Share valuation in a forced exit: how is the price determined?

In this previous article, you could read about how a shareholder can be obliged to take over the shares of a fellow shareholder through the legal dispute resolution process, at a price determined by the court. But how does that price come about? What factors weigh into the valuation? Attorney Marlies Janssens clearly explains the basic rules.

A look back at the case study from our last newsletter to illustrate this:

A and B, a married couple, establish a company together and both become shareholders. Ten years later, their marriage ends, and professional cooperation also proves to be no longer feasible. Neither spouse strikes a clear fault.

In this situation, the court may not, in principle, take into account in determining the price:

• The circumstances that led to the claim: in this case, the marital problems between A and B.
• The behavior of the shareholders as a result: such as the fact that A and B, due to their private conflict, hid essential information from each other within the company and stopped making joint decisions.

Indeed, the circumstances that led to a shareholder's exclusion or exit claim can affect the share value, both positively and negatively. As a result, the current value may be higher or lower than before the conflict. In order to arrive at a correct price determination, the court must adjust the current value to the level before the disagreement.

According to settled Supreme Court case law, such adjustments are only permissible if the court finds that the circumstances or conduct of the parties in the specific case actually affected the value of the shares. Mere reference to a serious and lasting disagreement is not sufficient: the impact on the share value must be demonstrated concretely. In all other cases, the basic rules remain strictly applicable.

Case study Court of Appeal Ghent, Jan. 8, 2024: how a shareholder dispute affects valuation

A recent decision of the Ghent Court of Appeal (Jan. 8, 2024) illustrates how judges deal with the valuation of shares in conflict situations.

We return to the example of A and B. Both shareholders are also directors of a joint banking and insurance company (hereinafter: the joint company). In addition, A has been a shareholder and director of his own competing company for many years. Following their de facto separation and subsequent divorce, A claims the estoppel of B.

However, B claims that between 2012 and 2014, A transferred clients and associated portfolios from the joint venture to her own company.

The first instance judge deviates from the basic rules in two respects:

1. The trial date is advanced to the date of summons.

2. The expert is instructed to include in the share valuation any irregularities in management or accounting after the de facto separation.

The expert investigation confirms that A effectively transferred policies and bank products to her own company, causing the joint company to lose about €35,000 in commissions. The court therefore decides that these losses must be factored into the share price and imposes an adjusted (higher) takeover price on A.

A disagrees and appeals, arguing that she did not disadvantage the joint company and that, on the contrary, the share value should be reduced by €35,000.

The court of appeals affirmed the correction applied by the first judge, basing its decision on the following considerations:

• Although the competing company had existed for a long time, the combination of directorships in both companies became problematic at least from the onset of the marital problems. It is clear from the facts that A violated her non-compete obligation inherent in her directorship.
• A no longer had a personal interest in making efforts to retain clientele of the joint company. Her actions lowered the value of the joint venture's shares, which played to her advantage as she sought to acquire them from B. At the same time, the share value of her own competing company increased.
• In addition, A had an asset conflict of interest as she was a salaried director in the competing company.

On the basis of these findings, the court ruled that in this exceptional case the reduction in value due to the shed commissions did have to be taken into account. It therefore concluded that A was obliged to pay B an adjusted, higher share price.

Do you need legal assistance with shareholder exclusion or exit proceedings? Or would you like advice on possible alternatives, such as the joint sale of shares to a third party or the dissolution of the company? Do you have questions about the valuation of your shares in a conflict situation and its legal foundation?

NOMA has years of expertise in corporate dispute resolution. Our attorneys will guide you with strategic insight and in-depth legal knowledge so that you can make informed decisions. Contact us.