A company’s Articles of Association, or ‘Articles’ are its constitution that regulate its internal affairs and its relationship with its officers and shareholders.
Articles should be carefully prepared to ensure that they reflect all company stakeholders agreement as to how a company will be operated.
All UK companies have articles that are publicly accessible at the Registrar of Companies. Articles take one of three forms:
- Model Articles;
- Model Articles modified as desired; or
- Bespoke Articles.
Model articles are the default statutory form of articles contained in the Companies Act 2006. They import limited default provisions such as shareholder liability, director appointments and proceedings, share rights, and shareholder decisions. In most cases where there are two or more shareholders they will not be suitable
Articles should normally be extended beyond the limited default Model Articles, by either amending the Model Articles or, by adopting Bespoke Articles.
Adopting Bespoke Articles should be considered by all companies, especially in the following scenario:
Majority/minority shareholder companies
Where a company has unbalanced shareholdings, for example 60/40, 75/25, Articles need to provide appropriate minority protections for the minority shareholder(s) and appropriate rights of control for the majority shareholder(s).
Provisions may include:
- An ability for both the majority and minority shareholder(s) to appoint a director;
- Weighted voting rights and/or dividends;
- Pre-emption rights upon a sale of the majority/minority shareholder(s) shares to a third party;
- Drag along and tag along rights that would apply upon a sale to a third party (so that a minority of shareholders cannot frustrate a sale whilst having the right to participate in a sale of a company and receive the same value for their shares as majority shareholders); and
- Anti-dilution rights.
It is also very desirable to also enter into a Shareholders Agreement when adopting such Articles.
In a company with balanced 50/50 shareholdings, articles should include provisions that enable a deadlock to be overcome, otherwise the company will be unable to function.
Provisions may include:
- Casting votes for chairpersons or veto provisions;
- Compulsory share transfers; or
- Structured transfer provisions such ‘Russian roulette’, ‘Texas shootout’ or Mexican Shoot-out (Dutch auction);
- Cooling-off mediation.
It is very desirable to also enter into a Shareholders Agreement when adopting such Articles.
In a joint venture company, the shareholders will often contribute different assets to a company such as real estate, intellectual property, initial capital, know-how or trade contacts etc. The Articles should cover:
- The different contributions of shareholders;
- Alphabet share classes with different rights; and
- The return of shareholder assets upon a winding up to the original contributing shareholders.
If a company has external equity investment from an institutional investor or business angel investor the Articles will usually be entirely bespoke to regulate the relationship between the investor and the owners. This can include provisions such as:
- Investor and owner board representation;
- Alphabet share classes;
- Non-dilution provisions;
- Swamping rights;
- Compulsory share transfer provisions;
- Share valuation provisions, in particular good, early and bad leaver provisions; and
- Weighted voting rights in favour of the investor.
Articles often interact with an Investment Agreement (which sets out private arrangements between shareholders which are not publicly accessible at the Registrar of Companies). Both Articles and Investment Agreements should be adopted in parallel to ensure that they properly work together.