6.7.4 Damages and reflective loss

In the former exit proceedings, a shareholder was not entitled to claim damages to his shares, for instance by way of requesting an increase of the value of the shares by the court. Although the legislator acknowledged that a claimant could be faced with a decrease in the value of the shares due to the conflict and caused by the defendant, he was of the opinion that such claims must not be rewarded onder the exit proceedings. The legislator found it most appropriate that the shareholder starts additional proceedings on the basis of tort (onrechtmatige daad) in order to claim his damages.1 It was held:

An important shift in the aforementioned view of the legislator was introduced by current BV law. In line with case law outlined below, the Minister was now of the opinion that proceedings for damages seldom lead to compensation for a decrease in value of the shares.3 Because of that, and taking into regard that the decrease in value is often caused by the defendant or at least a person which the defendant is able to influence, the Minister thought that it would be für to allow compensation.

The decrease in value of shares usually concerns derivative or reflective loss (afgeleide schade). Further to the defmition of Kroeze, reflective loss concerns the decrease of the value of shares if and for as far as this decrease is a consequence of loss caused to the company.4 In the definition of Kroeze, the amount of reflective loss runs parallel with the loss of the company according to factual and objective standards.

In case law, it has been established that in principle it is up to the company itself to claim its own damages and that shareholders are not in the position to claim reflective loss. In its landmark judgment Poot/ABP, the Dutch Supreme Court clarified the principles to be applied when a third party causes damages to the company.5 These principles determine that the NV and BV each have separate legal personality implying own rights and obligations. The NV and BV each possess a separate estate (vermogen). In the situation of a breach of contract (wanprestatie) or a tort (onrechtmatige daad) caused by a third party to a company, in principle only the company itself and not its shareholders are entitled to claim damages. If the company succeeds in its claim for damages, the derivative loss consequently vanishes. It can be assumed that comparable principles have to be used if an insider causes damages to the company, such as a managing director.6

Nonetheless, as for instance appears from the case of Chipshol, it seems likely that there is a narrow scope for an exception to the mie that shareholders cannot claim damages in the situation that a third party or an insider caused breach of contract or tort towards the company.7This could be the case if also a specific standard of care (zorgvuldigheidsnorm) in relation to a shareholder is breached. An example of a breach of a specific standard of care in relation to a shareholder could be the fact that a managing director acts in contravention of provisions in the articles of association which aim to protect that shareholder.8With respect to this breach of a specific standard of care, relevant factors to be taken into account can be whether a final decrease in the value of the shares is present and whether a decrease of the value is deliberately intended.9

In the case of Poot/ABP, the Supreme Court puts forward that Dutch law offers shareholders sufficient possibilities to compel the management board to initiate claims for damages. In this respect, the Supreme Court does not differentiate between companies with a sole shareholder and companies with several shareholders. The Supreme Court does not clarify which possibilities it aims at. In his comments to this case, Maeijer notes that one could think of interaal pressure, such as dismissal of a managing director or the initiation of inquiry proceedings.10

Even so, it is questionable whether this interaal pressure can be initiated by a minority shareholder. He will not be able to dismiss a managing director, whereas such a resolution requires at least the majority of the votes in the general meeting. Moreover, the minority shareholder cannot start inquiry proceedings if he does not meet the threshold of 10% of the issued capital or holds shares for at least a nominal value of €225,000. This minority shareholder does not have many possibilities if the majority shareholder is not willing to press the company to recover its losses.11

In order to enable compensation for what concerns derivative loss in essence, the legislator introduced Art. 2:343 paragraph 4 DCC. In short, this article hands discretion to the court in respect of increasing the price of shares in order to compensate reflective loss. Art. 2:343 paragraph 4 DCC stipulates:

As appears from the legislative history, rewarding compensation of reflective loss by way of increasing the price of the shares can be reasonable onder the circumstances in which the exit proceedings are applied:

The justification of the discretion of the court to impose an increase of the price of the shares was already recommended by Leijten and, some years later, by Kroeze in his dissertation.14 Kroeze held that he does not see any practical objections against rewarding the exiting shareholder with an increase of the price of the shares at the expense of the defendant-co-shareholder. This can be explained from three perspectives.

To start with, attention must be paid to the perspective of the company. In principle, the company will always be able to start proceedings in order to claim its damages. The fact that part of the compensation for damages of the company has already been paid to a former shareholder does not affect the right of the company to claim its own damages. Consequently, the position of the company is not affected.

