New articles of association are often drafted at the same time as a shareholders' agreement (since provisions relating to share transfers and the issue of new shares are usually set out within the articles). They should be considered together and the shareholders' agreement and the articles are together referred to as the "Shareholder Documents" on this page.
New Shareholder Documents are put in place to formalise the intentions of the parties, create certainty and avoid dispute in future. A company may have run for many years without issue, however, when there is a conflict previously agreed Shareholder Documents can save time and money.
Specific areas/benefits
1. The Shareholder Documents can help prevent unwelcome third parties becoming shareholders of the company by regulating share transfers and the issue of new shares.
2. Specific important matters can be reserved for agreement by all shareholders. Therefore each shareholder will have a veto in respect of certain key areas such as strategic acquisitions/disposals, bank borrowing, material litigation, recruitment of senior employees etc. This will ensure that minority shareholders are involved in major decisions.
3. Providing certainty as to the make up of the board of directors. Should all shareholders have the right to appoint a director and therefore have their say on the board?
4. If a majority of the shareholders would like to sell their shares to a third party - provisions can be included to force the minority to sell (a buyer is highly likely to want 100% of the shares). This prevents an aggrieved minority from blocking a sale.
5. Setting out an agreed procedure to resolve any "deadlock".
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