KNOWLEDGE

Are my Company's Articles of Association and Shareholders' Agreement consistent?

Morton Fraser Senior Associate Julie Nixon
Author
Dr Julie Nixon, WS
Senior Associate
Morton Fraser Solicitor Robert Jessiman
Author
Robert Jessiman
Solicitor
PUBLISHED:
15 December 2021
Audience:
Business
category:
Article

Articles of association and shareholders’ agreements are both key documents for a company. What happens if the two aren’t on the same page when it comes to key issues? Julie Nixon, a Senior Associate and Robert Jessiman, a Solicitor in the Morton Fraser corporate team, explore the issue.

When setting up a company for success, it is important to have the proper foundations in place.  This includes ensuring that the constitutional documents relating to the company and its shareholders are clear and consistent. These documents can often overlap on key issues, and so any conflict or ambiguity can cause issues for those who are party to them. The recent case of Lord v Maven Wealth Group [2021] EWHC 2544 (Comm) offers one such example, where a company’s shareholders disagreed on how to read the company's articles of association and shareholders' agreement together. Before looking at this case in greater detail, it is first important to understand the nature and purpose of these two documents.

Articles of association and shareholders’ agreements - a brief guide

A company’s articles of association are its main constitutional document. Every limited company is legally required to have a set, which must also be filed at Companies House. The articles will then be made publicly available on the Companies House website. A company can have bespoke articles or use the “default” model articles of association prescribed by legislation. Articles of association cover a wide range of issues, including (but not limited to):-

  • the appointment and removal of directors;
  • the rights attached to each class of share held in the company; and
  • how shares can be issued and transferred.

As the main constitutional document of a company, a breach of the articles can render a decision void.

Shareholders’ agreements are a form of contract entered into between a company’s shareholders. This agreement governs the relationship between the shareholders and may include restrictive covenants for shareholders and provisions for handling disputes between shareholders. The shareholders' agreement is a private document and does not need to be filed at Companies House. However, if it is necessary to read a shareholders’ agreement to understand the articles properly (because the documents cross reference each other), the company may be required to file the shareholders’ agreement itself publicly. Breaching the terms of a shareholders’ agreement opens up the party in breach to damages but will not by itself render an action void.

Lord v Maven Wealth Group- what happened?

The Lord case arose from a dispute between the shareholders of a financial services company (the “Company”). At the time of a share sale new articles of association (the “Articles”) were adopted by the Company and the Company and its shareholders entered into a new call option and shareholders’ agreement (the “Agreement”).  The claimants were employees of the Company who were suspended from their positions. This removal constituted a “Transfer Event” under the Articles which prompted the compulsory transfer of the employees' shares. The parties could not agree on the way to interpret the relevant clauses of the Articles and the Agreement in order to value the shares for this compulsory transfer. The Agreement included a clause which stated that in the event of a conflict between the Articles or the Agreement, the latter would prevail. The employees sought to rely on this provision in order to use the valuation mechanism in the Agreement. The defendants argued that the Articles alone should be used for the valuation and that the two documents did not conflict in this specific instance.

On review of the documentation, the court held that there was only some “unimportant untidiness” between the two documents and found no relevant conflict between them. Although the facts allowed this case to be resolved without further exploration as to handling conflicting terms between a shareholders' agreement and articles, there is one important lesson to take from the case. Namely, even the perception of conflict between constitutional documents can lead to disputes. As a result, it is important that these documents are drafted with care to ensure that there is clarity of meaning across the documents. This is especially important when these documents are not being drafted at the same time.

At Morton Fraser, clarity is our watchword. If you are considering adopting new articles of association or a new shareholders’ agreement, we would be happy to assist. For an initial call, please get in touch with Julie on 0131 247 1012 or Robert on 0131 247 1117.

Disclaimer

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers.  Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.