INTRODUCTION
Regardless of whether you are an existing shareholder who wants to welcome new partners or you are considering investing in a company, changes of ownership entail a strategic and complicated process that requires careful planning. There are several important aspects to take into account and that entail a risk of various problems arising if not dealt with.
There are various ways to acquire or subscribe to shares and thereby become a partner in a limited company. For example, it is possible to ”buy into” a company through either purchasing shares from an existing shareholder or participating in a new share issue (and thereby obtaining newly-issued shares).
With acquisition of existing shares, the purchase price for the shares usually corresponds to the total on which buyer and seller agree. If, on the other hand, the shares were acquired through a new share issue, as a rule the subscription price is ultimately determined by the general meeting, which consists of existing shareholders. We will not go into detail in this article on how a new share issue is resolved and implemented in purely practically term. However, we have written more about how a new share issue proceeds in this article.
IMPORTANT PRACTICAL ISSUES IN CONNECTION WITH CHANGES OF OWNERSHIP
We will start by reviewing some important practical issues to bear in mind when changes of ownership in a private limited company are going to take place.
CHECK THE ARTICLES OF ASSOCIATION
Before shares are transferred to the new partner, the parties should check any provisions in the company's articles of association – are there any obstacles to transferring or acquiring shares? It is common for articles of association to contain, respectively, right of first refusal and post-sale purchase right provisions, which in principle means that shares that are to be transferred to an external party must first be offered to other shareholders (right of first refusal), and also that an external acquirer of a share has an obligation to offer the share to existing shareholders or others when an acquisition has taken place (post-sale purchase right).
In other words, provisions in the articles of association can be binding in preventing the transfer of shares to the new partner. The external acquirer is expected to be legally aware of the provisions set out in a company's articles of association, which means that these regulations are effective in relation to third parties.
TRANSFER THROUGH SHARE TRANSFER AGREEMENTS
A share transfer agreement should be drawn up when changes in the ownership base are effected through transfer of existing shares. The share transfer agreement sets the parameters for the transfer and can protect both the purchaser's and the seller's interests. The agreement contains conditions and important information surrounding the share transfer, such as purchase price, payment terms and any guarantees that the transferor
provides concerning the company's condition and assets. How these guarantee conditions are formulated is often of great importance. The price that the purchaser pays for the shares is normally based on information about the company that the seller provides. Should these details be incorrect, the purchaser has an interest in being able to enforce consequences, a price reduction for example.
It is important that the details provided in the share transfer agreement are correct and clearly defined in order to avoid any disputes in the future.
SHARE CERTIFICATE AND SHARE REGISTER
A share certificate is a valuable document and constitutes proof of a share holding. It is therefore of the utmost importance that the share certificate is ”transported onward” (through noting the transfer on the share certificate) and submitted to the new shareholder. Issuing a share certificate is not a requirement, which means that a share certificate does not always exist. Information on whether a share certificate has been issued or not shall be set out in the share register, and if it is the case that no share certificate has been issued, it can be a good idea for a new partner to ensure that the seller (if it concerns a share transfer) guarantees that this is also the case in relation to the relevant shares.
It is also important to update a share transfer in the company's share register. The share register must be scrupulously updated with all changes in the ownership structure in order to ensure that it is current and reflects the actual ownership of the company. Besides having to keep the share register up to date, there are further legal requirements surrounding what a share register must contain. It is the responsibility of the board of directors to ensure that the company has a current and otherwise correct share register.
EXTRAORDINARY GENERAL MEETING AND STATUTORY BOARD MEETING
If the new ownership structure entails a change to the composition of the board of directors, it is important to keep minutes of meetings in order to formally adjust the composition.
In the event that all or a large proportion of the shares in a company are transferred, it can often be beneficial to clarify the board's areas of responsibility in their entirety, how the company signatory will be structured and the significance of the different positions within the board through a so-called statutory board meeting. The purpose of such a meeting is to establish a stable foundation for the new board's respective members' future work and responsibility. What is resolved at a statutory board meeting can be adjusted at subsequent board meetings and updated as necessary.
