Pre-emptive rights

The articles of association of a Swedish company may include provisions on pre-emptive rights, to the effect that a purchaser is obliged to offer a purchased share to other shareholders for pre-emption (Swe: hembudsförbehåll, Fi: lunastuslauseke). In Chapter 4 of the new Companies Act (2005:551) adopted on 1 January 2006 renewed regulation on pre-emptive rights was introduced which provides that the mandatory content of such provisions and the applicable procedure are stipulated in greater detail. For companies which shares are publicly listed, special restrictions apply.

Right of first refusal, requirement for consent

In addition to the possibility to include pre-emptive rights in the articles of association, new features which are described below, have been introduced for companies which shares are not subject to registration in the book-entry system.

It is possible to insert in the articles of association a requirement for consent by the company before a share is disposed of (Swe: samtyckesklausul, Fi: suostumuslauseke). The articles of association may stipulate that the consent may be given by the shareholders’ meeting, alternatively by the board of directors. If the consent is not given, another purchaser must, on request by the seller, be designated. The shareholders’ meeting or the board cannot delegate the decision making in any way. A requirement for consent may only apply to transfers of shares by acquisitions, trades and gifts (not e.g. by inheritance or testament) whereas pre-emptive rights may be stipulated to apply to all types of transfers.

Further, it is possible to insert right of first refusal provisions in the articles of association, i.e. the seller is obliged to offer the share to the other shareholders before selling to a third party (Swe: förköpsklausul, Fi: etuostolauseke). It is considered an important improvement that right of first refusal provisions, which are standard in shareholders’ agreements, can now be strengthened by provisions in the articles of association and thus, be deemed to be known to the public and potential third party purchasers. Compared to pre-emptive rights, a right of first refusal is applicable prior to the transfer of shares. A right of first refusal may apply to transfers of shares by acquisitions, trades and gifts (not e.g. by inheritance or testament) including transfers of shares belonging to a bankrupt estate or subject to execution procedure.

The Companies Act states that a transfer of shares contrary to a provision on requirement for consent or right of first refusal shall be void, and further that a transfer contrary to the companies relevant decision on consent or to the restriction periods for transferring the shares subject to right of first refusal shall be void.

Shareholders’ agreements

As it has not earlier been possible to enter a provision in the articles of association and thus create title protection for transfers affected by virtue of a right of first refusal or consent, such transfer restrictions have usually been agreed in shareholders’ agreements.

For the purpose of protecting a right of first refusal against disposals contrary to an agreement, the transferred shares are normally pledged and placed in escrow. Such measures do not, however, prohibit a third party from becoming the rightful owner of the shares pursuant to a transfer contrary to an agreed right of refusal provision.

Under Swedish law, agreed disposal provisions, option rights and pre-emption provisions are not considered effective against a third party (regardless of whether such third party acts in good or bad faith) since such rights are not rights in rem but merely apply to the contracting parties. The principle is that the effect of agreed transfer restriction is limited to the relationship between the parties to the relevant agreement and that a shareholders’ agreement does not have any corporate implications or direct effect against the company. In respect of shares this principle has if anything been reinforced by the new features added to the Companies Act. The general principle on the free transferability of shares was earlier subject only to one exemption, i.e. pre-emptive rights in the articles of association.

However, since a careful purchaser seldom acquires a share without having the corresponding share certificate delivered into their possession a certain protective effect could be achieved.

Given the above described new possibilities under the Companies Act to include pre-emptive rights, requirements for consent and rights of first refusal in the articles of association of a company, one can expect that such restrictions will now become less frequently used in shareholders’ agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.