A recent ruling by the Gelderland District Court shows how an error in the financial administration can have far-reaching consequences. In this case, a share purchase agreement was declared void because the transaction conflicted with the company’s articles of association. The cause? An incorrect assessment of the company’s equity by the accountant. What exactly happened, and what can you, as a business owner, learn from this?
Background of the dispute
The case revolved around two business partners who together set up a company in 2006 to exploit the titles of various local newspapers. When one of them wanted to withdraw after more than ten years, an oral agreement was reached for his depositary receipts in the company’s capital to be repurchased by the company for €300,000. Payments were to be made in five annual instalments of €60,000.
In April 2019, the payments stalled, leaving €245,000 outstanding. The selling partner then started proceedings to enforce payment. The buyer, however, disputed the validity of the agreement and argued that the repurchase of the depositary receipts conflicted with the company’s articles of association. As a result of the transaction, the equity would become negative, meaning the agreement had to be declared void.
What was at issue?
Investigation revealed that the accountant had made a crucial error in assessing the company’s financial position. At the end of 2017 it was assumed that the equity was around €300,000, but a later check by a new accountant showed that the actual equity was considerably lower, and possibly even negative.
The original accountant had carried out only a limited balance sheet test and distribution test, and had thereby incorrectly represented the company’s actual financial situation. Moreover, it emerged during the court proceedings that the company’s records had not been carefully maintained. This affected not only the determination of the purchase price, but also the lawfulness of the transaction.
The court’s ruling
Based on article 2:207a of the Dutch Civil Code, the court ruled that the company’s repurchase of the depositary receipts was void, because this agreement conflicted with the articles of association. The articles of association stated that a company may not repurchase its own shares if this would cause the equity to fall below a certain threshold. Because that was the case here, the court concluded that the depositary receipts had never been validly transferred and that the seller was still the holder of the depositary receipts. As a result, the seller had to repay the €55,000 already received to the company, and also had to pay legal costs of around €15,000.
Lesson for business owners
This ruling shows how important it is, as a business owner, to be alert to your company’s financial position before entering into important transactions, and to ensure that these transactions are properly aligned with the articles of association and the statutory requirements. It is important to always maintain accurate financial records in this regard. An incorrect assessment or an error in the bookkeeping can easily have major legal and financial consequences.
To prevent this kind of situation, it is wise to:
- Have a thorough financial analysis carried out before entering into an important transaction.
- Engage a competent accountant who accurately assesses your company’s financial situation.
- Carefully check the articles of association and statutory requirements when drafting an agreement.
- Engage a skilled lawyer to draft your purchase agreement for you.
Do you have questions, or are you unsure about a business transaction? We are here to provide legal advice and to make sure your agreements are watertight. Feel free to contact the lawyers at The Legal Company via info@thelegalcompany.nl or call 020 345 0152.