The In-House Lawyer

when entering into a joint venture, a great deal of attention can be devoted to the exit. For many hypothetical situations, the parties wish to lay down how the price of the interest to be transferred when a party exits is fixed. In practice, a substantial degree of flexibility is required in fixing the value of the interest to be transferred. Parties want to make the ‘reward’ for the exiting partner depend on the circumstances of the exit. If, for example, a partner is being ousted on account of negligence, then this is a good reason to apply a discount to the real value of the interest involved.

In connection with the limited liability of the partners, joint ventures often acquire the form of a co-shareholding in a BV (Besloten Venootschap, private company). A disadvantage of the BV in its current form is the mandatory character of the provisions of Book 2 regarding the BV. For this reason, parties often regulate important components of their mutual relationship in a mandatory shareholders agreement. I will confine myself, in this article, to arrangements regarding price fixing upon transfer of shares in a BV.

Overview

Upon entering a joint venture (in the form of a BV) future shareholders are aware that certain circumstances can occur in which a shareholder cannot be expected to continue the joint venture with the other shareholder. In the event of such a situation the shareholder wants, in a simple manner, to be able to get rid of the other shareholder by ousting them, whereby the shareholder who is being ousted is obliged, on the basis of Article 2:195a of the Dutch Civil Code (DCC) (the Burgerlijk Wetboek (BW)) to offer their shares. If the shareholder has been ousted and forced to offer their shares, then the price for the shares concerned must be determined.

An exit arrangement provides for a mechanism to fix the price for the share of the exiting shareholder. Within the framework of this article, the assumption will be made that the price fixing agreed by the parties deviates (in a negative sense) from the value of ‘the share or shares, determined by one or more independent experts’ as referred to in Article 2:195a, paragraph 3, DCC. It is generally assumed that the statutory premise used in fixing the price should be the market value (on the date of the transfer of the shares).₁

For this reason Article 2:195a, paragraph 3, DCC stipulates that the shareholder (who must offer their shares) will receive a price for the shares that is equal to the value of the shares, determined by one or more independent experts.₂ Article 2:195a DCC is a mandatory legal provision. It is therefore not possible to adopt articles of association in which a shareholder receives, in the event of a forced sale, a price that is lower than the actual value. Laying down drag-along or tag-along conditions in the articles of association is, however, deemed possible.₃

Price-fixing arrangements – as referred to above – can therefore not be included in the articles of association and do not, therefore, have property law force. From a bankruptcy law perspective this is very relevant. I will revert to this later.

If the intention of the parties is, under all circumstances, to pay the exiting shareholder a compensation equal to the market value, then nothing unusual is going on. There may possibly be some haggling with the expert(s) regarding the value. In that case – as far as the price is concerned – a shareholders agreement will not be necessary. If, in the event of a forced sale, the parties wish to arrange that the selling shareholder receives less than the actual value for his shares, then this must be provided for in a shareholders agreement. The articles of association do not provide any scope in this regard. The background to these arrangements are often understandable and can vary. It can, for example, be considered unreasonable if a seriously defaulting shareholder who has been ousted is ‘rewarded’ by a price equal to the market value of that share. Many examples are conceivable why parties would wish to deviate from the actual value of the share.

Example

In a recent judgment rendered by the Hague Court of Appeal the question was posed about how joint venture partners in a BV should reach a settlement in the event a co-shareholder is ousted.₄ Summarised, in this case a joint venture partner/shareholder, hereinafter: ‘Ramsley’, was ousted by the remaining partners on account or ‘incompabilité d’humeurs’ or ‘non-performance’. Ramsley, however, took the primary standpoint that this was a case of disability, in which case – according to the shareholders agreement – the shares should have been valued at a higher value.

Alternatively, Ramsley argued that according to Article 2:195a DCC ousting is only possible against a value of the shares determined by the experts at market value, and that any contractual stipulations in the shareholders agreement deviating therefrom are null and void or subject to annulment. This would give the best results of Ramsley because in that case, in accordance with Article 2:195a, paragraph 3, DCC, the actual value of the shares would be valid as purchase price. This value would be higher than the outcome of the formulas stipulated in the shareholders agreement.

The Court of Appeal agreed with Ramsley’s standpoint that Article 2:195a, paragraph 3, DCC, is mandatory, on the understanding that the regulation only forbids adopting articles of association stating that in the event of a forced sale of shares, the shareholder will receive a price less than the actual value (ground 37).

The Court of Appeal subsequently referred to the explanatory notes to the bill:₅

‘Article 195a stipulates that the articles of association can provide for a regulation for price fixing which deviates from the law. Consultations show that often in practice a preference exists, in the event of a statutory obligation to offer the shares, for alternative, sometimes creative methods to determine the price of the shares to be transferred and that there are objections to (…) mandatory regulations. There is no objection to allow arrangements as outlined above, on the understanding that this is not imposed against the will of the shareholder.’

Ramsley was not successful in his alternative defence. The Court of Appeal determined (ground 41):

‘That currently there is a broad consensus that even the articles of association should be able to contain a regulation stipulating that in the event of a forced sale a shareholder receives less than the actual value for his shares if he has agreed to that regulation.’

The price-fixing clause in a shareholder agreement is, according to the Court of Appeal, not null and void and not subject to annulment. The consequence of this reasoning is that a contractual price-fixing arrangement in a shareholders agreement is enforceable, despite the mandatory effect of Article 2:195a, paragraph 3, DCC. Therefore, Ramsley also remains bound to the price-fixing arrangement in the shareholders agreement and he cannot fall back on the more favourable outcome of the market value emanating from the application of Article 2:195a, paragraph 3, DCC.

