Responsible Companies in Norwegian Law – Capital Structure, Liability, and Transferability

General partnerships represent a distinct form of company in Norwegian law with unique characteristics that clearly distinguish them from joint stock companies. These companies are primarily characterized by the direct, unlimited, and joint liability the participants have for the company's obligations. This article highlights fundamental legal aspects of general partnerships, focusing on capital requirements, decision-making, transferability, and the partner's ownership rights.

Capital aspects in general partnerships

Absence of deposit requirement

Unlike joint stock companies, where the share capital must be at least 30,000 kroner, there is no statutory obligation in general partnerships for participants to make capital contributions or other efforts in the company. This is clearly stated in the Companies Act § 2-6 first paragraph. However, the law allows participants to agree on capital contributions among themselves.

Practical reality

Even though the law does not require capital contributions, it will often be necessary in practice for participants to contribute capital, labor, or other values for the company to carry out its business. This means that the main rule in practice often becomes the opposite of the law's starting point – contributions are usually necessary for the company to function.

Free disposal of company capital

A significant difference from joint stock companies is that there are no rules on the binding of company capital in general partnerships. This is related to the form of liability:

• The participants are directly, unlimitedly, and jointly liable for the company's obligations (Companies Act § 1-2 first paragraph letter a, cf. §§ 1-1 first paragraph and 2-4 first paragraph)

• In principle, all equity can be returned to the participants

• Distributions can even be decided at the expense of the company's debts, without the company's creditors being able to oppose it

Creditor protection is thus not linked to the binding of capital in the company but to the participants' personal and unlimited liability.

Decision-making processes in general partnerships

Principle of unanimity

In general partnerships, the main rule is that decisions in the company's meeting require the consent of all participants. This principle of unanimity is enshrined in the Companies Act § 2-12 first paragraph and reflects the company's character as a partnership where participants have personal liability.

The principle of unanimity gives each participant a veto right against company decisions, which highlights the strong position each participant has in the company. This contrasts with joint stock companies, where decisions are normally made by majority vote.

Transferability of company shares

Main rule of non-transferability

A share in a general partnership is, as a default rule, not transferable. This is stated in the Companies Act § 2-28 first sentence. This limitation in transferability reflects that general partnerships are personal companies where the identity of the participants is considered a fundamental foundation for establishment.

The non-transferability is directly related to the form of liability – when participants have unlimited liability for the company's obligations, it is crucial who the other participants are, especially considering their financial solidity and personal qualities.

Consequences for the share's character as a financial right

While shares typically have value as transferable financial rights, this is not the case to the same extent for shares in general partnerships. The limited transferability means that the share's value is primarily linked to the participants' right to distributions from the company and not to the possibility of selling the share at a profit.

Alternatives to transferability

The law does not exclude that certificates of shares for a share in a general partnership can be issued, and it can be agreed that the share shall be transferable. Such agreements must be included in the partnership agreement and will represent an exception to the main rule.

Change of ownership on a basis other than transfer

Inheritance and spouse substitution

The same considerations that argue against transferability of shares also argue against change of ownership on other grounds:

• A share in a general partnership cannot change ownership by inheritance without authorization in the partnership agreement

• The other participants can exclude the heir or the estate (Companies Act § 2-31 first paragraph)

• The same applies to the spouse who has taken over a deceased participant's share in connection with undivided estate, or who has received the share in a spouse substitution

Pledging and creditor seizures

Even though the share as a rule cannot be transferred, this is not in itself a hindrance to:

• Voluntary pledging of the share (although there is a question of mortgage legal authorization)

• Creditor seizures in the share - the company's and participants' individual creditors can seize the company share

• Bankruptcy - both the company and the participants can be declared bankrupt or be subject to other insolvency proceedings

It is worth noting that the company is considered its own bankruptcy entity, with the consequence that company creditors have a priority over the company's assets compared to the participants' individual creditors.

Participant's ownership control

Control over the company's assets

The ownership control over the assets of a general partnership must be resolved by the rules governing the management of the company. It is the company – through the company's meeting – that exercises ownership control over each of the company's assets (e.g., use, sale, pledging).

Participants in general partnerships are prevented from controlling their shares in individual assets in their own interest. This does not differ significantly from the situation in joint stock companies, but the reasoning is more practically oriented – individual control would create insurmountable practical problems.

The relationship to individual authority under the Companies Act § 2-20

The participants' lack of right to control individual company assets does not conflict with the authority each participant has under the Companies Act § 2-20 to exercise ownership control. Important points here are:

• The authority under § 2-20 is exercised as an organ for the company and in the company's interest

• The authority is not limited to the participant's own shares in the company's assets

Control over net share

Although the participant cannot control the individual assets of the company, each participant has control over their claim for distributions from the company (net share). This is an independent asset that the participant can dispose of.

Mutual deduction right

A particular question that arises in connection with the participants' ownership control is whether each participant can demand that the company's assets primarily cover the company's obligations. This may become relevant in several situations:

• When a participant is to be redeemed

• When the company is to be dissolved

• When the company is declared bankrupt

It is a settled law that each participant in a general partnership has such a mutual deduction right concerning the company's obligations. This right can also be asserted against the individual creditors of the other participants.

Comparison with joint stock companies

To understand the unique features of general partnerships, it is useful to compare them with joint stock companies:

Conclusion

General partnerships are personal companies where the participants' unlimited liability for the company's obligations is the central characteristic. This liability influences all other aspects of the company form – from capital aspects and decision-making to transferability and ownership control.

The absence of statutory capital contributions and capital binding makes the company form flexible but also imposes significant financial responsibility on the participants. The principle of unanimity and the limitations on transferability underscore the personal element and mutual trust that must normally be present between participants.

For businesses where participants want close cooperation and are willing to take on personal responsibility, a general partnership can be a suitable company form. However, it requires careful considerations and a good understanding of the legal consequences that this company form entails.