Rechtbank Amsterdam, ncc civiel recht overig

Subsequently, Straco made a non-binding offer and the parties agreed on the parameters for the sale and purchase of all shares in the share capital of the Group by entering into the Term Sheet dated 23 November 2022. Key elements of the Term Sheet were:

? an effective date of 1 January 2022, meaning that the economic benefits and risks related to the Group would be deemed transferred to Purchaser with effect from and including 1 January 2022 (the Effective Date),

? an enterprise value of EUR 120,000,000 on a cash-and-debt-free basis which resulted in a purchase price of (i) EUR 105,000,000 payable at Closing and (ii) a deferred payment and conditional Earn Out of EUR 15,000,000,

? the purchase price equals the enterprise value adjusted for debt, debt-like items, cash and cash-like items as per the Effective Date,

? the purchase price was based on several assumptions, such as:

o the provision of accurate information regarding historic revenue, gross margin and EBITDA for the financial year 2021,

o a satisfactory due diligence on the latest estimate of the EBITDA for the financial year 2022, and

o a satisfactory due diligence on the approved budget for the financial year 2023,

? a “locked box mechanism”, where the purchase price was to be reduced by any unallowed cash ‘leakage’ between Effective Date and Completion.

On 30 December 2022, the Purchaser and the Seller signed a Share Purchase Agreement (the SPA), which reads – in relevant part – as follows:

“(…)

2 Sale and transfer of the Shares

Sale

The Seller hereby sells the Shares to the Purchaser and the Purchaser hereby purchases the Shares from the Seller.

Transfer

The Seller shall transfer the Shares to the Purchaser free from any Encumbrance and together with all rights attaching to them at Completion in accordance with Clause 8, and the Purchaser shall accept the Shares from the Seller free from any Encumbrance and together with all rights and obligations attached to them at Completion.

Effective Date

Subject to the terms and conditions of this Agreement, the economic benefits and risks which are directly or indirectly related to the Shares shall be deemed transferred to the Purchaser with effect as from and including the Effective Date.

3 Purchase Price

Purchase Price

The purchase price for the Shares (the "Purchase Price") shall be an amount equal to:

(i) EUR 97,687,000, being the amount as identified as the equity value in Annex 3.1(i) (the "Initial Purchase Price");

plus

(ii) the Completion Compensation; minus

(iii) the Completion Leakage; plus

(iv) if applicable, a conditional and deferred payment (if any) that may become due and payable to the Seller as part of the Purchase Price and is to be calculated in accordance with Annex 3.1(iv) (the "Earn Out").

Payment

On the Completion Date, the Initial Purchase Price, plus the Completion Compensation, minus the Completion Leakage and minus the Reinvestment Amount (the "Completion Payment") will be paid by the Purchaser to the Seller in accordance with the Notary Letter. (…)

7 Pre-Completion undertakings

Remedy

The Seller shall not be liable in respect of a Breach, if such Breach is remedied by the Seller in full, at its own cost, to the reasonable satisfaction of the Purchaser after the expiry of fifteen (15) Business Days following receipt by the Seller of a written notice from the Purchaser in accordance with Clause 12.1.1.

(…)

Maximum liability

The liability of the Seller in respect of any and all W&I Claims shall not in the aggregate exceed an amount equal to EUR 1.

Fraud

Nothing in this Agreement shall operate to limit any liability of the Seller in case of fraud (bedrog) by such Seller in respect of the relevant Breach.

(…)

20 Miscellaneous

(…)

No rescission

Unless stated otherwise in this Agreement, the Parties waive their rights, if any, to in whole or in part annul (vernietigen), rescind (ontbinden) or partially rescind (gedeeltelijke ontbinding) this Agreement on the basis of article 6:228, article 6:265 or article 6:270 of the DCC.

(…)

Entire agreement

This Agreement sets out the entire agreement and understanding between the Parties in respect of the subject matter of this Agreement and supersedes any previous arrangements or agreements between the Parties. No Party will have any right or remedy against any other Party arising out of or in connection with any such preceding or concurrent agreement unless agreed otherwise herein.

21 Law and jurisdiction

Governing Law

This Agreement shall be governed by and constructed in accordance with the laws of the Netherlands.

