Typically a company’s articles of association cover the main administrative issues: for example, how directors are appointed, the voting procedure at shareholder or board meetings, and how shares are transferred.
A shareholders agreement can cover similar ground but often also looks at broader issues, such as how the company is funded, what the policy is on paying dividends, what happens if someone offers to buy the company and so on.
Often there is a choice whether to include particular terms in the articles of association or in a shareholders agreement. Each can be effective, but there are differences. For example:
- If the shareholders are likely to change frequently, you may want to include key terms in the articles of association. A shareholders agreement only binds those individuals who agree it at the time, whereas the articles continue to govern how the company is run regardless of who the shareholders are.
- Unless otherwise agreed originally, a shareholders’ agreement can only be changed unanimously. Changes to the articles can usually be made by special resolution (with the agreement of 75% of votes cast) unless the articles include extra restrictions.
- The articles of association are a public document whereas a shareholders agreement can be kept confidential.
Your lawyer can advise you on which terms it is best to include in each.