Apr 7, 2025
Transferability of Company Shares – Limited Liability Companies and Partnerships
For participants in partnerships, economic gain from the investment can be achieved in two main ways: through regular distributions and a share in profits (returns), or by realizing a gain by relinquishing the position as an owner. This article focuses on the latter – the possibilities of selling or otherwise transferring a company share, with particular emphasis on the legal frameworks for transferability in both joint stock companies and general partnerships.
The question of the transferability of company shares is of great practical significance. For investors wanting to realize a gain on their investment, it is crucial that the share can be transferred quickly and at market price. At the same time, the company and other participants often have an interest in controlling who comes in as new owners. The legal frameworks for transferability balance these considerations differently for different company forms.
Joint Stock Companies and Public Limited Companies
Main Principles of Transferability
In joint stock company law, it has traditionally been a main principle that shares are freely transferable. This principle is based on the notion that the joint stock company, as an economic instrument, aims to allocate risk-willing capital, and this function assumes that investors have an opportunity to exit the corporate relationship.
For public limited companies, the principle of free transferability still applies as a main rule, cf. the Public Limited Companies Act section 4-15, first paragraph:
"Shares may change owners through transfer and otherwise unless otherwise determined by law, the company's articles of association, or agreement between shareholders."
This is natural since public limited companies typically raise capital from the public, and shares in public limited companies are often listed on the stock exchange. For listed companies, a stricter requirement for free transferability applies as a condition for listing, cf. the Securities Trading Act section 13-2 and the Securities Trading Regulation section 13-4, cf. section 13-2.
However, for joint stock companies, the legal status changed with the Joint Stock Companies Act of 1997. The main rule now is that the acquisition of a share requires consent from the company, unless it is specified in the articles of association that consent is not required, cf. the Joint Stock Companies Act section 4-15, second paragraph.
The legal basis for this change is the recognition that transferability cannot solely be considered as a question of the right to dispose of property rights. In practice, most smaller joint stock companies have various transfer restrictions in their articles of association, making them "closed" companies. The legislator considered that the main rule of the law should reflect this practice.
Consent Requirement and Refusal of Consent
In joint stock companies, the board holds the authority to grant consent, unless otherwise specified in the articles of association, cf. the Joint Stock Companies Act section 4-16, first paragraph. The board must address a consent application as soon as possible, and no later than two months after the company received notice of the acquisition. Otherwise, consent is considered granted.
Consent may only be refused when there are justifiable grounds, cf. the Joint Stock Companies Act section 4-16, second paragraph. The requirement for justifiability implies that the refusal must be justified in the interests of the company, not in extraneous considerations. Case law has recognized the following as justifiable grounds for refusal of consent:
Preventing competitors or others with "hostile" intentions from obtaining an ownership position and insight
Preventing a single shareholder from becoming too dominant in the company
Maintaining the company's distinct character, for instance, as a locally anchored company (Supreme Court Report 1999 p. 1682 Østlendingen)
In Supreme Court Report 2013 p. 241 (Stangeskovene), the Supreme Court emphasized that if one wishes to ensure widespread ownership, this should be indicated in the articles of association and practiced consistently with all shareholders.
Consequences of Refusal of Consent
Upon refusal of consent, the acquirer has four alternatives under the Joint Stock Companies Act section 4-17:
Rescind the agreement with the transferor
Transfer the share to another
File a lawsuit over the validity of the refusal
Demand the share be redeemed by the company
The redemption right is particularly important as a mechanism to prevent the share acquirer from being "locked in" with their investment. The company may only refuse redemption if it designates another buyer who is willing to take over the shares on the same terms, or if redemption would cause significant damage to the company's operations or be unreasonable to the company.
Upon redemption, the value of the share shall be set to the "real value" at the time the claim is made, cf. the Joint Stock Companies Act section 4-17, fifth paragraph. In Supreme Court Report 2007 p. 1392 (Flesberg), the Supreme Court held that this is generally the presumed market value, if there is sufficient basis to determine this.
Articles of Association with Personal Clauses
The Joint Stock Companies Act allows for requirements to be set in the articles of association that share acquirers and/or shareholders must have specific characteristics, cf. the Joint Stock Companies Act section 4-18. Such personal clauses can be:
Requirements for certain qualifications (residence, profession, education, family ties)
Requirements connected to other ownership relations
Quantitative ownership restrictions ("ownership ceilings")
If the acquirer does not meet the requirements in the personal clause, the board shall refuse the acquisition to be entered into the shareholder register. The acquirer then has three alternatives: rescind the agreement, transfer the shares, or file a lawsuit to determine whether the articles of association requirements are met.
Preemptive Rights
A further restriction on the free transferability of a share is the legal main rule of preemptive rights. According to the Joint Stock Companies Act section 4-19, first paragraph, shareholders have the right to take over a share that has changed owners unless something else is established in the articles of association.
