Articles of Association: established business multiple investors

Articles of Association: established business multiple investors

Articles of Association for an investment in an established business by multiple investors.

Background

As part of an investment transaction by investors in a private limited company, the investors will likely require that the company adopts new Articles of Association.

What will Articles of Association for an investment in an established business cover?

The typical matters covered in the Articles of Association for an investment in an established business include:

• allotment of shares: pre-emption rights for existing shareholders on the allotment of further new shares, with possible exception for the grant of options under an employee option pool
• transfer of shares: provisions governing the transfer of shares in the company, including pre-emption rights and permitted transfers
• good and bad leaver events:  if the founder leaves the company, then the Articles of Association will usually provide for a compulsory transfer notice to be given in respect of some or all of the founder’s shares
• tag-along and drag-along rights, with the investors having the right that the investors must voluntarily participate in any transaction which triggers the drag-along rights
• director: a right for the investors to appoint a director
• proceedings of directors: if agreed, a requirement that the quorum for any meeting of the board of directors must include the investors’ appointed director
• shareholder meetings: if agreed, the quorum for any meeting of shareholders must include the investors

About these Articles of Association

These Articles of Association are for an investment transaction for an established business where more than one investor is investing in return for ordinary shares in a private limited company.

The Articles of Association contain relatively strong protective rights for the investors, some of which will be a matter of negotiation between the parties.  As the company is an established business, provisions is made for certain restrictive matters for a founder to be relaxed, if agreed.

The rights of the investors are exercisable by investors holding a majority of the shares held by all of the investors.

Document features

• pre-emption rights on the allotment of new shares
• provisions relating to the transfer of shares, including:
  • permitted transfers to defined classes of permitted transferees
  • pre-emption rights on the transfer of shares to third parties
  • compulsory transfer on a shareholder (excluding an investor) ceasing to be employed or breaching the shareholders agreement
  • tag-along and drag-along rights
• regulation of board and shareholder meetings

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