When a Norwegian limited company (aksjeselskap, AS) enters into contracts with its own owners or management, there is an inherent risk that the company's interests will not be sufficiently protected. Section 3-8 of the Norwegian Companies Act (aksjeloven) addresses this risk directly: it requires the board to approve such contracts and to document that they are sound.
What Is the Purpose of Section 3-8?
The provision is designed to prevent breaches of the principle of equal treatment of shareholders, to protect the interests of creditors, and to ensure transparency around contracts where the parties may have personal interests that conflict with those of the company.
When Does the Rule Apply?
The board must approve contracts between the company and the following parties, provided the company's consideration exceeds a certain threshold:
- a shareholder (regardless of ownership share)
- a shareholder's parent company
- a board member (including deputy members and observers)
- the CEO
- a person closely related to any of the above
- a person acting pursuant to an agreement with any of the above
The threshold is that the company's consideration at the time of contracting has a real value exceeding 2.5 percent of the balance sheet total in the company's most recently approved annual accounts. For companies that have not yet filed annual accounts, the threshold is instead calculated as 2.5 percent of the aggregate nominal value and share premium of issued shares.
The rule applies to all types of contracts – purchases, sales, leases, loans, services and more – and is not limited to contracts where the consideration is money.
What Must the Board Do?
When a contract falls within Section 3-8, the board must:
1. Approve the contract. It is the board – not the CEO – that has authority to approve such contracts, even where the contract would otherwise fall within the CEO's day-to-day management powers.
2. Prepare a report. The board must arrange for a report in accordance with Section 2-6 subsections 1 and 2. The report must be confirmed by an auditor – even if the company has otherwise opted out of statutory audit.
3. Issue a declaration in which the board confirms that:
- the contract is in the company's interest
- there is reasonable correspondence between the value of what the company gives and what it receives
- the requirement for sound equity and liquidity under Section 3-4 will be satisfied
4. Sign both documents. The report and declaration must be dated and signed by all board members, except those who were disqualified from participating due to conflicts of interest. A board member who disagrees may sign with a reservation and set out their objections in the report.
5. Distribute the documents without delay to all shareholders with a known address and to the Register of Business Enterprises (Foretaksregisteret).
Exceptions to Section 3-8
The rule does not apply to all contracts with shareholders and management. The most important exceptions are:
- Contracts entered into in the ordinary course of business on normal commercial terms and principles – such as standard supplier agreements, lease contracts and employment agreements
- Contracts where the company's consideration has a real value below NOK 100,000
- Contracts regarding salary and remuneration to the CEO and board fees set by the general meeting
- Contracts on loans and security in wholly owned group companies falling within the exceptions in Section 8-7
- Contracts on financial assistance in connection with share acquisitions under Section 8-10
- Contracts on non-cash contributions at incorporation or capital increases under Sections 2-4 and 10-2
Consequences of Non-Compliance
If a contract is entered into without the required board approval under Section 3-8, the contract is not binding on the company – but only if the company can demonstrate that the counterparty understood or should have understood that board approval was absent. The burden of proof lies with the company.
Where a contract is not binding, any performance received must be returned. If restitution is not possible – for example because the consideration was a service – the obligation converts to a duty to pay compensation in money.
Note that only the company itself (or its insolvency estate) may invoke the invalidity of a contract under Section 3-8. Neither the counterparty nor the company's creditors may do so.
Practical Takeaways
Many companies overlook Section 3-8 in situations where there is pressure to act quickly – for example when taking out an intra-group loan, selling a property to a shareholder, or entering into a consultancy agreement with a company connected to a board member. Failing to comply can have serious consequences.
If you are running a Norwegian limited company and considering entering into a contract with a shareholder or someone in management, always ask: does this contract require board approval and a report under Section 3-8?
At Stift, we help you set up your company correctly from day one – with articles of association, board structure and internal procedures that keep you on the right side of the rules. Get in touch if you have questions.