Approval of cookies
By clicking "Accept" , you agree that we store cookies on your device to analyze your website visit. See our privacy statement for more information.
The principle of equality in company law assumes that all shares give equal rights in the company, regardless of the number of shares owned. If a limited liability company is to raise new equity (a share issue) where the participants make contributions in Norwegian kroner, the main rule of the Limited Liability Companies Act is that all existing shareholders must be offered the opportunity to participate pro rata. However, it is a common practice to deviate from the main rule and instead carry out a share issue directed at one or more specific persons or companies, with the effect that other shareholders are not given the opportunity to participate in the issue (a private placement).
There are several questions that may arise in connection with private placements in both listed and unlisted companies. In this article, we present a selection of some basic questions and answers that arise in connection with private placements in unlisted limited liability companies pursuant to the provisions of the Limited Liability Companies Act. The article is thus limited to public limited companies and the Public Limited Liability Companies Act, and the special issues that arise in connection with private placements in listed companies.
QUESTIONS AND ANSWERS
In a rights issue, the deviating main rule of the Norwegian Companies Act is that all existing shareholders are offered to subscribe for shares in the company in the same proportion as they already own shares (preferential rights). For example, if you own shares corresponding to 5%, you have preferential rights to subscribe for 5% of the new shares that are issued. In a private placement, the preferential rights of existing shareholders are waived in order to offer new shares to a specific selection of existing shareholders or investors who do not already own shares. This is permitted as long as the majority of shareholders who make the decision have objective reasons to deviate from the general rule.
According to the Limited Liability Companies Act, the preferential rights only apply if the company raises equity in the form of Norwegian kroner (only Norwegian kroner constitute cash contributions in the sense of the Limited Liability Companies Act). Thus, there is no preferential right for existing shareholders to participate in issues where contributions for shares are made with settlement in other means of value, including e.g. money in foreign currency, real estate, shares, movable property, intellectual property rights, etc. The legislator's reasoning for this is that it would be impractical to have a preferential right in connection with issues of contributions in kind, since contributions will often be made by transferring an asset to which only the investor in question has access, e.g. real estate or a ship. Contributions in kind must also be valued at a monetary value in Norwegian kroner before it can be provided to the company as a contribution in an issue. In such cases, the board of directors is obliged to account for and declare that the value of the specific contribution in kind is at least equal to the total value of the shares the company will issue in the share issue. Any issue where contributions in kind are to be made must therefore be a private placement, as the valuation of the contribution must be made prior to the general meeting's decision.
A private placement requires that two-thirds of the shares and share capital represented at the general meeting vote to waive the preferential rights of existing shareholders, i.e. the same majority as is required for all capital increases. The Norwegian Companies Act does not allow for advance waivers or general exceptions from the preferential rights in the company's articles of association - any disregard of the preferential rights is therefore subject to a specific assessment by the general meeting. However, the general meeting may authorize the board of directors of the company to resolve on private placements, but in such situations the general meeting must specify in the authorization that the board of directors has the right to waive the preferential rights of existing shareholders.
In addition to the majority requirement mentioned above, there is also a requirement that a private placement must be objectively justified in the company's interest. This follows indirectly from the rules on abuse of authority in the Limited Liability Companies Act.
Private placements are very practical, usually for commercial reasons. For example, a company may be in a process where the company wants to engage a new strategic partner/investor that can further develop the company's business. A practical example is situations where the company wants to issue shares to key employees in line with a share incentive program with the purpose of establishing an incentive for key employees to further develop the company's business. In such contexts, the commercial interest in deciding on a private placement will often be objectively justified in the company's interest.
Another practical example is situations where the company has an acute need for capital. In these situations, it is often time-critical that the company raises equity quickly to ensure liquidity in the company. In such cases, private placements to persons or companies that are able to provide the company with rapid financing will often be in the company's interest. In such situations, the principle of equality may be fulfilled by offering the non-participating shareholders a repair issue so that those who wish to participate can still do so, see section 2.7 below.
A private placement can usually be decided and implemented in less time than a rights issue. In addition, in a private placement, the company will usually have greater predictability as to how much equity will actually be raised, since the terms of the issue are often negotiated and the investors commit themselves before a general meeting is convened. In a rights issue, the company will have less certainty about who and how many of the existing shareholders will participate in the issue.
The main disadvantage of private placements compared to rights issues is that the non-participating shareholders' ownership interests in the company will be diluted.
In a private placement, existing shareholders will first and foremost be diluted by reducing their ownership share when new shares are issued that they are not given the opportunity to subscribe for. This is called ownership dilution. For example, if a shareholder owns 5% before the private placement, their ownership interest will be diluted, as they will own a smaller proportion of all shares after the private placement. This is often referred to as organizational dilution, since the existing shareholders' influence in voting at general meetings will be weakened as a consequence of more shares being eligible to vote. For shareholders who have rights related to maintaining a certain ownership stake, e.g. if a minority shareholder falls below 10% and thus cannot block compulsory redemption, this can be of great importance.
Even if existing shareholders are diluted in terms of ownership, this does not necessarily imply a dilution of value. A share issue provides the company with equity, of which the non-participating shareholders also receive a share. Provided that a private placement is based on a valuation that reflects the company's market value, the issue of more shares and the injection of more capital will not in itself have any effect on the value of the shares. If the subscription price per share is lower than the market value of the shares (e.g. if the company offers a discount to a new investor), the consequence will be that all existing shares will also be worth less. For example, if a company is worth NOK 10 million before a private placement and the company has 10 shareholders (where each shareholder owns 1 share), each share will be worth NOK 1 million. If the company decides to launch a private placement to five new investors at NOK 500,000 per share (50% discount), the value of the company after the placement will be NOK 12.5 million. The original shareholders' value share will thus be reduced to NOK 833 333.33 per share.
One of the ways to repair dilution after a private placement is for the company to carry out a repair issue. In a repair issue, the shareholders who did not have the opportunity to participate in the private placement will be offered to subscribe for new shares in the company in a number that allows them to maintain their proportional ownership interest as it was before the private placement. In this way, the existing shareholders will be placed as if the private placement did not take place. There are no rules in the Limited Liability Companies Act regarding access to repair issues - the starting point is therefore that the initiative for such a remedial exercise must first be proposed by the board of directors before a decision is made by the general meeting with a two-thirds majority. At the same time, the terms of the private placement will often prevent the implementation of a repair issue as described above. This will, for example, be relevant in cases where the private placement is subscribed for by an investor who subscribes for shares corresponding to 1/3 ownership interest and where it is an agreed condition that the investor shall maintain such ownership interest. In such a situation, the private placement will be prevented precisely by this condition, because the result of the private placement could be that the investor's ownership interest falls below 1/3.
* * * * *
AGP is a law firm specializing in transactions, capital markets and corporate. We regularly assist companies, shareholders and investors in connection with capital increases in both listed and unlisted companies. See more about us at www.agpadvokater.no.
