Claims buyer in case of error in purchase of shares

05 August 2024

Blogs Marc Janssen Corporate M&A

Destruction in the event of error

It follows from the law (Article 6:230 of the Civil Code) that the buyer's authority to set aside the contract on account of error (breach of the seller's duty to speak or the seller's making a false statement) lapses if the seller proposes, in a timely manner, an amendment of the consequences of the contract which "adequately eliminates the disadvantage" suffered by the buyer if the contract to sell the shares is maintained. The court may, at the request of one of the parties, instead of declaring nullification, modify the effects of the agreement in order to eliminate this disadvantage (so-called afterdeletion). This can play an important role in takeover contracts, as they usually contractually exclude the possibility of annulment on the grounds of mistake in the context of the idea that the parties consider the remedy (potentially) worse than the disease. After transfer of shares where the buyer has continued the business for some time at his expense and risk, it is particularly difficult to undo them after annulment or dissolution.

Exclusion of appeal to annulment

It is assumed that an appeal to exclusion of mistake in takeover contracts is legally valid, but an appeal to exclusion of deceit is void. It is striking that in quite a few takeover contracts annulment (in particular on account of mistake) is excluded, but often not modification of the agreement in the aforementioned sense. A recent judgment of the Supreme Court of February 9, 2024, illustrates the importance of the exclusion of a claim for nullification on the grounds of mistake. The buyer sought annulment of the share purchase agreement for error. This was granted. If, as a result of the annulment of a share purchase agreement, title to the transfer ceases to exist, those shares have not left the seller's estate. In such a case, the court may, upon request, on the basis of the law (Article 3:53 paragraph 2 of the Civil Code) deny the nullification, in whole or in part, its effect if the consequences of the share purchase agreement that have already occurred can hardly be undone. According to the Supreme Court, the mere circumstance that the shares have been transferred to the buyer does not entail the aforementioned objectionability.

Determining the moment and extent of the disadvantage

Opinions differ as to how and at what moment the disadvantage in the event of a requested post-dilution waiver must be determined and as to the question when the disadvantage would subsequently be "sufficiently" eliminated. A frequently mentioned method to determine (the extent of) the loss due to error is to make a comparison between the contract actually concluded by the parties and the 'hypothetical contract'; the contract that the parties would have concluded if the facts were correct. This seems correct to me, because error involves a will, which means that the 'disadvantage' consists of the difference between the contract actually concluded and the contract that would have been concluded under a correct representation of the facts, in concrete terms: a lower purchase price. Focused on the erring buyer of shares, it is then a matter of putting her in the situation she would have been in if she had not erred. If it is plausible that she would have been able to negotiate a lower purchase price in that case, the "disadvantage" is the difference between the agreed and the (hypothetical) purchase price. This is not damages, but since in this case the 'disadvantage' is situated in, in short, an excessive purchase price of the shares, the same result can actually be achieved.

Other in these important Supreme Court rulings for takeover practice

A parallel can be drawn here with the Supreme Court's 2018 WEA ruling. That case involved the acquisition of an accounting firm and the buyer's contention was that the purchase price and management fee had been determined incorrectly as a result of malpractice by the seller. The court of appeal had ruled that the seller had imputably failed to perform the takeover agreement vis-à-vis WEA with which WEA, as aggrieved party, was in principle entitled to full compensation for the damages it had suffered as a result of that failure. The court of appeal had deemed the existence of the damage, consisting of overpayment of the takeover price and management fee, plausible, but ultimately ruled that the substantiation of the damage put forward by WEA could not be followed and that in the absence of other evidence, it could not be determined what the exact damage suffered by WEA was. The court subsequently dismissed the claim (in its entirety). The Supreme Court set aside the judgment of the court of appeal, because in the aforementioned state of affairs, since it apparently considered that the extent of the damage could not be accurately determined, it should have estimated the extent of the damage, after instruction or otherwise, or it should have referred the parties to the statement of damage, even without this having been expressly requested. Also relevant to takeover practice in this regard is the Supreme Court's judgment concerning the municipality of Vianen. In the damages state proceedings at issue in this judgment, the damage suffered by a company as a result of not being able to expand its business in 1976 had to be determined. In cassation, the issue in particular was whether a reference date in the past could be used to determine the damages. The Supreme Court put first and foremost that the court estimates damages in the manner most consistent with their nature. According to established case law, when estimating damages, the court has the freedom to capitalize the damages suffered and to be suffered in a lump sum to a reference date that is well before its ruling. Even with such a method of estimation, the basic principle remains that as much as is reasonably possible, the damages actually suffered and to be suffered are estimated. According to the Supreme Court, this principle does not allow the court to take into account only the expectations existing on the reference date about what the future might bring. He is therefore free to take into account facts and developments that actually occurred afterwards. If you have any questions as a result of this blog or have other corporate law questions, please feel free to contact Marc Janssen or other members of the Corporate Law section.