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Do you know what is in your articles?

Napthens - July 17th 2017

A company’s articles of association are the rules and regulations that govern the day to day management of a company and the conduct of its business. A company’s articles of association, will typically deal with the following matters:

  • director’s powers and responsibilities;
  • how directors and shareholders make decisions;
  • how directors are appointed and removed;
  • the organisation of company meetings;
  • the issue and transfer of shares including pre-emption rights and protections for minority shareholders; and
  • how dividends should be distributed.

Unless a company adopts their own bespoke articles of association, then ‘Model Articles’ will be adopted by default and many companies adopt these on incorporation without amending them to suit their company’s needs. Often, shareholders forget or are not even aware that they have template articles in place. It is only when a dispute arises that they realise they do not have the desired rules in place. Adopting Model Articles without tailoring them can lead to disputes arising between directors or shareholders, as they do not differentiate between share classes; voting rights; or dividends. Therefore, it is important to tailor a company’s articles of association to reflect the position of the company.

Model articles do not provide for a whole host of rules that often shareholders would require in their articles. For example:

  • Good and bad leaver provisions. If an employee or director leaves the company and if they held shares in the company, such provisions would deal with whether they can be forced to sell their shares back to the company or to the other shareholders.
  • Drag along provisions. A drag along provision would allow a certain percentage of shareholders to accept an offer from a third party and would force (“drag along”) the remaining shareholders to sell as well.
  • Pre-emption rights. To ensure that if anyone wishes to sell their shares, they must be offered to the company’s shareholders or to the company first.
  • Compulsory transfer events. To cover events such as death, mental incapacity or bankruptcy and to address what happens to that shareholder’s shares on such events occurring.

To amend your articles of association the shareholders of the company would need to approve the new articles of association by signing a special resolution, which requires the approval of 75% of the shareholders (unless a private agreement exists which requires a higher majority).

If you would like to discuss amending and tailoring your articles of association to meet your company’s requirements, please do not hesitate to get in touch with a member of our corporate team.