One of the ways to take over a company is by buying the shares in the relevant limited liability company (in Dutch: BV). The question is: if it turns out afterwards that the buying party made a misrepresentation, can the purchase of the shares be reversed? This was recently decided by the Dutch Supreme Court. Read more here:

What were the facts of the case?

The Dutch Supreme Court ruled on the following situation. Already back in 2012, Rookie BV bought all the shares in Promis Security Systems BV (PSS), from ABC Hekwerk Participatie BV for a purchase price of €1 for the shares and assumption of a current account debt of €482,933 from PSS to ABC Hekwerk. According to the acquisition balance sheet provided by ABC to Rookie, profit was €94,284, gross profit margin was 54.1% and work in progress was €156,330. Moreover, in the SPA (share purchase agreement), ABC had given an assurance that the acquisition balance sheet gave a true and fair view of the size and composition of the assets and results.

Unfortunately, it turned out afterwards that PSS had not made a profit, but had instead made a loss of €109,236. PSS subsequently went bankrupt. Rookie annulled the purchase agreement on the grounds of error (in Dutch: ‘dwaling’, on the basis of Article 6:228 of the Dutch Civil Code). After all, the acquisition balance sheet depicted the situation too optimistically and Rookie therefore bought the shares on the basis of incorrect information. Had Rookie known this, it would not have bought the shares.

Such an annulment for mistake has retroactive effect, and the parties must proceed to undo their obligations. So in this case, Rookie would have to return the shares, and ABC would have to refund the purchase price to Rookie. But as said, the already went bankrupt.

What was the opinion of the subdistrict court?

At first instance, the court ruled that the claim alleging error did not succeed. However, ABC must pay damages of €107,313 for breach of the balance sheet guarantee. A different judgment follows on appeal: Rookie's claim of error does succeed. However, according to the court of appeal, the share transfer can hardly be undone, also in view of the bankruptcy of PSS. The court of appeal also ruled that Rookie would be unfairly advantaged if ABC had to repay the entire purchase price, and therefore reduced the purchase price by 25%.

The Supreme Court held a different view: the court of appeal should have explained better why the share transfer could not be reversed. After all, the shares could simply be returned. Also, the court of appeal did not (recognisably) establish that there would actually be an unfair advantage for Rookie in the event of such undoing. The court had only looked at ABC's disadvantage. Ultimately, the Supreme Court referred the case to another court of appeal, which has to reassess the case. Thus, after more than 10 years, there is still no end to this issue.

You can read the full judgment here.

Conclusion

The moral of the story? As a potential buyer or seller in a share transaction, make sure you involve an experienced corporate law specialist, to guide the due diligence investigation and draft the necessary documents, including the Share Purchase Agreement (SPA). In that agreement, nullification for error can also be excluded. This way, you avoid situations such as discussed above.

The experienced corporate lawyers and/or the experienced business mediator of SPEE advocaten & mediation will be happy to advise and assist you.