Compulsory Redemption and the Right to Investigation | Forvis Mazars Legal

What Happens to the Right of Investigation When a Shareholder Is Compulsorily Redeemed? An unresolved question with implications for minority protection and the balance of power in limited liability companies.

If a shareholder wishes to examine certain matters relating to a limited liability company, the shareholder may demand an investigation pursuant to section 5-25 of the Norwegian Limited Liability Companies Act (the “Companies Act”). Under this provision, an investigation may be requested into the company’s formation, its management, or specified aspects of its administration or accounts, as set out in the first paragraph. A strict requirement applies: representatives of at least 10 per cent of the share capital must vote in favour of the demand at the general meeting for the investigation to be carried out.

Once such a demand has been made, a delicate situation arises. From the moment the demand is submitted, any shareholder who owns more than 90 per cent of both the shares and the votes may initiate a compulsory redemption (squeeze-out) of the remaining shareholders, cf. Companies Act section 4-26. The question then arises whether the shareholder who has demanded the investigation still has a legal interest in having the investigation request heard—or whether that shareholder must withdraw the case, or the district court must dismiss it for lack of standing. The same issue also arises where an investigation has already been ordered.

This situation appears to have been considered in Rt-2004-1170. In paragraph 26 of the decision, the Supreme Court’s Appeals Committee stated:

“In the Appeals Committee’s view, section 5-25 of the Companies Act must be understood to mean that, as a general rule, it is a condition for carrying out an investigation at the request of a shareholder that the shareholder is a shareholder at the time the demand is submitted and continues to be so for as long as the investigation is ongoing.” (emphasis added)

That case concerned a shareholder who voluntarily transferred his shares to another party after the demand for investigation had been made. In such circumstances, different considerations come into play, suggesting a form of acceptance by the transferring shareholder that he relinquishes participation in the investigation.

The issue forming the basis of this article, however, concerns situations in which the minority shareholder is redeemed by force. The scope of the 2004 decision is commented on by Jacob Sverdrup Bjønness-Jacobsen in Gransking etter aksjelovene at pp. 111–112:

“A rule that the shareholder must continue to be a shareholder for as long as the investigation is in progress has no basis in the wording of the statute and is not specifically reasoned in the 2004 decision. The statement was unnecessary for the outcome of the case, and the justification for such a rule is doubtful. The investigation proposal will, by implication, have been supported by a sufficiently large group of shareholders, the court has found reasonable grounds for investigation, and which shareholder happened to submit the demand is incidental. Shareholders come and go, an investigation may last a long time, and there is no necessary or presumed link between the applicant and the investigation process.” (emphasis added)

Bjønness-Jacobsen’s position is briefly noted by Magnus Aarbakke et al. in their commentary to Companies Act section 5-25, para. 2.2:

“The main rule is that the party demanding an investigation must be a shareholder at the time the demand is made and must continue to be so while the investigation is ongoing. … [Bjønness-Jacobsen] questions whether a requirement can be imposed that the demanding shareholder must remain a shareholder for the entire duration of the investigation.”

On the basis of the foregoing, it is legitimate to ask which solution the courts should adopt—whether to allow the investigation to proceed or to dismiss the case when this particular situation arises.

The investigation mechanism may be viewed as two-fold: on the one hand, it protects shareholders against any disloyal or reckless management of the company by the board; on the other, it respects that the board has been entrusted with its mandate and responsibility to decide what is in the company’s best interests, both now and in the future. Because the board’s mandate is granted by the shareholders at the general meeting, there should be a certain threshold before shareholders can overrule the board’s strategic and business decisions. One may therefore argue that it is reasonable for a shareholder, after compulsory redemption, to have lost their corporate interest in reviewing the board’s decisions. The shareholder no longer has voting rights at the general meeting and will not receive dividends. Whether the company prospers or falters in the future will not affect the redeemed shareholder.

Conversely, the rule apparently established by the Supreme Court—and endorsed by Aarbakke et al.—would create a presumably unintended opportunity for abuse by the company and the majority shareholders. A shareholder who has been squeezed out may no longer have an interest in the company’s future growth, but will often have a strong interest in discovering whether the company’s past operations complied with the Companies Act and other regulatory rules and regulations that the board is obliged to follow. The board may, for instance, have embezzled funds, diverted company assets, or made concealed payments that directly affected the shareholders’ dividends—or lack thereof. Even though the shareholder is no longer a shareholder, they may still have both economic and business interests in pursuing a well-founded suspicion of wrongdoing. Ultimately, it is for the district court to assess the merits of the demand, cf. Companies Act section 5-26, and the shareholder’s status as shareholder should play no role in that assessment.

Moreover, under the solution endorsed by the Supreme Court and Aarbakke, the board and majority shareholders could always squeeze out minority shareholders who demand an investigation, thereby ensuring that the company is never subjected to scrutiny. That would entirely undermine minority protection and cannot have been the intention of the legislature.

Conclusion: The Supreme Court and other courts should not dismiss an investigation demand on the ground that the demanding shareholder has been redeemed by the majority shareholder after the demand was made.