Articles of Association

What will the Articles of Association cover on an investment transaction?

The shareholders agreement between a company and its investors is a private document between them.  By contrast, the company’s Articles of Association are filed at Companies House and are available to the public.  For this reason, parties would usually prefer to include the confidential terms of their agreement in the shareholders agreement only.  However, certain matters are often included in new or revised Articles of Association adopted at closing of the investment transaction.  

The matters typically covered in Articles of Association include:

• issue of shares: pre-emption rights for existing shareholders on a proposed issue of new shares in the company
• transfer of shares: provisions governing the transfer of shares in the company, including:
  • permitted transfers: circumstances in which transfers of shares may be permitted, for example to family members and members of the same corporate group
  • pre-emption rights: rights for existing shareholders to acquire shares prior to their transfer to a third party
  • compulsory transfer: circumstances in which shares may be compulsorily acquired, including where a founder shareholder or employee shareholder has ceased to be employed by the company, whether as a good or a bad leaver
  • tag-along rights
  • drag-along rights
• directors: rights for the investor(s) and other shareholders to appoint a director
• proceedings of directors: provisions relating to the conduct of board meetings, including voting rights and quorum requirements
• shareholder meetings: provisions relating to the conduct of shareholder meetings, including voting rights and quorum requirements
• preferred share rights: if the investor(s) will receive shares with preferred rights over the ordinary shares, these preferred rights will need to be included in the Articles of Association.  Preferred rights might include some or all of the following:
  • dividend: prior right to dividends
  • liquidation preference: prior right to payment on the sale or liquidation of company
  • conversion: right to convert preferred shares into ordinary shares by reference to a defined conversion rate
  • anti-dilution: the right to receive either additional preferred shares or to adjust the conversion rate of preferred shares, in the event of a future issue of ordinary shares below a specified price
  • director: right for the holder(s) of preferred shares to appoint a director
  • consent matters: right for the holder(s) of preferred shares to consent to certain specified matters