Cheyney Goulding

Cheyney Goulding Solicitors

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Business

Do I Need a Shareholders’ Agreement?

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If you’re a business owner in England, you may be wondering whether you need a shareholders’ agreement. While it’s not a legal requirement, having one in place can be highly beneficial for your business. In this article, we’ll explore what a shareholders’ agreement is and why you may want to consider having one.

What is a Shareholders’ Agreement?

A shareholders’ agreement is a private contract between the shareholders of a company. It sets out the rights and obligations of the shareholders, as well as the procedures for making decisions and resolving disputes. It can cover a wide range of issues, such as:

  1. How the company is managed
  2. The roles and responsibilities of the directors
  3. How decisions are made and what voting rights each shareholder has
  4. What happens if a shareholder wants to sell their shares
  5. How disputes are resolved
  6. How profits are distributed
  7. Protecting the company from unfair competition by individual shareholders

Why Might You Need a Shareholders’ Agreement?

There are several reasons why you may want to consider having a shareholders’ agreement in place. Here are a few:

Clarify Roles and Responsibilities

A shareholders’ agreement can set out the roles and responsibilities of each shareholder, as well as the directors of the company. This can help to avoid disputes and confusion down the line.

Protect Your Investment

A shareholders’ agreement can include provisions to protect your investment in the company. For example, it can specify how profits are distributed, or what happens if a shareholder wants to sell their shares.

Resolve Disputes

No matter how well a company is run, disputes can arise. A shareholders’ agreement can set out a clear process for resolving disputes, which can help to avoid costly and time-consuming legal battles.

Attract Investors

Having a shareholders’ agreement in place can give potential investors confidence that the company is well-managed and that their investment is protected. This can make it easier to attract funding and grow the business.

In Conclusion

While a shareholders’ agreement is not a legal requirement, it can be highly beneficial for your business. It can help to avoid disputes, clarify roles and responsibilities, protect your investment, and attract investors. If you’re considering setting up a shareholders’ agreement, it’s a good idea to seek legal advice to ensure that it’s tailored to your specific needs.

At Cheyney Goulding, we have extensive experience in advising businesses on shareholders’ agreements. If you would like to discuss your options, please don’t hesitate to get in touch.

This article is for general information only and does not constitute legal advice.

The author generated this text in part with GPT-3, OpenAI’s large-scale language-generation model. Upon generating draft language, the author reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication.

Provisions Commonly Added to a Company’s Articles of Association and Shareholders’ Agreement

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When setting up a company, there are several legal documents that must be drafted and agreed upon by its founders, including the articles of association and shareholders’ agreement. These documents set out the rules and regulations that govern how the company will be run and how decisions will be made. In this article, we will look at some of the most common provisions that are included in these documents.

Articles of Association

The articles of association are a company’s internal rule book. They set out the procedures for the management and administration of the company and govern the relationship between the company, its directors, and its shareholders. Some common provisions that may be included in a company’s articles of association are:

Objects Clause: This outlines the purpose and scope of the company’s business activities.

Share Capital: This section covers the company’s share capital, including the number of shares, their nominal value, and any restrictions on their transfer (such as pre-emption rights on transfer, drag and tag along rights and compulsory transfer obligations).

Director Appointment and Removal: This section sets out the procedure for appointing and removing directors, as well as their powers and duties.

Meetings: This outlines the rules for holding meetings of shareholders and directors, including notice requirements, quorum, and voting procedures.

Dividends: This section sets out the rules for the payment of dividends to shareholders, including the timing and amount of payments.

Winding up: This section outlines the procedure for winding up the company, including the appointment of liquidators and the distribution of assets.

Shareholders’ Agreement

A shareholders’ agreement is a private contract between the company’s shareholders. It sets out the rights and obligations of each shareholder and governs their relationship with each other and the company. Some common provisions that may be included in a shareholders’ agreement are:

Shareholder Rights: This section outlines the rights of shareholders, including voting rights, the right to receive dividends, and the right to participate in the management of the company.

Shareholder Obligations: This section outlines the obligations of shareholders, including restrictions on the transfer of shares and requirements to provide financial support to the company.

Board Composition: This section sets out the composition of the board of directors, including the number of directors, how they are appointed, and any special voting requirements.

Decision Making: This outlines the procedures for making decisions, including the types of decisions that require shareholder approval and the voting thresholds required for approval.

Dispute Resolution: This section sets out the procedures for resolving disputes between shareholders, including the use of mediation or arbitration.

Exit Strategy: This outlines the procedures for a shareholder to exit the company, including the sale of shares and any restrictions on the transfer of shares.

Conclusion

The articles of association and shareholders’ agreement are critical legal documents that govern the operation of a company. It is essential that they are drafted carefully to ensure that they reflect the intentions of the founders and protect the interests of the company and its shareholders. If you are starting a company, it is recommended that you seek legal advice to ensure that your articles of association and shareholders’ agreement are drafted correctly and cover all necessary provisions.

This article is for general information only and does not constitute legal advice. If you would like to discuss anything in this article, please get in touch. 

The author generated this text in part with GPT-3, OpenAI’s large-scale language-generation model. Upon generating draft language, the author reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication.

The Adequacy of the Model Articles of Association for Private Companies Limited by Shares for Companies with Sole Directors

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(All references in this article to any company or companies are to private companies limited by shares)

(any reference to ‘Fore Fitness’ means the case of Hashmi v Lorimer-Wing [2022])

Recently I wrote an article (also published on this website) about articles of association of private companies limited by shares and the High Court case of Hashmi v Lorimer-Wing [2022]; this case established that the ‘Model articles for private companies limited by shares’ (the ‘Model Articles’) are inadequate for enabling a sole director to manage a company because they require at least two directors to manage a company.

