates a long one. The offer letter sets the amount, the term, the margin and the repayment schedule; the lender’s general banking conditions and general credit provisions do the rest of the work, and it is in those documents that the acceleration clauses, the information obligations and the security arrangements are found.

Three clauses deserve attention before signature. Financial covenants, usually a leverage or solvency ratio tested periodically, convert a bad quarter into an event of default; the question to ask is what headroom the covenant leaves and what happens on a breach. The negative pledge prevents the company from granting security to anyone else, which is a problem if a later investor or supplier requires it. And the termination provisions determine how much notice the bank must give: a credit facility is generally terminable, but Dutch case law limits that freedom, because a bank exercising a contractual right must still act in accordance with its duty of care and with reasonableness and fairness, and an abrupt termination without a reasonable transition period can be unlawful.

Personal exposure is the point where entrepreneurs most often misjudge the risk. A director or shareholder who guarantees the company’s debt is personally liable, and the standard bank documentation asks for exactly that. Where a private guarantee is given outside the normal course of the company’s business, article 1:88 of the Civil Code requires the consent of the guarantor’s spouse or registered partner, and a guarantee given without it can be annulled. There is an important exception: consent is not required where a director who alone or with co-directors holds the majority of the shares gives the guarantee for a transaction in the normal course of the company’s business. Whether a particular financing falls inside or outside that exception is a recurring point of litigation, and it is worth resolving before the deed is signed rather than after enforcement begins.

Security rights under Dutch law: pledge, mortgage, guarantee and retention of title

Dutch law recognises a closed set of security rights. They cannot be invented by contract: a security interest exists only if it is created in the form the Civil Code prescribes. That formality is a protection as much as a burden, because a properly created security right gives the holder priority over ordinary creditors and, crucially, survives the insolvency of the debtor.

Pledge (pandrecht)

A pledge is the standard security over movable assets and receivables. It comes in two forms. A possessory pledge requires the asset to be brought under the control of the pledgee, which is impractical for a trading company. A non-possessory pledge, used in almost all business financing, is created by notarial deed or by a private deed registered with the tax authorities, and leaves the assets where they are. Receivables can be pledged in the same two ways: an undisclosed pledge is created by registered deed without notifying the debtor, and becomes a disclosed pledge, entitling the pledgee to collect directly, once notice is given. Because a pledge only captures receivables that exist at the time of the deed or that arise from a relationship already in place, credit agreements routinely oblige the borrower to execute supplementary pledge deeds at regular intervals.

A pledgee has the right of immediate enforcement (parate executie): on default it may sell the pledged assets without obtaining a court judgment first. The sale must in principle be public, although the court can permit a private sale, and the proceeds are applied to the secured claim with any surplus returned to the debtor.

Mortgage (hypotheekrecht)

Security over immovable property, registered ships and aircraft takes the form of a mortgage. It is created by notarial deed executed before a Dutch civil-law notary and entered in the public registers kept by the Land Registry. Like the pledgee, the mortgagee has a right of immediate enforcement, exercised through a public auction unless the court approves a private sale. The rank of competing mortgages follows the order of registration, which is why the timing of the notarial appointment matters in a refinancing.

Guarantees and joint liability

A guarantee (borgtocht) makes a third party liable for the debtor’s obligation, in principle only after the debtor has defaulted. Groups also use joint and several liability, a parent company guarantee, or a declaration of joint liability under article 2:403 of the Civil Code, which allows a subsidiary to be exempted from filing its own annual accounts in exchange for the parent assuming liability for its debts. That declaration is easy to give and notoriously difficult to unwind: withdrawal only ends liability for new debts, and the residual liability for existing obligations continues until a separate statutory procedure has been completed.

Retention of title

Suppliers have a cheaper instrument. A retention of title clause postpones the transfer of ownership of delivered goods until payment has been made, so the goods remain the supplier’s property and can be reclaimed if the buyer fails to pay or becomes insolvent. It has to be agreed before or at delivery, which in practice means it belongs in the general terms and conditions and in the order confirmation, not in the reminder letter. Our article on financial security within corporate law examines these instruments in more detail, and our overview of the financing agreement deals with the contract itself.

Equity finance: issuing and transferring shares in a BV

Raising equity in a Dutch BV is a formal exercise. An issue of new shares requires a resolution of the general meeting, unless the articles have delegated the power to another body, and both the issue and any transfer of shares must be executed by notarial deed before a Dutch civil-law notary. There is no minimum share capital: since the reform of BV law the capital can be set at a nominal amount, which is why the negotiation is about the share of the company rather than about the sum paid up.

The documents that matter are the articles of association and the shareholders agreement. The articles are public and govern the company; they contain the share classes, the transfer restrictions and the rules on decision-making. The shareholders agreement is private and governs the relationship between the shareholders: reserved matters requiring investor consent, board composition, anti-dilution protection, information rights, drag-along and tag-along on an exit, and what happens if a founder leaves. Where the two conflict, the articles prevail as a matter of company law while the agreement binds the parties contractually, which is a recipe for an expensive dispute; aligning them at the time of the round is far cheaper. Our article on what a shareholders agreement must contain works this through, and for foreign investors our guide to setting up a Dutch BV with foreign shareholders covers the incorporation side.

