Right of First Refusal in Articles of Association and Shareholders’ Agreements: Legal Framework, Application and Practical Considerations

Right of First Refusal in Articles of Association and Shareholders’ Agreements: Legal Framework, Application and Practical Considerations

Right of first refusal is a key feature in both articles of association and shareholders’ agreements, ensuring that existing owners have a preferential right to acquire ownership interests (shares) before they can be offered to external parties.

In Denmark, right of first refusal is governed by the Companies Act and may be incorporated into both articles of association and shareholders’ agreements. A right of first refusal in a shareholders’ agreement is a contractual right that entitles a natural or legal person to purchase a share as a form of preferential right before natural or legal persons outside the existing shareholders’ agreement. Shares are typically offered on the same terms as they would apply to a third-party purchaser, although this depends on the agreement between the parties. This right must be clearly specified and agreed upon by the parties to be valid.

Rights of first refusal may be incorporated into a company’s articles of association, making them binding on the company and all its owners (shareholders). When rights of first refusal are included in the articles, they ensure that existing shareholders have a preferential right to acquire shares before they are offered to external parties. In this context, it is relevant to consider the provisions of the Danish Companies Act regarding restrictions on the transferability of shares.

In shareholders’ agreements, which are agreements between the owners of the company, the rights of first refusal may be used to regulate the relationship between the shareholders and to preserve the intended ownership structure. Shareholders’ agreements are, as a general rule, flexible and can be tailored to the specific needs and preferences of the company’s shareholders until the agreement is negotiated and finalised between the parties. They may contain detailed provisions on how the right of first refusal is to be exercised, including procedures for offer and acceptance, pricing, and applicable deadlines.

The right of first refusal may also be subject to certain conditions, such as a fixed price or a price matching an offer from an external buyer. This ensures that the holder of the right of first refusal has a genuine opportunity to exercise their right, while the seller receives a fair price for their shares.

By incorporating rights of first refusal into either the articles of association or the shareholders’ agreement, the company and its owners can achieve a high degree of control over the ownership structure and prevent unwanted changes in the group of shareholders. This is particularly important in smaller companies, where the ownership structure plays a significant role in the company’s operations and decision-making.

Legal Provisions on Right of first refusal

Rights of first refusal are governed by several provisions in the Danish Companies Act, which ensure a fair and transparent process for the exercise of such rights, including the principle of rights of first refusal in the articles of association, as set out in Section 67 of the Companies Act. This provision states that if the articles stipulate that, in the event of a transfer of shares, shareholders or others shall have a right of first refusal, the articles must include specific rules regarding this, including the deadline for exercising the right. If such provisions result in a clearly unreasonable price or otherwise clearly unreasonable terms, they may be set aside, in whole or in part, by a court ruling.

There is therefore a requirement that the rules governing the right of first refusal must be precisely defined, and that both the price and the associated terms must be reasonable.

This is just one example of relevant considerations under the Companies Act that must be observed when a right of first refusal is to be implemented in the company’s articles of association.

Right of first refusal in the shareholders’ agreement or articles of association

There are significant differences depending on whether the right of first refusal is regulated in a shareholders’ agreement or in the company’s articles of association.

A shareholders’ agreement is a private law contract between the company’s owners that governs their mutual relations. It is not publicly accessible and binds only the parties who have signed the agreement. This means that prospective shareholders may not be aware of the right of first refusal unless they receive specific insight into the agreement and consent to it. Breach of a right of first refusal contained in a shareholders’ agreement may result in contractual breach and liability for damages.

A right of first refusal stipulated in the articles of association, on the other hand, forms part of the company’s official regulations and is publicly accessible via the Danish Business Authority’s central business register at www.cvr.dk. By virtue of this, the articles are binding on all current and future owners and may be directly enforced by the company. Breach of such a provision may result in the invalidity of a transfer of shares.

Although the right of first refusal stipulated in the articles of association has the advantage of being binding on all owners and publicly accessible, it is often more advantageous in practice to regulate the right of first refusal in a shareholders’ agreement. The shareholders’ agreement provides greater flexibility to tailor the provisions to the specific needs of the ownership group and can include more detailed and situation-specific terms that are not suitable for inclusion in the articles of association. At the same time, confidentiality is maintained, as the shareholders’ agreement is not publicly accessible, which can be beneficial in relation to business strategy and ownership structure. Thus, the shareholders’ agreement allows for a more nuanced and discreet regulation of ownership matters.

If you have any questions regarding the above, please feel free to contact Business Lawyer and Partner, Thomas Hvid Kjær from Raadgiver.dk ApS at +45 71 99 06 10 or thomas@raadgiver.dk.

This article does not constitute and cannot replace legal advice. Raadgiver.dk ApS assumes no liability for any damage or loss, directly or indirectly, attributable to the use of the information provided in the article.