When Can an Immediate Resale Carry the Proof of Undervalue?

When Can an Immediate Resale Carry the Proof of Undervalue?

Some observations on Chapter 17 of the Swedish Companies Act

Point of departure

It is tempting to read the case as a straightforward instance of suggested opportunistic intermediation: a company acquires shares for SEK 10 million and resells them the next day for SEK 36 million. The question that deserves attention is different, and considerably narrower: what evidentiary weight should be attributed to an immediate resale when the court is required to determine market value at the preceding transaction within the framework of Chapter 17, section 1, first paragraph 4 of the Swedish Companies Act?

The transaction chain

On 9 November 2021, Sälfjällstoppen Holding AB transferred 100 out of 250 shares in Vivid Bostad Utveckling 16 B AB to L&L 117 AB for SEK 10 million. The following day, L&L transferred the same shares to Bostadsrättsföreningen Utsikten Orrliden for SEK 36 million. After Sälfjällstoppen’s bankruptcy, the bankruptcy estate argued, as its primary case, that the first transfer constituted an unlawful value transfer and sought restitution of the difference, SEK 26 million. The Court of Appeal upheld the district court’s judgment and ordered L&L to restore that amount.

The controlling issue

What matters in the district court’s reasoning — reasoning expressly adopted by the Court of Appeal — is not the result but the method. The district court started from what is orthodox: the question whether there has been a diminution of wealth must be determined by a market valuation of the parties’ performances at the time when the company bound itself to the transaction, that is, on 9 November 2021. Book values are not decisive as such. The burden of proving that the transfer was made at an undervalue also rested on the bankruptcy estate. None of that is remarkable.

From legal rule to evidentiary assessment

The interesting part begins only when the court fills that framework with actual evidentiary assessment. The shares were not traded on an open market. No conventional market price was therefore available. The bankruptcy estate relied primarily on the fact that L&L was able, the very next day, to resell the same shares for SEK 36 million. The district court accepted that circumstance as sufficient support for fixing market value at the earlier transaction. On that basis, the court held that the shares were worth SEK 36 million on 10 November and that their value had been the same the day before. Sälfjällstoppen was therefore taken to have disposed of the shares at an undervalue of SEK 26 million.

The strength of the method

This method has obvious advantages. It is simple. It anchors valuation in an actual transaction concluded in immediate temporal proximity to the challenged transfer. It also avoids the kinds of hindsight constructions that often characterize disputes over the value of project companies, where parties tend to explain each purchase price by reference to special risk allocation, financing arrangements, or future calculations. Against that background, it is easy to see why the court chose to attach decisive weight to what an actual counterparty was in fact prepared to pay.

The weakness of the method

But that is also why this is the point at which the judgment becomes interesting as a matter of principle. A resale is not, without more, a neutral measure of objective value at the earlier transaction. It may be shaped by features that cannot simply be projected backwards to the first valuation date: control premiums, particular financing commitments, allocation of risk, internal arrangements, or a pricing mechanism that reflects the structure of the project rather than the value of the asset in isolation. L&L sought to advance precisely that line of argument. It contended, first, that the purchase price in the subsequent transaction was in reality preliminary and linked to a guarantee in respect of future cost overruns; second, that the price difference was explained by the fact that L&L could provide the financing that Sälfjällstoppen was unable to obtain.

The court’s answer

The district court rejected that objection rather firmly. The fact that the purchase price might later be affected by cost outcomes was held not to alter value at the relevant point in time. Nor was L&L’s ability to arrange financing regarded as independently relevant to the market value of the shares. The seller may well have had compelling commercial reasons to dispose of the shares; that does not necessarily say anything about their objective value. There is also an implicit but important premise in the reasoning: the court was not prepared to allow the seller’s financing weakness to depress the legally relevant market value.

From undervalue to unlawful value transfer

Once the undervalue had been established, the remainder of the analysis was comparatively direct. The district court accepted that the sale of shares in a subsidiary within a development project fell, in principle, within the scope of Sälfjällstoppen’s business. But the manifest discrepancy between the parties’ performances meant that the transaction could not be regarded as having a purely commercial character for the company. The transfer therefore constituted a value transfer under Chapter 17, section 1, first paragraph 4 of the Companies Act. Since there was no distributable capacity and the capital maintenance limitation in Chapter 17, section 3 had been exceeded, the value transfer was unlawful. Through L&L’s representative — who had been deeply involved in the transaction structure and had signed both transfer agreements — the company was held, at the very least, to have had reason to realize that the transaction entailed a value transfer. Restitution liability therefore arose under Chapter 17, section 6.

The dissent

What makes the Court of Appeal’s judgment worth reading, however, is not the majority’s confirmation of this line, but the dissenting opinion. Court of Appeal Judge Aspegren accepted the legal framework but not the evidentiary assessment on which the majority’s conclusion depended. He emphasized that the bankruptcy estate had, in practice, submitted no independent valuation evidence — such as a valuation certificate or a clearly articulated valuation method — but had relied chiefly on the resale the following day. He further pointed out that the later pricing may have been influenced by circumstances that should not automatically be considered in valuing the shares in the relationship between Sälfjällstoppen and L&L, including financing capacity and the alleged risk allocation within the project. On that basis, he concluded that the bankruptcy estate had failed to discharge its burden of proof, both as regards unlawful value transfer and clawback under the Bankruptcy Act.

The real dividing line

The dissent therefore identifies the point at which the judgment can genuinely be debated. The majority’s method is practically attractive and commercially intuitive. The dissent insists, by contrast, on stricter evidentiary discipline: an immediate resale may constitute strong circumstantial evidence, but not necessarily enough in itself where there is a plausible objection that the later price is partly a function of something other than the asset’s objective value at the first transfer. The question is not whether the majority’s conclusion appears reasonable. The question is whether the evidence sustains that conclusion with the degree of precision that Chapter 17 ought to require when a court retrospectively recharacterizes a civilly valid transfer as an unlawful value transfer.

Conclusion

For advisers in transactions where pricing is influenced by financing, guarantees, or project-internal risk allocation, the lesson is not merely that undervalue transfers may be challenged long after the event. The more precise lesson is that anyone who wishes to argue that a subsequent transaction is not a pure expression of market value must ensure that this can be read from the documentation and, if necessary, carried in the evidence. If the price in the later transaction in reality includes something other than the value of the transferred asset, that must be shown with greater sharpness than appears to have been done here. Otherwise, there is a real risk that the court will treat the resale as the best available expression of market value — and thus as the key to the entire value-transfer analysis.