European leveraged finance transactions (i.e., acquisition financing by fund sponsors of European targets) are often structured through Luxembourg or the Netherlands because those are creditor-friendly jurisdictions for the creation, perfection and enforcement of (certain) security interests. Structuring through Luxembourg or the Netherlands provides a high degree of transaction flexibility compared to other jurisdictions.
Contrary to the US Bankruptcy Code, there is no pan-European insolvency regime. Rather, each European jurisdiction has its own insolvency regime. Also, a US insolvency procedure or security interest over European companies or assets is typically not recognized. Thus, to enforce security interests over assets located in Europe, the secured parties must follow the enforcement proceedings applicable in the relevant European jurisdiction, not all of which are creditor-friendly when it comes to the enforcement process.
The typical double holding structure (i.e, a “double Luxco” or “double Dutchco” structure), which is used to ensure that enforcement of security interests will not be subject to the bankruptcy laws of a jurisdiction other than the Netherlands or Luxembourg (as applicable), includes a holding company (TopCo) that holds 100% of the shares of another holding company (MidCo and, together with TopCo, the HoldCos), both of which are located in either Luxembourg or the Netherlands. MidCo holds the shares in a company (BidCo) that obtains the acquisition financing to purchase the target. The secured parties obtain, among other things, a security interest over the shares of MidCo granted by TopCo.
The secured parties can enforce their security interest under Luxembourg or Dutch law, depending on whether MidCo is a Luxembourg or Dutch entity. In the case of a Luxembourg entity, the secured parties can appropriate or sell the MidCo shares quickly and out of court. If MidCo is a Dutch entity, a public sale or, alternatively, a private sale with court approval (which is not open for appeal on the merits) of the MidCo shares is possible.
Prior to enforcement of the security interest over the MidCo shares, secured parties can step in and take control by appointing replacement directors at MidCo level to ensure that MidCo does not apply for insolvency or commence proceedings that protect it against enforcement by the secured parties.
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