Equity interest sold at (in retrospect) an excessively low price. What to do now?
It is not uncommon that a shareholder sells their equity interest for a price that afterwards turns out to have been excessively low. In this ruling of the Rotterdam District Court, the Dutch court examined when such an agreement can and cannot be annulled. Corporate law lawyer Martijn Kesler explains.
Share purchase agreement
In October 2011, a shareholder of the Dutch company Sera sold its equity interest for 3 million euros. For this purpose, the parties drew up an agreement to buy and sell
The portion of registered capital of a private or public limited company
» Meer over share shares, also called a share purchase agreement or SPA. In 2013, however, this same interest was sold on for nearly four times the original amount, namely 10.7 million euros.
Was the Dutch agreement contrary to public morality?
When the seller, the Dutch company Sera, became aware of this, it suspected that it had sold its equity interest for an excessively low value. It then annulled the contract extrajudicially by letter on the grounds of (among other things) conflict with good morals and error. To this end, it stated that there had been a conspiracy to ‘squeeze out’ Sera by depriving it of income. As a consequence, Sera ended up in financial difficulties. This situation forced Sera to accept this excessively low bid.
Dutch court: the purchase agreement will remain the guiding principle
However, the court based its decision on the provisions in the SPA. One of the relevant provisions was the one in which the parties are granted full and final discharge and waive the right to dissolve or annul all or part of the contract. The court also considered that the parties were assisted by experts at the time of conclusion of the contract.
In the Netherlands, legal actions become prescribed after three years
As the purchase agreement was concluded in 2011 and Sera did not serve a summons until 2016, the court held that the legal action had become prescribed. Pursuant to Section 52 of Book 3 of the Dutch Civil Code, an action for annulment will become prescribed three years after the act has come to light. Since there was no evidence that the prescription had been interrupted in writing and Sera had not taken legal action until five years after that date, Sera was unable to bring an action for the legal acts to be declared null and void.
Is the agreement null and void?
In addition to annulment, Sera’s lawyer also relied on (among other things) the nullity of the contract. The circumstances that Sera invoked in this context were that the sales contract’s content was contrary to good morals in that Sera had allegedly been squeezed out by, inter alia, the non-payment of dividends and management fees, and that there had been undue influence. However, it was important to note that there was also a provision that the parties had ‘waived rights.’ In the light of the above, that clause had to be dismissed.
The court considered the economic tide in its assessment
Again, the court was unable to follow Sera. The Court held that (i) Sera had not only been assisted by professional parties (ii) but also that in 2013, the economic tide in the Netherlands had changed since 2011 and that (iii) in general, a minority shareholder package of Sera would yield less than the majority shareholder package that was subsequently sold.
Relinquishment of rights is rock-solid
The court ultimately ignored all the circumstances cited by Sera. In any event, the circumstances could not have resulted in the setting aside of the ‘waiver of rights’ clause in the purchase agreement in that as regards the content or purport, the contract of sale was contrary to public morality.
Corporate law lawyers in Amsterdam
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