Newly issued shares

When do they constitute an asset at the free disposal of the subscriber?

What is the earliest stage at which a newly issued set of shares may become an asset at the free disposal of the subscriber? This question may be relevant in connection with transactions and may also be important in several other respects. Even so, opinions in the Norwegian market differ on this subject.

Under the Norwegian Limited Liability Companies Act (the "Act"), the general principle is that a holder of new shares acquires rights in the company when the capital increase is registered in the Norwegian Register of Business Enterprises. However, this applies only as long as the resolution of the general meeting relating to the issue of new shares does not stipulate otherwise. The general meeting could for instance decide that the new shares will give the holder rights in the company at an earlier stage. A feasible (and probably also the earliest possible) stage may be the time of subscription.

In that case, the subscriber of the shares will not have to wait until registration to exercise all its shareholder rights. The question is whether or not the resolution by the general meeting has a corresponding effect for rights holders deriving their rights from the subscriber, e.g. third parties seeking to acquire the shares from the subscriber and wishing to consolidate a 100% ownership before registration has taken place or banks seeking a pledge of the new shares. Can the company issue new shares constituting assets that may be pledged and transferred immediately upon subscription?

We believe the answer is "yes".

According to Section 10 11 of the Act, a general meeting can decide that a subscriber may gain rights in the company prior to registration of the capital increase. There is nothing in the provisions of the Act regarding capital increases which prevents the general meeting from deciding that the shares carry full rights immediately on subscription. Pursuant to Section 4 9 of the Act the board of directors must ensure that the new shares are reflected in the shareholder register from the time when the rights attached to them arose.

It is left to the general meeting to decide whether or not the shares will carry full rights at the time of subscription. This means that where the subscriber is granted full shareholder rights on subscription, the shares become an asset owned by the subscriber which may be transferred or pledged. No exception is made in the Act regarding the shareholder's ability under Section 4-8 of the Act shares to pledge shares subscribed for in unregistered capital increases, and the requirement to enter them in the shareholder register supports the argument that the shares are assets acquired by the subscriber. The drafting of Section 2 13 (4) of the Act also indicates that shares may be transferred as well as pledged before the capital increase is registered.

Is there anything in the Act or otherwise to suggest that this is not the intention or that this should not be the case?

Under Section 10-9 of the Act, a notice of the capital increase must be submitted to the Register of Business Enterprises within three months of the final subscription date. Failure to do so means that registration will be refused. The same applies if registration is refused due to errors that cannot be rectified. In either case the capital increase lapses and the share subscription is no longer binding. Failure to meet the deadline is likely to cause the new shares to become void. The three-month deadline also applies to the formation of companies.

It may therefore be argued that when the capital increase and the shares are capable of lapsing in this way, the newly issued shares cannot be regarded as having been definitively issued to the same extent as existing shares have been, and that until registration their status is different and less complete (and, by implication, that they may not be transferred or pledged). This view is not supported by the Act, however. In practice, it is not uncommon for companies to keep shareholder registers where newly issued but not yet registered shares are described as "currently undergoing registration" or similar. A practice involving a separate entry for shares that have been subscribed for but not paid up may have some merit, but will be of little relevance when assessing at what point the shares become an asset at the free disposal of the subscriber.

The share capital is not considered to have been increased until the capital increase has been registered and the legislation reflects the importance attached to ensuring that the share capital of a company should be fully paid up before any new capital is registered.

On subscription, the consideration must be contributed in full before the capital increase is notified to the Register of Business Enterprises. The regulations governing payment of consideration for shares issued on the formation of a company have been applied correspondingly in capital increases. The acquirer of a share for which the consideration has not been paid becomes jointly and severally liable with the previous owner towards the company for payment of the consideration. If settlement of a claim for payment of the consideration is delayed and the company is aware that the share has changed owner or has been pledged, it is under an obligation to notify the rights holder that the consideration must be paid. This provision in itself makes it clear that subscribed shares may be transferred as well as pledged prior to registration of the capital increase.

Describing the shares as "not fully paid up" could serve to alert an acquirer to the potential liability to which the acquirer may become subject. This, or the risk that the capital increase may lapse, could be the origin of the practice whereby some companies keep shareholder registers in which newly issued but not yet registered shares are described as "currently undergoing registration" or similar. In our view, the provisions regarding lapse of capital increase in the event of non-registration will not affect the ability of the shareholder to transfer or pledge the subscribed shares. This view is based on the fact that there are no such limitations in the Act and the fact that it is quite clear from the Act that such shares may be transferred as well as pledged. However, the practice involving a separate entry for shares that are subscribed for but not fully paid up may still have certain merits in terms of alerting third parties to the risk of joint and several liability and to the fact that a part of the share capital is unpaid.