Articles of Association: lender or investor requires protection

This "memo and articles" document is for a trading company with a simple structure where a minority shareholder or large lender invests. You are probably an advisor looking to protect this investor or make a proposal on behalf of the company. The investor may be a director, but we have assumed his interest will be protected without that. This version provides a reasonable, practical and balanced framework to manage and control the company, while protecting the investor.

Suitable for use in: England & Wales and Scotland
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About this memorandum and articles of association

This set of articles has been drawn for a situation where a new minority shareholder requires high level protection of his/her interest but does not want to be a director.

This will arise when:

  • a company raises money in terms whereby the lender also takes an equity interest but most likely does not wish to appoint a director on account of the responsibility that comes with that appointment.
  • A large shareholder who has probably controlled the company, now retires but wants to be sure the smaller interest he 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 other influential shareholder who 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 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 many small changes we have made are identified in the notes and each is effectively an option for you to use or delete or edit.

In summary, these articles provide a balance between letting the directors get on with making money, on the one hand, while protecting the interest of every shareholder, on the other hand.

In passing, if you need this version of the memo and articles, you also desperately need a shareholders’ agreement and a new service contract for each of the directors.

The framework provided here is of course based on the model articles provided in the Companies Act 2006. That act freed us from the longstanding straight jacket of a document few people dared to edit. Because you can now edit your articles more flexibly, you can make just the structure you need. The so called model articles will not suit you. There are many additions and omissions that are unworkable or impractical in the real world.

For more detailed information on the changes we have made from the model articles, you can read Setting up the Structure of Your New Company and other articles which explain in more detail.

Using other legal agreements too

As we have said, the articles of association of a limited company are its legal “constitution”. They are a framework within which the company must be managed. They can be changed - but only with the consent of at least 75% of the shareholders. The most efficient way to operate your company is to keep the articles "clean" of everything likely to change soon. Stick to principles and a structural framework.

To deal with detail and management issues it is essential that you have a shareholders’ agreement. If there are conflicting interests represented among the shareholders, you should also make sure each director has a director’s service contract. That way, there can be no misunderstand about responsibilities and power.

The law requires that minutes of meetings are kept, so we also include free bonuses of draft minutes of directors' and members' general meeting to change the articles.

Alternative versions of company articles

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.

Articles of Association: limited company (ltd) by shares is suitable for a company with shareholders in control with several directors and possibly some shareholders who are not directors. This is the “plain vanilla” version which will be used by most companies.

Memo and Articles for shareholder-director for a simple structure controlled by one person, or a start-up with no complications. We sometimes refer to this as the “autocratic manager” version.

Articles of Association: multiple share classes based on the standard version, this set of articles provides for different classes of shares. We give you examples of different class rights, but if you are considering different classes, you will already have decided what you want. We also have an article at Company structure: using different classes of shares. You can also use this version to edit your existing version if that is your preferred route.

Articles of Association: family owner-managed company for a husband and wife team, or maybe for other close family members with no outsiders.

Articles of Association: property management company for a property management company. This is a rather different animal from a trading company because it exists only to enable a set of flat owners to manage their building together.

Mostly private companies are limited by shares. However, if you want a company through which to operate a charity, club or non-for-profit association you will require articles for a company limited by guarantee.

Draftsman

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

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