Articles of Association & Shareholders Agreement Solicitors

Focusing on potential issues in advance, and agreeing the “ground rules” as between shareholders, often avoids potential disputes. For example, the question of how your company’s shares would be valued if a shareholder were to leave is much better discussed and agreed in advance, rather than seeking to agree something at the point of exit.

Without specific contractual provisions entitling the company and/or the remaining shareholders to purchase the shares, there is no such right. This means that an ex-director or ex-employee can retain their shareholding (even if working for a competitor) or demand an artificially high price for their shares at the point of exit. Hence the importance of having the correct provisions in place in advance.

Appropriate pre-emption rights and share transfer provisions can restrict shares being transferred to “outsiders” unless the other shareholders agree, ensure that existing shareholders control the company’s ownership structure, and facilitate smooth business succession. Pre-emption rights generally require shares to be offered to the company and/or the remaining shareholders for purchase, before they can be sold to third parties.

Articles of Association are a contract between the shareholders and the company itself, and are a public document, registered at Companies House. It is therefore often preferred to put certain matters in a Shareholders Agreement, which is a private, unregistered contract. This can include restrictive covenants, “reserved matters” requiring specific levels of consent or agreement between shareholders, and dividend policies.

A 20% shareholding gives little influence, and certainly no control, over how the company conducts its business and could entitle you to regular information about the business, require your consent for particular big decisions or transactions, or entitle you to a seat on the board if you wish.

Two equal shareholders may appear to be the simplest shareholding structure. However if the shareholders disagree on a particular decision the company can become “deadlocked”, and sometimes unable to carry on its business. A Shareholders Agreement or Articles can avoid this by setting out how any deadlock would be resolved. Without such provisions, winding up the company may be the only solution.

Consider including provisions in the Articles of Association/Shareholders Agreement whereby, if an offer is made for the company which most shareholders wish to accept, the minority must sell their shares on the same terms accepted by the majority. Without these provisions, the minority shareholders could refuse to sell (or demand a higher price for their shares), and scupper the sale.