12.2.1 Problem statement

The central problem statement is as follows:

In this book, “corporate law proceedings” are defined as (a) the dispute resolution proceedings (geschillenregeling), also known as the ‘forced exit proceedings’, (b) squeeze-out proceedings (uitkoopprocedure) and (c) the procedures in respect of transfer restrictions (blokkeringsregeling). In those proceedings, most of the time the respective shareholders cannot agree upon the exit or sales price of the shares that need to be transferred. In the aforementioned Dutch proceedings, a pricing mechanism applies. Pursuant to this mechanism, an independent valuator will be appointed in order to value the shares. For the purpose of those proceedings, it is assumed that the value of a share is equal to the price of a share. This assumption will most of the time be incorrect in market transactions. In a market transaction, whereas the value is the outcome of an internal in depth desk- top analysis, the price is the outcome of negotiations. It is said: “Price is what you pay, value is what you get.”1

Dutch jurisprudence indicates that the independent valuator, when appointed, faces various difficult questions, either in the preparation phase of the valuation analysis (i.e. is the valuation based on fair (market) value, intrinsic value, book value etc.)) or, subsequently, in the phase of actually valuing the company.2 For example, when applying the Discounted Cash Flow method, parties can have a different view on the WACC (or its components such as the Market Risk Premium), what formula should be used in order to determine the continuing or terminal value, how the free cash flows should be assessed, how one should deal with the impact of financial distress etc. Those more technical questions will not be discussed in this book. Those questions have been discussed in great detail in, mainly, U.S. literature already. The same valuation principles apply to the Dutch market.

This book will, however, present a valuation framework which is adapted to the Dutch legislation and practice. When an independent valuator is appointed, it will be solely up to him how to assess the value and which assumptions to make. But currently, in the Netherlands, different valuators may have a different view about the valuation approach – and not only on the valuation methodology. This is because one can ask a corporate finance advisor/consultant, an accountant or an investment banker to value a company. They may differ about the fundamental questions of valuation, before they start their analysis and calculation. This book therefore aims to provide a legal valuation framework in order to provide all stakeholders involved with a more transparent approach of how to value corporates (enterprise value) and the shares (share price or equity valuation) in respect of corporate law proceedings.

With respect to financial restructurings this book focusses on the Dutch Bankruptcy Code and particularly the contemplated revision thereof. On 14 August 2014, the Dutch Ministry of Justice presented the Draft Continuity of Enterprises Act II (Wet Continuïteit Ondernemingen II). After a consultation process, this draft was amended and a new draft was presented on 5 september 2017, which is called the ‘Amendment to the Bankruptcy Act in connection with the introduction of the possibility to confirm a private restructuring plan in order to prevent bankruptcy’ (Act on the confirmation of a private restructuring plan in order to prevent bankruptcy).3 In the meantime, also the European Commission developed a recommendation in this respect. On 22 November 2016, the European Commission presented a “Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU”, briefly stated a draft restructuring directive.4

The Act on the confirmation of a private restructuring plan in order to prevent bankruptcy, sometimes referred to as the “ACPRP”, envisages to introduce pre-insolvency scheme proceedings in the Netherlands, like the U.K. scheme of arrangement or the U.S. Chapter 11 plan of reorganization. The reason for the ACPRP is that the Netherlands currently lacks an effective restructuring procedure, especially out of bankruptcy. The main reason for the ineffectiveness is that the available suspension of payments proceedings (surseance van betaling) bind neither shareholders nor secured or preferential creditors. It can only bind ordinary unsecured creditors, making it ineffective for many cases, also because of the applicable voting thresholds (i.e. majorities are required).

Pursuant to a financial restructuring, the capital structure of the company will be amended. In order to implement a financial restructuring, it is necessary to assess which shareholders and/or creditors have a financial interest in the company, i.e. which financing providers are “in” or “out of the money”. Because the company will not be sold in a market transaction to an external party, no market pricing takes place. In order to conclude which shareholders and/or creditors have a financial interest, a valuation is thus required (provided that the capital providers cannot in majority agree upon the content of the scheme). What kind of valuation has to be carried out and how a judge should determine whether a stakeholder is in or out of the money, are questions which are discussed in this book. That valuation can lead to lengthy discussions has been demonstrated in the proceedings in the U.S. Chapter 11 reorganization cases. One of the reasons for those “valuation fights” is that valuation is not a science, which is illustrated by the following consideration of the United States Bankruptcy Court: