Articles of Association – the Rulebook
The articles of association (Articles) are a public document lodged at Companies House. They detail the basic rules of how the company is administered, including the appointment and removal of directors, decision-making processes and how shares can be issued or transferred. Because they are public, Articles are usually kept fairly simple and comply with the Companies Act, which means there are limitations on how flexible or bespoke they can be.
The Articles present the default position which governs all shareholders, current and future. For example, if a new investor comes in, they are automatically bound by the Articles. This offers some consistency and transparency, however, sensitive or commercial arrangements will often be better placed elsewhere.
Shareholders’ Agreements – the Private Contract
Conversely, a Shareholders’ Agreement is a private agreement between the shareholders (and sometimes the company itself). It allows for much greater flexibility covering everything from dividend policy and funding obligations to rights of first refusal on share sale agreements, drag-along/tag-along provisions, and good leaver/bad leaver obligations for departing employees.
Because it is private, the Shareholders’ Agreement will often record more commercially sensitive arrangements. The Shareholders’ Agreement may also include specific dispute resolution mechanisms or tailored protection for minority shareholders. It is also important to note that the Shareholders’ Agreement can only be amended with the consent of all parties meaning that one shareholder cannot simply change the rules without the agreement of others.
Why Both Matter
Neither document acts as an alternative to the other. Articles set out the statutory framework for governing the company, while the Shareholders’ Agreement allows shareholders to decide and structure the nuances of their relationship. Together, they serve to reduce ambiguity, avoid disputes, and structure how the company will behave in relation to its governance, as well as the ownership's evolution.
For business owners, relying on common Articles without any Shareholders’ Agreement is risky. It may be okay for a little while in the early stages of the business, but in the event of disagreements, raising investment, or thinking about a potential exit, missing a well drafted Shareholders’ Agreement can lead to costly disputes.
To put it simply, the Articles are the public rulebook for the company, whereas the Shareholders’ Agreement is the private roadmap. Both are important, and should be drafted together to ensure they complement each other and reflect the needs of the business and its owners.
For further information please contact Nick Dawson