Regulation of first refusal in Private Limited Liability Companies

Pursuant to the Norwegian Private Limited Liability Companies Act (the PLLCA) the shareholders in a limited liability company have a right of first refusal to shares in the company upon change of ownership to the shares. Chapter 4, Part VII of the PLLCA contains more detailed regulations pertaining the right of first refusal, including the exercise of the right of first refusal, to whom the right of first refusal applies and the determination of the redemption amount. Although these provisions set out an arrangement that may be suitable for many shareholder communities, the rules are somewhat unclear and could also be more unpredictable than many expect. Our recommendation is always that an assessment is made as to whether the standard regulation in the PLLCA is appropriate for the specific shareholder community, or if adjustments should be made in the shareholders' agreement and/or articles of association.

A brief introduction to the rules in the PLLCA

  • The right of first refusal is triggered by any form of change of ownership. This also includes change of ownership by inheritance or gift. When the company is notified of a change of ownership, the other shareholders must be notified immediately.
  • Shareholders who wish to exercise the right of first refusal, must send a notification to the company. This notification can be given both in writing and orally, but must have arrived at the company within two months after the company was notified of the change of ownership.
  • Pursuant to the PLLCA, the right of first refusal can be exercised against anyone who acquires the shares. Exceptions apply to previous owners' personal close relatives. These are spouses, cohabitants, minor children (also "bonus children") and companies that the previous owner or spouse/cohabitant controls. In addition, there are exceptions for the previous owner's relative in the ascending or descending line.
  • The right of first refusal must be exercised for all shares which are subject to a change in ownership. It is thus not possible to choose the number of shares and one must take "all or nothing". If several shareholders exercise the right of first refusal, the shares shall be allotted to them in proportion to the number of shares already owned in the company.
  • The consideration for the shares when exercising the right of first refusal shall pursuant to the PLLCA be actual value of the shares. According to case law, this should be the sales value of the shares. There are several ways to assess this. However, it is important to be aware that this does not necessarily constitute the agreed price between buyer and seller in the transfer that triggered the right of first refusal.  

Deviation from the provisions in the PLLCA

The provisions in the PLLCA on right of first refusal may be deviated from both in the company's articles of association and any shareholders agreement between all or some of the company's shareholders. Regulations of the right of first refusal in a shareholders agreement will only be binding to the parties in the agreement, and any shareholder who is not a party will therefore be able to exercise the right of first refusal pursuant to the PLLCA if this is not deviated from in the articles of association.

Our experience is that several companies choose to apply the law's rules on right of first refusal and that they do not want to include a more specially adapted scheme in the company's articles of association. For many, it seems reassuring to fall back on the basics of the Companies Act. Nevertheless, it is important to be aware that the Companies Act also contains a complex and detailed regulation of the right of first refusal, so that it does not necessarily involve the greatest possible degree of predictability for the shareholders and the company.

By deviating from the provisions and introducing a more specially adapted arrangement, one can regulate oneself away from some of the PLLCA's uncertainties, including when the right of first refusal is triggered, the process of exercise, who it applies to and determination of the redemption price for the shares acquired. Such adapted solutions could create greater predictability for both the selling shareholder, buyer and right of first refusal holders and not least avoid that the PLLCA's provisions entail a right of first refusal in situations that are often unintentional between the parties, such as certain intra-group transfers.  

We at AGP have extensive experience in preparing pre-emption rights schemes that are adapted to the needs of the individual shareholder composition.

Feel free to contact one of us if you need assistance in connection with the right of first refusal or other company law matters.

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Gard A. Skogstrøm