It is important for all business owners and founders to be aware of the benefits of reviewing and updating their company's articles of association and shareholders' agreement (or putting in place a shareholders' agreement) to fit the company's current circumstances. This article briefly considers these benefits.
Articles of Association
A company's articles of association govern its day-to-day management and can be considered an internal rulebook.
Often on incorporation companies adopt model articles which are non-bespoke and basic in nature. Model articles will apply automatically where bespoke articles are not registered. Over time, a company can outgrow such default provisions or find its articles of association no longer reflect existing how the company is actually run (perhaps as a result of changes in shareholding or other operational / management changes).
Trowers & Hamlins can advise and help a company amend or adopt new articles of association tailored to its circumstances. Usual provisions contained in bespoke articles of association include:
- rights relating to classes of shares, such as voting rights, capital received on winding up the company, and distribution of dividends. Model articles are designed for companies with one share class;
- board and shareholder meeting requirements such as notice, quorum and voting requirements. These can be used to ensure certain persons are present at meetings;
- appointment and removal of directors and directors' conflicts of interest;
- rights relating to the transfer or issue (i.e. creation of new shares) of shares including pre-emption rights, permitted transfers and other restrictions;
- "drag-along" rights which allow a majority of members (usually at least 75%) to accept an offer to buy their shares and oblige the remaining members to sell on the same terms;
- "tag-along" rights which protects minority members by forcing other members to procure an offer for their shares;
- administrative matters such as share certificates, company seal, and means of communication; and
- the inclusion, exclusion, or amendment of certain other provisions of the Companies Act 2006
Generally, to amend articles of association a shareholders' special resolution is needed. A copy of the amended articles must then be sent to the Registrar of Companies within 15 days after the amendment takes effect. Some amendments require further procedural considerations, and the process is one that Trowers & Hamlins advise on regularly.
Shareholders' Agreement
A shareholders' agreement is a private contract entered into between all or some of the company's shareholders and governs the running of the company.
Typical provisions within a shareholders' agreement (which may not be found within a company's articles of association) include:
- reserved matters requiring consent of a certain threshold of shareholders, such as 50% or 75%, for matters including the issuing of new shares, changes to existing share classes or capital, limits on company borrowing, and the sale of company property. These "minority protection" rights ensure shareholders with less than 50% of the shares have a say in the running of the business;
- dispute resolution and deadlock mechanisms. This provides a clearer framework and process for disputes or stalemates in decision making to be resolved (which may otherwise inhibit the company's day to day trading activities); and
- restrictive covenants, use of confidential information, and the company's intellectual property rights; and
- the structure of the board (who is on it and how it should act) and meeting requirements (frequency and information to be provided).
If a party to a shareholders' agreement commits a breach, the other shareholders will have a claim for breach of contract, and potentially in some cases an injunction.
New shareholders acquiring shares by a transfer or fresh issue will not automatically be bound by the terms of a shareholders' agreement (in comparison to being automatically bound by the articles of association) and may be required to sign up to a "deed of adherence" to become a party to the shareholders' agreement.
In the corporate team at Trowers & Hamlins LLP, we have extensive experience to review, amend or put in place new constitutional arrangements for companies. Please let us know if you would like to discuss how we can assist you.
