A shareholders’ agreement is an agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It will also govern the way in which the company is run.
Articles of association are legal documents that establish the rules governing a business’s activities and describes the business’s purpose. The document details how responsibilities inside the corporation are to be completed, including the process for appointing directors and the management of financial records.
It may be usual to combine the use of a shareholders’ agreement with a specifically drafted set of articles of association for your company. In this article, can a shareholders’ agreement override articles, we consider the process and mechanism involved in more detail.
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Can a shareholders’ agreement override articles?
No, a shareholders’ agreement will not supersede the Articles; in the event of a conflict, the Articles will take precedence. However, it is feasible to stipulate in the shareholders’ agreement that, in the event of a conflict, the shareholders and directors will work together to amend the Articles of Incorporation so that they conform to the terms of the shareholders’ agreement. This is known as the “supremacy clause.”
When creating your shareholders’ agreement, it is best to seek legal advice from an experienced corporate lawyer so that, if necessary, the Articles can be amended at the same time as the shareholders’ agreement is signed.
When a shareholders’ agreement is established, it is customary for a company to adopt new articles of association so that they are consistent with the conditions of the shareholders’ agreement. Moreover, issues such as the issuance and transfer of shares, board meetings, and shareholder meetings are frequently better addressed in the company’s articles of organisation than in the shareholders’ agreement, as the articles of association are automatically binding on all members.
Why should you use a shareholders’ agreement?
Each share in a limited corporation (whether public or private) typically carries one vote. If the owners who collectively control more than 50 percent of the shares at a meeting agree on a motion, the motion is passed regardless of the opinions of the others. If a single shareholder owns more than 75 percent of the company’s shares, he or she has absolute power and can veto the choices of all other shareholders.
How therefore can a minority investor be protected from having his investment controlled by a majority shareholder, and how can decision-making authority be distributed more equitably among the owners?
There are two options available under these circumstances: the use of different classes of shares or a shareholders’ agreement.
Share Classes
The first option is to create various types of shares with varying values and rights.
For instance, preference shares are frequently used to give their owners the right to receive dividends before holders of other classes of shares, but without conferring voting rights.
A corporation may issue various classes of preference shares, such as Preference A, Preference B, and Preference C, all of which have distinct rights. There are no restrictions on the names of classes or the privileges they provide.
If a shareholder sells or gives away his shares, the rights associated with those shares are transferred instantly to the new owner.
When shares are sold (since the selling shareholder’s interests are no longer in the long-term profitability of the company, but rather in the short-term value of the shares) or when a shareholder dies, the remaining shareholders are likely to suffer difficulty protecting their assets (because his beneficiary could be an inexperienced or uninterested family member).
The other shareholders have no authority over the transfer or over who acquires the rights.
Using a shareholders’ agreement
Using a shareholders’ agreement is by far the superior method for regulating the authority amongst shareholders and, in particular, for defining the limitations of director-shareholders’ freedom.
It is strongly recommended that every shareholder in every corporation utilise one of these agreements.
If you own 90 percent of the company’s shares, you will want to ensure that your minority shareholder will not rush to court to enforce his legal rights.
Obviously, if you are a minority shareholder, you will want to ensure that your co-shareholders are not trying to take advantage of you.
What is the purpose of the articles of association?
Articles of association and a memorandum of association are required when a new company is formed under the Companies Act 2006.
The articles of association establish the rules for managing, regulating, and governing the corporation, including the directors’ duties and powers, as well as the amount to which shareholders have influence over the board of directors.
This is crucial because it aids in the prevention of internal conflicts and instils shareholder confidence in the board of directors. For example, directors’ articles of association can specify that they are prohibited from performing specified acts without shareholder authorization and that shareholders are prohibited from making undue demands on directors.
The articles of incorporation are public documents. If shareholders prefer to amend the articles of association without disclosing more information, they may do so through the creation of a shareholders’ agreement.
How we can help
We have a proven track-record of dealing with shareholder agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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