Every limited company in England must have a document called the Articles of Association by law. If a company has two or more shareholders, it’s strongly advised to have a Shareholders’ Agreement in addition to the Articles of Association.
These two key documents help businesses outline the duties and rights of shareholders and company directors, determine how the business will be run, and find ways to prevent or handle disputes ahead of time.
In this article, we’ll talk about what the Shareholders’ Agreement and the Articles of Association do, how they’re different, and which one is more important in a disagreement.
What are Articles of Association?
Articles of Association are public documents that lay out the rules for how a company will run internally. These rules provide guidance on:
• How voting at shareholder meetings works
• The process for transferring and issuing shares
• The structure of the business
• The different types of shares
When someone buys part of a business, they automatically agree to follow the Articles of Association.
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a contract that is established between either all or a portion of the shareholders within a company. This agreement outlines and manages the relationship among the shareholders, the company’s management, and the ownership of shares, while also ensuring the protection of the shareholders.
The main goal of the Shareholders’ Agreement is to prevent disagreements among the directors, shareholders, and the company. Having these agreements should make things run more smoothly.
Shareholders’ Agreements typically cover:
• How future decisions about the company will be made
• The rights of those involved
• The steps a shareholder should take if they want to leave
• How to resolve disputes
• The process of appointing a director
• How to buy or sell shares
• Protecting shareholders who own a small part of the business
• What happens with shares when a shareholder passes away
• Rights about ‘drag along’ and ‘tag along’*
• The duties and powers of directors
• The rights and influences of a shareholder
Unlike the Articles of Association, a Shareholders’ Agreement isn’t legally required. However, if a business has multiple shareholders, it’s strongly recommended; as it can save everyone involved a lot of time, money, and trouble.
What’s the difference between Articles of Association and a Shareholders’ Agreement?
Both the Articles of Association and Shareholders’ Agreements aim to define how a business will operate internally and lower the risk of disagreements. But there are some key differences:
1. Articles of Association are public documents (they can be found at Companies House), while Shareholders’ Agreements are private contracts.
2. Having a Shareholders’ Agreement isn’t mandatory in the UK, but having Articles of Association is.
3. There are strict rules for what Articles of Association must include. A Shareholders’ Agreement can contain anything that the shareholders decide. It can set up legal duties that are outside of and often go along with, the Articles of Association. But never go against law or set lower bars than the law sets.
4. The Articles of Association legally require the business to follow the rules they outline. This creates a legal duty between the business and the shareholders. Shareholders’ Agreements also give legal duties to those they apply to, but these often deal with issues that are more personal to the parties and sometimes commercially sensitive.
Which is more important, a Shareholders’ Agreement or Articles of Association?
In case of conflict between the two, if the Shareholders’ Agreement has a ‘supremacy clause’, then it will take priority over the Articles of Association. However, if there is no such clause, the Articles of Association would generally take priority.
How can a solicitor help with Articles of Association and Shareholders’ Agreements?
Shareholders’ Agreements and Articles of Association can be fairly straightforward but can also become very complex.
Support from a specialised solicitor is always recommended; giving peace of mind that you and your business are covered should a dispute arise.
Corporate solicitors can provide many services, including but not limited to:
• Writing new articles
• Amending Articles of Association
• Reviewing existing articles
• Writing terms for Shareholders’ Agreements
• Identifying areas that need improvement
• Handling complex voting and dividend requirements
Are new shareholders required to follow the Articles of Association?
When a new shareholder joins, they automatically have to follow the Articles of Association. However, if they want to be part of the Shareholders’ Agreement, it will need to be rewritten to include them.
Are you looking to secure your business against possible disputes?
* The drag-along clause requires the minor shareholder to sell their shares. The tag-along clause requires the minor shareholder to be allowed to join in on a sale. The drag-along is more beneficial for the majority shareholder as it allows them to force the minority shareholders to sell if the majority shareholder can’t find someone who will buy just their shares.