Relationship agreements – The Danish perspective

Relationship Agreements under Danish Law

A relationship agreement is entered into between a listed company and the controlling shareholder and is mandatory for listed companies in certain jurisdictions, such as the United Kingdom. In these jurisdictions, a listed company with a controlling shareholder must be able to demonstrate that the company carries out its business independent of the controlling shareholder. As such, the function of the relationship agreement is generally to ensure this independence of the target company, e.g. by stating that all future agreements between the target company and the controlling shareholder will be entered into on arm's length basis. Relationship agreements may also contain provisions preventing the controlling shareholder from interfering in the day-to-day management of the target company. 

However, the relationship agreement will normally also provide certain rights for the controlling shareholder, e.g. the right to appoint and/or dismiss specific members of the target company´s management (executive officers and directors of the board). This right of appointment and/or dismissal will naturally vary in line with the percentage of the shareholder's voting rights. The right is therefore perceived as giving investors some form of handle on their appointment rights. This aspect of the relationship agreements, however, causes concern under Danish law, as such specific rights will not be enforceable under Danish company law, in particular because of i) the general principle to treat shareholders equally and ii) the regulatory prohibition against agreements concluded by the management with some shareholders to the disadvantage of other shareholders. 

The principle of equal treatment

Section 45 of the Danish Companies Act outlines the principle of equal treatment of the shareholders of a company. This principle entails that all shareholders, in a comparable legal situation, must be treated equally. The purpose of this principle is to safeguard the minority shareholders against unequal treatment by other (controlling) shareholders. A contractual right to nominate directors of the target company would generally be assessed as an advantage to the controlling shareholders and therefore not in compliance with section 45 of the Danish Companies Act. 

In addition, section 127 of the Danish Companies Act provides that members of the management of a limited liability company must not conduct any transaction that is clearly likely to provide certain shareholders or others with an undue advantage compared to other shareholders or the limited liability company. Accordingly, the possibilities of the (controlling) shareholder are further limited with regard to agreements by which the shareholder obtains rights to nominate and/or dismiss certain directors. 

The effect is that in most scenarios the problematic clauses of the relationship agreement would be considered null and void and would be unenforceable by the investor. In reality, this leaves investors with the simple, yet for some slightly unsettling, choice of simply relying on their ability to nominate and elect directors based on the general framework of the company's articles of association and the Danish Companies Act considering the shareholder base of the company in question. These mandatory provisions are supplemented by the Danish Corporate Governance Code, which on a "comply or explain"-basis sets out requirements for independence, nomination committee, etc. in respect of directors, their appointment and work on the board, which should also be taken into regard.

Needless to say, all of the above is in addition to paying attention to any requirements under or implications of capital markets regulations in the Market Abuse Regulation as well as the applicable issuer rules, i.e. mandatory takeover obligations, disclosure requirements etc.