What is the Relationship Between a Company’s Articles of Association and Shareholders Agreement?

In Short

• A company’s Articles set the core governance rules and are legally binding on directors and shareholders.
• A shareholders’ agreement is a private contract that adds tailored rights and protections, especially for minority shareholders.
• If the documents conflict, the Articles generally prevail unless the shareholders’ agreement includes a clause requiring amendments to resolve inconsistencies.

Tips for Businesses

Make sure your Articles and shareholders’ agreement work together from the start. Clearly align decision-making powers, veto rights and approval thresholds to avoid disputes later. Review both documents regularly as your business grows, and seek legal advice when drafting or amending them to ensure they remain consistent and fit for purpose.

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Table of Contents

• The Company Articles
• Shareholders’ Agreement
• Conflicts Between Company’s Articles and Shareholders’ Agreement
• Key Takeaways
• Frequently Asked Questions

Running a successful private company requires having a clear, robust set of rules that all parties follow regarding how the business is governed. Two key legal documents establish these governance rules:

• the company’s articles of association (‘Articles’); and
• a shareholders’ agreement. 

While both are important, they play distinctly different yet complementary roles. The Articles outline the overarching procedures, while the shareholders’ agreement adds an extra layer of customised rights and processes. This article explains the roles of each document and how they integrate in establishing a company’s governance framework.

The Company Articles

A company’s Articles are the foundational legal document that prescribes the core procedures and regulations for how the company should be operated. It covers key governance areas, such as:

• defining the powers, responsibilities and limitations of company directors;
• the procedures for appointing and removing directors from the board;
• the rights, privileges and constraints attached to different classes of shares;
• outlining the process and voting requirements for holding shareholder meetings; and
• setting out the procedure for significant corporate actions like issuing new shares, approving a transfer of shares or putting the company into liquidation.

If the Articles stipulate a particular procedure or require shareholder consent for certain actions, the directors must comply with these requirements, or their decisions may be deemed invalid. The Articles set the core governance framework, while specific decision-making powers and veto rights are usually set out in the shareholders’ agreement.

Shareholders’ Agreement

Unlike Articles, a shareholders’ agreement allows more: 

• specialised rules; 
• rights; and 
• protective provisions tailored to the requirements of the shareholders.

A shareholders’ agreement is a private contract mutually agreed upon by a company’s shareholders. This can include:

• personal rights; and
• obligations for specific shareholders that do not apply to all shareholders.

Typical clauses covered in shareholders’ agreements include:

• confirming the process for shareholders appointing board observers;
• granting minority shareholders, founders or investors veto rights over certain prescribed decisions;
• non-compete provisions that prohibit shareholders from competing with the company’s business for a period after ceasing to be a shareholder;
• powers of attorney granting directors authority to execute documents on behalf of shareholders in certain circumstances; 
• confidentiality obligations for shareholders regarding the company’s confidential information; and
• detailed procedures for resolving internal disputes between shareholders themselves.

A shareholders’ agreement protects the rights of different shareholder groups, particularly minority investors, and helps balance control while holding the board and majority shareholders accountable for key decisions.

Conflicts Between Company’s Articles and Shareholders’ Agreement

While both documents are crucial, there is potential for inconsistencies or direct conflicts to arise between the terms stated in a company’s Articles and its shareholders’ agreement.

In situations where the respective rules and powers outlined in each document contradict each other, the default legal position is that the company’s Articles overrule the shareholders’ agreement. As the primary statutory governance document filed with regulators, the Articles prescribed terms take strict precedence over any inconsistent informal contracts between investors.

Typically, the shareholders’ agreement includes a clause stating that it takes precedence over the Articles in case of any inconsistencies. This clause often requires shareholders to amend the Articles to remove any conflicts that may arise.

Leaving ambiguities or conflicting provisions creates a prime environment for disputes, shareholder oppression and costly litigation over decision-making powers. Robust integration between these two critical governance documents is essential from the outset.

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Key Takeaways

A company’s Articles acts as the legally-binding core governance rulebook. While a shareholders’ agreement is a supplementary private contract with custom terms, the Articles legally overrule the shareholders’ agreement if their respective rules conflict in the absence of a supremacy clause in the shareholders’ agreement. 

Resolving any inconsistencies during drafting avoids disputes over authority. You should ensure your private company’s Articles and shareholders’ agreement are appropriately integrated and consistent in allocating governance powers, as this is foundational for equipping the business with a robust rulebook that protects all shareholders’ interests.

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Frequently Asked Questions