REGISTRATION AT THE SWEDISH COMPANIES REGISTRATION OFFICE AND ESTABLISHMENT OF GENERAL POWER OF ATTORNEY
Any changes in the composition of the board of directors as well as, where appropriate, information on new beneficial owner, must be registered at the Swedish Companies Registration Office. Such registration can take place online or using physical forms. To avoid the risk of potential sanctions, it is important to consider the legal requirements in order to ensure that details concerning the company are correctly registered. For example, the Swedish Companies Registration Office is entitled to impose fines in relation to the company, the company's CEO or individual directors if the company (after being ordered) has not submitted details of who is beneficial owner.
If the company needs to be able to be represented by new persons directly after access to the transferred shares, it is important that a general power of attorney is issued so that relevant persons can demonstrate their authority to outsiders before such time as changes concerning, for example, the board and company signatory have been registered at the Swedish Companies Registration Office. Such a power of attorney is issued by the company's existing company signatory and essentially means that, depending on the configuration of the power of attorney, the new authorised representative will be able to perform various duties in the company's name, for example, dealing with banking matters, concluding agreements and taking decisions on company affairs before such time as all changes concerning the board of directors and the company signatory have been registered at the Swedish Companies Registration Office.
BENEFITS AND DRAWBACKS OF BRINGING IN NEW PARTNERS
Even if the issues above are dealt with correctly, introducing a new person into the ownership base can involve risks and challenges. The more partners a company has, the more complex the ownership structure becomes. It can be more difficult to make rapid decisions as a greater number of individuals might need to agree on each decision. There is therefore an increased requirement for effective, functioning communication between the partners. Furthermore, shareholders who sell parts of their shareholding will receive a smaller proportion of any profits in the company compared with if they had retained their entire holding. If the new partner subscribes to newly issued shares, this furthermore means that existing partners' shareholdings are diluted.
Bringing in a new partner in a private limited company can naturally also deliver a number of benefits, both for the company and for the existing owners. For example, a new partner can inject new capital into the company through subscribing to newly issued shares. This capital can be used for expansion, investments or to reduce any indebtedness. A new partner can also contribute competence and experience within a specific area. It can also be particularly valuable if the partner has expertise within business development, marketing or the sector in general, or if the person in question can contribute connections to a new business network for the company and thereby open up new business opportunities.
SHAREHOLDERS' AGREEMENT AND OTHER AGREEMENTS
There are various ways to minimise the risks involved in bringing a new partner into a private limited company. For example, the partners can and should – at least when it comes to private companies with a limited ownership base – conclude a shareholders' agreement. The shareholders' agreement is an agreement that regulates the relationship between the company's owners and that contains regulations on, among other things, the owners' rights and obligations, sale of shares, decision-making and resolution mechanisms in connection with any conflicts. For example, a shareholders' agreement can enable the new ownership base to agree on various majority requirements for decisions at general meetings or in the board of directors in order to either avoid the new partner gaining too much influence or, the reverse, ensure that the person in question has sufficient influence to be able to have an impact when decisions are to be made concerning the company's operations.
The shareholders' agreement also functions as a preventive measure – it is often concluded in order to avoid future disputes and discord in general among the owners. Further, it clarifies expectations and establishes a stable foundation for the company's operations. Without a well-formulated shareholders' agreement, minor disagreements can rapidly escalate into serious problems that in the worst case threaten the company's survival.
We have written in more detail specifically on shareholders' agreements in this article.
Depending on the circumstances in each individual case, it can also be necessary to conclude other agreements. For example, it might be relevant to produce an employment contract if a new partner is to be employed in the company.
To sum up, the process of bringing new partners into a private limited company is a complex task that requires planning and, in most cases, legal expertise. It should also be mentioned that the above is only a summary of certain practical issues surrounding changes in ownership in private limited companies. This article does not therefore constitute legal advice in an individual case.