Model Article 7 states:

“7.—(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

(2) If—

(a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.”

Model Article 11 states:

“11.—(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.

(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision—

(a) to appoint further directors, or

(b) to call a general meeting so as to enable the shareholders to appoint further directors.”

The judge in Hashmi v Lorimer-Wing [2022] ruled, amongst other things, that Model Article 11(2) requires at least two directors to manage a company; this was surprising and contrary to a previous understanding that Model Article 7(2)(a) and (b) prevails over Model Article 11(2), enabling a sole director to manage a company governed by the Model Articles.

However, the recent High Court case of Re Active Wear Ltd [2022] is at odds with Hashmi v Lorimer-Wing [2022].

Re Active Wear Ltd [2022] involved an application to the High Court to declare whether administrators of a company were validly appointed by its sole director or not. One of the judge’s reasons for ruling that the administrators were validly appointed was that Model Article 7(2)(a) and (b) enables a sole director to manage a company. In reaching this decision, the judge in Re Active Wear Ltd [2022] applied the legal principles governing the interpretation of written contracts and ruled that the “unambiguous effect of” Model Article 7(2)(a) and (b) is to enable a sole director of a company governed by the Model Articles to manage that company.  The judge in Re Active Wear Ltd [2022] also ruled that Model Article 7(2)(a) and (b) “prevails over” Model Article 11(2). This is a welcome judgment, as it recognises what is arguably the very purpose of Model Article 7(2)(a) and (b), that is, to accommodate companies which are governed by the Model Articles and have a sole director, so that such sole directors in these circumstances can manage the companies they are directors of “…without regard to any of the provisions of the articles relating to directors’ decision-making” (Model Article 7(2)(b)), such as those contained in Model Article 11.

The judge in Re Active Wear Ltd [2022] addressed the judgment in Hashmi v Lorimer Wing [2022] directly.

In Hashmi v Lorimer-Wing [2022], the company which had a sole director was, in addition to being governed by the Model Articles, also governed by a bespoke Article 16 which stated, amongst other things, that the quorum for a board meeting of the company is two directors, and it amended Model Article 11(2) by imposing some different rules regarding the company’s directors’ meetings.

Whilst upon a reading of the judgment in Hashmi v Lorimer-Wing [2022] it is clear that the judgment applies generally to the interpretation of Model Article 11(2) and Model Article 7(2)(a) and (b) (which I stated in my previous article), the judge in Re Active Wear Ltd [2022] interpreted Hashmi v Lorimer-Wing [2022] as being decided as it was, due to the presence of the bespoke Article 16; the judge in Re Active Wear Ltd [2022] stated that it is: “…clear that the factor dictating the result in Fore Fitness was the existence of Bespoke Article 16.” In relation to the Model Articles, the judge in Re Active Wear Ltd [2022] stated that: “…it cannot have been the intention that they would need to be amended…” in order for Model Article 7(2)(a) and (b) to enable a sole director to manage a company in certain circumstances. Thus, the case of Re Active Wear Ltd [2022] provides legal authority for the legal position that Model Article 7(2)(a) and (b) prevails over Model Article 11(2) and suggests that this legal position may only be displaced if there is a bespoke article in a company’s articles of association which imposes different rules regarding directors’ decision-making.

However, the judge in Re Active Wear Ltd [2022] also stated that Model Article 7(2)(a) and (b) only applies when a company has never had more than one director. Therefore, whilst there is now clear legal authority for Model Article 7(2)(a) and (b) prevailing over Model Article 11(2) when a company has a sole director at the time of incorporation, and has never had more than one director, applying the view of the judge in Re Active Wear Ltd [2022], if a company, governed by the Model Articles, has more than one director and then enters into a state of having a sole director, Model Article 11 will prevail, meaning that at least two directors will be required to manage that company, and a sole director in these circumstances could only appoint further directors or call a general meeting so as to enable that company’s shareholders to appoint further directors in accordance with Model Article 11(3).

It is important to note that Re Active Wear Ltd [2022] and Hashmi v Lorimer-Wing [2022] are both High Court cases and therefore both cases have the same level of legal authority; however, it seems clear that the judgment in Re Active Wear Ltd [2022] will be cited by solicitors when interpreting and applying the terms of the Model Articles, with the judgment in Hashmi v Lorimer-Wing [2022] perhaps being cited in cases where there is a bespoke article within a company’s articles of association which imposes different rules regarding directors’ decision-making.

It will be interesting to see if a case comes before a higher court, such as the Court of Appeal (Civil Division), and a clear judgment which firmly establishes that Model Article 7(2)(a) and (b) prevails over Model Article 11(2) is delivered.

In my previous article, I wrote about the ramifications of the judgment in Hashmi v Lorimer-Wing [2022] and the actions companies with sole directors should take in light of that judgment. In light of the judgment in Re Active Wear Ltd [2022], it appears that it is not necessary for the shareholders of a company governed by the Model Articles with a sole director at the time of incorporation, and which has never had more than one director, to amend that company’s articles of association, nor is it necessary for the shareholders to ratify the decisions of a sole director of that company. However, if a company, governed by the Model Articles, has entered into a state of having a sole director after previously having more than one director, the shareholders of that company should amend that company’s articles of association to make it explicitly clear that that company can be managed by a sole director, and the shareholders of that company should ratify any (purported) decisions made by that company’s sole director in those circumstances.

This article is for general information only and does not constitute legal advice. If you would like to discuss anything in this article, please get in touch.