Brokerage firms prevailed in case concerning internal partnerships

Three brokerage firms had established internal partnerships (indre selskaper) with key employees. An internal partnership is not a separate legal entity, and the business continues to be conducted in the name of the brokerage firm. The key employees are not presented externally as partners in the enterprise, but they assume limited liability for losses and become entitled to a share of the profits. The structure was adopted to ensure that key employees bore financial risk, that their contractual relationship would no longer be governed by the Working Environment Act, and that overall tax costs would be reduced. The arrangement had been cleared with the Norwegian Tax Administration. The issue before the courts was whether it was also compatible with the Securities Trading Act and the Alternative Investment Funds Act.

The Supreme Court held that the use of internal partnerships was lawful. The arrangement did not violate the requirement that licences may only be granted to limited liability companies. The establishment of the internal partnerships did not mean that the brokerage firms had changed their corporate form. Nor could the internal partnerships be regarded as carrying on licensed activities without authorization, since they neither acted externally nor conducted business in their own name. It remained the brokerage firms that provided investment services, carried out investment activities, and managed investment funds. Accordingly, there was no legal basis for requiring the brokerage firms to alter their organizational structure. The State’s appeal was therefore dismissed.

The Supreme Court’s judgment clarifies the legal effects of the internal partnership (indre selskap) as a business structure and its relationship to financial regulatory legislation

Source: Supreme Court