Apr 7, 2025
Group relationships in corporate law – legal frameworks and group regulation
Corporate groups constitute a significant part of the business world and raise unique corporate law issues. This article outlines the central legal aspects of corporate group relationships, including the definition of a corporate group, the purposes of corporate group organization, the principle of legal independence, and special rules applicable to corporate groups.
Definition and Characteristics of Corporate Groups
A corporate group is characterized by two or more legally independent companies being connected as parent and subsidiary companies or as subsidiaries of the same parent company. The legal definition of a corporate group can be found in the Companies Act and the Public Limited Companies Act § 1-3, as well as the Partnership Act § 1-2.
The decisive criterion for whether a corporate group relationship exists is whether one company has "control" over another company. Such control will always exist when:
A company has the majority of votes in another company
A company has the right to elect or remove a majority of the members of the other company's board
In practice, this means that the parent company can control the economic activities of the subsidiary. This enables the organization of business activities under a common management, where the parent company constitutes the group management and is typically represented on the subsidiary's board.
Motivation for Corporate Group Organization
There can be several business reasons for organizing activities in a corporate group:
Limited Liability: By placing risky activities in separate subsidiaries, the group can limit its liability to the capital invested in the specific subsidiary.
Capital Structure: A corporate group structure allows external capital to be raised for capital-intensive parts of the business, without affecting other parts of the group.
Strategic Flexibility: Corporate group organization provides flexibility in buying, selling, and reorganizing business areas.
Operational Efficiency: The connection within the group facilitates coordination and common management of the business.
The Principle of Legal Independence
The fundamental principle in Norwegian company law is that each company within the group is a separate legal entity. This has several important consequences:
Separation of Liability: The parent company is normally not liable for the subsidiary's debts beyond its share contribution.
Decision-Making Authority: The parent company cannot make decisions that are directly binding for all group companies or issue direct orders to subsidiaries.
Formal Decision-Making Process: Formal decisions must be made in the subsidiaries' own bodies, even though the parent company often has decisive influence in practice.
Capital Rules: Each company must independently fulfill the legal requirements for capital and liquidity.
However, it is worth noting that the issue of piercing the corporate veil is particularly relevant in corporate group situations. The Supreme Court has, in certain cases, allowed for an alternative form of identification between group companies in situations of circumvention, for example in Rt 2012 s 1628 (Nordavis), which concerned the distribution of shares within the group to circumvent a voting rights restriction.
Special Rules for Corporate Groups
The legislation contains several special rules that apply precisely because there is a corporate group relationship. These rules recognize that group companies in certain contexts should be considered as an economic unit:
1. Transactions Between Group Companies
The Companies Act/Public Limited Companies Act § 3-9 establishes an important principle that transactions between companies within the same group should be based on ordinary commercial terms and principles. This implies that:
Transactions should occur at market price
Agreements should be in writing
Consideration should be given to the interests of minority shareholders
2. Group Accounts
The Accounting Act § 3-6 requires parent companies to prepare group accounts that show the results and balance when the group is considered an economic unit. This provides a more comprehensive picture of the group’s financial position.
3. Dividend Payments
A subsidiary's ability to distribute to a parent or sister company is limited by the requirement of free equity in the company making the distribution, as referenced in the Companies Act § 8-1. This also applies to a wholly-owned subsidiary.
The Supreme Court's decision in HR-2016-1439-A (Bergshav Holding) illustrates that the size of dividends "must be determined at the company level, not at the group level". At the same time, the group's financial position may be relevant when assessing whether there is an abuse of authority.
4. Credit and Security
The Companies Act/Public Limited Companies Act § 8-7 contains an important exception rule for intra-group transactions: The prohibition on a company providing credit or security in favor of a shareholder does not apply to credit or security in favor of a parent company or another company within the same group.
5. Group Contributions
Particularly practical are the tax rules on group contributions, which allow for the balancing of profits and losses between the group's companies. This helps to minimize the overall taxation of group companies, as referenced in the Tax Act §§ 10-2 to 10-4 and the Companies Act § 8-5.
6. Simplified Merger Rules
If a parent company owns all shares in a subsidiary, a merger between these companies can be carried out under simpler rules than otherwise, as referenced in the Companies Act/Public Limited Companies Act § 13-24.
7. Employee Representation
Regarding employees, there are rules on collective representation in groups that ensure the right to co-determination at the level where the real decisions are made (the parent company).
Various Definitions of Corporate Groups
It is important to be aware that different laws may have their own definitions of what constitutes a corporate group:
Corporate group in company law (Companies Act/Public Limited Companies Act/Partnership Act)
Corporate group in tax law
Corporate group in VAT law
Corporate group in accounting law
The definitions may overlap, but can also vary in content to a greater or lesser extent. For corporate law issues, the definitions in the Companies Act, Public Limited Companies Act, and Partnership Act are decisive.
Conclusion
Corporate group law illustrates a fundamental tension in corporate law - on one hand, the principle that each company is a separate legal entity, on the other hand, the economic reality that group companies often operate as an integrated unit.
The legislation balances these considerations by maintaining the principle of legal independence while recognizing the corporate group as an economic unit through special rules. This legal framework provides corporate groups with the flexibility to organize their activities optimally, while also setting boundaries that protect the interests of minority shareholders, creditors, and other stakeholders.
