Over a series of articles we examine some of the traps and pitfalls of operating within a private limited company structure without the protection of either a shareholders’ agreement or bespoke articles of association. Poor preparation of a company’s constitutional documents can lead to disputes and ultimately the business failing.
You’ll notice a common theme in this series; I’ll be mentioning ‘articles of association’ and ‘shareholder agreements'. A lot. And for good reason. But what are they?
The articles of association are essentially the company rulebook.
They dictate various aspects of the day to day operation of a company, such as the powers of the directors, the quorum for meetings of directors (meaning how many directors must be present in order for a meeting to be validly held), casting votes, conflicts of interest and involvement in meetings where such conflicts arise, the appointment and removal of directors, the issue, transfer and transmission of shares, the declaration of dividends, conduct of meetings of members, and other aspects besides these.
They are, not to put too fine a point on it, very important.
All companies have articles of association, and, if a company doesn’t have a bespoke document, there are default articles provided by legislation. Bespoke articles, which are tailored to a particular organisation’s individual needs, can be adopted at incorporation, or at any time thereafter, subject to the approval of the shareholders. The articles are binding on all directors and shareholders, come what may and are also a public document. All companies are required to publish their articles on the public record maintained by Companies House.
Unlike articles of association, a shareholders’ agreement is a private contract (i.e. not on the public record), usually between the shareholders in a company, and often with the company itself. It binds the parties involved to certain obligations, but will also allow the parties certain rights, and the enforcement of the same against the other parties. Not all companies have a shareholders’ agreement, although the strong recommendation is that any company with more than one shareholder ought to have one in place.
When things go wrong
A breach of the obligations provided within the articles of association will, usually, render the action taken void, whereas a breach of the obligations provided within a shareholders’ agreement will give rise to a claim for breach of contract by the wronged party.
However, there may be certain aspects of the internal operations of the business which you don’t want to be in the public domain, for example its dividend policy or any element of minority shareholder control and so the recommendation in the majority of instances is to have both. Where properly drafted, the documents will dovetail together, and cover all reasonably foreseeable issues.