Buyout of minority shareholders

For various reasons, a shareholder of a B.V. or N.V. holding an interest of 95% or more may want to acquire a 100% interest in the company. In the Netherlands, it is possible for this shareholder under certain conditions to force the buyout of the other shareholders. This takes place via a ‘squeeze-out procedure’ at the Enterprise Chamber (Ondernemingskamer) in Amsterdam. In this blog, I reflect on the advantages, requirements and bottlenecks of the squeeze-out procedure.

Advantages of acquiring all the shares

Besides any financial advantages and the positive sentiment of full ownership, there are also several practical considerations for acquiring the remaining percentage of interest in a company. This will simplify decision-making by making the holding and convening of the shareholders’ meeting subject to fewer legal requirements. There will no longer be any need to take other shareholders into account when determining the dividend policy. Minority shareholders will no longer be able to frustrate the application of a ‘403 declaration’, which basically allows companies to use consolidated financial statements in a group context. Finally, the law provides a simplified merger option for companies with only one shareholder. This means that there are enough reasons for the majority shareholder to consider a squeeze-out procedure.

Conditions and grounds for refusal

The majority shareholder’s interest in acquiring all the shares is counterbalanced by the minority shareholder’s right of ownership. To balance this, the legislator has provided some safeguards to the forced squeeze-out. First, two requirements must be met:

• the majority shareholder holds 95% of the issued capital; and
• the majority shareholder can exercise 95% of the voting rights.

The procedure is also available to two or more group companies that jointly meet the above criteria.

The Enterprise Chamber judge will reject a squeeze-out action in the following cases:

• a minority shareholder would suffer serious tangible loss as a result of the buyout;
• it concerns shares that are subject to special control in the articles of association; or
• the majority shareholder has waived its right to initiate the squeeze-out procedure.

These last two grounds speak for themselves. In contrast, the concept of ‘serious tangible loss’ seems at first glance to be a broad ground for refusal, but case law is clear on this. However, this only applies to financial loss that is not covered by the set buyout price. Because the Enterprise Chamber partly bases the buyout price on potential financial loss, this does not often occur. In addition, the extent of this loss must be ‘severe’. The Enterprise Chamber, incidentally, has never upheld an appeal for refusal on this ground. It would therefore have to be a very exceptional situation. All in all, this means that it is unlikely that the prospective buyout bidder will be surprised by the grounds for refusal.

Value assessment

In practice, the value assessment of the buyout shares is the biggest bottleneck. There is no legal framework regarding value assessment. The general principle is that the Enterprise Chamber sets the price of the shares at their fair market value on a given reference date. This has also sometimes been phrased by the Enterprise Chamber as ‘the value that would be paid by the highest-bidding bidder in the sale of those shares in the most appropriate manner after the best preparation’. This should constitute a fair and reasonable consideration for the shares. The buyout price claimed by the buyer is the minimum price in this respect.

Different calculation methods are recognised in case law. This distinguishes between ‘listed shares’, which are freely tradeable, and ‘non-listed shares’. A ratio of 95% to 5% is rare for listed shares. When listed minority shares are involved in squeeze-out procedures, their value is usually relatively easy to determine. This is because the procedure often follows a public offer, which makes it possible to establish a recent market price. The focus here will therefore mainly be on the valuation of non-listed shares.

Valuation of non-listed shares

The valuation of non-listed shares is complicated because the market often does not provide benchmarks. In that case, the Enterprise Chamber will determine the value of the shares based on other documents submitted by the buyout bidder or an expert opinion. Given the costs involved, the judge rarely appoints an expert. The calculation is generally based on the value of the company (‘pro rata parte’) or on the yield value of the shares (the value of future cash flows associated with the shares). In principle, the Enterprise Chamber assumes the pro rata parte calculation.

The issue with the pro rata parte calculation is how to value the company. The DCF (discounted cash flow) method is often used, but the Enterprise Chamber is also open to other methods. A valuation based solely on intrinsic value will be accepted only if it is properly justified. In that case, only the value of equity on the company’s balance sheet is taken into account. The profitability method is also sometimes accepted for valuation purposes. Case law does not provide concrete guidelines on the appropriate method. The calculation is generally only accepted or rejected. Whether a calculation is accepted depends on the justification and all the circumstances of the case.

Reference date

Another important issue in valuation is its reference date. This is because the price is calculated based on all changes in value up to the reference date. As a general rule, the reference date should be as close as possible to the date of the actual transfer. In the squeeze-out procedure, this is the day on which the final judgment is delivered in which the Enterprise Chamber approves the squeeze-out action and the price. This means that when calculating and justifying the buyout price, the buyout bidder must assume a future value.

Expert advice

It is important to get the squeeze-out procedure right the first time. This requires that the buyout bidder is aware of the various pitfalls of the procedure. GMW Advocaten has extensive experience in corporate law and proceedings before the Enterprise Chamber. Its lawyers have the necessary business knowledge in-house and a strong network of financial experts. This makes GMW Advocaten ideally placed to assist or advise both buyout bidders and minority shareholders. If you are facing a squeeze-out procedure or considering acquiring the entire interest in your company please do not hesitate to contact one of our lawyers. We will be happy to assist you!