Jurisdiction

The Netherlands Commercial Court in Amsterdam, the Netherlands shall have exclusive jurisdiction over a dispute arising out of or in connection with this Agreement.

Annex 3.1(iv) Earn Out (Earn Out Annex)

“(…)

1 Earn Out

Earn Out Payment

The Parties acknowledge and agree that, subject to Clause 1.2 of this Annex, the Seller may as part of the Purchase Price for the Shares, become entitled to an earn-out payment of a maximum of EUR 15,000,000 (the "Earn Out Payment").

Annex 10 Warranties (Warranties Annex)

“(…)

4. Financial statements and financial position

(…)

Such management accounts:

(i) are not misleading in any respect;

(ii) give a true and fair view (getrouw beeld) of the value of any of the assets and liabilities of that Group Company as at the dates to which they were drawn up; and

(iii) fairly reflect the profits and turnover of that Group Company in respect of the periods to

which they relate. (…)

Since the Accounts Date:

(a) the Group Companies have operated its Business as going concern in a normal and prudent manner and have conduct its business in the ordinary course consistent with past practice in all material respects and no Group Company did or agreed anything which is outside the ordinary course of the business of such Group Company; in the ordinary course in a normal and prudent manner;

(…)

(e) there has not been any event, occurrence, fact or change that has had a material adverse effect on the condition (financial or otherwise) of the business, prospects, assets (including intangible assets) and liabilities, results of operations or financial performance of any Group Company;

(…)

16 Compliance

To the best of Seller’s knowledge, the Group Companies are conducting (and have at all times conducted) their business activities in material compliance with its constitutional documents and all Applicable Laws.

(…)

18 Information

The Data Room includes all information which is likely to be material to a purchaser of the Company and/or an investor in the Company. Without limiting the generality of the foregoing, no information was withheld or excluded from the Data Room for reasons other than being immaterial to a purchaser of the Company.

(…)”

The factual allegations supporting the Purchaser’s claims are threefold:

? in the period between 7 November 2022 and Completion, the Group deferred certain costs, which it had incurred in the 4th quarter of 2022 (Q4 2022), to the first quarter of 2023 (Q1 2023),1 which was not in accordance with the Group’s past accounting practices and constituted a structural change of the Group's accounting policies,

? in the same period the Seller presented financials for the year 2022 which contained substantial accounting irregularities: revenue was overstated while several costs (such as holiday accruals) were understated (which are referred to below as P13 bookings),2

? the Seller failed to disclose that the financial performance of the Group (presented in the form of the 2022 EBITDA3) had deteriorated in Q4 2022 compared to the estimates provided by the Seller and that the underperformance was more than the EUR 0.5 million that the Seller had communicated previously to the Purchaser.

According to the Purchaser, the Seller has, with these actions, breached the Warranties and Pre-Completion Undertakings. The Purchaser further argues that the Seller committed these breaches intentionally in order to mislead the Purchaser as to the financial performance of the Group and thereby induce the Purchaser to enter into the SPA and to complete the Transaction. This constitutes fraud, which precludes the Seller from invoking the limited liability clauses in the SPA (Clauses 11.4 and 11.5.1), so that the Seller is fully liable for the damages resulting from the fraud, which the Purchaser quantifies as follows:4

? the difference between the enterprise value in the Anchor Valuation of EUR 104.9 million (based on a 2022 EBITDA of EUR 12.7 million x 8.2 multiple) and the Adjusted Valuation of EUR 65.6 million (as calculated by Deloitte, retained by the Purchaser) based on the adjusted 2022 EBITDA of EUR 9.7 million x 6.8 multiple)

= EUR 39.3 million

? damages relating to financing arrangements with the banks: EUR 900,000

? reasonable costs incurred by Purchaser, consisting of the costs for investigating the breaches (the Eight Advisory Report, EUR 25,000) and the costs for quantifying the damages (Damage Quantification Calculation Report, EUR 31,290).5

This is what a reasonable person in the same circumstances as the parties would have expected in signing the SPA. In the SPA “Seller’s Knowledge” is defined as follows [bold added by the Court]:

“Seller's knowledge or any similar expression means, with respect to any fact, matter or circumstance, the actual knowledge of the Seller, [the CEO] and [the CFO] at the date of this Agreement and the Completion Date, and the knowledge they should have had after having made due enquiries by each of them into the relevant subject matter with the relevant persons responsible for the matters in question within the Group Companies.”

