Vol 4 (2007) - Issue 3

Article preview

The Use of the Netherlands Cooperatives in Tax-Driven Restructurings

1. Introduction

Default rates of leveraged companies are at an all-time low. At the same time, debt levels are at an all-time high. The market expectation is that the first insolvency wave may hit as early as the end of 2007 or early 2008.

Lenders looking to restructure their loans to a company in financial distress via a ‘debt-for-equity’ restructuring should consider the Netherlands cooperative as the restructuring vehicle of choice, with its favourable tax treatment and flexible legal characteristics. In this scenario, (1) a cooperative is placed on top of the distressed company and will hold its shares; and, (2) the loan receivables of the lenders on the distressed company are contributed to the cooperative in exchange for a predetermined amount of ‘equity’ (i.e. membership interests) in the cooperative.

The main benefits of using a Netherlands cooperative are discussed herein. Obviously, the strategic location of the Netherlands in Europe continent and the strong professional infrastructure of the Netherlands are also important factors.

2. What is a cooperative?

The cooperative is a special type of association. Historically, cooperatives were primarily used in the agricultural sector, but that is not to say that cooperatives are small enterprises by nature. Rabobank and
Campina, for example, are actually both very large cooperatives. The cooperative is also increasingly used as a holding company, mainly in private equity structures, but also in group structures.

In comparison with a BV or a NV (the Netherlands limited liability companies), the requirements for establishing a cooperative are minimal. For instance, a Declaration of ‘No Objection’ from the Ministry of Justice is not required, as is for other types of entities. A cooperative is established by notarial deed, and can be established in a matter of days. The cooperative must be registered in the Trade Register run by the Chamber of Commerce. A cooperative must be established by at least two members.
All cooperatives must abide by the following objective: to provide for ‘certain material needs of its members by concluding agreements with them (which may not be insurance agreements) in the business it conducts or causes to be conducted to that end for the benefit of its members’. The object clause contained in the articles of association of the cooperative may list specific activities in which the cooperative is involved.

A cooperative is a legal entity and as such can own assets, can incur liabilities and is capable of suing and being sued in its own name. The articles of association may exclude or limit, up to a certain maximum amount, any liability of the members or former members of the cooperative. If the articles of association provide a limitation or exclusion of liability, the name of the cooperative must contain the letters ‘BA’ (if liability is limited) or ‘UA’ (if liability is excluded). If the liability is not excluded or limited, the name of the cooperative must contain the letters ‘WA’. Cooperatives are required to publish an annual account and an annual report.

3. How is a cooperative governed?

The main governing bodies of a cooperative are the Managing Board and the General Meeting of Members. The cooperative may also have a Supervisory Board and/or other bodies.

The Managing Board manages the cooperative. Directors on the Managing Board can be either natural persons or legal entities. The Managing Board decides on the admission of members to the cooperative, the suspension of membership rights and the termination of membership. The articles of association can, however, contain other arrangements. In order to be able to benefit from the favourable tax features of a cooperative (see below), the admission of new members and the transfer of membership interests by members are subject to certain limitations.