Apr 8, 2025
Fundamental Principles in Corporate Law – Liability, Democracy, and Duty of Loyalty
Company law is a comprehensive legal field that today is extensively regulated through legislation, primarily through the Companies Act and the Public Companies Act. Behind the many individual rules, however, lie a few central legal principles that both justify and interpret the corporate law rules. These principles are crucial to understanding company law as a whole and form the foundation for the various provisions in the legislation.
This article highlights the most central principles in company law. The principles we review represent the cornerstones of company law and have a direct impact on practical corporate management, the legal position of shareholders, and the protection of various interests related to the company.
The Principle of Limited Liability
One of the most fundamental features of limited companies and public limited companies is the principle of limited liability. This principle is enshrined in the Companies Act and the Public Companies Act § 1-2 first paragraph, which states:
“The shareholders are not liable to the creditors for the company's obligations.”
This means that it is the company itself – and not its shareholders – that is liable for the business's obligations. The company's assets are thus separate from the shareholders' other assets, creating a clear distinction between the company's and the shareholders' finances. This principle constitutes one of the most important differences between limited companies and personal company forms such as general partnerships.
The Principle of Limited Contribution
As a supplement to the principle of limited liability, the principle of limited contribution applies. This is enshrined in the Companies Act and the Public Companies Act § 1-2 second paragraph:
“The shareholders are not required to make contributions to the company or, in case of bankruptcy, to its estate beyond what follows from the basis for the share subscription.”
This principle means that shareholders are not liable for the company's debts beyond the amount they have subscribed or bought shares for. The company's potential bankruptcy will therefore not have direct consequences for the shareholders' personal finances, and creditors cannot demand that shareholders cover the company's debts with their personal assets.
The principle of limited liability is not absolute, as shareholders may become responsible on a particular basis in certain circumstances:
Through contractual obligations, such as guarantees
Through liability for compensation for losses creditors incur if the shareholder intentionally or negligently caused the loss
In very special cases through the piercing of the corporate veil, where shareholders can be identified with the company
The Principle of Restricted Capital
The principles of limited and indirect liability must be seen in conjunction with the principle of restricted capital. This principle means that the share capital (along with certain reserves) constitutes the company's restricted equity, and this sets limits on the company's freedom to make distributions.
The Companies Act and the Public Companies Act § 8-1 first paragraph first sentence states:
“The company may only pay dividends to the extent that the net assets after the distribution cover the company's share capital and other bound equity according to §§ 3-2 and 3-3.”
This means that shareholders cannot freely dispose of the share capital; it is, as the name implies, bound equity. Only the company's free equity can be used for distributions, such as dividends, group contributions, gifts, loans to or guarantees for shareholders, acquisition and pledging of own shares, and capital reductions.
Limited Significance for Creditor Protection
It is important to be aware that the bound share capital in practice has limited significance as protection for creditors. There are no investment restrictions or requirements that the share capital must remain immobile in an account. As long as management operates within the corporate purpose, the share capital can be freely used for operations, investments, or other purposes.
Especially in companies with the legal minimum share capital requirement (30,000 kroner for limited companies), the share capital provides no real creditor protection. This was one of the reasons for reducing the minimum share capital requirement from 100,000 to 30,000 kroner in 2011.
Substantive Rules as Supplement
To compensate for the limited creditor protection provided by the formal capital requirements, the company legislation contains substantive, discretionary rules. The Companies Act § 3-4 requires that the company must at all times have equity and liquidity that is “prudent considering the risks and extent of the company's operations.” This places a significant responsibility on the board, which must make independent assessments of what constitutes a fair dividend distribution, even if the formal requirements for free equity are met.
The Principle of Shareholder Democracy
In limited and public companies, a principle of democracy applies, meaning that shareholders can control the company through majority decisions at the general meeting, such as by appointing the board and making other central decisions. This principle is grounded in the Companies Act and the Public Companies Act § 5-17, which states that an ordinary majority is sufficient for most decisions at the general meeting.
The principle of democracy enables effective leadership of the company and allows for a separation of ownership and management, which may be necessary to achieve professional management and attract investors.
The principle of shareholder democracy is limited by two factors:
Minority Rights: Statutory rights that allow a minority of shareholders to exercise certain rights, such as the demand for an extraordinary general meeting or audit.
Qualified Majority Requirements: For particularly important decisions, such as amendments to the articles, more than an ordinary majority (two-thirds majority) is required.
The Principle of Minority Protection
The majority principle in company law creates a need for rules that protect minority shareholders. This is especially important in limited companies, where shares are often not subject to regular market trading, and where minorities may therefore find it difficult to exit the corporate relationship.
The Companies Act contains several rules that provide minority protection, including:
Minority Rights: Rights that can be exercised by a minority of a certain size, for example:
Right to demand an extraordinary general meeting (§ 5-6)
Right to demand an audit (§ 5-25)
Right to demand a higher dividend set by the district court (§ 8-4)
Right to make compensation claims on behalf of the company (§ 17-4)
Qualified Majority Requirements: For particularly important decisions, such as amendments to the articles, a two-thirds majority is required (§ 5-18).
Right to Withdraw: In specific circumstances, a shareholder can demand to be bought out of the company (§§ 4-24 and 4-17).
Prohibition Against Abuse of Power: The general clause in § 5-21 prohibits the general meeting from making decisions that give certain shareholders or others an unreasonable advantage at the expense of other shareholders or the company.