In an article worth reading that appeared in the ‘Tijdschrift voor Ondernemingsbestuur’₆, Prof CA Schwarz devoted attention to the conflict between statutory and contractual arrangement. The article regarded the calculation of the price to be paid for shares offered pursuant to the pre-emption rights.

distinction between statutory and contractual arrangements from a bankruptcy law perspective

Let us assume that Ramsley is bankrupt and the trustee has found the shares in the estate. We also assume that the articles of association of the company are organised in such a way that in the event of a shareholder’s bankruptcy the shareholder will be obliged to offer their shares to the other shareholders. Ramsley’s co-shareholders ask the trustee to offer the shares to them in accordance with the articles of association (and Article 2:195a, paragraph 3, DCC). The co-shareholders state that the purchase price for the shares to be transferred should be determined in accordance with a formula agreed in the shareholders agreement. The price determined thus is considerably lower than the market value of the shares concerned.

Two questions arise:

1. i) is the trustee bound to the obligation to offer the shares to the co-shareholders; and
2. ii) is the trustee bound to the price-fixing clause in the shareholders agreement or can they fall back on the estate, the more favourable outcome of Article 2:195a, paragraph 3, DCC?

Answers

The answer to the first question is easily answered. The trustee will have to offer the shares. The estate, too, is bound to any statutory restrictions with regard to the shares.₇

The answer to the second question is somewhat more complicated. If the trustee is confronted with an obligation emanating from the articles of association to offer shares existing in the estate, there is, as stated, no doubt that the trustee will have to offer those shares. If there is no special contractual agreement, Article 2:195a, paragraph 3, DCC is applicable (the market value). Article 2:195a DCC is a mandatory legal provision (Article 2:25 BW). The trustee will usually not be reluctant to co-operate in determining the price. After all, they will realise the market value for the assets in this way.

However, what if a shareholders agreement stipulates that in the event of a forced offer in accordance with the article of association the shares must be offered (Article 2:195a, paragraph 3, DCC), but that a price fixing deviating from Article 2:195a, paragraph 3, DCC, has been agreed in case the forced offer is connected, for example, to a serious form of negligence or the bankruptcy of a shareholder? Is the trustee in that case bound to put the shareholders agreement into effect?

In the Bankruptcy Act (Faillissementswet) the premise is that the bankruptcy will not negatively affect the contents and validity of existing agreements. This premise has been laid down in the central article for reciprocal contracts, Article 37 of the Bankruptcy Act. It is clear that the trustee cannot be forced to do something to comply with a performance. If the trustee then makes a choice for nonperformance, the other party is left with a verifiable claim for compensation. They will rank pari passu with the other (ordinary) creditors.

The answer to the question of whether the trustee is bound to a price-fixing arrangement in a shareholders agreement does not lie in a performance to be carried out. The shares must be offered (in my opinion there is no doubt in this regard) but the agreed consideration is not on market terms. According to FMJ Verstijlen the estate will be harmed if the agreement is not on market terms. The other party withdraws a value from the estate, which is in breach of the paritas creditorum.₈

The Supreme Court ruled, in the well-known Nebula judgment, that a breach of the paritas principle would occur if the bankrupt person would have to tolerate, in accordance with an agreement, the use of an immovable (belonging to the bankrupt person) by his contractual partner.₉

It is assumed that the right to nonperformance by the trustee is also limited by the legal protection of certain other parties. A tenant, for example (Art. 7:226, DCC). According to Verstijlen the interest of the tenant takes precedence over the interest of the joint creditors.₁₀

SUMMARY

In cases where the trustee encounters a stipulation in a shareholders agreement in which the price fixing will result in a price that deviates from the market value in an unfavourable sense for the estate, the trustee will have to ignore this stipulation. They will have to offer the shares and they will not have to be bound by the contractual arrangements regarding price fixing. The unjustified cancellation of the paritas creditorum will be an important argument in this regard.

In the Ramsley judgment the Hague Court of Appeal ruled that a contractual – deviating from Article 2:195a, paragraph 3 – price-fixing arrangement is not null and void and not subject to annulment on account of violation of that article. It may be the case – according to the Hague Court of Appeal – that the (non-bankrupt) contracting party who agreed to this provision is bound to this. In my opinion that is not the case for the trustee. The trustee is not bound to restricting provisions regarding the sale of assets belonging to the estate that the bankrupt person has undertaken before their bankruptcy.₁₁ This could possibly be different if these restricting provisions are/can be included in the articles of association and have an effect from a property law perspective.

Upon the expected implementation of the Act simplification and flexibilisation of Dutch BW Law (Vereenvoudiging en flexibilisering van het Nederlandse BV-recht), and in particular the proposed amendment of Article 2:195a, paragraph 3, DCC – become law, the other party of a bankrupt co-shareholder will be protected more fully. After all, this new law will provide for the possibility of including a regulation for price fixing that deviates from the law in the articles of association, if the shareholder agrees to this.₁₂ This would mean that price-fixing arrangements that currently can only be laid down in shareholders agreements, acquire a property law effect. In the example given above, the trustee would presumably have to accept the estate for an unfavourable outcome.

By Wouter Jongepier,

partner, Boekel De Nerée.

E-mail: wouter.jongepier@boekeldeneree.com.