Apr 8, 2025
Articles of Association and Shareholders' Agreements – Central Governance Tools in Corporate Law
In corporate law, there are several legal instruments that regulate a company's operations and the rights and obligations of its participants. While legislation provides general rules for all companies of the same type, articles of association and shareholder agreements are company-specific documents that offer more detailed regulation of the individual company. This article provides a thorough introduction to the significance and legal effects of the articles of association and shareholder agreements, as well as the relationship between these two central governance tools in Norwegian corporate law.
Articles of Association as a Legal Basis
The Legal Nature of the Articles of Association
The articles of association are often referred to as the company's "constitution" and are the central governance document for limited liability companies and public limited companies. They are binding on the company's bodies and all shareholders - both those who were present when the articles were adopted and those who have subsequently acquired shares in the company.
The articles have both a contractual and corporate legal aspect. On one hand, they constitute an agreement between the founders/shareholders. On the other hand, they establish the company as an independent legal entity and thereby also regulate the relationship between the participants and the company as such, which in practice means its governing bodies.
Relation to the Incorporation Document
It is important to distinguish between the articles of association and the incorporation document. The company laws prescribe that the founders of a limited liability company create an incorporation document, which must include the articles of association (cf. the Companies Act/Public Companies Act § 2-1). Therefore, the incorporation document is more comprehensive than the articles and includes additional information specified in the Companies Act/Public Companies Act § 2-3.
The founders must date and sign the incorporation document, and when all founders have done so, and the shares are subscribed, the company is considered incorporated (cf. the Companies Act/Public Companies Act § 2-9).
Amendments to the Articles
One of the most significant differences between articles and ordinary agreements is the way they can be amended. Articles can be amended by the general meeting with the approval of at least two-thirds of both the votes cast and the share capital represented at the general meeting (cf. the Companies Act/Public Companies Act § 5-18).
This requirement for a qualified majority represents a balance between two considerations:
The need for stability and predictability for shareholders (which suggests unanimity)
The need for flexibility and adaptability over time (which suggests a simple majority)
Public Disclosure and Legal Effects for Third Parties
The articles must be registered in the Business Register and are thus publicly accessible (cf. the Business Register Act § 3-1 no. 1). This has an impact on the legal effects of the articles for third parties. A third party dealing with the company is deemed to be aware of the contents of the articles, as they could have examined the Business Register (cf. the Business Register Act § 10-1).
Contents of the Articles
The articles include both mandatory subjects (which the law requires to be included) and optional subjects (which the company itself can choose to regulate). The minimum content requirements are specified in the Companies Act/Public Companies Act § 2-2.
Interpretation of Articles
In interpreting the articles, the starting point is the general principles of contract interpretation. Nonetheless, the wording is usually given even more emphasis in the interpretation of articles than in ordinary contract interpretation. This is because the articles apply to an indeterminate group of people - not just the founders, but all who are shareholders at any time and potentially also third parties.
For article interpretation, an objective interpretation principle applies, where the individual shareholder's intentions, company practices, etc., are largely disregarded. In companies with a few shareholders, it may still be natural to place greater emphasis on what the parties intended when the specific provision was included in the articles.
Other factors that may be significant in article interpretation include the duration of the company relationship, the fact that the company relationship is typically a cooperative relationship where the parties owe each other loyalty, other real considerations, and avoidance principles.
The Company Agreement in Partnerships
Function and Nature of the Company Agreement
In partnerships, participants are obliged to create a dated written company agreement to be signed by all participants (cf. the Partnerships Act § 2-3 first paragraph first sentence).
The company agreement in a partnership has essentially the same function as the incorporation document/articles in a limited or public limited company. It is considered the company's "constitution" and is binding on the participants, the company itself, and third parties.
From the time the company agreement is created and signed, the partnership is considered formed. At this point, the situation is the same as in a limited company.