While it is true that “Seller’s Knowledge” is used in the SPA as a definition, and that the Warranties invoked by the Purchaser in these proceedings are not knowledge-qualified, this does not help the Seller. Attribution of knowledge is not only guided by contractual definitions, but also by standards prevalent in the community (as the Court ruled above).

Under these standards, the definition only confirms that the parties to the SPA expected the Seller (as in fact a reasonable observer in the same circumstances would have done) to know what the CEO and CFO knew and what the CEO, the CFO and the Seller itself should have known, based on appropriate enquiries.

Change in accounting practices (2) and fraud (3)?

As the SPA does not contain a definition of fraud, and Dutch law applies to the legal relationship between the parties,12this term must be construed under the Dutch legal concept of fraud (bedrog) which is defined in Article 3:44(3) DCC:

“Fraud occurs where a person induces another to perform a specific legal act by intentionally providing the other with inaccurate information, by intentionally concealing any fact the person was obligated to communicate, or by any other artifice. Representations in general terms, even if they are untrue, do not, as such, constitute fraud.”

Deferral of costs

The Court finds that the approval by the CFO of the deferrals was contrary to the accounting practices of the Group, and that this was done intentionally, and with the purpose of concealing the lower profitability of the Group and inducing the Purchaser to adhere to the Transaction as previously agreed. The reasons for these findings are as follows.

? The evidence shows that the deferrals listed in the Eight Advisory Report were made in the period between November 2022 and February 2023 and consisted of costs of a certain nature which – according to general accounting principles – could not be deferred to another period than the period in which they were incurred. This follows from the note prepared by the Group's auditor, Crowe. This note13 will be referred to below as the Crowe Report. Not only were the deferrals – according to the Crowe Report – impermissible according to applicable accounting rules and a deviation from past practice. They also constituted a fundamental change of accountancy practices (stelselwijziging).

? Crowe produced its report well after the deferrals were made and after Completion, at a time when the Purchaser was in charge of the Group, but this does not mean that its opinion is biased, despite the Seller’s argument along these lines. It is true that Crowe – prior to the position paper drafted by the CFO14 – initially gave the impression that deferring study costs to the next year could be in line with the “matching principle”, which is the principle that a cost item should be reported in the same period as the corresponding revenue is earned. However, (1) the discussion between the CEO/CFO and Crowe dates from well after the time the deferrals were made and could therefore not contribute to the decision to defer these costs in late 2022, and (2) Crowe’s opinion was dependent on (i) a substantiation by the CFO of her decision to defer and (ii) the advice of Crowe’s specialised committee of reputable independent experts ("de afdeling vaktechniek").15 In the end, Crowe – having read the position paper drafted by the CFO and the advice from this special committee – decided that the deferrals were impermissible. That is decisive in the Court’s analysis.

? The fact, stressed by the Seller, that Crowe met privately with representatives from Straco prior to its report does not make its report biased either. As Straco is the current majority owner of Group shares, there is no reason why it should or could not have meetings with the Group’s auditor, even without the CEO or CFO of the Group being present.

? It is noteworthy that the Seller did not produce a report by an expert of its own contradicting Crowe’s findings and that the CFO, by not asking the auditor what its position was prior to actually making the deferrals, accepted the risk of the auditor seeking advice from its special committee and taking a position contrary to her position.

? The CEO’s statement (made during the interview by the Seller’s counsel after the Interim Judgment) to the effect that Straco only cared about the deferrals being made because of disappointing 2022 Group performance is inconsequential. The reason is that by making the deferrals, the disappointing results were hidden from the Purchaser’s view, and this in essence is the reason for the Purchaser initiating these proceedings, more than anything else.

? If the deferrals were contrary to Group accounting practices (and even a structural change), the CFO must have been aware of this at the time the deferrals were made. There is nothing in the record to suggest anything to the contrary.

? The Seller’s reference to one other instance in the Group’s past where study costs were deferred (the “Kunners” project, where the deferrals were reversed within the same financial year (2020)) was not in the context of an M&A process and does not justify the deferrals here.

