Veto rights in shareholder agreements

In private limited liability companies, a fundamental principle of the Companies Act is that the majority has a decisive power over the minority. This entails that a majority shareholder controls a number of decisions to be made by the general meeting as the majority shareholder owns the most shares and/or votes. There is nevertheless an opportunity to agree on tailored majority requirements or veto rights for board and/or general meeting decisions in the articles of association or a shareholder agreement, and where such rights may deviate from the general majority principle. A judgment from the Gulating Court of Appeal from November 2023 ( LG-2022-095528 ) illustrates this issue and contributes to uncertainty as to whether agreed veto rights in shareholder agreements work as intended. The judgement is legally enforceable as the appeal was denied by the Supreme Court.

In brief, the case concerned a shareholder agreement between Blom Gruppen AS and Coast Seafood AS regarding the company Blom Fiskeoppdrett AS. Coast Seafood AS owned approx. 34% of the shares in Blom Fiskeoppdrett AS while Blom Gruppen AS owned the remaining shares and votes. One of the main questions in the case was whether the shareholder Coast Seafood AS could exercise a "veto right" upon the question of whether Blom Fiskeoppdrett AS should enter into a cooperation agreement with a competing company (Firda Sjøfarmer AS). The decision to enter into such an agreement was to be considered by the board of Blom Fiskeoppdrett AS. In the shareholders' agreement, the parties agreed on a list of decisions (often referred to as "reserved matters") which required the approval of board members appointed by Coast Seafood AS to be valid, regardless of how many shares and votes Coast Seafood AS owned. To enter into a cooperation agreement with Firda Sjøfarmer AS was covered by one of the points in such a list. The Gulating Court of Appeal came to the conclusion that the agreed "veto right" must be set aside on the grounds that it  can be used in conflict with significant third-party and societal interests.

There are several topics in the judgement that are important to bear in mind when preparing shareholder agreements:

• Minority protection: It is not unusual to agree on specific majority requirements/veto rights in a shareholder agreement. For example, an investor can demand such rights in connection with a private placement so that the investor is assured a certain control even if the investor becomes a minority shareholder. Such a provision is quite common. The Gulating Court of Appeal's disregard of agreed veto rights on a general basis is suitable for limiting minority shareholders' ability to protect themselves through shareholder agreements. The judgement therefore casts doubt on the legality of an established market practice.
• The difference between effects by law and contractual effect: The Gulating Court of Appeal emphasizes the fundamental principle that shareholder agreements only have binding effects on the parties to the shareholder agreement (and not the company which the shareholder agreement governs), while the articles of association have effect by law and thus have binding effect on the company (by the board). It is also clear that board members have an independent and individual responsibility to safeguard the company's interests upon making decisions. If a board member acts contrary to this, the board member may risk liability for damages. This principle applies regardless of what the shareholders have agreed in a shareholder agreement. It must nevertheless be clear that a board member can choose to act in accordance with an agreed "veto right" in the shareholder agreement provided that such voting is in accordance with the company's interests. In such a case, the existence of a "veto right" in the shareholders' agreement is not suitable to limit the board's competence, as each board member's independent responsibility always apply regardless of the provisions of the shareholder agreement. In any case, we would assume that the Gulating Court of Appeal would reached a different result in this case if the "veto rights" had been included in the company's articles of association and thus given effect under company law.
• Significant third-party and societal interests: The meaning of "substantial third-party and societal interests" is unclear. This creates doubts concerning the interpretation of already concluded shareholder agreements, including which considerations that must be taken into account when balancing such interests. The main consideration in company decisions is the comapny's interest , not necessarily external societal considerations or third party interests (unless such third party is a creditor of the company).

The Gulating Court of Appeal's judgement illustrates several challenges relating to shareholder agreements.

AGP has extensive experience with assistance related to shareholder agreements. Our experience is that there are significant variations with regard to how shareholder agreements are drafted, but it is in all cases crucial that the provisions of the shareholder agreement are drafted with a high degree of precision.

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

‍