Articles of Association vs. Shareholders’ Agreements

Pursuant to the Companies Act 2006 (“CA 2006”), all UK companies must put articles of association (“Articles”) in place on incorporation. Many shareholders of companies also choose to put in place a separate shareholders’ agreement, however, this is an optional contract, rather than a statutory requirement. Both documents play a crucial role in how a company operates and how the relationship between its shareholders works and so it is important to understand their purpose and the key differences between them as issues may arise if they are incorrectly drafted, unaligned or, in the case of a shareholders’ agreement, not in place at all.

What are Articles of Association?

Articles set out the company’s constitution and are a legal requirement under section 18 CA 2006. They are mandatory and must be filed at Companies House where they are publicly available – any resolutions used to amend the Articles or put in place new Articles must also be filed. Pursuant to section 33 CA 2006, the provisions of a company’s Articles are legally binding on the company and its shareholders.

Subject to the overall requirement that they must be compliant with the CA 2006, there is a great deal of flexibility for the contents of a company’s articles, however they typically contain provisions on the following:

• share capital and class rights;
• appointment and removal of directors;
• decision making at board and shareholder level;
• conflicts of interest;
• declaration and payment of dividends; and
• share issue and transfer mechanisms.

A set of default ‘Model’ articles are available to be used by any company under schedule 1 of the Companies (Model Articles) Regulations 2008 for private companies limited by shares for companies who do not wish to draft their own. These are standard Articles which companies may choose to adopt, however they will not consider the bespoke needs of a business so in most cases, we would recommend that either amended model articles or bespoke articles are put in place.

What is a Shareholders' Agreement?

A shareholders’ agreement is a private contract between the shareholders of a company. Given a number of typical provisions in such an agreement will require action to be taken by the company itself, whilst not compulsory, it is common for the company to also be party to the agreement so that shareholders have the ability to enforce their rights against it in respect of such provisions if necessary. While the agreement is not a statutory requirement, it ensures fair treatment towards each party as provisions can be agreed to go beyond or reinforce those set out in the Articles. A key benefit of a shareholders’ agreement is that it is a private and confidential document which does not need to be filed at Companies House and so shareholders will often utilise this route to set out more commercially sensitive or other private arrangements between them.

There are no statutory limitations on the contents of shareholders’ agreements so they can be tailored dependant on the parties’ needs. However, common provisions include:

• protection for majority/minority shareholders;
• reserved matters requiring unanimous or special consent at board or shareholder level;
• share transfer restrictions;
• provisions covering the sale of shares;
• tag-along and drag-along rights;
• shareholder exit or dispute mechanisms; and
• confidentiality and non-compete clauses.

Whilst it is hopefully the case that there will never be a shareholder dispute, it is wise to set out how disagreements between parties would be handled in a shareholders’ agreement to ensure certainty in unexpected circumstances. Equally, having a clear agreement in place from the outset of a new business venture, will certainly minimise the chances of there being any future disagreements.

Key differences between Articles of Association and a Shareholders' agreement

Why do you need Articles of Association and a Shareholders' Agreement?

There are many benefits to putting both Articles and a shareholders’ agreement in place as they can work together to ensure a smooth running of the company. However, it is crucial that they are not contradictory so legal advice should always be sought when they are put in place or amended. If you are considering implementing a shareholders’ agreement for the first time, it is recommended that new articles are adopted simultaneously to ensure both documents cooperate for complete shareholder protection. Once in place, they should be regularly reviewed to ensure they remain practical, particularly following any major changes within the company.

If you require assistance reviewing, amending or putting in place articles of association and/or a shareholders’ agreement please do not hesitate to contact our Corporate team.