Solicitors and Business Lawyers
When you set-up a company in England, your company is required to have 2 constitutional documents – the memorandum and articles of association. Those documents are public documents, which can be viewed on the companies register at Companies House in the UK.
The articles of association is the most important constitutional document in UK companies which have been set up under the current companies legislation, as the memorandum of association has a limited role in modern companies – in older companies, the memorandum of association may still have a significant role. The articles of association of your company will contain rules relating to the management of the company and the separate relationship that exists between the shareholders and the company.
You can choose to create your own bespoke articles of association when starting a new company in the UK. Alternatively, you can choose the relevant standard type of articles of association (commonly known as ‘Model articles’). The format of the various types of Model articles of association are prescribed by the Companies Act 2006 and apply by default where no bespoke articles of association are filed.
As the articles of association of your company will contain rules relating to the management of the company and other matters, you may wonder why you should also have a shareholders’ agreement.
Shareholders’ agreements are contracts between some or all of the shareholders of a company and, sometimes, the company itself. There is no legal requirement for your company or its shareholders to have a shareholders’ agreement. Furthermore, where a shareholders’ agreement is created, it is not necessary to include all shareholders in the relevant agreement (although that is usually the case).
The main reasons why shareholders enter into a shareholders’ agreement in addition to the articles of association include the following:
1. Privacy - Shareholders’ agreements are private contracts, which do not usually have to be registered at Companies House.
2. Flexibility – As they are contracts, shareholders’ agreement are extremely flexible.
3. Dispute resolution – Shareholders’ agreements can contain a private procedure for dealing with any disputes between shareholders, which can otherwise be expensive.
4. Confidentiality and restrictive covenant clauses - Shareholders’ agreements will usually contain such provisions. They provide the shareholders with a potential contractual remedy against any shareholder that breaches them.
5. Minority shareholder protection - Shareholders agreements can provide minority shareholders with an agreed level of protection and security, which they would not otherwise have under the articles of association or general law.
6. Majority shareholder protection - Whilst majority shareholders may not need the same level of protection as minority shareholders, there may be circumstances in which majority shareholders need to ensure that their position is protected (for example, where they are a passive investor, that is not involved in managing the company).
7. Organisation, regulation and stability – Properly drafted shareholders agreements should provide a stable base for the management and running of the company and a clear set of rules where difficult issues arise. They also provide third parties (such as banks, investors or future purchasers) with a greater level of reassurance.
Naturally, it is sensible to make sure that your shareholders’ agreement does not conflict with any part of the articles of association of your company. Ideally, the 2 documents should dove-tail as neatly as possible.
There are a number of circumstances in which it is common for shareholders to enter into shareholders’ agreements. These include Founders shareholders’ agreements, Family shareholders’ agreements, Share class shareholders’ agreements, Investment shareholders’ agreements, management buy-outs and management buy-ins, and Joint venture shareholders’ agreements.
Whilst some shareholders may have legitimate business or personal reasons for not entering into a shareholders’ agreement with some or all of the other shareholders, in most cases shareholders will have a common interest in starting, developing, managing and, ultimately, selling their shares in the company (or procuring the sale of the business of the company) to a third party.
It is usually in the interests of all shareholders to ensure that this process is carried out in a stable and organised environment so that the shareholders are able to develop the company without significant disruptions and can deal with any disagreements in an efficient and effective manner. In most cases, that is likely to increase the prospects of successfully developing the company, improving its turnover and profit and, consequently, maximising the value of the company.
With the above in mind, in most cases, it is good practice for shareholders to put a shareholders agreement in place as early as possible where the relevant company is to be started by or has more than one shareholder. Often it will be prepared at the outset together with other key documents such as bespoke articles of association of the company and directors’ service agreements.
You can read more about shareholders’ agreements on our dedicated page on Shareholders’ Agreements.
Whatever stage of the process you have reached, we can help you to understand the different legal and related commercial issues when you are considering a shareholders’ agreement, to choose the option that is right for you and to help you develop your business in the UK.
If you would like more information about shareholders’ agreements or would like to discuss a potential or existing shareholders’ agreement please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.