? In any case, when allocating income and expenses, Article 2:384(2) DCC requires prudence. Prudence dictates that deferring costs may not be done without a solid ground to do so. This means that the CFO should have obtained a substantiation of her decision to defer costs before the decision to defer was made, instead of preparing a substantiation after Completion), and that she should have consulted the Group’s accountant before implementing such a change in Group accounting policies. In other instances (e.g.. the holiday accruals, see below), that is exactly what she did.

? The reason why she did not do this for the deferrals in question is obvious when analysing the emails and Teams messages exchanged between the CFO and her finance team (and among the finance team members themselves) in the period prior to actually making the deferrals. The Court will now go in to the specifics of these emails and messages.

o On 6 December 2022, one of the Group's finance employees ([X]) informed the CFO about the 'extremely bad results' of one of the Group's subsidiaries (Bold) in November 2022.16The revenues were very low (EUR 311k under the forecast) and there were additional costs of sales. This meant that the EBITDA was 138k negative instead of 319k positive. In response, the CFO indicated that additional sales costs had to be 'spread' to the next year (Q1 2023), with the ‘story’ that it was an investment, and that they had to 'play' with this.

o That same day in a Teams message17 [X] communicated to [Y] (another financial officer of the Group) that the CFO wanted him to reverse the previous month’s capitalisation of the study costs and to re- book them. He indicated that he felt that this would be insufficient to ‘close the gap’, but that the CFO found his proposal to defer the costs for two months ‘hard to defend’ (“lastig verdedigbaar”).

o In the end, the costs were deferred to three months later.

o On 7 December 2023, the CFO was again informed of the extremely bad results for one of the Group's subsidiaries in the month November 2022 ("Ik heb net de cijfers ingeladen en zie een extreem laag resultaat").18

o That same day, [X] sent an e-mail to the CFO about the actual figures for November 2022.19 This e-mail contained an Excel document with possible deferral bookings (referred to as "correctieboekingen"). He indicated that the gap between the actual figures and the forecasts were 'enormous', and that this was the result of lower hires, lower productivity and lower fees. He noted that with a 'maximum stretch' he would be able to defer EUR 756,000 in costs, that this would 'postpone the problem', but that hopefully the ‘story’ could eventually be that figures are lower because certain hires had been postponed.

? There is no reference in the messages quoted above that the deferred costs actually related to the next financial year or that the deferrals would comply with the matching principle, as the Seller now claims. Instead, the focus is on closing the gap between the Q4 2022 estimate, which was communicated to the Purchaser, and the actual financials. This shows intent to hide the Group’s actual financial position from the Purchaser.

? The evidence also clearly shows that the CFO was aware that the deferrals were a structural change of the Group’s accounting practices (which was not allowed under the Warranties). If not, why would she have to present a ‘story’ to substantiate the deferrals? And if the CFO found a deferral of more than two months hard to defend, why would she allow a deferral for three months, without even checking the admissibility with the Group’s accountant, as she or her team had done previously as to another accounting issue (see the holiday accrual discussion below)? And finally: why did she say that there were no alternatives or even suggest that not implementing the deferrals would jeopardise the Transaction (“Echt vervelend maar alternatief is no go20”)21?

? The CFO’s statements in the interviews held by the Seller after the Interim Judgment are unconvincing as they do not provide any compelling rebuttal of the above points, including contemporaneous documentary evidence. Moreover, the CFO’s statements (that she would not be in any position to commit fraud as she does not have access to the accounting system and would need two or three accomplices)22 are beside the point. The allegation is not that the CFO committed fraud on her own, but that the Seller committed fraud by misrepresenting the financials as a consequence of the CFO’s actions. The CFO was instrumental in the misrepresentation, and – as shown by the Teams messages and emails – she was aided by other Group finance employees.

? At no point in time did a Group or Seller representative communicate to the Purchaser that the deferrals were made. The Seller was under an obligation to disclose, as the deferrals constituted a change of accounting policy which was likely to be material to the Purchaser due to its impact on the 2022 EBITDA. In fact, during the Q&A process preceding the Completion, the Seller stated, in response to a question posed by the Purchaser: “non-chargeability is within cost of sales”.23 This implies that non-chargeable costs (such as study costs) are treated as expenses in the profit and loss statement (with a resulting effect on EBITDA) and not as capitalised costs on the balance sheet (with no EBITDA impact). The CFO in her interview did not explain why she thought the Purchaser knew or had reasons to know that the answer in the Q&A did not relate to study costs, which were substantial. Even if the answer is technically not false (as the Seller suggests), it is, at the very least, misleading, as it is incomplete and does not clarify that there are a number of substantial non-chargeable costs that had been capitalized (added to the balance sheet and removed from the profit and loss statement, with a substantial upward EBITDA impact). A reasonable person in the same circumstances as the Purchaser would not have understood this.

