What are the articles of association?
The articles of association, or just ‘articles’, are essentially a binding contract between the company and each shareholder affecting and shareholders and directors automatically as soon as they receive shares or take office. They govern what directors and shareholders can and can’t do and set out rules that must be followed as to how the company should be run.
This article tells the cautionary tale of a shareholder who was not familiar with their articles when they became a shareholder and the difficulties this later caused.
Our Client’s Story
Zora owned 33.3% of a private limited company.
The company was originally set up by her father when he was a young man and was incorporated with articles of association under the Companies Act 1985, opposed to the updated Companies Act 2006.
Over the years, and as the family and sons got more involved in the Company, Zora’s father gifted shares to his wife, Zora and Zora’s brother. Ultimately, all four members of the family became directors while Zora and her brother led the company with a third of the shares each. Zora’s father and mother held a third of the shares between them.
As shareholders, they were all automatically bound by the company’s articles.
The importance of being familiar with your company’s articles of association
Zora enjoyed her time at the company for many years until she began to fall out with her family. She wanted to improve her situation and soon discovered that the company’s articles made this harder than she originally thought it would be.
Zora had never received a dividend while being a shareholder and asked the other directors to be paid some. The articles were silent on shareholder rights to dividends and there was no dividend policy in the articles. The decision to pay dividends was therefore decided by the directors who outvoted Zora by 3 to 1 at board level.
Zora therefore decided to sell her shares to a third party and leave the company. This upset her family and fellow shareholders greatly. Despite this, Zora instructed her accountant to value the shares who estimated their value at almost half a million pounds.
It was then that Zora found out that under the articles, unless shares were to be transferred to a fellow shareholder, her children or a trustee of the will of a deceased shareholder, the directors had absolute discretion to decline to register the transfer of any shares. Zora was again outvoted at board level.
Zora resolved herself to selling her shares back to the shareholders. Her fellow shareholders offered her a fraction of what the shares were valued at, and without any sort of fair value provisions in the articles, Zora had no way of insisting on a higher value.
At this point, the work and family environment had become very toxic, and Zora had to endure the stress and upset associated with being cast aside by her fellow shareholders, and the financial worry and uncertainty of what her future looked like.
How we helped Zora
We were able to assist Zora with negotiating a return of her director’s loan (the unpaid dividends she was owed) as well as a share transfer to her son who worked within the company.
Had Zora reviewed the company’s articles prior to becoming a shareholder or before her relationship with the other shareholders broke down, she may have been able to suggest that the company obtains an updated set of articles that were more appropriate for the company and its shareholders.
For more details on how we can support you or your business, contact our Corporate and Commercial Law team today.