The preemptive right is partly justified by the shareholders' need to control who becomes a shareholder and partly by the desire to maintain their proportional ownership stake in the company.
Following a legal change in 2006, the preemptive right is triggered only when the share has changed owners. Previously, it became effective even before the ownership change, which can still be established in the articles of association.
When exercising the preemptive right, all shares covered by the transfer must be redeemed, cf. the Joint Stock Companies Act section 4-21, third paragraph. This protects the acquirer from being left with a small, non-influential shareholding.
The redemption sum must be set to the shares' "real value", cf. the Joint Stock Companies Act section 4-23, second paragraph, following the same principles as for redemption after refusal of consent.
Company's Acquisition of its Own Shares
Joint stock and public limited companies have a limited ability to acquire their own shares (buyback). For joint stock companies, rules were liberalized in 2013, removing the previous restriction on 10% of the share capital. For public limited companies, the 10% restriction still applies.
Buybacks of shares must fulfill three statutory requirements:
The share capital, less the repurchased shares, must not fall below the minimum allowable share capital
The remuneration must lie within the limits of the funds the company could have distributed as a dividend
The general meeting must have authorized the acquisition with a two-thirds majority
Share buybacks can be a useful instrument for ownership and generational changes, for acquiring asset values, or in companies where employees own shares as part of an incentive scheme.
General Partnerships
The Principle of Transfer Prohibition
In contrast to joint stock companies, the default rule for general partnerships is that a share cannot be transferred, cf. the Partnership Act section 2-28. This is because the personal qualities and creditworthiness of the participants are so important to the other participants that no one should be able to substitute another in their place without the consent of all other participants.
The background for this difference between company forms is the personal, unlimited, and joint responsibility for partnership obligations that participants in general partnerships have. This makes the identity of co-participants much more important than in joint stock companies, where liability is limited to the share capital.
The transfer prohibition applies to all forms of ownership transition to a new owner, including sale, exchange, gift, and inheritance. It also affects the splitting of a participant's share into "sub-shares" and the establishment of co-ownership in the share.
Possibilities for Transfer
Notwithstanding the main rule, the partnership agreement may provide that the transfer prohibition shall not apply, allowing free transfer of the share. This can be suitable in larger partnerships with many passive participants.
It can also be agreed that only certain types of transfers are permitted, for example, inheritance, while others, such as sales, require consent.
In the following special cases, there may be grounds to imply a right to transfer, even without an explicit agreement provision:
Where the partnership share is purely a capital share without rights to participate in management
Where the share is tied to a share certificate
Where the partnership agreement stipulates that the share shall not be redeemable upon termination
Consequences of Transfer
In the case of a lawful transfer, the acquirer steps into all rights and obligations of the transferor towards the other participants, cf. the Partnership Act section 2-30, first paragraph. This includes:
Right to economic dividends
Right to participate in company meetings
Authority to bind the company by agreement
Obligations under the Partnership Act and partnership agreement
Liability for the company's debt
For the company's obligations existing at the time of the change of ownership, the transferor and the acquirer are jointly liable, cf. the Partnership Act section 2-30, second paragraph. This joint liability can be a significant burden for the transferor, who risks being liable for the company's debt long after the transfer.
To alleviate this situation, the Partnership Act section 2-30, third paragraph, provides the transferor an "interpellation right" towards the company's creditors. This means the transferor can ask the creditors to release them from liability and will be free if the creditor does not respond to the request within three months.
Withdrawal as an Alternative to Transfer
Since participants in general partnerships cannot freely sell their share, the Partnership Act section 2-32, first paragraph, gives participants a compensatory right to terminate their participation with six months written notice and demand to be redeemed from the company.
This withdrawal right is an important "exit opportunity" and differs from the legal situation in joint stock companies, where no general redemption right exists.
Upon withdrawal, the participant's involvement in the company relationship ends, while the shares of the remaining participants become proportionally larger. The company is obliged to pay the withdrawing participant a redemption amount, which shall be set at the value of the share at the end of the notice period, cf. the Partnership Act section 2-32, first paragraph, second sentence.
It's important to note that the remaining participants can generally counter a withdrawal claim with a demand for dissolution and liquidation of the company. However, in practice, the remaining participants often wish to continue the partnership, making the withdrawal right a real alternative to transfer.
Conclusion
The rules on transferability of company shares reflect the fundamental differences between company forms. In joint stock companies, where responsibility is limited, the starting point is a conditional transferability with a consent requirement, but with the possibility of redemption as a safety valve. In general partnerships, with unlimited liability, the starting point is a transfer prohibition, compensated by a withdrawal right.
For potential investors and company participants, it is crucial to be aware of these differences. The choice of company form directly affects the ability to realize the investment through sale, and thus the liquidity and risk associated with the investment. At the same time, one must be aware of the possibilities to adjust the transferability rules through articles of association or partnership agreements.