The Supreme Court has in several cases upheld claims by minority shareholders for withdrawal or annulment of the majority's decisions, particularly in cases of “starvation,” where the majority has long refused to distribute dividends despite good dividend capacity.
The Principle of Equality
The principle of equality is enshrined in the Companies Act and the Public Companies Act § 4-1 first paragraph first sentence, and means that all shares of the same size have equal rights in the company. This ensures that shareholders have equal and reasonable access to benefit from the company's operations through the value and dividends their shares are entitled to.
The principle of equality does not prevent a majority shareholder from gaining preferences at the expense of the minority due to the size of their shareholding. The majority shareholder can, for example, “control” the general meeting and elect those they desire to the board, as a consequence of the majority principle. The principle of equality is related to the share, not the shareholder.
However, the principle of equality prevents:
A shareholder from receiving a greater right to dividends on their shares than other shareholders
A shareholder from receiving a greater share of the assets upon liquidation
A shareholder from receiving extended voting rights on their shares compared to other shareholders
The legislation allows statutes to provide for “shares of different types” (multiple share classes), but the principle of equality is manifested by the fact that such division into different share classes cannot occur for previously equal shares without the consent of all shareholders.
The principle of equality is not absolute. It is the unfounded differential treatment of shares/shareholders that it hinders. For differential treatment to be legitimate, it must be the result of a balancing of the collective shareholder interest (corporate interest) against the interest of the individual shareholder.
The Principle of Prohibition Against Abuse of Power
The principle of equality must be seen in conjunction with the principle of prohibition against abuse of power, which is enshrined in the general clauses in the Companies Act and the Public Companies Act §§ 5-21 and 6-28. These provisions mean that corporate bodies must not undertake anything that is suitable to give certain shareholders or others an unreasonable advantage at the expense of other shareholders or the company.
The general clauses establish a broad basis for minority protection and go beyond the principle of equality and the individual rules on minority rights. They typically address two situations:
Favoring Certain Shareholders at the Expense of Others: This directly refers to the principle of equality but extends it to cover decisions that do not alter the relationship between the shares themselves. It particularly encompasses advantages of an economic nature.
Favoring Some at the Company's Expense: The most practical is that the majority's special interests are favored by contributions from the company, for example through favorable loans or unreasonable remuneration to the majority shareholders or their family.
The general clauses only cover cases where a decision leads to an “unreasonable” advantage. They do not cover decisions that necessarily must favor certain shareholders, such as decisions about the time and place of the general meeting or where the company's business should be carried out.
The effect of a decision that contravenes the general clause is that the decision can be challenged and declared invalid by the court. In case law, it is also established that an agreement that is affected by the abuse rules can be revised or justify withdrawal from the company.
The Principle of Publicity
The principle of publicity implies that everyone – shareholders, creditors, employees, and the public – has the right to familiarize themselves with the company's articles and annual accounts, and thus gain insight into the company's financial position.
This principle is rooted in the Enterprise Registry Act § 8-1 and the Accounting Act § 8-1, which give everyone the right to access company information registered in the Enterprise Register and the company's annual accounts.
The principle of publicity also includes that the shareholder register is open to inspection by anyone, including the company's competitors.
This transparency can contribute to investors channeling capital to the company, but also to potential creditors or partners avoiding companies with weak finances or other problems.
The Principle of Loyalty
Company law must be supplemented with an unwritten duty of loyalty, which is based on general contract law principles. The Supreme Court has in several decisions confirmed that the duty of loyalty also applies in corporate relationships.
The duty of loyalty in company law implies that:
Shareholders have a duty to act loyally towards the company and other shareholders: This can, for example, mean that a shareholder cannot exploit voting restrictions in the statutes in a disloyal manner.
The company has an obligation to provide information to shareholders: The company must keep shareholders informed about matters of significance to their interests.
Majority shareholders have a particular duty of loyalty towards the minority: Due to the power relationship between participants, majority shareholders may have a more extensive duty of loyalty towards minority shareholders than vice versa.
The content of the duty of loyalty must be determined concretely through a weighing of different opposing considerations and can be influenced by company-specific circumstances. In a publicly listed company with many shareholders, the duty of loyalty will be less extensive than in a small limited company with few owners and close cooperation.
The Significance of Principles in Practice
The reviewed principles form the cornerstones of company law and are crucial for the interpretation of individual rules in the legislation. In practical situations, the principles can:
Provide guidance in interpreting legal rules: When the law is unclear, the principles can indicate which interpretation aligns with the fundamental ideas of company law.
Supplement legal rules: In cases where the legislation does not provide an answer, the principles can function as an independent legal basis.
Guide in the exercise of discretion: For example, when the board is assessing whether the equity is “adequate,” the principles provide guidance on which considerations should be emphasized.
Provide a basis for judicial review: The principles, particularly the prohibition against abuse of power, give courts the ability to overrule decisions that contravene the fundamental values of company law.
Conclusion
The fundamental principles of company law form a framework that balances various considerations and interests – the consideration of efficient corporate management, protection of the minority, creditor protection, and the public interest in transparency about company activities.
The principles are not static but are developed and adapted through case law and legislative changes. An example is the evolution from formal creditor protection based on rules about bound capital to more substantive protection based on requirements for adequate equity and liquidity.
For anyone working with company law – whether as an advisor, board member, or shareholder – it is crucial to understand these principles in order to navigate the complex regulatory framework that company legislation constitutes.
