Articles of Association: start-up business single investor

Articles of Association: start-up business single investor

Articles of Association for an investment in a start-up company by a single investor

Background

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

What will Articles of Association for a start-up investment cover?

The typical matters covered in the Articles of Association for an investment in a start-up company include:

• allotment of shares: pre-emption rights for existing shareholders on the allotment of further new shares
• transfer of shares: provisions governing the transfer of shares in the company.  As a start-up company, share transfers are likely to be more restricted than transfers of shares in an established business.  This may include a restriction on the founder voluntarily transferring shares to a third party or to family members without the consent of the investor
• 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 the founder’s shares.  For a start-up company, this might be for all of the founder’s shares, especially where the founder is a bad leaver or, even if a good leaver, if this happens in the first few years
• tag-along and drag-along rights, with the investor having the right that the investor must voluntarily participate in any transaction which triggers the drag-along rights
• director: a right for the investor to appoint a director
• proceedings of directors: the quorum for any meeting of the board of directors must include the investor’s appointed director
• shareholder meetings: the quorum for any meeting of shareholders must include the investor

About these Articles of Association

These Articles of Association are for an investment transaction for a start-up business where a single investor is investing in return for ordinary shares in a private limited company.

The Articles of Association contain relatively strong protective rights for the investor, some of which will be a matter of negotiation between the parties.

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 the 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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