Articles of Association and Shareholders’ Agreements: What are they and do I need them?

Articles of Association

What are they: It’s a “public” rule book setting out how the Company is run and governed by its directors and shareholders. It defines how the Company should operate and provides specific provisions to deal with (not limited to):

• Powers and duties of the directors and shareholders;
• Appointing and removing of directors;
• Voting and decision making of directors and shareholders;
• Share classes and rights attaching to shares; and
• Transferring of shares.

Do I need them: Yes, it is a legal requirement if your Company is a limited company. The standard “model articles” can be used in default, although these are usually updated and amended to ensure the articles reflect the business’s current circumstances.

Shareholders’ Agreement

What is it: It’s a “private” agreement regulating the relationship between the shareholders of a Company and the Company itself. This agreement can cover matters already outlined in the articles, but would also include matters such as:

• Providing clarity as to what happens to a shareholder’s shares should there be a dispute between the shareholders, a serious illness or death of a shareholder;
• Detailing share transfer provisions and specific policies about when and how this can be done, together with tag along/drag along provisions and good leaver/bad leaver provisions;
• Setting out how key decisions will be made and whether the management of the Company must obtain shareholder approval for certain key decisions;
• Protecting minority shareholders (and majority shareholders) in certain events i.e when an offer is made for the sale of the business and including any veto rights; and
• Helping to attract investment into the Company – an investor may look favorably knowing the clarity that a shareholders’ agreement brings.

Do I need them: Although not a legal requirement, it makes good business sense to put one in place. A lack of certainly by not having one can often lead to costly and lengthy disputes amongst shareholders.

To seek advice, please contact our Corporate Team via corporate@mlplaw.co.uk