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Annulment of an agreement to transfer shares or other assets: who bears the risk of a considerable decrease in value?

March 2017

In a recent judgment, the Court of Cassation specified the consequences of the retroactive annulment of a share purchase agreement: in principle, the seller bears the consequences of any decrease or increase in value since the sale of the shares.

In 2003, two sisters separately sold their shares in two companies to the same purchaser. Both companies managed share portfolios and had been set up by the sisters' father in the framework of estate planning. Each of the sisters had acquired the shares of one of the companies. After the sale of the shares by the sisters, both sale and purchase agreements were annulled by the court because of a joint and several guarantee contracted by the two companies for the payment of the purchase price, in violation of the then applicable rules on financial assistance.

In a judgment by the Court of Cassation dated 13 January 2017, the question was raised as to how the retroactive annulment of the two purchase agreements should have been dealt with. More specifically, the question arose as to how the restitution of the shares should be effected. In one case, restitution in kind of the shares was still possible, but the value of the shares had fallen considerably due to the financial crisis of 2008. In the other case, restitution in kind was no longer possible, because the company whose shares had been transferred had been liquidated in the meantime. The Court of Cassation ruled on the two cases:

  • If, at the time of the judicial annulment of the agreement, the shares are still in the possession of the purchaser, the shares must be restituted in kind to the seller, regardless of any decrease or increase in the value of the shares. In other words, since the shares in the case at hand were still in the possession of the purchaser, the judges in appeal could not order compensation by equivalent, even if the property rights attached to those shares had considerably decreased in value since the sale of the shares.
  • If restitution in kind of the shares is not possible, the restitution takes place by equivalent. The obligation to pay the value of the shares is a value debt and the compensation to be paid is equal to the value which the shares, in the condition they were received, would have had at the time that the court determines the compensation.

The appeal judges could therefore not determine the value of the shares on the basis of the annulled agreement (the purchase price), without taking into account the change in value of the shares at the time of the judicial determination of the compensation and without verifying whether the change in value was due to the restitution debtor (the purchaser of the shares in this case).

From the judgment of the Court of Cassation, it follows that a decrease (or increase) in the value of the shares since the conclusion of the annulled share purchase agreement must be borne by the seller, unless the difference in value is due to the action or inaction of the purchaser. In other words, in the case of the annulment of a sale of shares which have fallen in value, the seller gets the shares back in kind with the reduced value. However, if a restitution in kind is not possible, the seller will receive compensation equal to the reduced value of the shares (set at the time of the judicial determination of the compensation). The opposite is true in the case of a value increase. In such a case, in principle, the seller benefits from the increase in value (both in the case of restitution in kind and in the case of restitution by equivalent).

This case law of the Court of Cassation is not only important in cases of the annulment of a transfer of shares, but may also be relevant in other situations, such as the annulment of a real estate transaction where the value of the real estate has decreased or increased.


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