The subsidiary rule for the valuation of the compensation in the event of a statutory withdrawal or exclusion of a shareholder in a BV or CV is that a shareholder receives his actual paid-in and non-refunded contribution unless it exceeds the net asset value of the shares as shown in the last approved annual accounts. In the latter case, the budget is based on the net asset value. (Sections 5:154-5:165 and 6:120-6:123 CC)
This subsidiary valuation method is stricter than under the previous Companies Code, where the withdrawing or excluded shareholder was entitled to the net asset value of his shares. Moreover, both a valuation at net asset value and at historical contribution value are static valuation methods: they do not account the goodwill.
This legal premise therefore leads to an absurdly compensation. Why is this a problem and how can it be addressed?
1. The rationale behind the low compensation
This anomaly can only be explained by looking at the rationale behind this withdrawal or exclusion remedy. The subsidiary valuation rules and in particular the static valuation method were originally written with the cooperative nature of the CV in mind. Profit sharing and sharing in the value of the realisation of the business activity are not objectives here. A low compensation that does not take into account the enterprise value can therefore be legitimised for companies with a truly cooperative character.
However, under the Companies Act, the static valuation method was also prescribed as a subsidiary rule for CV’s without a cooperative objective and under the Code of Companies and Associations, also for the BV. In these companies, profit distribution is the objective of the company and a low compensation cannot be legitimised on the basis of the classic legitimation for cooperatives. On the contrary, under the current subsidiary rules, the excluded or withdrawing shareholder shares only in the company’s losses and not in its profits.
2. Why is the low compensation a problem?
These subsidiary valuation rules create a risk of abusive withdrawal or exclusion in companies without a cooperative objective.
This risk of abuse is related to the withdrawal or exclusion ground. From a normative point of view, this valuation method is less problematic for withdrawal than for exclusion. Indeed, the low compensation could still be legitimised as a kind of quid pro quo for the withdrawal right at will for the shareholder. Moreover, this valuation method is consistent with the cooperative background of the withdrawal remedy. However, things become more difficult when the shareholder has a legitimate reason to withdraw from a non-cooperative company, for instance in the event of a default by the other shareholders. Even in that case, where he is almost pushed towards exit by the remaining shareholders, is he bound by the low compensation?
Exclusion from non-cooperative companies is also different. Unlike with withdrawal remedies, the remaining shareholders force the exit of the excluded shareholder. If they obtain the exclusion for a low compensation, the value of their shares increases, thus obtaining an asset benefit.
The more subjective the grounds for exclusion (think of grounds for exclusion open to interpretation such as a reasonable grounds or a “deadlock” situation) or even discretionary, the easier it is for shareholders to enforce the exclusion. The supplementary valuation rules lead to a high risk of abuse especially for these more subjective grounds for exclusion.
An important nuance here is that shareholders are free to deviate from these subsidiary valuation rules. For example, shareholders can provide a clause that assesses the compensation based on a dynamic valuation method (e.g. via an EBITDA multiple or DCF method) that also reflects the enterprise value. Nothing prevents them from providing a more balanced valuation clause. However, not all shareholders (and advisers?) will be so thoughtful as to provide in such a deviation from the subsidiary rules.
3. Is an exclusion against the subsidiary compensation enforceable?
The shareholder who is excluded at too low a compensation has a whole arsenal of grounds for challenging the exclusion and/or the valuation of the compensation at his disposal.
However, the underlying test that will always have to happen is whether the low compensation is legitimate and therefore whether the exclusion has taken place in good faith.
As a lawyer advising the shareholders who enforced the exclusion, you will probably argue that the legislature indicates what can be considered as “in good faith” with the subsidiary rules. In other words, the legislature is giving a sort of “stamp of approval” to the valuation rules that he codified in the law.
In the present case, however, that subsidiary rule seems to have been written specifically with genuine cooperative companies in mind and the legislator seems to have lost sight of its application to other types of companies. Abstracting from the legitimising circumstances of (i) an objective ground for exclusion or shareholder misconduct, (ii) a genuine cooperative company and/or (iii) a professional company in which all dividends are paid and goodwill is personal, an exclusion against the subsidiary valuation rules is not bona fide for BVs and CV’s without a cooperative objective. However, the fact that the subsidiary rules can serve as an element of assessment for assessing good faith makes them all the more problematic.
We therefore dare to defend that shareholders should deviate from the subsidiary valuation rules in a company where there are no legitimising circumstances for these rules. A deviation seems to us not only desirable but simply necessary for an enforceable exercise of the exclusion/withdrawal remedy.