Misuse of Position in the Company!

When a company enters into an agreement, this must be done by someone with the authority to represent the company externally — typically the board, in some cases the managing director, and other individuals who have been granted external authority. When these individuals exercise this authority, it must be used within certain limits. They are prohibited from “taking any action that is likely to give certain shareholders or others an unreasonable advantage at the expense of other shareholders or the company,” cf. Section 6-28 of the Norwegian Limited Liability Companies Act (aksjeloven). This article takes a closer look at what this restriction actually entails.

Unreasonable Advantage

Section 6-28 of the Limited Liability Companies Act does not mean that every special benefit is unlawful. Rather, the special benefit must be based on a legitimate and reasonable ground that serves the common interest of the company and its shareholders. The law characterizes a benefit that fails this test as an unreasonable advantage. It must therefore be assessed whether a benefit that goes beyond a single shareholder or other party would nonetheless serve the common interest of the company and its shareholders. Since the law specifies that the advantage must come at the expense of the company or the shareholders, the provision does not capture arrangements where the company receives something in return of equivalent value — even if the shareholders consider the arrangement to be commercially unwise.

Since the law states that one may not take any action that gives either a shareholder or someone else an unreasonable advantage, there is no limitation on who may receive such a special benefit. It could therefore be a shareholder’s related party, a creditor, or an entirely unrelated third party. The key point is that no one should receive a special benefit at the expense of the company or the other shareholders.

It also follows from the law that one must not take any action that is “likely” to give rise to an unreasonable advantage. This means the special benefit need not have already materialized — it is sufficient that the decision could potentially create such an advantage.

Transactions Covered

The law states that one cannot take any action that could give rise to an unreasonable advantage. This means that, in principle, all types of transactions can be covered. It therefore does not need to be a commercial agreement with another company — it could equally be a shareholder’s spouse being hired by the company on terms that are not at market rate.

Consequences of Breaching the Provision

If someone representing the company misuses their position by granting an unreasonable advantage, this may give rise to liability for damages on their part — provided the other conditions for liability under Section 17-1 of the Limited Liability Companies Act are also met. It may also render the transaction invalid, cf. Section 6-33 of the Limited Liability Companies Act, provided the counterparty neither understood nor should have understood that the person representing the company externally lacked the authority to carry out the transaction.

Shareholders who are dissatisfied with a transaction they believe violates Section 6-28 can claim both damages and invalidity, as described above. In addition, several company-law remedies are available. An extraordinary general meeting can be called, cf. Section 5-6 of the Limited Liability Companies Act. At this meeting, the board’s decision can be reversed if sufficient majority is achieved and no third-party rights stand in the way. If the decision cannot be reversed, the board can be instructed to refrain from similar decisions in the future. Furthermore, board members can be removed, cf. Section 6-7 of the Limited Liability Companies Act, and an investigation can be demanded, cf. Section 5-25 of the Limited Liability Companies Act.

Duty to Refrain From Implementing Certain Decisions

The starting point under the Limited Liability Companies Act is that the board has a duty to follow up on decisions made by the general meeting, and the managing director has a duty to follow up on decisions made by the board. However, it follows from Section 6-28(2) of the Limited Liability Companies Act that the board or the managing director must not comply with decisions from the general meeting or other company bodies that conflict with law or the articles of association. For the board, this applies to decisions from the general meeting and the corporate assembly, while for the managing director it also extends to board decisions. The wording only refers to the board and the managing director, but is presumed to also cover others who participate in carrying out a decision that conflicts with law or the articles of association.

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