The need for customising papers in cases involving many shareholders Scotland Solicitor

Every company is obliged to have a basic constitutional instrument in place on incorporation and all during its existence: the Articles of Association. Articles set the guidelines for how a company should run. Standard, untailored Model Articles of Association[1] are options for businesses. Where there is, or is expected to be, more than one shareholder, it is crucial to take into account the rights and obligations of those owners and make sure the Articles fairly show how the company is to be run. Shareholder rights and obligations derive from several sources, including the Companies Act 2006, the Articles and any Shareholders Agreements (or equivalent) agreed into; this blog will go over the need of customising a company’s Articles suitably.

Protection of Shareholder Rights

Customised Articles help to protect shareholder interests and offer a structure for just business decision-making. A firm can have several types of shares, say “A ordinary shares” and “B ordinary shares”. From the beginning, the extent of shareholder involvement can be set by clearly stating the rights and advantages connected with various classes of shares in the Articles. This can include connected to every share class certain voting rights or varied dividends entitlements.

Furthermore specified in the Articles are individual shareholders’ right to name a director to the Company Board. This will only be feasible if it is explicitly mentioned in the Articles (or Shareholders Agreement, as addressed later in this blog). It will let some shareholders keep a certain degree of control over the composition of the board.

Standard Model Articles will ensure that all shares have equal rights regarding issues including voting or dividend distribution, thus it is crucial to take this point of view in line with the particular purposes of the directors and shareholders.

Clarifying Roles and Responsibilities

Under the Articles, shareholders might be allocated particular responsibilities, therefore establishing a kind of contract between every shareholder and the firm as well as between each shareholder and the other ones.

The Companies Act 2006 mandates that shareholders cast votes—or decide not to vote—on business resolutions. This can entail sanction of important changes such as Article modification or director dismissal. These kinds of decisions can be voted on by Written Resolution where suitable or in a shareholder meeting, sometimes known as a General Meeting. Should a company’s Articles of Business not be customised, all shares will default to carry one vote per share. This should be taken into account while creating a company (or by anyone wishing to acquire shares in a corporation) since it may not reflect the goals of how the firm is to be run. For instance, it could be intended that some shares have improved voting rights or that shares be issued without any voting rights—as those granted to some employees suggest.

Although the roles of shareholders can be as specifically or as generally specified in the Articles as necessary, it is advisable to take any possible impact into account from the beginning and keep in mind that as the company develops the needs of the company and the arrangements between shareholders are prone to change. Private companies sometimes incorporate or add extra shareholders—often employees—without thinking through changes that would be needed to the Articles to accommodate this and that might result in issues much later on.

Article amendments and replacements are conceivable. To change or replace Articles, however, the usual stance is that a “Special Resolution”—that is, the consent of 75% of the issued shares—would be needed (meaning revisions that are not approved of by this majority will be blocked).

Disputes

Arguments among shareholders might develop for several different causes. Certain shareholders could object to the choices directors make on business matters or even to other shareholders on the best course of action. Minority shareholders may feel as though their best interests are not given enough thought, and personal conflicts—especially in cases where shareholders are family members—may cause decisions to be vetoed. These problems can destroy confidence among shareholders and lead to internal strife that compromises the functioning of the business.

Although it may more usually be stated out in a Shareholders Agreement and, on that, see below, articles can explain how decisions are to be taken and may even set out particular processes for settling shareholder conflicts. Though not always suitable, establishing explicit dispute resolution policies helps prevent issues from getting out of hand and motivates shareholders to look for friendly solutions.

Shareholders’ Changes and Exits

The shareholders or shareholdings of most businesses will vary with time. This can include shareholder “exits,” in which they sell their shares and stop being a shareholder (which can be especially important if it is the majority shareholder choosing to sell their interests), or when new shareholders join on either buying or allocating shares.

Ensuring the continuous stability of the firm depends on customising clauses inside the Articles to enable a seamless departure of a shareholder, or to guarantee a clear knowledge as to how new owners might join the company. Clear, well-defined policies include tag-along and drag-along rights, pre-emption rights, and good/bad leaver clauses that help to control the exit process of a shareholder and therefore comfort the remaining shareholders.

In cases when the majority shareholders wish to transfer control of the company, tag-along and drag-along rights provide means for minority shareholders to join a majority sale share or force minority shareholders to sell, respectively, so ensuring justice and unity in exit transactions.

By guaranteeing the possibility of acquiring new shares to be issued before they are offered to outside parties, pre-emption rights (on allocation) might enable existing shareholders to retain their proportional ownership.

Pre-emption rights also apply on a planned share transfer: should a shareholder wish to sell their shares, they must first be offered to current shareholders (or certain of them) to buy, or to the company itself to be bought back. Pre-emption rights can be specifically waived for some transfers, say if the articles let family members transfer shares as allowed. It is also feasible to say that in some situations (such as their ceasing to be involved with the management of the firm / being an employee or director, falling bankrupt / entering liquidation or even on death) shareholders are required to offer their shares for transfer.

Noting that the Companies Act 2006 has some pre-emption on allocation rights, it would not apply without specifically incorporating a clause requiring shares to be offered round in specified circumstances (noting this). Unless an agreement can be struck individually with them, an employee who acquires shares in a company but subsequently resigns to join a rival company would probably be entitled to retain their shareholding (which may not be what the remaining shareholders would prefer).

Good leaver/bad leaver clauses specify the conditions under which a departing shareholder is classified as either a “good leaver” or a “bad leaver,” therefore triggering particular repercussions. Good leavers can be eligible to enjoy preferential buyback conditions or the “fair value” of their shares. When a shareholder leaves for reasons thought to be damaging to the company, such as a breach of contractual commitments or competition with the business, bad leaver clauses can be triggered. Usually, bad leaver clauses provide less desirable share values. These clauses not only encourage loyalty to the business but also offer a disciplined approach for managing departures, therefore preserving the stability of the organisation.

The Articles build a disciplined framework for shareholder changes by customising these clauses to the particular demands of the business and its owners, therefore reducing possible conflicts and disturbances.