? The conclusion of all the evidence is inescapable: the CFO approved or allowed the deferrals with the intent to conceal the Group’s lower profitability from the Purchaser as the lower profitability would, if disclosed, jeopardise the transaction process.

P13 bookings

Provision for holiday accruals

The evidence shows that the CFO reduced the Group’s provision for holiday accruals in Q4 2022 – compared to its accounting policy in previous years and the accounting rules – and that this was not an honest mistake or a consequence of illness of Group employees, as explained by the CFO in her statement, but an intentional act designed to conceal the Group’s lower Q4 2022 profitability. The reasons for these findings are as follows.25

? In October 2022, there was a discussion between the Group’s finance officers and the CFO on the provision that needed to be taken for holiday accruals.

o On 10 October 2022, [the finance director], the finance director of one of the Group's subsidiaries ([the finance director]) indicated to the CFO that he had spoken to the Group’s auditor (Crowe) about the difference in provisioning for holiday accruals within the Group: the Group recorded a provision of 50%, whereas a subsidiary (CarriereCafé) recorded a 100% provision. [the finance director] communicated that the auditor had a negative stance towards a provision of only 50%.

o On 20 October 2022, [Y] asked the Group's auditor whether it was mandatory to record a provision for holiday accruals and which Clause in the ‘RJ’ [Richtlijnen Jaarrekeningen; Dutch Accounting Standards] applies to this issue.26

o The auditor replied that a provision is mandatory and attached the underlying accounting standard, which states that when determining the amount of the provision for holiday accruals, account must be taken of the likelihood of a certain employee’s employment ending. His advice was to record a provision of 100% “if every euro counts”.27

o In response, [Y] said that for several years the Group had only recorded 50% of its holiday accruals, and asked if the Group had acted in violation [of accounting standards].28

o The auditor subsequently wrote that recording a provision of only 50% was a violation. He said that he understood that the Group in practice did not pay out all accrued holidays and that sometimes remaining rights to take holiday time may expire, but that according to the letter of the law/accounting rules, you should take a 100% provision.29

o [Y] (as late as 20 October 2022) communicated the auditor’s advice to the CFO.30

? The CFO did not decide to follow the auditor’s clear instructions that a provision of 100% was required according to the law and accountancy rules:

o In response to the last communication in October 2022 she replied: “Wonderful! Now I need to cop out on that little shit. I will tell [the finance director] that they can continue the old way of provisioning, but that we will organize it differently at group level (to bluff).”31

o On 9 November 2022 the CFO revisited the issue and asked [X]: “I want to know whether you set the provision for holiday [accrual] to 50 or 25 [percent].” (“wil weten of je reservering vakantie nu op 50 of 25 hebt gezet”). [X] replied that it was now 25% with regard to Bold and CarriereCafé. The CFO’s response was: “Doing it this way is fine.” (“is goed zo door te voeren“)32

o On 17 January 2023, the CFO wrote to [X]: “I reported [to [the investment manager], investment manager with OTC (the Seller’s parent company)] that we tweaked [the consolidated report on 2022] and that I only had a moral dilemma regarding the provisioning for holiday accruals.” (“ik heb gemeld dat we getweaked hebben en dat ik enkel bij de reservering vakantoedagen [sic] een moreel dilemma had”).33 It is evident that this “moral dilemma” stems from the discussion several months earlier (in October 2022) with the Group’s auditor on the subject of the size of the holiday accrual provision under the accounting rules.

o The CFO eventually lowered the percentage which was customary at Group level, which was 50%, to 25%.

