Shareholders’ agreements according to Norwegian law

Dalan advokatfirma and I provide frequent legal counsel to foreign entities when faced with ownership issues in Norwegian private companies and this article is written on that basis. If you require assistance do not hesitate to send me and email to jervell@dalan.no or chat with me on this web page. 

1. What is a shareholders’ agreement?

A shareholders’ agreement, also referred to as stockholder agreement, is an agreement between the company’s shareholders on how the company is to operated and what rights and obligations the shareholders have as the company’s shareholders. Normally a shareholders’ agreement for Norwegian entities contains four sets of regulations:

1. Control of the company and how the company is managed, including how key decisions are made
2. Rights and obligations of the company’s shareholders and board members
3. What rights and obligations shareholders have and how these are to be safeguarded through agreed upon remedies
4. On what terms the shareholder can enter or exit the company.

2. Are shareholders’ agreements legally binding?

In Norway, registration is not required for a shareholders’ agreement to be effective. The agreement is effective, legally binding and enforceable when agreed upon by the shareholders / parties. The shareholders’ agreement is thus governed by Norwegian contractual law and enforceable on a contractual basis.

There is no requirement for all shareholders to agree to the agreement. If all shareholders do not agree, it will still be binding and enforceable among those parties who do agree and sign the agreement. Efforts should nevertheless be made to try and have all shareholders sign the agreement.

The company itself may also sign the agreement, and often does. As a general rule it will then be bound by the agreement on a contractual basis, but there are a few caveats:

1. Breach of the agreement by the company, for instance through decisions by the company, might lead to liability but breach of a shareholders’ agreement usually does not mean that the decision itself is invalid.
2. The shareholders’ agreement must be entered into within the framework of the articles of association and the provisions of the Limited Liability Companies Act. Both the articles of association and the Limited Liability Companies Act are superior to a shareholders’ agreement, so it is the shareholders’ agreement that must give way should it come into conflict with these regulations.

In that sense a Norwegian shareholders agreement differs from the articles of association that are legally binding for the company, including the company’s organs, and which can be invoked against third parties. Violation of the articles of association will lead to invalidity which is not the case in case of breach of a shareholders’ agreement.

3. What does it mean that the shareholders’ agreement is legally binding?

When the shareholders’ agreement binds the shareholders, that means that the shareholders can invoke the agreement against each other and that breach of the agreement may entitle remedies as laid out in the agreement. These remedies may vary from:

• Claim for damages for breach of agreement from the aggrieved shareholder / party
• A contractual fine with predefined sum (so-called penalty clause) for breach of the provisions of the shareholders’ agreement
• Exit clauses of the defaulting party. These are usually based on predefined valuation mechanism for the shares, including «good/bad leaver» regulations stipulating that the departing shareholder receives a reduced value for their shares or nothing at all. An exit clause is often combined with a predefined valuation principle, usually based on discounted cashflow valuation (DCV) or on the fair value of the company’s balance sheet, depending on which valuation method best captures the company’s value and what the shareholders themselves envision.

4. Why should we enter into a shareholders’ agreement?

A shareholders’ agreement is a good investment. Some important reasons are these:

1. The shareholders’ agreement limits the risk of shareholder disputes: The shareholders’ agreement is created by the shareholders talking through possible points of conflict and agreeing on rules and solutions for these. When the solutions are laid down in a written document, the shareholders’ agreement is in reality entered into.

2. Shareholder conflicts are time-consuming and can often be costly. They often have a paralyzing effect on the company’s development. A good shareholders’ agreement will tailor solutions based on the shareholders and the company’s needs and prevent disputes that, in the worst case, could pose a threat to the company’s survival and the shareholders’ finances. 

3. Drafting a shareholders’ agreement is fairly inexpensive: Legal costs for drafting a shareholders’ agreement are usually relatively inexpensive. Although the agreement will be based on individual assessments and will be adapted to the company’s situation and the shareholders’ wishes, a shareholders’ agreement is a standardised product. Expenses for work on the preparation of shareholders’ agreements are thus fairly reasonable, especially compared to the direct and indirect costs that will arise in the event of shareholder conflicts.

4. A shareholders’ agreement can ensure that shareholders have necessary influence in the management of company: The shareholders have no direct influence in the company’s operations, but are limited to what the shareholders vote for at the company’s general meeting. The company is managed by the board of directors and the CEO. It is these bodies and not the shareholders directly who run the company and make the decisions on behalf of the company.

Shareholders’ agreements may contain provisions that ensure that shareholders have a say in operations. Particularly practical are provisions for the prior consent of shareholders or veto right-regulations for important board decisions, such as dividend payments and dividend policy, the sale or purchase of assets or businesses, the raising of debt, and the formulation and change of business strategy. Other important provisions are regulations stipulating that certain shareholders have the right to appoint members of the board. These regulations prevent shareholders from being overrun or marginalized, either by an arbitrary board or by other shareholders.

