Shareholders Agreements and Articles of Association: Does my company need them?

Articles of Association

Articles of Association (Articles) are effectively the rules of the company and govern the internal affairs of the company.  Articles must take the form of:

• the statutory ‘Model Articles’;
• ‘Model Articles’ with amendments; or
• ‘Bespoke’ Articles which are drafted specifically for your company’s needs.

Articles cover matters such as:

• classes of shares and rights attaching to them;
• the procedure for transferring shares and issuing new shares; 
• procedures / voting at shareholder and board meetings;
• transferring shares on death and on leaving the company; and
• ‘drag along’ and ‘tag along’ rights

Every limited company must submit Articles to Companies House and so anyone can access and view the Articles at any time.  They are a public document.

When someone buys shares in a company and becomes a shareholder, they are automatically bound by the Articles of the Company.

The requirements under the Companies Act 2006 for a limited company to have Articles means they are governed by and must comply with statutory law.

Shareholders Agreements

These agreements generally contain additional obligations between the shareholders themselves and are supplemental to the Articles.  They are for the benefit of the shareholders, rather than the company itself.  They set out the rights, responsibilities, obligations and liabilities of each shareholder and also the directors. 

Shareholder Agreements cover matters such as:

• the decision making process;
• specific rights and obligations of directors;
• restrictive covenants;
• what happens if a shareholder wants to leave;
• resolving a deadlock (where shareholders cannot agree); and
• provisions for protecting minority shareholders

A Shareholders Agreement is a private document between those involved and so no third party has access to it or a right to view it. 

New shareholders are not automatically bound by a Shareholders Agreement.  Therefore, the existing shareholders will need to amend the Shareholders Agreement to include any new parties.

Shareholders Agreements are governed by contract law like other contracts made between private parties.  An action breaking a company’s Articles is likely to be ruled invalid, whereas a breach of the Shareholders Agreement will trigger contractual remedies.

Finally

Although you are not legally required to have a Shareholders Agreement, if you have two or more shareholders you should consider one.  It can regulate how decisions will be made, how future changes will be dealt with and what happens if the shareholders disagree.  Putting a Shareholders Agreement in place at the outset can save time and money at a later stage.

You must be careful to ensure to ensure that the provisions of the Shareholders Agreement complement the Articles and we recommend you seek legal assistance with drafting these documents. 

For help and advice on Shareholders Agreements and Articles, please speak to our Corporate and Commercial team by emailing commercial@mlplaw.co.uk or calling 0161 926 9969.