Bespoke Articles – Articles made for your company, just how you want them
Articles of association for a company are very important. They are the rules for how the company must be run. If the company makes a decision that doesn’t follow the rules, it can be invalid. When creating a new company, if bespoke articles are not selected, the model articles will be used.
What are model articles?
Model Articles are the default setting for companies. However, in many circumstances the provisions in the Model Articles won’t work for either a private company limited by shares or by guarantee. For example, the Model Articles will never be suitable for a company with one director. A company with Model Articles and a sole director should either appoint another director or adopt new articles.
Click here for more details on sole director companies.
The bad news is that the wrong articles can cause big problems for shareholders and directors. The good news is it is something we can easily fix for you.
The below explores some important provisions that we often include in bespoke articles, and which are not in the Model Articles. Model Articles leave a lot of power with the directors. Bespoke articles allow you to give the shareholders extra powers to keep the directors in check and protect their shareholdings.
The Articles must be filed at Companies House making them a public document. Shareholder agreements are private. They are also more flexible. It is important that if you have a shareholder’s agreement it works with and not against the articles. A shareholder’s agreement only affects the people who sign up to it. Articles are different. They automatically bind all shareholders and directors. You don’t have to sign up to the articles. It always makes sense to look at a shareholder’s agreement at the same time as looking at the articles.
For an explanation of how shareholders agreements typically work, please click here.
Shareholders and Directors – what is the difference?
A lot of people mix up the two roles. Click here if you would like to read an explanatory article.
Classes of Shares
Most companies have one class or type of share. These are usually ordinary shares of £1 each. The nominal value of the share is £1. The shares usually have the right to participate in a dividend, to one vote per share, and a right to the percentage of the capital of the company. It is perfectly possible to have different rights in all of these categories and each “class” of shares can have different rights. We usually recommend that the share classes are recorded in the Articles.
Please click here for more information on this subject.
Sometimes a shareholder who was there from the beginning might want to retain more rights over their shareholding. They are often called founder shareholders. These rights can be recorded in the articles or a shareholder’s agreement.
Pre-emption on the issue of new shares
This means if you already own shares, you must be told about the new shares being issued to existing or new shareholders. You also get the opportunity to apply for the new shares on the terms they are being offered. This gives existing shareholders a right of first refusal. Pre-emption rights allow the existing shareholders to avoid being surprised by a new issue of shares. Pre-emption rights means that existing shareholders can maintain their shareholding percentage but only existing shareholders who can afford to buy the shares offered will benefit from this provision.
Pre-emption on the transfer of existing shares
Similarly, this provision gives shareholders a right to buy the shares of a shareholder who wants to sell their shares. This prevents existing shareholders from being surprised by an unknown shareholder joining, and gaining a controlling portion of, the company. Without this provision it is possible for a shareholder to sell their shares to a stranger they meet in the pub.
Drag and Tag
In a share sale the buyer usually wants to buy all the shares. This allows them to have 100% control of the company. If a buyer doesn’t buy all the shares, then the purchase is usually described as an equity investment or a joint venture. Drag and tag clauses allow there to be a 100% sale. It prevents a minority shareholder from refusing to sell their shares.
Tag along rights apply when a majority of the shareholders transfer their shares to a third-party buyer. The other shareholders can ‘tag along’ their shares to the sale, typically on the same terms.
Drag along rights also apply in a sale. They allow the majority of shareholders to drag the minority shareholders with them to sell their shares on the same terms.
Transmission
The transmission of shares relates to the death of a shareholder. Where the shares are registered in the Deceased’s sole name, the legal title is transferred to their personal representatives. This is known as transmission. However, it may not be in the company’s best interests, or to the preference of the surviving shareholders, for the Deceased’s family, or whoever is entitled to the shares, to become a shareholder.
We can draft a clause that provides that on the death of a shareholder there is a compulsory transfer of those shares. This means that the personal representative is obliged to transfer the Deceased’s shares to the surviving shareholders. It is advisable to also include valuation provisions so there is certainty on how much the shares are worth.
There also needs to be some thought given to how the shares are to be paid for. If possible, life insurance policies are a very useful way to ensure the money is in place to do this. To work properly, the value of the life policies needs to track the value of the shareholdings. An IFA can typically advise you on the appropriate life policy to obtain.
Compulsory Transfer
A compulsory transfer clause would set out the key events that automatically trigger a requirement for a relevant shareholder to offer their shares to the remaining shareholders to protect them.
This is a powerful right, and the effects of it need to be carefully considered when drafting them. Trigger events typically include a shareholder: becoming bankrupt, lacking capacity under the Mental Capacity Act, committing a material breach of an agreement or ceasing to be a director or employee of the company.
For more details on how we can support you or your business, contact our Corporate and Commercial Law team today.
Client Case Study
Selling a company after 38 years
and why we chose HSR Law.
Client Case Study
The share-sale of a company
to an American buyer.
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Your Articles & Share Rights Team
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