At the start of every matter, we ask clients for a copy of their latest articles of association and shareholders’ agreement so that we can launch straight into your deal.
Often, our question is met with a “HUH?!”, and we can almost see the look of confusion set in on our clients’ faces.
We can practically hear the whispers:
“What are they?”
“What’s the difference?”
“Do we have these?”
Does this sound like you?
If you’re planning to set up a company or invest, this is everything you need to know about articles of association and shareholders’ agreements in plain English.
What are they?
Articles of Association: The constitutional document of a company that sets out the basic structure, management and internal affairs of the company. Think of it like a company bible.
Shareholders’ Agreement: A contract entered into between the shareholders of the company that contains additional rules between the shareholders.
What’s the difference?
Articles of Association
- Obligatory: UK law requires all companies to have articles of association for that company to be legally registered. Basically, if you don’t have articles of association, you don’t have a legal company.
- Public: The articles of association of every company must be filed at Companies House. When they are filed at Companies House, they become a public document and can be seen by anyone.
- Standardised: You can have a standardised set of articles of association under the Companies Act, known as the ‘Model Articles’. These are very basic Articles that are widely applied to all types of businesses. If you don’t want to adopt the Model Articles, any company is free to create ‘bespoke’ articles customised to particular needs or adopt a ‘hybrid’ approach by adopting the Model Articles with amendments.
- Statutory Law: As articles of association are legally required, they are governed by statutory law. Any action that goes against the articles of association is therefore invalid, as a general rule.
- New shareholders: The articles of association are a legally binding document and any new shareholder is automatically bound by them too.
- Optional: It is not a legal requirement for a company to have a shareholders’ agreement in place. No matter how many shareholders a company has, they are still legally entitled not to adopt a shareholders’ agreement.
- Private: The shareholders’ agreement is fundamentally an agreement concluded between shareholders in a company and therefore it is private in nature. There is no legal requirement to make it available to third parties.
- Unique: Each shareholders’ agreement is unique to the company and individuals involved. This means that there is no default or standard version and the shareholders should draft their own. As this is a technical area of law, it is recommended that you seek legal advice when drafting a shareholder’s agreement.
- Company Law: A shareholder’s agreement is essentially a contract between the shareholders and is therefore part of contract law. If a shareholder breaks the agreement, it will give rise to a claim for breach of contract and the wronged parties may seek damages.
- New shareholders: Any new shareholder is not automatically bound by the existing shareholders’ agreement as it is a private agreement between the individuals that concluded it. To make the shareholders’ agreement bind any new shareholder, it must be amended to identify the new shareholder and signed by them.
Do we have these?
The simple answer: it depends.
Whilst you will have articles of association by default, you may not have a shareholders’ agreement.
We would recommend that if your business has multiple shareholders, you have a shareholders’ agreement in place to clarify rights, responsibilities and help you deal with disputes in the most painless and profitable way.