Transferring shares

This article answers some common questions pertaining to how transferring shares to a third party (on either a voluntary or compulsory basis) affects shareholders, or co-owners of a joint stock company.

At the outset there must be a shareholder agreement in place between the shareholders. This is a voluntary agreement that all co-owners sign when shares are acquired. It is the group of shareholders that determines the content of this agreement, which is usually based on the Limited Liability Companies Act and fulfills the requirements stipulated by this law.

In cases where a shareholder agreement does not regulate the shareholders’ relationship, the agreement must be interpreted in accordance with the rules in the Limited Liability Companies Act. Additionally, the company’s statutes may contain requirements that could be significant for understanding the shareholder agreement.

The fundamental principle is that all shareholders are to have equal rights, as stipulated by the Limited Liability Companies Act section 4-1. However, exceptions may be made in cases where different classes of shares (A and B shares) have been established. The regulations pertaining to the various classes usually appear in the statutes.

Generally speaking, while share transfers can take place freely, there are certain restrictions in shareholder agreements or statutes. Transfers cannot normally take place without any restrictions because a company often has a legitimate interest in overseeing and approving who can become a shareholder. Traditionally, any individual who buys shares must receive approval for this transfer from the company’s board of directors, according to the Limited Liability Companies Act section 4-16 nr 1. This approval must be given within two months after purchase and may only be denied if there is a valid reason for doing so. One reason might be if a new shareholder does not satisfy the requirements for ownership as stipulated by the shareholder agreement.

Buying and selling shares often – but not always – requires that a new owner enters into a shareholder agreement, thereby becoming bound by the rules that apply to among other things transferring the shares in question. This process may take place either through a so-called deed of accession or a signature on the shareholder agreement.

Right of first refusal

A stipulation may be made in the shareholder agreement which states that a company has the right to purchase its own shares, and that this right will be prioritized over other shareholders or any other external buyers.

The Limited Liability Companies Act section 4-19 is based on the principle that all existing shareholders have the same right to acquire a share that has changed owners. Exceptions from the Act’s stipulations may be agreed upon in the shareholder agreement or statutes. The first right of approval may not be given to previous shareholders’ close relatives.

Redemption of previous owners

What are shares worth? Disagreements over price may arise between individuals who want to dispose of their shares and companies who want to acquire their share portfolios. This may be especially true for start-up companies where the value consists of human capital or a patent that has not yet been commercialized. The Limited Liability Companies Act is based on the stipulation that a redemption amount is to be determined in accordance with section 4-17 nr 5. The process for calculating this sum may be defined in the statutes or shareholder agreement. Alternatively, a dispute resolution process may be sought if the parties cannot agree.

The law is based on the idea that it is the share’s actual value that must be compensated at the time of any buyout. One way of doing this is of course to look at the book value or last accounting month, especially if this is given a short time before the takeover. Another method can be to estimate the actual market value. Giving consideration to protecting the individual who is selling their share (“minority protection”) dictates that the pricing must be as correct as possible.

If the parties cannot come to an agreement, a request may be made to resolve the dispute over the share’s value. This may mean that it will take time to determine the correct value, and it may also lead to added costs. While the Limited Liability Companies Act does not say anything about how this dispute resolution is to be conducted, the shareholder agreement might contain rules about this point. However, it should be noted that a shareholder does not necessarily need to accept the shareholder agreement’s rules if the result leads to the risk of an incorrect valuation. The Limited Liability Companies Act says itself that a rule in the shareholder agreement or statutes that indicates a calculation of the redemption sum can be censored in accordance with section 36.

Drag along right

‘Drag along right’ is a term that is often used in shareholder agreements. It describes a situation when one or more shareholders want to sell their shares, the drag along right gives the other shareholders the right to have their shares sold to the same buyer at the same price, terms and conditions. This means that shareholders do not have to be minority owners in their own company; nor are they locked into any situation as a result of a transfer.

Tag along right

‘Tag along right’ is also a term that frequently appears in shareholder agreements, taking place when one or more shareholders want to sell their shares. The tag along right means that a shareholder can force the other shareholders to sell to the same buyer under certain terms, thereby singlehandedly initiating the sale of the entire company.

A tag along clause can therefore not only take away the possibility the other shareholders have to hinder a buyout offer but also the chance to get a higher price in the market since the entire company can now be sold as one unit.