Do you need a shareholders’ agreement and articles of association?

When you are thinking of starting a company, the legalities can be overwhelming.

Getting the legal structure right from the outset can prevent costly disputes and uncertainty later.

One of the most important first steps is to comply with the Companies Act 2006 and agree on your articles of association.

Although these articles can provide the legal framework, you may consider a shareholder agreement to help protect your interests.

Both documents govern how your company operates and you must understand when each is required and how they work together.

Why are articles of association needed?

Articles of association are a legal requirement for every limited company in England and Wales and you cannot incorporate a company without them.

They form part of the company’s constitution and must be filed at Companies House, meaning they are publicly available.

The articles set out the company’s internal rulebook and usually cover:

• The rights attached to shares
• Procedures for issuing and transferring shares
• Appointment and removal of directors
• Decision-making processes for directors and shareholders
• Rules for board and shareholder meetings
• Dividend declarations

Many companies use the model articles provided by law, but these are generic and may not reflect the specific needs of your business.

Companies with less straightforward structures, multiple share classes, bespoke voting arrangements or complex dividend structures may benefit more from bespoke articles.

However, remember that anything included in the articles becomes public.

When is a shareholders’ agreement needed?

Many disputes between shareholders arise not from bad faith, but from unclear expectations. This is where a well-drafted agreement proves invaluable.

A shareholders’ agreement is not compulsory, but it is highly advised if your company has more than one shareholder.

Unlike articles of association, a shareholders’ agreement is a private contract between the shareholders and often the company itself.

It does not need to be filed at Companies House, so it can contain commercially sensitive or confidential information.

Shareholders’ agreements usually address matters such as:

• Exit strategies and share sale provisions
• What happens on the death or incapacity of a shareholder
• Dividend policy in detail
• Protection against share dilution
• Reserved matters required shareholder consent
• Time commitment and competing business restrictions

These agreements allow shareholders to agree in advance on how difficult situations will be handled before any disputes arise.

Even when the commercial relationships are strong, for example, if you work with friends or family, tension and disagreements could still arise.

Shareholder agreements are about prevention and a well-drafted agreement acts as a form of insurance.

Can you have one without the other?

You must have articles of association to form a company, but you do not need a shareholders’ agreement alongside this.

However, relying solely on standard articles can sometimes leave gaps in your protection, particularly when it comes to minority shareholder rights or exit planning.

A shareholders’ agreement cannot replace the articles entirely, but it can:

• Sit alongside them – These agreements can expand on areas that require more detail
• Cover topics not included in the articles – This can include detailed buyout provisions
• Override them contractually – This can happen when a properly drafted supremacy clause is included, but care must be taken to make sure it is enforceable

If you choose to implement a shareholder agreement with the articles, the documents should work together cohesively.

Poor drafting can put you at risk and create inconsistencies or unintended consequences.

How can we support your company?

Investing in robust documentation now is far more cost-effective than resolving disputes in the future.

Many businesses skip a shareholders’ agreement over cost concerns or optimism that their business relationships will not break down.

However, resolving shareholder disputes later is almost always far more expensive than putting the right documents in place at the start.

Our professional team is here to support you at the very start of your company starting up.

We can help draft bespoke articles and shareholder agreements that reflect your company’s structure and interests and ensure they are consistent.

Having both in place is a smart move for your company’s future and we can update your documents as your company grows or takes on investment.

If you want further advice or support on a shareholder agreement for your company, contact our corporate team today.