What rules apply to company transactions with related parties?

If you run a limited liability company, you will likely engage in various agreements with suppliers, customers, and other business partners. Typically, the company’s board of directors or CEO is authorized to enter into such agreements on behalf of the company. However, if the agreement involves a related party, different rules apply. In this blog, we look closely at these rules and outline the steps required to ensure that an agreement is not invalidated.

Who qualifies as a related party in a company?

A "related party" refers to individuals or entities closely connected to the company. This can include individuals or companies where these individuals hold significant ownership or control. The Companies Act defines it as follows:

• Shareholders, board members, and the CEO.
• Close family members of these individuals, such as spouses, parents, children, and siblings.
• Other companies where the abovementioned individuals hold a controlling ownership stake and influence.

The purpose of the provision

Section 3-8 of the Companies Act provides specific rules for transactions with shareholders, board members, or individuals considered related parties that exceed a certain value. The procedure for entering such agreements deviates from the standard rules.

The purpose is to prevent conflicts of interest and ensure that the company is not drained of its assets. The law ensures that agreements between the company and related parties are made on ordinary market terms, protecting the company from the risk of individuals with substantial influence using their position for personal gain. In doing so, the company’s creditors are also safeguarded.

Also read: Changes in the Companies Act.

What requirements apply when the board handles agreements with related parties?

The Board of Directors is responsible for determining whether an agreement falls under Sections 3-8 of the Companies Act. If the board determines that the provision applies to the agreement, it must prepare a report and a declaration about it. An auditor must verify the report.

The board’s report must include:

• An overview of the agreement.
• The principles used to assess the agreement's terms.
• Information on relevant factors affecting the agreement’s assessment.
• A statement that there is a "reasonable correlation between the value of the consideration provided by the company and the consideration the company will receive."

The board’s declaration must confirm that:

• The agreement serves the company’s interests.
• The agreement is on market terms (arm’s length pricing).
• The company meets the equity and liquidity requirements under Section 3-4 of the Companies Act.

These documents, along with the auditor’s confirmation of the board’s report, must then be submitted to the Register of Business Enterprises and the company’s shareholders.

This provision effectively anchors board members' personal responsibility for the company’s operations and prevents individuals with influence from misusing the company's assets.

Violation of Section 3-8 of the Companies Act may lead to claims for damages against the company’s board members if financial losses occur due to a lack of oversight by the board.

When do the rules for agreements with related parties apply?

Section 3-8 of the Companies Act applies when a company enters into an agreement with a related party, and the consideration exceeds 2.5% of the company’s total balance sheet from the most recent approved annual accounts.
If the company has an approved interim balance sheet registered in the Accounting Register, this can serve as the basis for calculation. If no annual accounts or interim balance sheets are available, the threshold is 2.5% of the combined nominal value of the company’s shares and share premium.

Examples of agreements requiring compliance with Section 3-8 of the Companies Act include:

• Sale of property from the company to a shareholder.
• Entry into a lease agreement for real estate owned by a shareholder.
• Loans from board members to the company.
• Services provided by the company to another company owned by the CEO.

In these cases, the board must approve the agreements to ensure they align with the company’s interests and are entered into on market terms.

Exceptions to the board’s requirements for related party agreements

In certain cases, following the process described above is unnecessary, even if the entry requirements are met.

These include agreements:

• They are part of the company’s normal business and take place on market terms.
• Where the value of the company’s consideration does not exceed NOK 100,000.
• Concerning salary or other compensation to the CEO and board fees (per Section 6-10 of the Companies Act).
• Regarding capital increases in the company in exchange for non-cash contributions (per Section 10-2 and related provisions of the Companies Act).

Note that this list is not exhaustive, and other exceptions may follow from the provision.

Consequences of not having a validly approved agreement

Ensuring that transactions between a company and related parties are conducted correctly is essential for safeguarding the company's resources and acting in the best interests of the business. Following these rules helps to avoid conflicts of interest, protect the company’s creditors and shareholders, and ensure the company operates fairly and transparently.

If an agreement covered by Section 3-8 is not approved under the legal requirements, it is generally considered invalid and not binding for the company. The company has the right to claim that the agreement is not binding.

The consequence of an invalid agreement is that exchanges between the parties must be reversed, restoring the situation as if the agreement never existed.

If the other party can demonstrate that they acted in good faith and believed that the board had taken the necessary steps, the agreement may still be considered binding.

Also read: How do you set up a private limited liability company in Norway?

Need assistance with related party agreements?

Are you planning transactions between your company and related parties and want to ensure the agreement is valid? We have extensive experience with so-called “3-8 transactions” and can advise you on executing this process most efficiently.