Every limited company in England and Wales must by law have articles of association. For every company with two or more shareholders, it is strongly recommended that you complement the articles of association with a shareholders’ agreement.
These two company constitutional documents help businesses to set out the rights and obligations of the shareholders and company directors, establish how the organisation will be run, and pre-emptively find ways to avoid or overcome disputes.
In the following article, we will discuss the specific roles of the shareholders’ agreement and the articles of association, the differences between them, and which takes precedence in a dispute.
What are articles of association in England and Wales?
To put it simply, company articles of association are public documents that set out rules for how the company will operate internally. The articles will provide guidance regarding:
- How voting will be conducted at shareholder meetings
- Procedures for transferring and issuing shares
- The structure of the organisation
- Any different types of shares
- The protocol to follow regarding shares after the death of a shareholder
- Rights regarding ‘drag along’ and ‘tag along’
- The responsibilities and the powers of directors
- The rights and influences of a shareholder
When a share of the company is purchased, the new shareholder is immediately bound by the articles of association.
What are shareholders’ agreements in England and Wales?
This contract between shareholders and their company outlines the obligations and responsibilities they have to one another and the company itself. If the company is a party to such an agreement, it must be shown at Companies House – if not it can remain private between the shareholders.
The main objective of the shareholders’ agreement is to prevent disputes among the directors, shareholders, and the company as a whole. By having these agreements in place, things should run more smoothly than if they were not.
The main points covered within shareholders’ agreements are:
- How future decisions concerning the company will be made
- The rights of those involved
- The process a shareholder should take if they want to leave
- How disputes would be resolved
- The process of appointing a director
- How to buy or sell shares
- Protecting minority shareholders
Having a shareholders’ agreement is not a legal requirement. However, if a company does have multiple shareholders, it is highly recommended. This can save a lot of time, money, and disruption for the company and its shareholders.
What’s the difference between articles of association and a shareholders’ agreement?
Articles of association and shareholders’ agreements have a very similar purpose, i.e. to outline how a company will operate internally and minimise the risk of disputes. However, there are a few key differences between the two.
- Articles of association are always public (they can be viewed at Companies House) while shareholders’ agreements are private contracts that do not need to be shared outside of the company, unless the company is itself a party to them.
- Having a shareholders’ agreement is not compulsory in the UK, but having articles of association is.
- There are strict rules around what articles of association must include, whereas a shareholders’ agreement can contain anything that the company/shareholders may see fit to include. This encompasses where they are seeking to create legal obligations outside of, and often complementing, the articles of association.
- The articles of association bind the company to follow the rules they set out by law, creating a contractual obligation between the company, its shareholders and the shareholders themselves. Shareholders’ agreements also confer contractual obligations on those to whom they apply. But these often deal with issues that are more personal to the parties and sometimes commercially sensitive.
What takes precedence, a shareholders’ agreement or company articles of association?
If the shareholders’ agreement is silent on the issue, the standard articles of association will take precedence. However, in the event that the shareholders’ agreement has a ‘supremacy clause’, it would supersede the articles.
The supremacy clause would come into effect in the event of conflict between the shareholders’ agreement and the articles of association, specifying that the provisions in the shareholders’ agreement should take precedence. This is commonly the case.
How can a solicitor help with articles of association and shareholders’ agreements?
Shareholders’ agreements and articles of association in the England and Wales can be straightforward or incredibly complex. With the help of expert Corporate and Commercial lawyers, this daunting task can be made simple.
They can provide experienced advice that will help a company to complete the articles and shareholders’ agreements correctly the first time around.
Solicitors can be a massive asset, providing services including, but not limited to:
- Drafting new articles
- Amending articles of association
- Reviewing existing articles
- Drafting shareholders’ agreement terms
- Identifying areas for improvement
- Handling complex voting and dividend requirements
Are new shareholders bound by the articles of association?
When a new shareholder joins, they are automatically bound to the articles of association. However, if the company wants them to be included within the shareholders’ agreement, it must be redrafted to incorporate them.
Get in touch with our expert solicitors today
Getting your articles of association and shareholders’ agreement right is crucial for the success of your business. They give you a strong framework for how the organisation operates and how decisions are made.
Our Company and Commercial team can help you with all aspects of negotiating, drafting and amending these critical documents, setting your business up for success.
For specialist advice regarding articles of association and shareholders’ agreements, get in touch with one of our corporate partners, Jeremy Clough or Mark Lello by giving us a call or emailing jec@prestonredman.co.uk or jml@prestonredman.co.uk.