? The CFO changed Group subsidiaries’ accounting practices, despite the fact that she was aware that the Group was involved in an M&A transaction, and that the Seller had committed to the Purchaser that the Seller would operate its business as a going concern and not make any material change to the accounting practices and principles as applied in the annual accounts of the previous year (2021).34

? Instead of coming forward with this change, she wrote to [the finance director] that the old way of provisioning was fine and that she would bluff her way out of admitting that the Group needed to provision for 100% (which was what CarriereCafé did).

? Furthermore, the VDD Report dated 17 November 2022, as provided by the Seller to the Purchaser,35which was the basis for the subsequent top-up due diligence by the Purchaser, states unequivocally:

“Vacation days. As per discussion with the accountant, management records 50% of the vacation days provision. However, dependent on the amount of vacation days taken, additional liabilities arise.

Therefore, we include a n.q. item for consideration.”

o This information was incorrect. The auditor did not – in its discussion with the Group’s finance people – recommend that a provision of 50% for holiday accruals would be prudent, but stated that the law and accounting rules would require a 100% provision. A correct and not misleading way of communicating the auditor’s advice would have been: “Our accountant requires a 100% provision, but in these circumstances we have chosen to only do 50%...”.

o In practice, the Group did not adhere to the previous policy of 50%, but lowered the provision for holiday accrual even further, down to 25%. The Purchaser was notified of this change in the Q&A report:36

“For Welten Group records the vacation day provision at 50% as historically the actual pay-out of vacation days has been around 25%, which is assessed on an annual basis by management. Welten Group aims to minimise the payout of the vacation days by asking the employees to notify the Company about their leave and utilise their remaining vacation days. This way of accounting and the approach will be adopted by Carriere Cafe as well as part of aligning the accounting policies. The costs and balance sheet position will be provided tomorrow.”

o However, this still is misleading given the statement in the VDD Report that the accountant was fine with 50%. The gap between the accountant’s recommendation (100%) and the 25% actually provisioned for holiday accruals would likely have given rise to questions from the Purchaser’s side, as this was a huge step with significant impact on the 2022 financial results.

Breach of Warranties

The Court finds that by providing false or misleading information on the deferrals and holiday accruals the Seller breached Warranties 18.1 (all information in the Data Room is correct and not misleading) and 18.2 (all information which is likely to be material to Purchaser is in the Data Room). These warranties are not limited to the information provided on the period from the Accounts Date (31 December 2021) to 31 September 2022, such as Warranties 4.3 and 4.5, but apply to the entire period until Completion of the Transaction (23 February 2023). This follows from the definition of ‘Breach” in the SPA:

“Breach means any fact, matter or circumstance that causes any of the Warranties, individually or together with the other Warranties, to be wholly or partly untrue, inaccurate or misleading on the Signing Date or on the Completion Date. ” [bold added by the Court]

This is further confirmed by Clause 10.1.6 of the SPA which stipulates:

“The Seller shall not be liable in respect of any forward-looking forecasts, estimates, interpretations, analysis, projections, statements of intent or statements of opinion in relation to the period as from the Completion Date, which have been included in the Data Room in good faith, save as where they form part of the Warranties.” [bold added by the Court]

This means that the Data Room is supposed to include information up to the date of Completion.

The Court’s conclusion is that the actual 2022 EBITDA that should have been disclosed before Completion is:

EUR 12,746k38

minus:

? EUR 1,261k deferrals39

? EUR 402k holiday accruals40

? EUR 599k reported underperformance41

= EUR 10,484k

Causation

The Seller’s second argument is that - if it had informed the Purchaser of the Group’s actual 2022 underperformance and the incorrect deferrals and holiday accruals provision prior to Completion - this would not have steered the Purchaser away from signing and completing the SPA, because:

? the Purchase Price was based on the 2021 EBITDA, not the 2022 EBITDA; if the Purchase Price offer implied a multiple of 8.3 x 2022 EBITDA, that does not mean that the agreed Purchase Price is based on the 2022 EBITDA,

? the Purchase Price was a result of a controlled auction process, where the Seller required offers exceeding EUR 100 million,

? the Purchaser was only interested in the Group’s cash-generating capabilities, and was very eager to roll out the Welten model to Belgium.

