Both articles of association and shareholders' agreements set out how decisions about the management of the company are made.
The Companies Act is the outer framework which regulates what you can do with your company. It is a flexible framework to some extent. You must comply with what is laid down as fixed law (for example, the statutory rights of shareholders), but you can vary the flexible parts if you like.
Articles of association are compulsory, but flexible
What you decide about the flexible parts must be written in your company articles. That is a rule. But you do get to choose how you want to change the flexible rules.
The articles of association that were given to you when your company was formed are likely to be the model Companies House version. But they are not 'model' as in the standard to attain, but rather model as in they are a reasonable fit for any company.
Most new company owners leave the document as it is, making changes only as necessary over the years. That is a mistake. Only a small proportion of it reflects the fixed parts that cannot be changed by law. The rest is flexible. If you change it, you will be able to administer your company in a way that suits you far better.
We explain each point in the model set with suggestions as to how to improve the provision for your company in our own articles of association templates.
Bringing in a shareholders' agreement
Within the structure of the articles you can arrange for a shareholder agreement. That document gives you even more flexibility. But whatever rules you make in a shareholders’ agreement must comply with the fixed parts of your articles, just as the articles must comply with the fixed parts of the Companies Act.
The problem comes in identifying which are the fixed parts and which are flexible - in the law and in the articles. Here are just a few of the questions that can arise:
Appointment of directors
- Can the other directors appoint a new director?
- Who else can, and how is that done?
- Can the directors over-rule the shareholders in making the appointment?
Chairman
- What is the role of the chairman?
- How is the chairman appointed?
- Does he or she have a casting vote at meetings, and if so, at which meetings?
Shareholders' meetings
- How often must a shareholders’ meeting be called, and for what purposes?
Directors' meetings
- Do all directors have to be present?
- What is a quorum?
- What happens if there is no quorum?
- What happens if the minutes are not accurate?
Decision making
- What can the directors do without asking the shareholders? (Read about reserved matters and preventing conflicts between directors and shareholders).
- What percentage of shares must be voted to carry a resolution?
- What subjects are exceptions to this rule?
- How far can the directors commit the shareholders to a liability: to pay or to take some course of action?
Sale of shares and exit
- Can a majority of shareholders sell their shares over the heads of the minority?
- Can any shareholder sell his shares, and if so, to whom?
- What conditions are attached to a sale?
Issue of shares
- Can new shares be issued?
- What if they are preference shares?
- Can the shareholders divide up the shares into smaller units?
- Can they issue more shares?
Dividends
- Can the directors declare a dividend according to any dividend policy, and if so, of what amount?
Director payments
- Can a director charge the company for his work or for other services?
How to avoid problems
Most problems can be avoided. Here are our suggestions.
Edit your articles so that they suit the company structure you want.
If your current ones are dated before 2006, you should change them for a new and modern set. But do not use the model set provided by Companies House. They are strictly a default position.
In any case - even if you have a post 2006 version - start with a really good template, then carefully read each provision, compare it to what you have and decide whether it is what you want. If not, change it.
Remember that every time you change an article you will need to have appropriate meetings approving the change and minutes of those meetings. So the best way is to prepare a complete new set of articles of association and adopt them as a single resolution. That is far easier than voting on every one of the changes.
Of course another advantage of the editing task is that you will have an excellent understanding of the contents by the time you finish. That will make it very easy to edit an equally good template shareholders’ agreement to complete your structuring task.
As you will guess, the next step is to draw your shareholders’ agreement. Even if you have a good template, do consider every provision carefully.
Finally, it is wise to consider possible conflicts between these two important documents.
As things stand, the company articles will always take priority or prevail as lawyers say. So nothing you can do will change that. However, there is a way around.
You can provide in your shareholders agreement that the shareholders and directors will amend the articles whenever there is a conflict, so as to make possible the terms in the shareholders’ agreement. By doing this, you simply remove any conflict when it occurs.