5. Protection of minority shareholders: The shareholders’ agreement can protect minority shareholders through provisions on participation and equal treatment. Typically, the shareholders’ agreement will contain veto provisions in that certain critical decisions require the unanimous consent of all shareholders or the approval of specific shareholders. Other examples are predefined trigger mechanisms with the right to exit at the agreed price or valuation mechanisms, as well as tag-along clauses. Such provisions customize rights relating to the sale of shares through predefined and thus predictable valuation mechanisms. Tag-along clauses, on the other hand, give the right to sell shares on the same terms as the majority shareholder, provided that he or she first sells his shares. These provisions protect shareholders against the board of directors or other shareholders abusing their authority without the high threshold for abuse of authority under the Norwegian Companies Act Sections 5-21 and 6-28 being met.

6. Dispute resolution mechanisms: The shareholders’ agreement often contains resolution mechanisms for solving conflicts and deadlocks. Such provisions are not only important for the shareholders themselves, but also for the company, as a deadlock can lead to the company’s operations being negatively affected or coming to a halt. Resolution mechanisms can include exit-clauses (good & bad leaver clauses), valuation mechanism clauses, mediation clauses and arbitration or litigation clauses. These mechanisms ensure that any conflicts can be resolved quickly and efficiently, and that the company’s activity is not unnecessarily harmed due to the company’s shareholders and even the company itself finding themselves in a costly and time-consuming shareholder conflict.

5. How do I structure a shareholders’ agreement?

Shareholders’ agreements range from short and simple agreements to long and detailed ones. The structure and scope depend on the situation and what shareholders envision. It is also a cost issue.

The shareholders’ agreement regulates conduct. A good shareholders’ agreement should secure the company, and shareholder interests it is intended to safeguard. This means that shareholders should be aware of what is agreed upon and what interests the agreement secures. With that in mind, a shareholders’ agreement should outline the following:

5.1. Regulations on structure, parties, duration, acceptance and amendment mechanisms

The shareholders’ agreement must specify which shareholders are parties to the agreement and whether the company is to be a party or otherwise affiliated.

Ideally, all shareholders should be parties to the shareholders’ agreement, but as a minimum the agreement should bind a sufficient number so that the provisions of the shareholders’ agreement can be implemented as valid company law decisions. This means in practise that shareholders representing more than half of the shares should be parties of the agreement, as a majority requirement generally applies to decisions at the company’s general meeting.

If possible, shareholders controlling at least 2/3 of the shares in the company should be bound by the agreement, as some decisions of the company’s general meeting require so-called qualified majority of 2/3 of the shares of the company.

The agreement should furthermore be sufficiently static to secure rights and create predictability for both the shareholders and the company. At the same time, the agreement must be dynamic enough to capture necessary changes that are required, both as a result of changes in the existing shareholder structure or as a result of changes in the company’s development. This means, among other things, that the shareholders’ agreement should contain acceptance mechanisms, duration mechanisms and change mechanisms.

5.2. Regulations on company operations (appointment of board members, veto provisions, information rights, etc.)

A shareholders’ agreement can ensure that shareholders directly or indirectly participate and decide upon the company’s operations. Most practical would be provisions on the right to appoint the members of the board of directors and that certain decisions require the approval of all or specific shareholders.

The shareholders’ agreement may also ensure the right to more frequent or additional information than what shareholders are entitled to through Norwegian law. For example, the shareholders’ agreement may require reporting on a monthly or quarterly basis rather the company’s information duty being confined to information on the company’s general meeting or as part of the company’s annual accounts.

The right to appoint directors may be of special importance for shareholders who are particularly involved in the operation of the company, such as entrepreneurs, or investors who inject capital on the condition of the right to influence. It may also be relevant as part of a generational change from senior to junior. These provisions must be weighed against changes to several share classes in the articles of association, where, for example, certain shares (B shares) are given limited or no voting rights.

Approval provisions from shareholders or from board members appointed by them (so-called veto provisions) are particularly relevant for certain critical decisions. At the same time, these provisions can paralyze the company’s decision making if not framed correctly. Typical decisions that may be subject to approval from all or certain shareholders could be among the following:

1. Decisions on the purchase and sale of business and assets (e.g. real estate) or taking on debt above certain thresholds.
2. Significant changes to the budget, business plan or strategy.
3. Decisions on dividends, remuneration of senior executives or other distributions.
4. Resolution on mergers, demergers, capital increases (share issues), convertible loans or instruments entitling to subscribe for or be issued shares.
5. Approval of agreements between related parties pursuant to Section 3-8 of the Norwegian Companies Act.
6. Contracting, renewing or termination of critical agreements, such as leases, supplier agreements, licence agreements, etc.
7. Issuance of guarantees, borrowings or investments above certain threshold amounts.
8. Employment or changes to terms and conditions for the Company’s senior executives, including bonus and option programmes.

