All limited liability companies are required to have articles of association – a series of written rules about the running of the company.
Some also have a shareholders’ agreement – this is not a legal requirement but for most companies is advisable. Together these form the constitution of a company.
However, it is now easier than ever to form a company without giving a second thought to constitutional matters.
Here, Paul Matthews looks at some common issues faced when forming a company and why adopting standard articles of association as a matter of convenience may not be the best approach.
The importance of constitutional documents
The online company formation process allows the option of ticking a box to select ‘Model Articles’ and this is what many new companies do.
These are a standard document prescribed by legislation and effectively act as a ‘one size fits all’ document. Unfortunately, it is unlikely that they will prove a good fit.
There are a number of issues which could easily be avoided by giving proper thought to Articles and putting in place an appropriate shareholders’ agreement.
Constitutional documents which are tailored to the circumstances of your company can greatly reduce the scope for disputes and costly and disruptive litigation. The best time for putting these in place is the earliest opportunity – it can be difficult or impossible to agree them once a dispute has arisen.
So, what are some of the common issues a business can face?
Restrictions on transfer of shares
The Model Articles provide simply that the directors may refuse to register the transfer of a share. This will be unsatisfactory for many companies and provisions for the shares of an outgoing shareholder to be offered first to the remaining shareholders may be far more suitable.
Compulsory transfers
There are various scenarios where a person may wish to transfer their shares in a company, however there may also be certain scenarios where it’s appropriate for a shareholder to be forced to sell shares, for example if a shareholder leaves for a competitor.
This is just one instance in which a right to compel a shareholder to sell shares if a certain event occurs may be appropriate.
Removal of directors
The board of directors is responsible for the day-to-day management of a company and therefore most of the decisions in relation to it. If directors fall out, a group could use their combined shareholding to remove another director who could not then participate in the management of the company.
If the intention is that each of the shareholders will have the right ability to participate in the management of the company, this can easily be dealt with in the Articles.
Rights to information
If someone is removed as a director, in the absence of express provisions in a shareholders’ agreement or Articles, their rights to receive information will be vastly reduced notwithstanding they remain a significant shareholder. This is unlikely to be appropriate.
Dividend policy
Suppose two shareholders out of three don’t want to declare dividends, then no dividends will be declared irrespective of the third shareholder’s wishes. An appropriate dividend policy in a shareholders’ agreement can help avoid this common source of dispute.
Minority protection
Whilst it is inappropriate for any shareholder to be given a right of veto in relation to run of the mill decisions, there will be decisions which are of such significance that it is appropriate that they should only be taken with the agreement of all shareholders, or all shareholders whose shareholdings are regarded as significant. This can be achieved through appropriate minority protection provisions in a shareholders’ agreement.
For further information on shareholder agreements, articles of association or any other corporate law matter, call Paul Matthews on 0161 761 4611 or email him at paul.matthews@whnsolicitors.co.uk