Differences from Articles in Limited Companies
The most important difference between a company agreement in a partnership and articles in a limited company concerns the amendment procedure. Unless otherwise agreed, a company agreement cannot be amended without the unanimous consent of all participants (cf. the Partnerships Act § 2-12 first paragraph second sentence).
This requirement for unanimity is related to the fact that a partnership is largely considered to be an ordinary contractual relationship between the parties, but also to the personal and unlimited liability that applies to the company's debts.
Changes to the company agreement should as a rule be made with the written consent of all participants (cf. the Partnerships Act § 2-3 first paragraph second sentence). A practical exception is that if the changes appear in the meeting minutes of the company meeting, the signing requirement does not apply.
Company Purpose
Function of the Purpose
A central part of the articles/company agreement is the company purpose. The company participants are obliged to agree on the business the company will conduct by including a provision on the company's purpose in the articles/company agreement (cf. the Companies Act § 2-2 first paragraph no. 2, the Public Companies Act § 2-2 first paragraph no. 4 and the Partnerships Act § 2-3 second paragraph letter c).
The purpose statement primarily acts as a directive for the board and the general meeting majority by ensuring that decisions lie within the purpose's parameters. In this way, the purpose sets a limit to the board's authority and the general meeting majority's authority.
Interpretation of Purpose Provisions
To determine whether a specific action falls within the purpose, the purpose provision must be interpreted. A practical interpretation question is whether the business is limited to what is expressly stated, or whether similar business or business associated with the stated is also included.
The initial interpretation is based on the purpose provision's indication of the purpose. The question then becomes which actions can reasonably be associated with the exercise of the business indicated there. More precisely, the action must by its nature be in a reasonable connection with the company-stated business, and its scope must reasonably relate to this business.
In practice, it has become common to formulate the company purpose quite broadly, often listing several purposes that end with a general statement about "other similar business." Since purpose provisions are typically liberal in their wording, they usually do not pose a strong limitation on the company's organs' representation and legitimacy outwardly.
Purpose Contrary Actions and Third Parties
For the board's and managing director's authority to bind the company vis-a-vis third parties, special questions arise if the company representative acts contrary to the company purpose. This must be assessed based on the Companies Act/Public Companies Act § 6-33 (cf. the Partnerships Act § 2-22 second paragraph).
According to these rules, a purpose contrary disposition cannot be challenged in relation to a contracting party who acts in (good) faith. Even though third parties via the Business Register are considered to be aware of the registered purpose, this does not mean that third parties are assumed to know that the individual action or agreement is contrary to the purpose.
Shareholder Agreements
Definition and Characteristics
A shareholder agreement is an agreement between two or more shareholders on the exercise of shareholder rights in the company. In principle, shareholder agreements can regulate both management rights, disposition rights, and economic rights, but most shareholder agreements concern the exercise of voting rights at the general meeting.
Essentially, a shareholder agreement is entered into between the shareholders; it is the shareholders, not the company (and its organs), that are obligated and entitled under the shareholder agreement. Thus, the company does not become a party to the shareholder agreement. Nor do shareholders who do not join the agreement as parties.
Binding Effect of Shareholder Agreements
In principle, the shareholder agreement only binds the shareholders who are parties at the time it is entered into. If the share is transferred to a new owner, the agreement must normally be considered non-binding on the acquirer. For the acquirer to be bound by the shareholder agreement, a specific legal basis is required, typically that the acquirer itself joins the agreement.
The parties may agree among themselves - and make it a condition in the shareholder agreement - that a shareholder cannot sell the share unless it is to a buyer who simultaneously adheres to the shareholder agreement. This can be an effective way to ensure that all shareholders are bound by the shareholder agreement at any time.
However, it is not permissible for the articles to require an acquirer to join a shareholder agreement as a condition for acquiring shares in the company. Such a provision would conflict with the principle of free transferability of shares (cf. the Companies Act § 4-15 first paragraph).
Relationship with the Company
A question that often arises is whether the company can be made a party to the shareholder agreement. In principle, the company can bind itself to the provisions of the shareholder agreement, but the possibility is limited by mandatory rules in corporate law and by unwritten shareholder law.