However, even if the EV of EUR 105,000k would have been based on the 2021 annual accounts (which the Seller contends), it must have been clear to the Seller that the Purchaser would renegotiate the deal (and possibly walk away from it), if the Group’s 2022 performance and growth potential (which is commonly measured by calculating the company’s EBITDA in a certain fiscal year) was not in line with the expectations provided by the Seller on the fiscal year 2022. This is evidenced not only by the fact that the due diligence prior to the signing of the SPA was done on the basis of the financial data from the Accounts Date (31 December 2021) to 31 September 2022, but also by the numerous times before Signing (which took place on 30 December 2022) the Group/Seller reported the estimated 2022 EBITDA to the Purchaser:

? the VDD Report dated 17 November 2022 included an estimated 2022 EBITDA of EUR 12,746,000,42

? in the financial report attached to the 12 December 2022 email,43the Group’s CEO informed Straco of the November 2022 financials and the effects they would have on the 2022 EBITDA (EUR 12,246k),

? on 19 December 2022, the CFO sent Straco an update on the 2022 financials, which included an EBITDA of EUR 12,002k,44

? in a phone call between the CFO and a representative of Straco on 23 December 2022, the CFO confirmed that the ‘reported’452022 EBITDA would be EUR 10.1 million,46

? on 26 December 2022, the CFO sent an Excel document (which was last modified on that same date by the CFO) containing a calculation of the bridge between the EV (Enterprise Value) and the PP (Purchase Price).47 The document suggests that the Enterprise Value was calculated by multiplying the 2022 EBITDA (EUR 12,533k) by 8.3 (see below).

The Seller argues that in the original document the multiple was calculated by the formula “Enterprise Value/EBITDA 2022=multiple”. Be that as it may, this document shows that the Seller was aware of the importance of the 2022 EBITDA to the Purchaser. That is the key point in the Court’s analysis.

After Signing and before Completion, the actual 2022 EBITDA was also misrepresented (insofar as the figures were not adjusted for the incorrect deferrals and holiday accruals provision):

? on 3 February 2023, the CFO shared the actual 2022 financial results as part of the leakage determination process which showed a reported48 EBITDA of EUR 10,031,000.49

Therefore, the Court considers it likely that if the Seller had disclosed the actual underperformance of the Group (as a result of the incorrect deferrals and provision for holiday accruals) prior to Completion, the Purchaser would – at the least – have renegotiated the Purchase Price.

Quantification of Damages

The parties do not agree on the purchase price they would have renegotiated at that time. The Purchaser argues – referring to the Damage Quantification Calculation Report drawn up by Deloitte – that renegotiations would have lowered the Purchase Price to an adjusted valuation of EUR 65,600,000. This is calculated as the difference between:

? the Anchor Valuation which results in an enterprise value of EUR 104,900,000 (which is based on a multiple of 8.2 x the misrepresented 2022 EBITDA of EUR 12.7 million)

? The Adjusted Valuation resulting in an enterprise value of EUR 65,600,000 (based on an adjusted EBITDA multiple of 6.8 x the actual 2022 EBITDA of EUR 9.7 million (after adjusting for deferrals, holiday accruals and underperformance).

The Seller argues that the Damage Quantification Calculation Report is flawed in several ways:

? the Enterprise Value agreed upon concerned the value as per 31 December 2021,

? the misrepresentation in the report allegedly occurred at the transaction date, i.e. on 30 December 2022, whereas the valuations were performed with a valuation date of 30 June 2022,

? if Deloitte had done a proper “high level DCF Analysis” based on the Free Cash Flow (FCF) the Group could generate, it would have found that no loss occurred.

As the Court ruled above, it is likely that the disclosure of the underperformance would have led to renegotiations. However:

? it is uncertain what purchase price would have been agreed in these renegotiations and whether or not an EBITDA multiple would have been used in relation to the actual 2022 EBITDA; that would, for instance, also depend on any other potential buyers. The parties have not sufficiently discussed the validity of the Purchaser’s assumption that the parties would have agreed on a lower multiple (6.8 instead of 8.2). The multiple obviously makes a lot of difference in quantifying the damages, and

? the Court’s decision on the amount of the 2022 EBITDA misrepresented by the Seller results in a lower EBITDA than used by the Purchaser to quantify its damages (EUR 2,262k instead of EUR 3,000k; see para. 4.28).

