Shareholders agreements and articles of association: how can they help with wealth protection?

What are articles of association?

Under the Companies Act 2006, every limited company must have articles of association prescribing regulations for the company. These are a fundamental constitutional document forming the basis of a statutory contract between the members and between each member and the company.

Articles of association are a public document filed at Companies House and automatically bind all current and future shareholders. While the Companies Act 2006 prescribes a form of model articles, it is possible to create bespoke articles of association for a company so that they accurately reflect intended governance and the rights attaching to the shares.

What is a shareholders’ agreement?

As the articles of association are a publicly filed document, it is common for a shareholders’ agreement to contain certain provisions which you would not want on the public record. In contrast to the articles of association – which bind all shareholders whether or not they indicate agreement to it when receiving shares – a shareholders’ agreement only binds the shareholders who are parties to it, unless a new shareholder specifically agrees to adhere to it. If you have a new shareholder, it is important to check the terms of the agreement to ensure they also become a party to it at the time they receive shares.

Shareholders’ agreements are often used as a safeguard and can provide for:

• The financing and management of the company
• Matters requiring shareholder consent
• Any specific dividend policy
• Procedures regulating transfers of shares.

How can they help with wealth management?

Whether you hold shares as part of an investment or have a family business, it is important to ensure that the governing documents accurately reflect the current structure of the business, anticipate how you will deal with future events, known or unknown, and provide necessary protections for you as a shareholder.

If you are a minority shareholder, it is crucial that the governing documents also include certain restrictions on the company from acting without the consent of minority shareholders.

A shareholders’ agreement can also help to minimise disputes and ensure the smooth operation of the company as treatment of key issues have been documented at the outset. By outlining decision-making processes and dispute resolution procedures, shareholders can work together effectively and minimise the risk of disagreements.