As a first seat trainee working in the Corporate and Commercial department, I will be the first to admit that company jargon can be intimidating and confusing. However, once you get to terms with the key terminology and concepts of company law, it all becomes a lot more digestible. If you’re planning to set up your own company, or considering investing for the first time, this blog should help you get your head around some of the main company documents you’re likely to come across during the process.
Articles of Association
Articles of Association (“Articles”) govern the internal affairs of a company, and act as a contract between each of the company’s shareholders, and between the shareholders and the company itself. All companies formed under the Companies Act 2006 (the “Act”) are legally required to have Articles, which must be contained within a single document and be divided into consecutively numbered paragraphs. This ensures clear and consistent regulation of company affairs.
For private companies limited by shares, Articles must take one of the following forms:
- the statutory default ‘Model Articles’;
- ‘Model Articles with amendments’; or
- ‘Special Articles’, which are drafted from scratch to suit your company’s needs.
Articles generally govern a variety of areas, including:
- classes of shares, and the rights attaching to those shares;
- the procedures involved with issuing, transferring and transmitting shares;
- buying back shares;
- the procedures for calling, holding and voting at general meetings and board meetings;
- the appointment, powers and duties of directors;
- removal of directors;
- drag along rights (i.e. when the majority shareholders can force minority shareholders to sell their shares on the same terms as them);
- tag along rights (i.e. when minority shareholders have the right to have their shares bought on the same terms as the majority shareholders).
Further, if you’re intending to create a right or obligation which will apply to all the shareholders of the company (for example, drag along rights) this should be set out in the Articles, which must be registered at Companies House.
Certain provisions in the Articles can be ‘entrenched’, which means they can only be amended or repealed if prescribed conditions are met, or if set procedures are followed. Entrenched Articles can only be made when the company is formed, or at a later date, if all the shareholders agree.
To alter the ‘non-entrenched’ Articles, the Act specifically prescribes that the shareholders must pass a special resolution. This reflects how important Articles are in terms of the company’s governance, and also affords protection to the shareholders, directors, and to the company itself.
Overall, although Articles are compulsory, there is a lot of room for manoeuvre and flexibility, enabling you to run your company in a way that best suits its (and your) needs. However, while there is flexibility, it is important to remember that some provisions of the Act cannot be excluded by the Articles, which must comply with the fixed provisions in the Act. This is why, if you are looking to adapt the Model Articles or draft Special Articles for your company, you should seek legal advice to ensure they are compliant with company legislation.
Shareholders’ agreements establish additional obligations between the shareholders themselves, and supplement the Articles by further organising the relationship between the shareholders. The main ‘attraction’ of drawing up a shareholders’ agreement is the fact that it is a private document – i.e. unlike the Articles, it does not need to be registered at Companies House.
Shareholders’ agreements are generally signed by all shareholders of the company at the time the agreement is entered into, and are entered into for the benefit of the members - not for the benefit of the company. As a result, these agreements are not regulated by the Act, and there is therefore no legally prescribed procedure to alter their provisions. Instead, the shareholders’ agreement will usually provide that all members who are a party to the document must give their consent to amend it.
Matters that are usually covered in a shareholders’ agreement include:
- dividend policy;
- which decisions by the directors require shareholders’ consent;
- provisions for protecting the minority shareholders;
- restrictive covenants (i.e. what a shareholder is prevented from doing after ceasing to be a shareholder of the company);
- issuing and transferring shares;
- rights and obligations that are specific to certain directors (for example, the personal right to remain appointed as a director).
You must be sure that the provisions of the shareholders’ agreement complement the Articles, which in turn must comply with the compulsory parts of the Act. Since there are no statutory ‘model’ shareholders’ agreements (as there are for Articles), we would strongly recommend that you seek legal assistance with drafting these documents.
Shareholders’ agreements and investors’ agreements both govern the relationship between shareholders, and contain similar provisions. The key difference is that investors’ agreements tend to be used when ‘new money’ is being invested in the company further down the line. Such investors may be unknown to the company’s current shareholders, and may wish to be more detached from the overall running of the business. These agreements therefore tend to include more extensive provisions, which investors require to give them more protection and reassurance. Examples of provisions include in an investors’ agreement include:
- warranties – the existing shareholders will make statements (‘warranties’) about various aspects of the company, confirming them to be true and accurate at the time the investors’ agreement is entered into. New investors can (subject to the terms of the agreement) take action against the warrantors if it later transpires that those warranties are inaccurate. Examples of typical warranties include tax warranties, and warranties about the company’s liabilities;
- tables setting out the company’s share capital before and after the investment;
- how the investment will be structured – i.e. by debt or equity.
Before entering into any of these documents, you should think carefully about how you want your company to be run, and whether you have any specific requirements. For example – have you founded the company with a friend or family member? How have you paid yourself? Are you a sole director? These issues might seem less important than raising money, but you will need to consider them when drafting your company’s Articles and any shareholders’ or investors’ agreements. By ensuring your company’s documents are drafted properly from the outset, you can avoid complications and additional expenditure later on. It is important to remember that, once entered into, these documents may not be easily amended.