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. It is essential therefore that the articles are well drafted to encompass the terms that have been agreed between the shareholders of the company and are not a source of uncertainty or dispute in the future.

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 and 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.

Whilst all is often harmonious between shareholders when you start your involvement in a company, it can often be the case that unexpected events cause disagreement between the parties. A shareholders’ agreement is intended to provide a mechanism for dealing with dispute and avoiding uncertainty in the future. So, while it may not appear essential initially, a shareholders’ agreement will prove beneficial as an insurance policy for the future. Even in the absence of future disputes, it will effectively regulate the parties’ involvement in the company, making it a valuable tool.

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 is bound by law to comply with its own articles whilst under a shareholders’ agreement, the parties have a contractual obligation to comply and a breach will by one party will entitle the other parties 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.

Whilst many companies will automatically adopt model articles, provided in the Companies Act 2006, we are used to dealing with situations that involve multiple share classes with complex voting and dividend requirements and amending the model articles appropriately.

It is important to have an experienced solicitor advise you on articles of association for your company so they are right first time. This is because a shareholder resolution passed by more than 75% of the shareholders is needed to adopt articles of association so companies are rarely keen to change articles more than is necessary.

Please contact the expert team at LA. We will be pleased to advise on any aspect of your articles of association – from drafting new articles though to a review of your existing articles and pointing out how they might be improved.

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.