16 Jun First aid kit for shareholder dispute resolution
First aid kit for shareholder dispute resolution
16 June, 2022
We come across shareholder disputes on a regular basis. In the interests of the company and the well-being of the shareholders, the only solution is often to separate the factions as quickly as possible. Both literally and figuratively. A deadlock situation where nothing happens can be fatal. That is why we are offering you a first aid kit for shareholder disputes.
Inquiry by the Enterprise Chamber (Ondernemingskamer)
There are several ways to separate feuding shareholders. In the case of a demerger resolution, the shareholders part ways and each continues with a part of the company. But ‘splitting up’ the shareholders often means more that one shareholder buying out the other. Who buys out who and under what conditions? One option is to initiate inquiry proceedings at the Enterprise Chamber. These proceedings are particularly interesting because of the interim measures that can be imposed. Obstructive shareholders can be (temporarily) deprived of their voting rights as a solution to a deadlock situation. Or a director may be temporarily suspended or an independent director appointed.
Then there are the legal provisions. Forcing a buy-out. A shareholder that has seriously and permanently harmed the interests of the company can be forcibly bought out through a squeeze-out procedure. The exit procedure defends the interests of shareholders whose rights and interests have been harmed. If it has been demonstrated that the shareholder can no longer be asked to remain a shareholder, he/she can demand that his/her shares be taken over by a fellow shareholder. The law also provides for a buy-out procedure. Under certain conditions, a 95% shareholder can force minority shareholders to sell their shares.
When implementing the legal regulations – read: a forced buy-out – the price immediately comes up. The law does not offer any guidance here. There may be provisions in the articles of association or the shareholders’ agreement, such as a formula to be used in the event of an exit. For example, a factor times the average EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) over the last two years minus the net debts. This may seem straightforward, but it can still be up for debate. Do non-recurring expenses need to be deducted from EBITDA? Should there be a normal net working capital? Is there a bad leaver clause? When do shareholders get a penalty discount on their share price? And does a forced buy-out qualify as a bad leaver provision?
And what if nothing has been arranged?
Then a valuation becomes even more difficult. In case law, several concepts of value can be used by different judges: fair market value, economic value, actual value, actual price or comparable third-party price. Only the concept of economic value has a generally accepted definition. The Dutch professional association of Registered Business Valuers (NiRV) states: “The cash (current) value of anticipated cash flows, in other words the valuation taking in account the current market value elements of money, risk and time.”
When appointing a valuation expert – either by statute or the court – the binding or non-binding result is also uncertain. Important factors include:
- value and price are different concepts;
- reasonableness and fairness;
- hearing the perspectives and viewpoints of both sides.
- weighing the facts and circumstances;
- possibly awarding a fair increase.
Deadlocks and shoot-out mechanisms
Calling in a valuation expert is not always necessary. It is also possible to opt for a so-called shoot-out mechanism, which is actually purely about the price. The parties make a bid, after which the other party can decide to buy, sell or make a higher bid. And then there is the fairest bid variant, a combination of a value assessment by an expert and bids made by the parties. The bidder who comes closest to the assessment from the valuation expert is then required to buy.
Having issues with your fellow shareholder(s)? Is a dispute imminent and do you have questions or need advice? Our experts can help you. Get in touch with the advisers of Joanknecht Corporate Finance and Forensics & Recovery.