Family ties whether through blood or marriage are usually the reasons family business owners give for not having formal legal documentation to govern the relationships between themselves.
If you’re planning to set up your own company, or considering investing for the first time, this Briefing sets out the main company documents you will need to consider and most likely require, and addresses a commonly-asked question – what is the difference between Articles of Association, Shareholders’ Agreements and Investors’ Agreements?
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:
Articles generally govern a variety of areas, including:
buying back shares;
removal of directors;
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Certain provisions in the Articles can be ‘entrenched’, which means they can only be amended or repealed if prescribed conditions are met, or if set procedures are followed.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:
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:
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 –
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.
Pelly’s Corporate and Commercial team can assist with drafting, reviewing, amending, and advising on the provisions of company documents. If you require assistance with any of the above or would like to enquire about how else the team could help with your company’s affairs, please contact Richard Murrall at richardmurrall@pellys.co.uk or on 01462 419917
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