Articles of Association: Why are they so important?

Whether your business is mature or if it is just starting out, the Articles of Association of your company will be the set of rules defining how the company is to be run, including details of any complex relationships between the company, its shareholders and directors.

As with most rulebooks, you may well be unaware of what they actually state, and, whilst things are ticking along nicely, this may not be a problem. You should, though, think through the following key points, particularly if there is more than one director and/or shareholder in your company or there may be in the future.

1. Conflicts of Interest and Transactional Conflicts

As a general rule, under company law, directors must avoid situations which may or do give rise to a conflict of interest. Typically this would be things such as the exploitation of property, information or business opportunities. Such conflicts can be approved by the Board under the Companies Act 2006 (“the Act”).

For companies incorporated before 1st October 2008, an ordinary resolution of the shareholders must be passed to “opt-in” to these provisions  whilst any company incorporated after this time should check to ensure there is nothing stating that this is not permitted in their Articles of Association (unless, of course, this is the intention).

Separately there are transactional conflicts to consider. This covers things such as entering into a contract with a director (or a connected person).

The Articles of Association of your company can set out the rules to be followed when dealing with such conflicts and, as long as such rules are complied with, the director should not be in breach of the relevant provisions under s175 of the Act (for situational conflicts) or s177 (for transactional conflicts).

2. The Board of Directors

The shareholders holding the majority of the issued share capital of the company have one of the most important rights a shareholder can have. They have the right to “hire and fire” the Board. Where there is more than one shareholder this can be crucial if there is a dispute.

Investors may also ask for the right to appoint a director, so even if the shareholders can, legally, remove that person, the investor could just appoint someone else to sit on the Board. Care should be taken in considering any bespoke provisions which move away from the standard company law position.

3. Investors and Minority Shareholders

Investors and minority shareholders might expect to see a complex Shareholders’ Agreement or have a long list of protections that they think they will need. The simplest way to ensure a fair and balanced position is bespoke provisions in your Articles of Association to give them certain veto rights and/or, as mentioned above, the right to appoint a director (if appropriate).

4. “Drag” Along

Deciding when you want to sell the shares in your company and on what terms is likely to be the most important decision you’ll make as a business owner.

A buyer will almost certainly want to acquire 100% of the shares in issue so you’ll want to ensure that you can “drag” any minority shareholders along with you on a sale. There is a statutory “drag” (for the holders of 90% of the share capital) but this may not be practical (in terms of following the strict procedures, or if you have minority shareholders holding more than 10%). A bespoke provision can be added to your Articles of Association setting out the rights of the shareholders (including the minority shareholders) and the procedure to be followed.

 5. Employee Shareholders

If you have given shares to any of your key team members, you’ll want to consider what will happen if they leave. The Articles of Association can set out the rules for what happens to their shares and can provide for an automatic transfer back to the company (or to other shareholders if you so choose).

The determination of the price can also be set out. You could decide that they should receive “fair value” for their shares to be calculated by an accountant (the company’s or perhaps an independent firm), or, if your exit plans have been clearly communicated and the employees haven’t paid much for their shares you might think that the acquisition price would be fair to enable you to continue to grow the business without having large amounts of cash being paid to people who have left your team.

6. Death

As a founder shareholder you may want to ensure that your shares would be passed to your family in the event of your death. If you have other key shareholders in the mix, they may well want the option to buy the shares back from your family to ensure that control stays with those working in the business. This could be backed up by appropriate shareholder protection (term assurance policies).

Whatever you think is appropriate care should be taken to ensure that your wishes are covered in your Articles of Association and are properly protected.

For further information on Articles of Association, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email