When setting up and running a company, it is important to consider how the relationships between the owners, the directors and the business itself will be regulated. B P Collins’ corporate and commercial team explores two key documents that cover this very topic: articles of association (Articles) and shareholders’ agreements.
Next week, we will look at 10 key questions to consider when reviewing or preparing your Articles and shareholders’ agreement.
Overview of Articles
A company’s Articles are often described as the rulebook of the company. All companies have Articles and they set out the rules on how the company is run. The Articles will describe the rights of the directors and shareholders to take certain actions in respect of their position in the company. The Articles are filed at Companies House and form part of the public record of a company. It is also important to recognise that they are automatically binding on all incoming shareholders and directors who will be deemed to be aware of them.
Many companies are set up with basic ‘model’ Articles or if the company is older, may use a form of ‘Table A’ Articles. Among other things, these basic articles will state that: all shares rank equally regarding voting and dividend rights, shares can be freely sold (if a buyer can be found) and that a minority shareholder can refuse to sell their shares, regardless of the majority view. The Articles will also restrict directors from voting on board decisions if they are conflicted.
In companies with more complicated structures, it may be worth considering whether the formation ‘model’ Articles are sufficient and appropriate.
Amendments to the Articles require the formality of a special resolution (75% majority) of shareholders entitled to vote and the resolution needs to be filed at Companies House.
Why have a shareholders’ agreement?
Whilst a shareholders’ agreement will often deal with issues which could be dealt with in the Articles of a company, a shareholders’ agreement provides for more flexibility. It is a private document between the parties that is not filed at Companies House and so it may be a more appropriate way of covering issues which are of a private nature between co-investors.
Whilst incoming shareholders are not automatically a party to the shareholders’ agreement, it is possible for incoming shareholders to become parties to the shareholders’ agreement by executing a deed of adherence. There are two common ways that this can be ensured:
- For a share transfer, the shareholders’ agreement may specify that outgoing shareholders must procure that the incoming shareholders enter into a deed of adherence before they can transfer their shares; or
- For a new share issue, the company could require the new shareholder to enter into a deed of adherence before the shares are issued.
The continuing shareholders will want to make sure that incoming shareholders enter into a deed of adherence to the agreement unless circumstances require a new shareholders’ agreement to be prepared.