6.4.2.5 Valuation clause

In principle, shareholders are free to arrange all aspects with respect to the valuation of shares. Within the scope provided by the law, shareholders have the freedom to design the articles of association of their company and to conclude a shareholders' agreement. As a starting point, shareholders, regardless whether they are majority shareholder, joint-venture partner or minority shareholder, do not have to be protected.1 Becoming a (minority) shareholder is often a deliberate choice. Nonetheless, a deviation of the aforementioned starting point is justified if oppression crises.

From this perspective, it is interesting to reiterate the view of the Court of Appeal of The Hague with respect to valuation clauses in a shareholders' agreement under former law. Before citing this court, I note that it can be assumed that this view on valuation clauses included in a shareholders' agreement has remained in full force under current law. In the Ramsley case, the Court of The Hague held:

It is permitted that valuation clauses may have a negative impact on the price of the shares, or even have a punitive nature.3 For instance, it is possible to include a clause in the articles of association that stipulates that if shares are transferred within five years after incorporation, the shares are valued pro rata parte to the book value of the company even if the hidden reserves and goodwill have substantially increased.

Nonetheless, statute sets out some boundaries. First of all, as follows from Art. 2:340 paragraph 3 DCC and Art. 2:337 paragraph 1 DCC, the court may disregard valuation clauses, if application thereof leads to a manifestly unreasonable (kennelijk onredelijke) price of the shares.4 I return to the example that the shares are valued pro rata parte to the book value of the company. If the discrepancy between the book value and the actual value of the company is considerable, the majority shareholder has an incentive to oppress the minority shareholder. If the oppression leads to the exit of the minority shareholder, the majority shareholder may buy the shares at undervalue. If the court does not interfere with the valuation, the majority shareholder receives a bonus for having oppressed the minority shareholder. In my view, under these circumstances the valuation clause, that causes a significant imbalance between the actual value and the contractual price, can be manifestly unreasonable.5

Consequently, a valuation clause that is acceptable under normal circumstances can be unreasonable if applied under the oppressive circumstances revealed in the exit proceedings. In the legislative history, the Minister of Justice held:

It is relevant to note that the court must be reticent to disregard valuation clauses, as these should not be just unreasonable but manifestly unreasonable. The notion of manifestly unreasonable can be regarded as a rule stemming from the general provision of Art. 6:2 paragraph 2 DCC. This provision embodies the limiting effects of the principles of reasonableness and fürness. Pursuant to Art. 6:2 DCC, the court may refuse enforcement of rules that in principle are binding between parties if application thereof under the given circumstances would contravene the principles of reasonableness and fürness.

In 1984, Slagter already mentioned clauses that in my opinion may lead to a manifestly unreasonable valuation.8 He used the example of a majority shareholder that freezes out the minority shareholders by voting in favour of resolutions for reservation of profits for many years. As profits are withheld in the company, the value of the company may have increased substantially. It is conceivable that in this situation, a valuation clause included in the articles of association stipulating that shares can only be transferred for a multiplier of the average distributed profits over the last ten years can be manifestly unreasonable.

Slagter also mentioned the example of valuation clauses using the book value of the company as a basis, or valuation clauses that disregard intangible assets of the company, such as goodwill. Under the circumstances of oppression, these valuation clauses may lead to a manifestly unreasonable valuation as well.9 In this context, Slagter appropriately points to the fact that unreasonable valuation clauses have as a downside of forming an incentive for the majority shareholder to oppress the minority shareholder in order to be able to purchase the shares at a floor price.

Secondly, except from being safeguarded against manifestly unreasonable valuation clauses, a shareholder also cannot be bound by valuation clauses to which he has not consented.10 This speaks for itself with respect to agreements, but this rule also applies if the clause is included in the articles of association. Art. 2:195 paragraph 4 DCC clarifies the latter rule. In consequence, if the articles of association are amended by way of a resolution in the general meeting, the minority shareholder who voted against that resolution is not bound. Holding such clause as binding without consent of the shareholder can be seen as a (partial) deprivation of a property right. This would contravene the principle of protection of property rights, as embodied in Art. 1 First Protocol ECHR. @@11

A rule comparable to Art. 2:195 paragraph 4 DCC is found in Art. 2:192 paragraph 3 DCC. The latter provision sees at valuation clauses applicable in the context of an obligatory offer of shares in situations clearly defined in the articles of association.

In conclusion, I assume that shareholders may agree on certain aspects of the valuation before the experts start preparing the valuation report. To give an example of a valuation arrangement, in the Van Huizen case, shareholders agreed on a certain valuation date with respect to the shares.12 When preparing the valuation report, the experts appointed in the exit proceedings have to take such valuation arrangements between the shareholders into regard.13