Worried that you do not know whether your Articles of Association will give you the protection you need? Could bespoke Articles of Association replace the need for a Shareholders' Agreement?
Well prepared Articles of Association can play an important role in dictating how your company operates. For new and more mature businesses alike, your Articles of Association are, simply put, the rules which define how your company is run and set out the sometimes complex relationships between the company, its shareholders and the Directors.
What is in the Articles of Association can decide who wins a power struggle for control of the Board, and whether a former Director or employee must sell their shares when they leave.
The enactment of the Companies Act 2006 led to an overhaul of the standard form “Table A” Articles and were superseded for companies incorporated on or after 1 October 2009 by the “Model Articles”. The Model Articles are different depending on whether your company is limited by shares, limited by guarantee or a public company.
It may well be that your company’s Articles of Association could benefit from a legal audit. Often it is only when a serious dispute arises that the Articles of Association of a company are examined in detail and the results can be surprising! There are a number of key issues to check and these should be considered carefully
Our dedicated team in Witney, Oxfordshire, would be happy to answer your questions.
Key issues addressed by the Articles of Association
Transfer of Shares, Buy Back Provisions and Employee Share Schemes
The Model Articles follow the old Table A provision giving the Directors a right of refusal on share transfers. You will want to check that this is included. If the Articles of Association include pre-emption rights on share transfers (i.e. rights of first refusal for existing shareholders before a transfer can be made) then these must be checked carefully. A common “add on” are leaver provisions, which require an employee leaving the company to offer his shares for sale (sometimes at a below market value). Whilst you may want to include this if you are looking to set up an Employee Share Scheme, it is likely that you, as the owner-manager, will want a carve out from such provisions.
Restriction on Share Issues
Before the Companies Act 2006, the Directors had to be given authority by the members to allot shares. The Memorandum of Association also included a share capital clause so, if the company wanted to issue more shares than specified, it had to increase its authorised share capital. The authorised share capital requirement was abolished with the new Companies Act. For companies incorporated before 1 October 2009, the restriction is imported into the Articles of Association as a “hidden” restriction. Many formation agents choose to adopt a cap in the Articles of Association on the number of shares that can be issued and you should check this carefully.
Drag Along / Tag Along Provisions
A provision can be inserted in the Articles of Association under which the sale of a specified percentage (often 75%) can trigger the compulsory acquisition of the minority shares at the same price per share. It is recommended that a drag along provision is included in the Articles of Association even if the controlling shareholder holds 90% or more of the equity. This is because the compulsory purchase procedures in the Companies Act are cumbersome and can be expensive to operate. Minority shareholders also have a legal right to challenge the procedure.
A tag along right is the right of a minority shareholder to block the sale of a majority interest unless a like offer has first been made for their shares too. Generally, a majority shareholder will be happy to concede the inclusion of a tag along right perhaps as a quid pro quo to the drag along. Care must be taken though in the framing of the tag along right. From the majority shareholder’s perspective, it should be the right to insist only on a like for like offer. So the minority should not be able to insist on cash if the majority offer is one in shares and if the offer is of deferred consideration (or an earn out) the tag should be similarly limited.
Please do not hesitate to contact an Everyman Advisory on 01386 240145 for a free discussion or email james.hunt@everymanlegal.com
Directors’ Conflicts of Interest in Company Transactions
The starting point in the Model Articles is that if a Director is “interested” in the business to be transacted at the Board meeting, he is disqualified from voting and cannot count in the quorum. There are permitted situations where a Director may be able to vote, for example a guarantee by a Director or a share subscription. You may want to replace these Model Articles with provisions which allow interested Directors full rights to vote and count in the quorum.
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