Redemption Clause in the Articles of Association of a Limited Liability Company

The purpose of the redemption clause is to prescribe who has the right to redeem shares if the shares are to be transferred to a third party by a shareholder other than the company. The redemption clause is very useful for example if one wants to control the owners of the company.

The Limited Liability Companies Act 3:7§ contains regulations regarding redemption: it contains minimum rules and presumption rules, which may be applied unless it is otherwise provided in the Articles of Association.

In addition, the article prescribes what the shareholder´s rights are, before it has been determined whether the right of redemption is to be exercised and about the cases where company wants to redeem shares. Although the redemption limits the free exchange of shares, it is very widely applied.

Minimum rules

According to The Companies Act, it can be provided in the articles of Association that a shareholder, the company or another person has the right to redeem shares due to be transferred to a third party by shareholder other than the company. Furthermore, the redemption clause shall indicate who has the right to redeem such shares and if, several persons have the right, how their precedence is determined.

Because of the idea of the redemption clause is to limit the free exchange of shares, it must be prescribed in the Articles of the Association who has the right to redeem: for instance only part of the partners may have that right. In practice, it is possible to freely entitle anyone the right to redeem shares.

In situations where many of the shareholders want to redeem shares at the same time, their precedence has to be determined. There is no limitation of such determination: shares can for example be decided to commensurate with their possession of shares.

Regarding the content of the Articles of the Association, these rules are absolute. Without these minimum rules, the redemption clause is invalid.

It is very important to keep separated the rights of squeeze-out and sell-out (Companies Act Chapter 18) and the redemption clause (Companies Act 3:7§). The rights of squeeze-out and sell-out are peremptory provisions, which concerns situations where a major shareholder is entitled to compel minority shareholders to transfer their shares.

Presumption rules

The Companies Act also contains the presumption rules, which may follow, unless otherwise provided in the Articles of the Association. It is good to notice, that the set periods referred to in subsections 4-6 cannot be extended. Unless otherwise provided, the presumption provisions are:

1) applies all types of acquisition;
2) shall cover all of the shares;
3) the redemption price is the fair price of the share or the agreed price;
4) the Board shall notify the transfer of shares to the person who has the right of redemption;
5) the demand for redemption shall be presented to the company within time limits; and
6) the redemption price shall be paid within time limits.

Lastly, the section 3:7§ of the Companies Act prescribes that the acquirer of the share shall only have the right of the payment in the event that assets are disturbed and to the pre-emptive right in a share issue, until it has been determined whether the right of the redemption is to be exercised. In addition, the company may redeem shares only with distributable assets.