Limited liability companies and pre-emption rights transfers to related parties

LIMITED COMPANIES AND PRE-EMPTION RIGHTS - TRANSFERS TO RELATED PARTIES

The exercise of pre-emptive rights in connection with the transfer of shares in unlisted private limited liability companies is a recurring dispute theme for Norwegian courts. A judgment from the Hålogaland Court of Appeal rendered earlier in 2023 emphasizes the importance of shareholders making sure they understand both the main rule of the law and the effect of any adjustments made in the articles of association.   

The main rule of the Companies Act is that unless otherwise stated in the articles of association, the transfer of shares in a private limited liability company will trigger pre-emptive rights (right of first refusal) for other shareholders. Exceptions apply, among other things, to transfers to the shareholder's "close associates." In corporate groups, it is assumed that the same exception applies to transfers from the shareholder to a subsidiary but not to the parent or sister company.   

The relevant judgment relates to Sortland Municipality's transfer of shares in Vesterålskraft AS to the municipality's wholly-owned company, Vesterålen Energi AS. In connection with the transfer, Lofotkraft AS, also a shareholder in Vesterålskraft AS, exercised its pre-emptive right to acquire the shares. Lofotkraft AS argued that a provision in the articles of association stating (translated from Norwegian) «in connection with any transfer of shares, the other shareholders have a pre-emptive right on otherwise equal terms» meant that the pre-emptive right was triggered by the transaction even though the buyer was the municipality’s wholly-owned subsidiary, as the articles did not contain an express exception corresponding to the law's exception for transfers to close associates. The Court of Appeal concluded that the quoted wording did not provide sufficient evidence that the exception set out in the law was deviated from, and the transaction was therefore found not to trigger Lofotkraft AS’ pre-emptive right. 

Based on the Court of Appeal's judgment, it is useful to note the following: 
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1. The rules of the Companies Act regarding pre-emptive rights will apply unless expressly deviated from in the articles of association. If the articles contain certain adjustments, but fail to constitute a complete pre-emptive rights mechanism replacing the statutory system, the determination of the scope of pre-emptive rights will depend on an interpretation of the article provision and the law;   

2. The main rules of the Companies Act are designed to create predictability regarding the rights of shareholders. Shareholder groups that wish to deviate from the rules of the law, especially if the desire is to eliminate exceptions and individual rights, must ensure that this is expressly stated in the articles of association – or as the Court of Appeal states, «it must be clearly expressed in the articles of association if the Companies Act rules on pre-emptive rights are to be considered deviated from»;   

3. To ensure the freedom to transfer shares within a group without triggering pre-emptive rights, specific regulations to this effect in the articles of association, such as stipulating a general exception from pre-emptive rights for transfers between companies in the same control sphere, i.e., companies that the shareholder «controls, is controlled by, or is under common control with"» and

4. Pre-emptive rights are often also regulated in a shareholder agreement, raising many of the same issues regarding the relationship between the main rule of the law, any articles provisions, and the shareholder agreement itself.   

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In AGP's experience, as evidenced by the cases that come before the courts, pre-emption rights are a topic that is sometimes difficult to understand and apply. In particular, complications may arise if the relationship between the main rules of the law and any adjustments in the articles of association and/or shareholder agreement is not carefully considered. To ensure the greatest possible degree of clarity and predictability for shareholders, we recommend that all shareholder groups seek advice on how the main rules of the Norwegian Companies Act on pre-emption rights work and which adaptations are appropriate for the individual company.  

AGP is a law firm specialized in transactions, capital markets and corporate. Advice related to company law matters is one of our core competences.  

Gard A. Skogstrøm
‍ Partner/ Gard@agpadvokater.no / +47 973 18 439
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Fanny Fasmer
‍ Associate/ Fanny@agpadvokater.no / +47 936 99 785