Huygens Quantitative Tax Consulting

Dutch Court of Appeal determines value of shares held by private equity portfolio company manager in ‘good justice’

14 July 2023 - The ‘s-Hertogenbosch Court of Appeal published a decision on the valuation of shares held by a manager of a private equity portfolio company as part of a management incentive plan (MIP).


On 11 July 2023, the ‘s-Hertogenbosch Court of Appeal (the ‘Court’) published its decision in what is the, so far, latest verdict in a lengthy trial. The case is about the € 24.5 million acquisition of a Dutch childcare company, Catalpa, by the Dutch private equity firm Bencis in August 2006. The acquisition was funded with a € 13.2 million bank loan and € 11.3 million equity. The equity was divided into (10,000 x € 10 nominal value and share premium =) € 100k ordinary shares (‘Ords’) and (112,210 x € 100 nominal value and share premium =) € 11.2 million cumulative preference shares (‘Cumprefs’), bearing an 8% coupon.

The taxpayer (the ‘Taxpayer’), a private individual who was part of the Bencis acquisition team for Catalpa, was appointed as CFO of Catalpa as of 1 January 2007. As part of his employment at Catalpa, he acquired 450 Ords and 1,210 Cumprefs for € 125.5k (i.e., at historical cost). The Dutch tax authorities (the ‘DTA’) argued that the fair market value of the Ords was much higher and, as a result, the CFO received taxable wage.

The DTA appealed the district court’s ruling that the DTA did not demonstrate that the value of the Ords was more than € 10 per share at the Arnhem-Leeuwarden court of appeal. This court of appeal held that (i) the burden of proof cannot be reversed and increased, because the Taxpayer took a reporting position in its tax return, and (ii) the value of the Ords was at least € 260 per share, meaning that the Taxpayer did in fact receive taxable wage of (€ 250 x 450 =) € 112,500.

After appeal against this court of appeal’s decision, the Dutch Supreme Court held that the court of appeal erred in ruling that the Taxpayer had taken a reporting position: as a valuation question is factual, and not of legal nature, the Taxpayer’s position could never be a reporting position. The case was referred back to the Court, to test whether (i) the burden of proof was reversed and increased (taking into account that the Taxpayer could not be considered to have taken a reporting position) and (ii) to determine the amount of taxable wage, if any, received by the Taxpayer.

The Court’s ruling

The Court ruled that the burden of proof can be reversed and increased, as

  • the Taxpayer had failed to file the required tax return because it was established that the Ords were worth minimum € 250, and as a result of that, the tax amount reported in the tax return deviates materially from the actual tax due; and
  • the Taxpayer should have been aware of this, because he was part of Bencis’ acquisition team for Catalpa and because of his financial knowledge as a CFO.

This means that the Taxpayer should convincingly prove that the DTA’s assessment is wrong. Nevertheless, the DTA must still act reasonably in determining the Ords’ value.

The Court held that the DTA’s positions were not reasonable, as their valuation was based on a transaction that took place in July 2007, while significant events (e.g., several acquisitions) affecting the Ords’ value took place in the period between the date on which the Taxpayer became a shareholder and July 2007. The Court therefore ruled ‘in good justice’ that the Ords’ value was € 800 on the date on which the Plaintiff became a shareholder. The Plaintiff’s additional pay was therefore determined at (€ 790 x 450 =) € 355,500.


  • We believe that DTA convincingly demonstrated that the price paid for the Ords’ was indeed too low. The IRR on the equity investment was 45% in Bencis’ management case for the Catalpa acquisition. Assuming an exit after 4 years and no dividends, the € 11.3 million equity investment was expected to be worth € 50 million. After 4 years, the Cumprefs principal amount would be € 15.2 million, meaning that the Ords’ value would be € 34.7 million. This is extremely disproportionate to the initial € 100k investment in the Ords (resulting in an annualized return of 332%), even if one considers that other scenarios than the management case are also possible and that there had been no fact-finding.
  • The case demonstrates that valuation requires in-depth analysis. The DTA’s valuator determined the Ords’ value at € 567 per share and the Cumprefs’ value at € 50 per share per the Catalpa acquisition date, and both the Arnhem-Leeuwarden Court of Appeal and the Court pointed out that this valuation was flawed. However, after the Court rejected the DTA’s primary position of a Ords’ share value based on the € 2,265 price paid in the July 2007 transaction, the Court also rejected the DTA’s position of a linear growth of the Ords’ € 567 value per the acquisition date to the Ords’ € 2,265 value in July 2007, as this does not adequately consider all facts and circumstances in the meantime. The Court therefore determined the Ords’ value ‘in good justice’ at € 800.
  • Private equity managers and portfolio company managers should be cautious with determining the value of their ‘skin in the game’ and the wage they may receive when becoming a shareholder. In view of the DTA and the courts, these managers have a higher-than-average knowledge of finance, valuation, investing and ‘sweet equity’, and therefore they may more easily be confronted with reversed and increased burden of proof.
  • We believe there may be arguments for the Taxpayer to reduce the additional wage as the Court’s decision demonstrates that the Taxpayer overpaid for the Cumprefs. If the Ords’ value is higher than their nominal value, logically, the Cumprefs’ value is lower than their nominal value. Therefore, the Taxpayer overpaid for the Cumprefs and the additional wage may be reduced by this amount. We are keen to see whether the Taxpayer will (again) appeal against the Court’s judgement with Supreme Court.

If you would like to know more about this case or the valuation of cumulative preference shares, please reach out to Quirijn Knab or Stephan Kraan.


Photo Quirijn Knab

Quirijn Knab

+31 20 247 03 03
+31 6 10 89 76 10

Photo Stephan Kraan

Stephan Kraan

+31 20 247 03 01
+31 6 82 32 67 91