One rule in this area is frequently overlooked and carries personal liability. A BV may only distribute profit or reserves after the management board has approved the distribution, and the board must withhold approval if it knows or ought to foresee that the company will be unable to continue paying its debts as they fall due. Directors who approve a distribution in breach of that test are personally liable for the shortfall, and shareholders who knew or ought to have known can be required to repay what they received. Dividend recapitalisations and shareholder loan repayments financed out of a new funding round are precisely the transactions this rule catches, and the analysis belongs on the file before the payment, not afterwards. Directors liability is the wider subject.

Offering securities to investors: when supervision applies

The moment a company offers shares or bonds to a wider circle rather than to a handful of known investors, financial supervision law becomes relevant. The framework is European. The Prospectus Regulation requires an approved prospectus for an offer of securities to the public or an admission to trading on a regulated market, and the Dutch Financial Supervision Act (Wet op het financieel toezicht, Wft) designates the Netherlands Authority for the Financial Markets (AFM) as the competent authority.

Exemptions do most of the practical work. Offers addressed only to qualified investors, offers to a limited number of persons per Member State, and offers with a high minimum investment per investor fall outside the prospectus obligation, and the Dutch exemption regulation adds a national exemption for smaller offers, subject to notification to the AFM and the use of a prescribed information document. The thresholds have been amended by recent European legislation, so the current figures should always be checked against the text in force at the time of the offer rather than taken from an article. What does not change is the consequence of getting it wrong: an offer made without a required prospectus can be halted by the AFM and exposes the issuer to civil claims from investors.

Crowdfunding has its own regime. Since the European crowdfunding services regulation took effect, platforms that bring together project owners and investors need a licence from the AFM, must apply investor protection rules including a knowledge test and a reflection period for inexperienced investors, and must publish a standardised key investment information sheet for each project. There is a ceiling on what a single project owner may raise through crowdfunding within a twelve-month period. For the company seeking finance this is largely good news: the platform carries the compliance burden, but the information the platform must publish about your business is prescribed and the accuracy of it is your responsibility.

Government schemes and guarantees

Public support for Dutch business finance runs along three tracks, and the legal work differs for each.

The first is fiscal support for research and development, principally the WBSO facility, which reduces the payroll tax and social security contributions payable on research work. It is administered by the Netherlands Enterprise Agency (RVO), the parameters are set each year, and the obligations that come with it are practical rather than legal: a project administration and hour registration that will withstand a later inspection.

The second is direct funding: innovation credit, regional development funds, and the national promotional bank Invest-NL, which invests in and lends to companies in areas where the market falls short, often alongside European institutions. These are contractual arrangements with conditions attached, and the conditions bind. Reporting obligations, milestones, restrictions on a change of control and clawback provisions are standard, and a breach can convert a subsidy into a repayable debt.

The third is state-backed guarantees, of which the SME credit guarantee scheme is the best known. The State guarantees part of a bank facility, which allows a company with insufficient collateral to borrow. It does not reduce the borrower’s own liability: the guarantee protects the bank, and where the State pays out under it, the company remains liable and the claim is pursued. That distinction is regularly misunderstood by borrowers who believe a state guarantee is a form of insurance for them.

Because the terms and the amounts of all these schemes are adjusted regularly, the only reliable source is the scheme documentation published by the administering body at the time of the application. Tax structuring around any of these facilities is a matter for a tax adviser; our role is the legal framework and the contract.

Common mistakes and what to settle before you sign

Four failures account for most of the financing disputes we see. The first is signing the term sheet as if it were a formality. A term sheet is usually expressed to be non-binding on the commercial terms, but the exclusivity, confidentiality and cost provisions in it are binding, and the commercial terms it records are extremely difficult to reopen later. Negotiate the reserved matters, the leaver provisions and the anti-dilution mechanics at term sheet stage.

The second is granting security wider than the financing requires. An all-monies pledge over all present and future receivables, stock and shares is standard bank drafting, but it removes the company’s ability to finance anything else. Where the facility is modest, the security should be too, and this is negotiable more often than borrowers assume.

The third is the personal guarantee signed without the spousal consent question being examined, or signed at a point when the company was already in difficulty. The consequences fall outside the company entirely and are not covered by any corporate structure.

The fourth is the mismatch between the funding and the need. Short-term facilities used for long-term investment force a refinancing at the least convenient moment; long-term debt taken for a seasonal working capital gap is expensive. Aligning the term of the money with the life of the asset it funds is the simplest financial discipline there is, and it belongs in the legal analysis because it determines the covenants the company can realistically live with.

Before signing any financing document, three questions should have written answers: what triggers a default and what happens next, what security is granted and over which assets, and who is liable besides the company. If any of the three is unclear from the documents in front of you, the documents are not ready.

How Law & More can help

Law and More advises on financing and securities in the Netherlands for Dutch and international companies: financing agreements, security documentation, share issues and shareholders agreements, subsidy conditions and the supervisory rules that apply when securities are offered to investors. We review the documentation a lender or investor puts forward, negotiate the terms that matter, and work with the civil-law notary on the deeds that Dutch law requires.

If you are preparing a funding round, a credit facility or a security package, or you want an existing arrangement reviewed before the next one is layered on top of it, please contact our corporate law team. Our corporate law guides collect the related material by topic.