Articles of Association: lender or investor requires protection

This set of articles has been written for a trading company that has a shareholder who requires special rights, whether to balance a minority stake or protect a debt investment. The owner may be a director, but we have assumed his or her interest will need to be protected without considering that status. These provisions give a reasonable, practical and balanced framework to manage and control the company, while protecting the shareholder.

Suitable for use in: England & Wales and Scotland
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About this document

These articles give additional protection to one or more shareholders who may not be directors.

The situations in which this document may be particularly useful include where:

  • the company borrows money from a lender who also takes an equity interest, but who does not wish to be, or to appoint, a director on account of the responsibility that comes with that appointment.

  • a majority shareholder who has controlled the company retires but wants to be sure that the smaller interest he or she has retained is still safe from unexpected activity by the remaining directors

  • a family dispute ends with agreement for one side to operate the company and the other side to retain shares but not be involved in the management

  • any influential shareholder does not want day to day involvement

Although it may be likely that an influential shareholder may not want to be a director, many investor organisations will want board representation. We have optionally provided in these articles for one or more directors to represent one of more shareholders and prefer their interest to the interests of the other shareholders - so far as it is possible by law to do this.

The framework provided here is of course based on the model articles provided in the Companies Act 2006. Not only does the model version not contain provisions suitable for redistributing power between owners, many of them remain impractical for most modern companies.

For more detailed information on the changes we have made from the model articles, you can read our article about the operational structure you might give your company.

Other documents you may need

The articles can be changed, but since doing so requires the consent of shareholders who own more than 75% of the company, you may not want to change them often. To keep the articles clean of ownership issues, we recommend that you use a shareholders' agreement such as this one.

If there are conflicting interests represented among the shareholders, you should also make sure each director has a service contract. That way, there can be no misunderstand about responsibilities and power.

The law requires that minutes of all meetings are kept, including those where changes to the articles are proposed and agreed. We include the draft minutes of the directors' and the members' general meetings to enable you to do this.

Alternative versions

Of course, not everyone wants to run his, her, or their company in the same way. To avoid having to change your articles frequently, it is also sensible to draw them in ways that suit how your company might be operated in the next few years, not just what you need today. Therefore, we offer various alternatives - each covering different scenario, creates a unique structure.

Our vanilla version for a limited company by shares is likely to be suitable where all shareholders are directors, or some but not all are.

We also have a version where there are multiple share classes. We give you examples of different class rights, but if you are considering different classes, you will already have decided what you want.

Draftsman

This document was written by a solicitor for Net Lawman. It complies with current English law.

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