Since these rules normally apply equally to both the company and the shareholders, the agreement cannot normally be given stronger corporate law effectiveness by including the company as a party. For example, neither the company nor the shareholders can, by agreement among themselves, bind the free exercise of authority in the company's organs.
Motivation for Shareholder Agreements
There are several reasons why shareholders choose to enter into shareholder agreements as an alternative or supplement to article provisions:
Lack of Majority for Amendments: It may be difficult to achieve a two-thirds majority to amend the articles, while a shareholder agreement only requires agreement between the parties.
Desire for Discretion: Articles are registered in the Business Register and are public, whereas shareholder agreements can be kept confidential.
Regulation Not Possible in Articles: Certain matters cannot be regulated in the articles by law but can be agreed upon among shareholders in a shareholder agreement.
Validity of the Shareholder Agreement and Relationship with Mandatory Law
Whether a provision in a shareholder agreement can conflict with mandatory corporate law depends on interpreting the relevant provision of the law. It is unclear where the boundary between mandatory and declaratory rules in corporate law lies, as the Companies Act does not contain a general rule on its (non-)derogability.
Often, the decisive factor will be whether the provision aims to protect someone who is not a party to the agreement - third parties. In such cases, the rule will easily be seen as mandatory, meaning it cannot be contracted out of in a shareholder agreement.
Breach of Shareholder Agreements
Breaches of shareholder agreements are sanctioned by general contract law remedies for breaches:
Specific Performance: The agreement can, in principle, be enforced in kind, but this may offer limited protection in, for example, voting agreements when the general meeting has already taken place.
Damages: In case of breach of shareholder agreements, damages can be claimed, but in breaches of voting agreements, it may be difficult to prove economic loss.
Termination: Fundamental breaches may justify termination, but this can be problematic for shareholder agreements since the parties will still be shareholders in the same company, but now without a shareholder agreement regulating their relationship.
It is particularly important to note that breaches of shareholder agreements have no corporate legal effects. A company resolution, for example, by the board or general meeting, is not invalidated because it is made in violation of the shareholder agreement.
Practical Illustration: Telia/Telenor Merger
The merger negotiations between Telia (Sweden) and Telenor (Norway) in 1999 illustrate well the relationship between articles and shareholder agreements in practice.
In connection with the planned merger, a shareholder agreement was made between the Norwegian and Swedish states as shareholders in the new parent company Newtel. The agreement regulated, among other things, the composition of company bodies, the location of the headquarters, and other central issues. However, the articles were kept to a minimum level according to Swedish corporate law.
The merger fell apart when disagreements arose over the location of the mobile unit's headquarters. The Norwegian board members believed this required a qualified majority in the board under the shareholder agreement, while the Swedes believed a simple majority was sufficient.
This case illustrates two important points:
Shareholder agreements do not bind the company's organs (the board could make decisions without regard to the shareholder agreement).
Termination of the shareholder agreement is not always an appropriate sanction, as the parties will remain shareholders in the company, but without the protection the shareholder agreement provides.
In reality, it was the lack of mutual trust and willingness to cooperate that caused the merger to fail, not the legal construction itself.
Conclusion
Articles of association and shareholder agreements are important governance instruments in corporate law, but with different functions and legal effects. The articles are the company's "constitution" and bind the company, its bodies, and all shareholders. They can be amended with a qualified majority and are publicly available.
On the other hand, shareholder agreements only bind the shareholders who are parties to the agreement, not the company or its organs. They can be kept confidential and offer greater flexibility in regulating relations between shareholders but have limited enforcement power in case of breach.
The choice between article regulation and shareholder agreement should therefore be based on a specific assessment of what is to be regulated, who should be bound, and the desired degree of publicity. In many cases, a combination of article regulation and shareholder agreement will provide the most appropriate regulation of the company's and shareholders' relations.
