What are articles of association?

Under the provisions of the Companies Act 2006, every limited company in England and Wales must have articles of association. Articles of association or simply articles, are the rules of the company that set out how it will be governed. The articles will be a public document, lodged and visible at Companies House.

If you are a significant shareholder of a company, you will want to make sure that its articles are appropriate to the company and how it operates. Ensuring the articles clearly reflect the terms agreed between the shareholders is essential to avoid uncertainty or disputes in the future. Well-drafted articles provide clarity and prevent potential conflicts down the line.

What is a shareholders’ agreement?

A shareholders’ agreement is a private contract between the shareholders of a company which sets out the rights and responsibilities of the parties in relation to the company. Unlike articles, it is not a compulsory document nor is it public. There are no prescribed provisions – it can, within reason, contain whatever the parties wish it to contain.

One of the main purposes of a shareholders’ agreement is to prevent future conflict, the idea being that whilst the parties are not in dispute, they agree the terms on which they will deal with future situations which may be the source of disagreement. In the long term, this should enable shareholders to realise the maximum value from their investment.

What is the point of a shareholders’ agreement and do you need one?

A shareholders’ agreement aims to establish agreed-upon terms for the involved parties to adhere to regarding the company and will encompass topics like:

• The amount of time each party is to spend working for the company;
• The extent to which shareholders may have other interests besides the company;
• A list of decisions that the directors can make without reference to the shareholders (some of which may be by reference to expenditure for example);
• A list of decisions that must be referred to the shareholders;
• What happens if a shareholder decides to sell his shares (which may include a right of first refusal to other shareholders);
• Situations in which a shareholder can be compelled to give up his shares; and
• Shareholders’ rights to dividends.

What’s the difference between articles of association and a shareholders’ agreement?

The main difference is that the articles are a statutory requirement which is a public document whilst a shareholders’ agreement is a private contract. The company must comply with its own articles by law, while under a shareholders’ agreement, the parties are contractually obligated to comply. If one party breaches the agreement, the other parties have the right to sue the non-compliant party.

How can our lawyers help with articles of association and shareholders’ agreements?

Our experienced team will be able to take your detailed instructions on what you want your company’s constitution to achieve and then translate that into a set of articles of association that meet the necessary statutory requirements at the same time as meeting all your requirements.

Many companies adopt the model articles provided under the Companies Act 2006 by default. However, We specialise in handling situations with multiple share classes and complex voting and dividend arrangements, and we make sure to amend the model articles as needed.

Our experienced team of corporate lawyers specialise in drafting shareholders’ agreements for businesses ranging from small family-run enterprises to larger companies with private equity investors and multiple interests. We create contracts that satisfy all parties’ needs while aligning with the company’s articles of association.