In addition to the articles of association, an agreement may be entered into between all or some of the shareholders in connection with the incorporation of the company or at a later stage. Such agreements may concern, for example, the company’s business in general, the allocation of board seats, the company’s dividend policy, or the shareholders’ rights and obligations to transfer or acquire shares.
In practice, shareholders’ agreements can be of significant importance for how the company is run. Formally, such agreements will often regulate how the shareholders are to vote at the company’s general meeting or how other shareholder rights are to be exercised.
Not directly regulated by the Companies Act
Shareholders’ agreements are not directly regulated by the Norwegian Companies Act. Legal issues relating to shareholders’ agreements must therefore be resolved on the basis of general principles of contract law, viewed in light of the corporate law context. There are no formal requirements as to how a shareholders’ agreement must be concluded, nor is it necessary for the agreement to be in writing.
Various reasons for entering into a shareholders’ agreement
There may be a number of reasons why shareholders choose to enter into a shareholders’ agreement rather than regulate a matter through the company’s articles of association. One reason may be that the company is a continuation of a collaboration that previously existed in another legal form, and that the shareholders’ agreement is simply the former cooperation agreement, now adapted to govern the relationship within the framework of a limited liability company.
Another reason may be that it is not possible to obtain the required majority to amend the articles of association, making a shareholders’ agreement a more practical alternative. This is because amendments to the articles generally require the support of two-thirds of both the votes cast and the share capital represented at the general meeting. Through a shareholders’ agreement, however, the interested shareholders may agree among themselves how they will act. If the shareholders who are party to the agreement formally or effectively control more than 50 percent of the voting rights at the general meeting, the agreement may have a significant influence on how the company is managed.
A further reason for using a shareholders’ agreement may be that the shareholders wish to establish an arrangement that cannot be implemented solely through the articles of association because the matter in question cannot legally be regulated in the articles. However, given the increased flexibility of the Companies Act, this need is generally less significant than it was in the past.
A fourth reason may be that the shareholders do not want a special arrangement to become publicly known. In such cases, regulation through the articles of association is not suitable. Unlike articles of association, shareholders’ agreements are not registered in the Register of Business Enterprises. As a result, shareholders’ agreements are often known only to the parties involved.
Formally, a shareholders’ agreement regulates only the relationship between the shareholders who are parties to it. As a general rule, the company itself is not bound by a shareholders’ agreement. Nor is the board of directors bound by such agreements; the board is bound only by legislation, the articles of association, and any instructions issued by the general meeting or set out in board regulations. Likewise, shareholders who are not parties to the agreement are generally not bound by it. The same principle normally applies to a purchaser of shares from a shareholder who was party to the agreement. For the shareholders who are parties to the agreement, however, the agreement is generally binding, just like any other contract.
A shareholders’ agreement may nevertheless affect the company if the company itself is a party to the agreement or if the agreement is interpreted as conferring rights upon the company.
Contractual regulation of exit arrangements
Shareholders may have a need for more detailed regulation of the right or obligation to dispose of shares. In practice, this is often achieved through a shareholders’ agreement, although such rights and obligations can frequently also be incorporated into the articles of association. There are many different forms and variations of such provisions. Some of the most common are outlined below.
- Lock-in provisions: Where the company is based on a collaborative project, a fundamental assumption among the shareholders may be that they will remain involved, at least during an initial start-up phase. To prevent shareholders from exiting the project prematurely, the parties may agree that shareholders are not entitled to sell their shares for a specified period of time.
- Right of first offer: When shares are sold, statutory pre-emption rights may complicate the transaction and reduce the sale price. To address this issue, shareholders may agree that a shareholder wishing to sell must first offer the shares to the other shareholders at a specified price (a “right of first offer”). If the remaining shareholders decline the offer, the shares may be sold freely to a third party at a price equal to or higher than the offered price, without triggering the exercise of pre-emption rights.
- Tag-along rights and drag-along rights: Minority shareholdings are often considerably more difficult to sell at an attractive price than majority shareholdings or the entire company. To address this issue, shareholders may agree that one or more shareholders have the right to participate in a sale to a third party on the same terms as another shareholder (a “tag-along right” or “co-sale right”). Alternatively, the shareholders may agree that one or more shareholders are required to sell their shares if another shareholder wishes to sell to a third party (a “drag-along right” or “drag-along obligation”). These provisions are commonly used to facilitate efficient exits and to align the interests of majority and minority shareholders in connection with a sale of the company.
