The Articles of Association of any company represent the legal contract between the business’ shareholders and directors. Like most contracts they sit in the bottom drawer and you forget about them. Before putting them in the bottom drawer, though, think about the following:-
- Sacking you as a Director
Those who hold more than 50% of the voting share capital have a very powerful right: the ability to remove Directors from office and, of course, it is the Directors who run the company. Where share ownership is split between two or more founders this can be a serious matter when shareholders fall out. The Board can also terminate employment contracts, increase salaries or award bonuses.
- Forcing a sale of shares if a Director or employee leaves
Deciding on the timing and manner of the sale of shares can be of great importance. As founder and owner of your company you will want to set the rules for what happens when someone leaves. If a leaver cannot be forced to sell their shares your business could suffer. You may no longer be able to pay tax effective “remuneration” through dividends. Leavers may participate in the growth in value of your company.
- What happens to shares on death?
Your Articles will set out whether your shares or those of your fellow shareholders can be transferred to a family member on death. As founder you may want your family to be in control of the sale price and the timing of a sale. For shareholders contemplating the death of a founder the right provisions (often backed by term assurance) can avoid costly disputes.
- Valuing shares on a forced sale
The choice of valuer may be crucially important. Any seller will prefer an independent accountant not the company’s auditors or accountants. You, as business owner, may wish the Company’s auditors or accountants to be involved if, for example, the sale is of a departing employee shareholders’ shares.
- Dealing with conflicts of interest
You will want to consider whether Directors are allowed to have an interest in a potentially competing business. This can be addressed in the Articles and in a Director’s service agreement or letter of appointment.
- Forcing others to sell when you do
A buyer of a company will often insist on acquiring 100% of your company. Be sure that you have the right clause (a drag along article) so that you can compel any minority shareholders in your company to sell when you do.
- Protections for investors and minority shareholders
Bespoke Articles of Association can be a simple way to provide basic protection for investors or minority shareholders. A veto on increases in remuneration is an obvious example, or perhaps limitations on the amount of capital expenditure which can be authorised by an individual Director.
For further information, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com
