On 31 January 2019, Sebastiaan van den Berg successfully defended his PhD thesis at the Radboud University in Nijmegen (the Netherlands). Under supervision of prof. mr. S.C.J.J. Kortmann and prof. dr. W.G.M. Holterman, Sebastiaan studied aspects of business valuation in (i) corporate law proceedings and (ii) financial restructurings or reorganizations of companies. Having a background in both law and economics, his book Valuation in Dutch Corporate Law and Dutch Bankruptcy Law”, is based on interdisciplinary research. With this research and its conceptual approach to valuation (instead of a mere technical overview of valuation methodologies), the book offers a useful guide on the key valuation concepts and principles that are relevant in legal settings.
Valuation in Dutch Corporate Law
In respect of “corporate law proceedings”, defined as (a) the dispute resolution proceedings (geschillenregeling), also referred to as the ‘forced exit proceedings’, (b) squeeze-out proceedings (uitkoopprocedure) and (c) the procedures in respect of transfer restrictions (blokkeringsregeling), the respective shareholders often cannot agree upon the exit price of the shares and a pricing mechanism becomes applicable. This mechanism generally provides for an independent valuator to be appointed to value the shares.
Dutch jurisprudence shows that the independent valuator, when appointed, faces various difficult questions, either in the preparation phase of the valuation analysis (i.e. the valuation based on fair (market) value, intrinsic value, book value etc.)) or, subsequently, in the phase of actually valuing the company. For example, when applying the Discounted Cash Flow method, parties can have a different view on the Weighted Average Cost of Capital (or its components such as the Market Risk Premium), the formula that should be used to determine the terminal value, what the projected free cash flows should be, how one should deal with the impact of financial distress etc. The aforementioned questions are discussed in great detail in, mainly, U.S. literature, but have been considered to a much lesser extent in Dutch case law and legal literature.
Once an independent valuator is appointed, it will be solely up to him how to assess the value and which assumptions to make. Currently, different valuators may have a different view on the valuation approach – and not only on the valuation methodology. If one were to ask a corporate finance advisor, an accountant or an investment banker to value a company, they may very well each have a very different view on the fundamental preliminary questions of valuation, before they have even started their analysis and calculations.
Because valuation is subjective to a large degree (the saying goes that “valuation is an art, not a science”), it is of the essence to be transparent about what kind of value is being determined. For this purpose, the book presents a practical valuation framework that can be used to identify the various steps that need to be taken to arrive at the appropriate type of value that is to be determined. The valuation framework aims to provide all stakeholders involved with a more transparent approach to value an enterprise (Enterprise Value) and/or the shares in a company (Equity Value) in the context of corporate law proceedings. The legal valuation framework consists of the following steps:
- What is the legal context; for which purpose do I require a valuation and what kind of value do I need to determine in this context?
- Choosing the standard or premise of value, being either the value in exchange or the value in use;
- Choosing the valuation concept, being either the concept based on financial economics or on financial accounting;
- Choosing additional valuation assumptions; and
- Choosing the appropriate valuation methodology.
Using and further optimizing such a framework in practice will hopefully contribute to less miscommunication between corporate finance practitioners and attorneys and other legal advisers and thus ultimately to a valuation approach that offers less scope for dispute.
Valuation in Dutch Bankruptcy Law
With respect to financial restructurings, the book focusses on the Dutch Bankruptcy Code and particularly the contemplated revision thereof. Different blogs on this website already paid attention to the Dutch (see here, here and here) and European developments (see here) in respect of preventive restructuring frameworks.
In the Netherlands, the Act on the confirmation of a private restructuring plan in order to prevent bankruptcy seeks to introduce pre-insolvency scheme proceedings. In October 2018, the latest (confidential) draft of this Act was sent to the Council of State (Raad van State). It is expected that the Bill will be submitted to Parliament this spring.
Looking at the European developments, on 19 December 2018, a political agreement was reached by the European Parliament and the Council on a set of European rules on business insolvency. The text of the draft EU Directive must now formally be adopted by the European Parliament and the Council of the EU (see here).
In light of the above mentioned developments, the book provides for a conceptual analysis of how to assess the financial impact of a reorganization by means of a pre-insolvency scheme. In this respect, two valuation principles are analysed: the “liquidation value” and the “reorganization value”.
The author notes that liquidation value has an ambiguous meaning. This is illustrated on the basis of two legal cases, namely a judgment of the Dutch Supreme Court dated 2 June 2017 (ECLI:NL:HR:2017:982; DA Retailgroep/DA Retailgroep c.s.) and a judgment of the European Court of Justice, dated 22 June 2017 (ECLI:EU:C:2017:489; FNV/Smallsteps).
Also, the relatively new term “reorganization value” is explained. Like in U.S. jurisprudence and literature, this value is considered to be the total value of the reorganized debtor that is distributable to the pre-restructuring capital providers, i.e. the claimants that exist immediately before the plan becomes effective. Compared to the enterprise value (based on the value of the operations of the enterprise), it is a different and more comprehensive concept. For example, one has to ascertain the amount of excess cash and/or minority shareholding interests, which both contribute to the reorganization value (e.g. Re Mirant Corp., 334 B.R. 800 (Bankr. N.D. Tex. 2005) or Re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011)).
Against this background, the envisaged Dutch legislation, the U.K. Scheme of Arrangement and the U.S. Chapter 11 are subsequently analysed from a valuation perspective.
Other topics: redemption option value and credit bidding
The book further examines and discusses the concept of redemption option value, as proposed by the American Bankruptcy Institute in its 2014 report on the contemplated revision of the U.S. Bankruptcy Code: “Final Report and Recommendations on the Reform of Chapter 11”. Finally, loan-to-own strategies as often used by distressed investors, are investigated from a Dutch law perspective.
The book (in Dutch) can be ordered here.