Moreover, in the situation that the company successfully claims its damages after the exit, the (former) claimant-shareholder will not be advantaged a second time, so there is no risk of double reward. This shareholder no longer has shares which will increase in value, because the company has successfully claimed its damages.

Thirdly, it must be noted that the defendant-co-shareholder runs the risk to be obliged to provide compensation two times: the first time to the claimantshareholder and the second time to the company. Nonetheless, if the company succeeds in its claim against the defendant-co-shareholder, the shares of the defendant-co-shareholder will increase in value accordingly, at least in proportion to the shares he holds. The defendant-co-shareholder receives (reflective) compensation when the company succeeds in his claim.

It is possible that after the exit proceedings and before the company has claimed its damages, the defendant-co-shareholder has transferred his shares or part of his shares. In this situation, the risk of a double obligation to provide compensation is present. In my view, this is not a reason to deny the claim of the company. The defendant-co-shareholder could have compensated the company when he was stilt a shareholder. The defendant-co-shareholder was in a position to prevent this situation. It should not be for the account of the company if the defendant-co-shareholder did not solve the problem in advance.

Consequently, from the perspective of the company, the claimant-shareholder and the defendant-shareholder there are no principal objections towards the für increase of the price. Nonetheless, some critical notes can be made. Firstly, one can doubt whether a defendant-co-shareholder has enough power to compel the company to initiate proceedings for damages. At least this can be doubted when this concerns a minority shareholder who is not in the position to appoint one or more managing director(s) who favour starting proceedings to recover damages and the minority shareholder who does not qualify for application of the inquiry proceedings.15 This minority shareholder can be in an uncomfortable position, whereas the legislator explicitly deemed possible that the conduct causing the reflective loss not necessarily must be caused by that minority shareholder. The Minister puts forward:

It is highly recommended that a court takes into account whether a shareholder has possibilities to compel the company to recover it losses when increasing the value of the shares at his expense this shareholders. Art. 2:343 paragraph 4 DCC leaves scope for this consideration. This provision stipulates that the court can award this increase and does not have to award this increase, so it is in the discretion of the court to do what is reasonable and für in the circumstances of the case.

In addition, one can doubt whether the company will be able to succeed in proceedings for damages, as future claims against a defendant-co-shareholder may turn out to be unrecoverable. In English law, this particular issue has been raised. As has been put forward in § 3.3.12.3, there can be a risk that the claimant-shareholder is paid compensation for reflective loss, whereas the company will receive nothing. This is problematic in the situation that the person by whom the damages of the company can be claimed becomes insolvent and the company becomes insolvent as well.17 In this unusual situation, the minority shareholder may have been granted compensation, but creditors may be lelt empty-handed. In my view, the answer to the question whether a claim of the company is recoverable can but does not always have to be a relevant factor that must be taken into account by the court. The fact that a claim is no longer recoverable can be cause by the defendant-co-shareholder or even be the company, for instance by waiver. I do not think that the aforementioned situation is a very usual situation and a justification to abolish the possibility to fürly increase the price of the shares.

Croiset van Uchelen critized Art. 2:343 paragraph 4 DCC inter alia for the reason that the claimant must make plausible and not must prove that the conduct has led to a decrease in the value of the shares.18 I do not agree with Croiset van Uchelen, because usually for an oppressed minority shareholder it will be difficult to obtain financial information about the company, so the requirement to prove may set the standard too high. Additionally, I put forward that the defendant always has the right to question the plausibility of the causal connection between the conduct and the decrease in the value of the shares. He may make plausible or prove that it is not plausible that the conduct has led to a decrease in the value of the shares.

Another question that can be put is how the für increase relates to the right of first refusal. If exit proceedings are started and the articles of association contain a right of first refusal, this transfer restriction clause must be applied.19 In this stage of the proceedings, the price is already determined by the court and, possibly, fürly increased. For this price, the shares are offered to the defendant-co-shareholder and other co-shareholders, except for the claimantshareholder. For the co-shareholders it may not be advantageous to acquire the shares against the price determined. These co-shareholders may not be in a position to compel the company to claim its damages. The only way to prevent that the defendant-co-shareholder increases his stake in proportion to the stakes of the co-shareholders is to accept the shares offered against the price determined. If they do not accept the shares, in principle their position is not altered accept for the fact that the defendant-co-shareholder has increased his stake. In my view, these co-shareholders have either to accept their vulnerable position or to start exit proceedings as well.