The Court therefore provides an opportunity to all parties (including the Underwriters) to comment on (paras. 4.50-4.52):

? the expected outcome of the hypothetical renegotiation process given the Court’s decision on the 2022 EBITDA and the multiple proposed by the Purchaser, both in terms of the lower EBITDA and the multiple to be applied,

? the other items of the Purchaser’s claim for damages,

? the reasonable costs, expenses and tax incurred in obtaining the sum recovered from the Underwriters.

The brief must be limited to the subject-matter listed above. Any attempts to replead points on which the Court has already reached a decision will be disallowed.

The Seller’s counterclaims are:

? to declare that the Purchaser has breached Clauses 1.3.1, 2.1.2 and 2.1.3 of the Earn Out Annex;

? to declare that the Purchaser is liable for the amount by which the Earn Out Payment is diminished as a result of these breaches,

? to order the Purchaser to pay the amount by which the Earn Out Payment is diminished as a result of the breaches, to be determined in follow-on quantification proceedings (schadestaatprocedure), and

? to order the Purchaser to pay the costs of the proceedings, plus statutory interest.

As a part of the counterclaim the Seller raised a second motion for disclosure of documents (the first one was decided upon by the Court in the Interim Judgment) in which it seeks an order for Welten:

a) to provide OTW with copies of all Group management accounts shared by the Group with Straco in the period from 23 February 2023 to 31 December 2023,

b) to provide OTW with copies of information on 26 topics,

c) to pay the costs of the motion proceedings, plus statutory interest.

The Court notes that the information obligation the Seller is referring to (Clause 1.3.2 of the Earn Out Annex) reads – in relevant part – as follows:

“Following receipt of the Earn Out Payment Calculation, the Purchaser shall provide the Seller, upon first request, such information as reasonable requested by it and provide the relevant information relating to the preparation of the Earn Out Payment Calculation, in each case for the purpose of assisting the Seller in its review of the Earn Out Payment Calculation and the calculations contained therein.”

The disclosure obligation relied on by the Seller here differs from the disclosure obligation that the Court dealt with in the Interim Judgment. The disclosure obligation here is in Clause 1.3.2 of the Earn Out Annex and:

? is limited to information that is “reasonably requested,”

? pertains to information that is relevant to the preparation of the Earn Out Payment Calculation, and

? is there for the purpose of assisting the Seller in its review of the Earn Out Payment Calculation and the calculations contained therein.

The Seller argues that this Clause contains two separate obligations:

? to provide all information reasonably requested, and

? to provide information relevant to the Earn Out Payment Calculation.

The Seller provided no proof that the Group’s business in 2023 – absent the alleged Purchaser mismanagement – would have been doing so well that the 2023 EBITDA would have surpassed the 2022 EBITDA (which was well below EUR 14 million). Instead, the case file contains numerous indications to the contrary:

? the actual 2023 EBITDA calculated by the Purchaser was only EUR 3 million; even if the Seller managed to show that the actual 2023 EBITDA was or should have been higher, it is still a long way even to get anywhere close to the required minimum of EUR 14 million,

? the actual 2022 EBITDA was not EUR 12 million, but – as the Court ruled above – EUR 10 million, which constitutes a downward trend compared to 2021,

? the Seller knew that one of the Group’s subsidiaries was having ‘extremely bad results’ in Q4 202250 and that this was caused by a lower number of hires, lower productivity and lower fees,51whereas this should generally be the best quarter of the Group.52

Even so, at the hearing, the Seller said that a right to an earn out payment in the current circumstances cannot be ruled out, as:

? the business did not collapse and there was no decline in revenue,

? there are indications that the CEO and CFO of the Group had difficulties focussing on the business as they were kept busy answering Straco’s questions and completing an M&A in Belgium, and

? the four label approach conducted prior to the Transaction changed after Completion: the labels were rationalised and were managed by only one director.

This means that the motion will be denied. The Seller being the unsuccessful party will bear the costs of these motion proceedings (2 points x the applicable rate of EUR 2,300) plus statutory interest.

on the counterclaim

directs the parties to send the drafts of their briefs to the other parties no later than 23 April 2025,

on the motion in the counterclaim

on the counterclaim

Done by L.S. Frakes, C.W.D. Bom and N.A.J. Purcell, Judges, assisted by W.A. Visser, Clerk of the Court.

Issued in public on 5 March 2025.

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