5.3. Regulations on terms and conditions for acquisition, ownership and sale of shares

The shareholders’ agreement should contain regulations on the terms and conditions for the acquisition and sale of shares.

The agreement may contain regulations that protect the existing shareholder structure through requirements for board consent and pre-emption mechanisms or stipulated terms or pricing mechanisms for acquisitions and for owning shares (for example, requirements for employment).

The terms and conditions for owning and holding shares may be combined with buyout mechanisms at predefined prices if the conditions are no longer met. It may also be a matter of «good/bad leaver» regulations with a price discount in the event of breach of the shareholders’ agreement or failure to comply with the terms and conditions required by the shareholders’ agreement.

The terms of sale may be based on fixed prices or valuation mechanisms. Pricing should be based on the valuation mechanism that best captures the value of the company. If, for example, the value of the company represents future cash flow and not the actual value of the company balance sheet, the valuation should preferably be based on a discounted value of the cash flow (DCF) or as a multiple of the company’s cashflow (EBITDA) or profit. For businesses where the company’s assets constitute the value, such as real estate companies, the value should preferably be based on the value of the underlying assets (substance-based valuation / value-adjusted equity).

5.4. Restrictive covenants – protection mechanisms for company operations (confidentiality clauses, non-solicitation clauses, non-competition clauses)

The shareholders’ agreement often contains provisions that protect the company against conduct by shareholders that may conflict with the company’s legitimate interests. Typically, regulations prohibiting shareholders from participating in activities that compete with the company, non-solicitation clauses, provisions on secrecy and confidentiality clauses may be relevant.

These clauses must be entered into within the framework of mandatory legislation. Particularly relevant are the Working Environment Act’s provisions on non-competition clauses and non-solicitation clauses that may be applied if it is in fact the employment relationship that is regulated.

Provisions prohibiting the dissemination of trade secrets or company-critical information as well as confidentiality clauses may also be relevant. These clauses are often combined with contractual fine provisions (penalty clauses), as it may be difficult to substantiate what losses the company has suffered and can thus claim compensation for in the event of a breach of such provisions.

5.5. Regulations on the sale of the shares in the company (drag along and tag along clauses)

Many shareholders’ agreements contain provisions on co-selling rights and co-selling obligations (so-called «tag along» and «drag along» clauses).

The co-selling obligation gives a shareholder the right to force other shareholders to sell their shares on the same terms and at the same price as themselves. The exercise of co-selling rights is often subject to the condition that the offered price exceeds a certain minimum and/or that shareholders representing a certain number of the total shares of the company invoke the clause. The purpose of the clause is to give shareholders the opportunity to sell all shares in the company to a potential buyer in order to avoid a sale not otherwise taking place or that valuation discounts must be granted. Liquidity and minority discounts in Norway may vary from between 10 to 70 percent, depending on the circumstances.

The right to co-sell (tag along) gives other shareholders the right, but not the obligation, to sell the shares together with other shareholders who have received offers for their shares. The co-selling right often stipulates that the terms and conditions must be the same. The provision protects minority shareholders and is intended, among other things, to prevent minority shareholders from remaining minority shareholders with new shareholders.

6. When should I engage Norwegian legal assistance?

Although I have gone through many of the more important aspects of the preparation of shareholders’ agreements, it would be pertinent to consider procuring an attorney for the drafting of these. Shareholders’ agreements are often created at an early stage and remain unchanged even if the company changes.

We often see disputes concerning shareholders’ agreements and often these disputes could have been avoided or limited if the shareholders’ agreement had been clear and not subject to unnecessary interpretation and uncertainty. It is also a clear advantage if the agreement actually regulates solutions for what the parties may later disagree on.

Whether it is we or others who assist in the preparation of the shareholders’ agreement is of secondary importance. The crucial thing is that it is reviewed and secured, so that the risk of disputes is limited, and the shareholders’ agreement lays the groundwork for shareholder activities that promote the company’s interests and value development.

If a dispute arises in connection with a shareholders’ agreement, legal assistance should also be engaged. In such situations, the situation should be legally clarified, including what options are available. This is especially true if the dispute has come to a head and a legal proceeding has been filed or is an imminent possibility.

Feel free to contact me or us for assistance in the preparation of shareholders’ agreements or other assistance in this connection. My e-mail is jervell@dalan.no.