Redemption right – in the articles of association or in the shareholder agreement?
According to the Companies Act, the company’s shares may be transferred without restriction unless otherwise decreed in the Articles of Association.
According to the Companies Act, each company must have articles of association, which must include at least the company’s business name, domicile and business.
In addition, the Articles of Association may specify the redemption right under which a shareholder, company or other person has the right to redeem a share transferred from another owner than the company to another. For more details on the redemption clause of the Articles of Association here.
Why should redemption right be stipulated in the Articles of Association?
The advantage of the redemption right under the Articles of Association is that it will automatically become binding on present and future shareholders. The provision of the articles of association shall not be contrary to the Companies Act, other compulsory legislation or good custom.
The redemption clause included in the Articles of Association can be considered to increase public confidence and the articles of association is surely one of the first documents that potential buyers and thus shareholders want to look at.
For this reason, shareholders need to think carefully about what they agree and what they want to be seen publicly, since the articles of association is a public document.
The benefit of the Shareholder Agreement compared to the Articles of Association
A more detailed agreement on the redemption right and a better instrument for securing mutual rights is a shareholder agreement, because it allows shareholders to agree more broadly on, for example, the issue of the transfer of shares or what will happen to the company’s shares when the shareholder dies.
The benefit of the Shareholder Agreement in relation to the Articles of Association may be considered its contractual nature which thus allows freedom to agree on things.
The Articles of Association is a stiffer instrument than a Shareholder agreement and changing it requires a qualified majority. In addition, the articles of association must be registered and the changes must always be reported to the Finnish Patent and Registration Office.
Changing the shareholder agreement is much lighter in this respect. Of course, it should be remembered that this also requires unanimity of all the shareholders.
Determination of redemption price
When the redemption clause is used either in the Articles of Association or the Shareholder Agreement, it is good to mention the determination of the share price.
The redemption price of a share may be determined by the nominal value of the share, according to the value of the company’s balance sheet as such or the price can be determined by a calculation formula mentioned in the redemption clause. It is common to fix the price to the average of few latest accounting periods before the redemption moment. However, the calculations can vary considerably.
It is also not unusual to use different calculation formulas for different situations, if the shareholder agreement contains the so-called “Bad Leaver and Good Leaver” provisions.
The redemption clauses of the Articles of Association and the Shareholder Agreement are in conflict with each other?
The redemption clause in the Articles of Association always gets priority over outsiders if the redemption clauses are mutually contradictory.
The premise is that the shareholder agreement is valid only between shareholders and therefore obligates only shareholders, while the articles of association binds also third parties.
Shareholders can take a provision into shareholder agreement that in a case of conflict the shareholder agreement will be applicable. However, such a provision is binding only between the parties of the contract and, in the case of a conflict with third parties, the provisions of the articles of association always apply.
It is profitable to try to avoid contradictions and the parties should be careful in drafting a shareholder agreement to be able to prevent interpreting problems, if the redemption clause in the shareholder agreement is wider than in the articles of association.