In the absence of a written shareholders’ agreement, the relationship between the shareholders of a company is governed by the company’s articles of association, the Companies Act 2006, case law and certain other relevant pieces of legislation.
The default provisions under the articles of association and company law may not always be suitable for all companies and very often a formal written shareholders’ agreement is desirable, or necessary, to vary certain of the shareholders’ rights and obligations.
Articles of association/general company law
A company’s articles of association may be entirely bespoke to the needs to the company, or they may be a set of generic “shelf company” articles. In addition, the articles may be based on the provisions in the new model articles implemented under the Companies Act 2006, or on the “Table A” regulations implemented under either the Companies Act 1985 or, for some older companies, the Companies Act 1948.
The provisions of a company’s constitution can differ very much from company to company. However, a simple set of “shelf” company articles of association based on the model articles implemented under the Companies Act 2006, together with general company law, will commonly provide for the following:
- Two directors will constitute a quorum for board meetings.
- Two shareholders will constitute a quorum for shareholders’ meetings.
- The chairperson at board meetings to have a casting vote.
- The approval of a majority of shareholders holding more than 50% of the voting shares is required to remove a director.
- The approval of a majority of shareholders holding 75% or more of the voting shares is required to amend the articles of association.
- No restriction on director’s management powers and directors decisions to be taken by a majority vote.
- New directors may be appointed by a simple majority of the shareholders or with the agreement of the other directors to fill a casual vacancy.
- The directors may refuse to register a transfer of shares provided that they give the transferee with reasons for the refusal.
- Interim dividends may be declared by the directors;•Final dividends must not exceed the amount recommended by the directors and must be approved by a majority of shareholders holding more than 50% of the voting shares.
- For companies with a single class of shares the directors have power to issue new shares (subject to statutory pre-emption rights of existing shareholders).
- For companies with more than one class of shares, the directors have power to issue new shares if a majority of shareholders holding more than 50% of the voting shares approve (subject to statutory pre-emption rights of existing shareholders).
- Existing shareholders must be given at least 21 days notice of a right to subscribe for new shares in the company. If that right is not exercised the shares may be offered to third parties (on terms that are no more favourable).
Therefore it is important to check to provisions that are included in your company’s constitution and where they are not appropriate for your purposes either to update your articles of association or put in place a written shareholders’ agreement.
One of the benefits of a written shareholders’ agreement is that it is a private document between the shareholders, unlike a company’s articles of association which must be lodged at Companies House and are available for inspection by the general public.
It is also usual that a shareholders’ agreement can only be altered with the consent of all of the shareholders who are a party to the document, whereas the articles of association of a company can, in most cases, be altered if shareholders holding 75% or more of the voting shares in the company agree.
It is common to see the following items provided for in a shareholders’ agreement:
- A list of procedures to be followed by the directors in operating the day to day business of the company, including reporting requirements and other provisions to protect minority shareholders.
- An enshrined right for each of the shareholders to nominate a director to sit on the board of directors.
- A list of matters requiring consent of all of the directors, including certain matters relating to the day to day running of the company.
- A list of matters requiring consent of all (or an increased majority) of the shareholders, including issuing new shares or amending the articles of association.
- A list of the circumstances in which the shareholders may be permitted to transfer their shares without having to seek the approval of the other shareholders (e.g. to a family member or a trust).
- A detailed procedure in the event that a shareholder wishes to transfer his shares in the company, including offer periods, independent valuation and possibly good leaver/bad leaver provisions.
- A list of events of default upon which the other shareholders may be able to require a “defaulting” shareholder to transfer his or her shares (e.g. gross misconduct, death, bankruptcy etc).
- A procedure to be followed for issuing shares (if the statutory position is not satisfactory) and a requirement for new shareholders to be bound by the terms of the existing shareholders’ agreement.
- A detailed dividend policy, possibly to include minimum levels of dividend to be declared per annum (with reference to profits).
- Drag along and tag along rights enabling all of the shares in the company to be sold together in the event of an offer for the majority of the shares from a third party.
- Restrictions to be imposed on current/outgoing shareholders to prevent them from competing with the company or poaching employees and/or customers etc during a defined restricted period.
It is important to periodically review your company’s constitutional documentation to ascertain whether or not the provisions are suitable for your needs. If you do not have a shareholders’ agreement in place then you should consider arranging for a suitable document to be prepared.
Any shareholders’ agreement should “dovetail” with your articles of association and a review of the articles is often advisable at the same time. The Companies Act 2006 introduced a new series of model articles of association for private and public companies, together with certain other changes to general company law. If your articles of association have not been reviewed since the implementation of the 2006 Act then we advise that you arrange to do so.