Disloyalty and circumvention

Lawyers Cecilie Amdahl and Sigurd Holter Torp of Schjødt represented Polaris Media ASA, which succeeded with its claim to enforce a redemption right.

In 2010, a shareholders' agreement was entered into between the three shareholders in Trønder-Avisa AS, i.e. Polaris Media ASA, AS Nord-Trøndelag and LL Inntrøndelagen. The shareholders' agreement contained provisions on both rights of first refusal and redemption rights. The redemption right would be triggered if someone acquired control of one of the shareholders. In that case, the other shareholders could demand to take over all of the shareholder's shares in Trønder-Avisa AS. According to the agreement, the term control was defined to apply by reference to the group definition in the Norwegian Companies Act, Section 1-3, second paragraph.

In 2020, Amedia acquired approx. 94% of the shares in LL Inntrøndelagen, and Polaris Media exercised its redemption right. LL Inntrøndelagen disputed that the redemption right had been triggered because Amedia had allegedly not acquired control of the company. Reference was made to the agreement's definition of control and that the articles of association in LL Inntrøndelagen had been amended so that no one could vote for more than 50% at general meetings. Polaris Media believed that the redemption right was triggered by the fact that Amedia had actual control, and that LL Inntrøndelagen disloyally and unlawfully tried to circumvent the redemption right.

Trøndelag District Court stated in a judgment of 6 May 2020 that the redemption right had clearly been triggered, and that there was a disloyal and unlawful attempt to circumvent the redemption right. In the judgment of 26 November 2021, Frostating Court of Appeal found it equally clear that the redemption right had been triggered.

LL Inntrøndelagen placed emphasis on the wording of the agreement related to the definition of control, so that its argument was largely made into a question of legal interpretation of decisive influence under the Companies Act, Section 1-3, second paragraph. The background was that LL Inntrøndelagen believed that it had constructed the share acquisitions and articles of association in line with  the group definition in the Companies Act.

The Court of Appeal acknowledged that a shareholders' agreement should in principle be interpreted objectively and with great emphasis on the wording, but that this did not mean that the interpretation is limited to a natural understanding of what the wording of the provision implies. The Court of Appeal stressed that any circumstance related to the agreement may be relevant to interpretation, such as the purpose of the agreement, factors from before the conclusion of the agreement, how it has been performed by the parties and general loyalty considerations. In addition, the agreement had to be interpreted broadly and, in this case, taking into account an express loyalty clause.

The Court of Appeal thereby rejected LL Inntrøndelag's narrow interpretation of the wording and stated that basic principles for interpretation of the agreement cannot be deviated from even if the agreement refers to a statutory provision.

The Court of Appeal assumed that the purpose of the first refusal right and the redemption right was to ensure that there would be no changes in the ownership of Trønder-Avisa, neither directly nor indirectly. The Court of Appeal also emphasized that the parties' subsequent behaviour showed this and that the concept of control was treated as acquiring more than 50% of the shares in one of the shareholders.

LL Inntrøndelagen had hidden Amedia's actual influence in the company through a number of different actions. The Court of Appeal agreed with the District Court's summary of Amedia's actual influence and that this entailed control. The Court of Appeal then stated that:

"In any contractual relationship, the parties have the opportunity to adapt to the obligations imposed by the agreement in order to safeguard their own interests in the best possible way without it being disloyal or involving an unlawful circumvention, even if moving close to the limits of a specific regulation. It is when the action violates the purpose and bears the mark of having been carried out for the purpose of circumvention, that it cannot be accepted."

The Court of Appeal saw no reason to go further into the Companies Act, Section 1-3, second paragraph because the entire construction from LL Inntrøndelagen's side, where 97.1% of the voting shares were sold, and still tried to assert that Amedia formally did not have control, entailed a clear circumvention of the redemption right. The Court of Appeal assumed that the amendments to the articles of association had been made solely to avoid the redemption right. The Court of Appeal also ruled out that such a complicated structure relating to the share acquisitions and Amedia's influence would have been chosen if the redemption right was thought gone. The Court of Appeal then stated that:

"There is no doubt that Inntrøndelagen was fully aware that the sale to Amedia was contrary to the purpose of the redemption right and thus contrary to the loyalty clause in section 10. The Court of Appeal believes that Inntrøndelagen has deliberately sought to exploit loopholes in the agreement and thus circumvent the redemption right as Inntrøndelagen believes it should be understood.

The sanction [relating] to an unacceptable circumvention being found is that the circumvented provision is applied in the same way as if the circumvention had not been attempted …"

LL Inntrøndelagen's appeal to the Supreme Court was refused on 23 February 2022, cf. HR-2022-438‑U.

The Court of Appeal's judgment is an important reminder for contracting parties who, by disloyal behaviour, seek protection from the wording of an agreement, knowing full well that the actions nevertheless run counter to the agreement's purpose and intentions. The parties to an agreement must be aware that it is not only the wording of the agreement that is decisive, but that a number of other factors are important to its interpretation. Furthermore, the parties to an agreement must be aware that the courts do not accept clever attempts to circumvent agreed rights, but that on the contrary, disloyal behaviour is not tolerated by them.