When you set up a limited company in the UK, two key documents govern how it operates: the Articles of Association and the Shareholders’ Agreement. These documents often address similar topics but serve different purposes.
The Articles of Association provide a stable constitutional framework, while your Shareholders’ Agreement can be used to cover detailed or changeable matters such as decision-making, share transfers, or exit arrangements. Below, we explain the difference between them and how they work together.
What Are Articles of Association?
The Articles of Association (often called “the Articles”) form the company’s main constitutional document. Every company must have them. They set out the basic rules for how the company is run and how decisions are made.
You file the Articles with Companies House when you incorporate the business, and they become a public document. This means anyone can look them up. The Articles usually address things such as:
- How directors are appointed and removed
- How board and shareholder meetings are held
- The rights attached to each class of share
- How dividends are declared and paid
- How shares can be transferred or issued
In most cases, your Articles remain unchanged, while you can tweak your Shareholders’ Agreement accordingly as your business grows and evolves.
What Is a Shareholders’ Agreement?
A Shareholders’ Agreement is a private contract between the company’s shareholders and the company. It sets out the rights and obligations of each shareholder and how they will deal with key issues affecting the company.
Unlike the Articles, a Shareholders’ Agreement is not filed at Companies House, so it stays confidential. This allows you to include more detailed or sensitive arrangements that you would not want to appear on the public record. The Shareholders’ Agreement usually covers things such as:
- How decisions will be made on major business matters
- How shares can be sold or transferred
- Rules about bringing in new investors
- What happens if a shareholder wants to leave
- How disputes between shareholders will be handled
- Restrictions on competing with the business of the company
A Shareholders’ Agreement can also include provisions that protect minority shareholders, such as giving them veto rights over certain decisions or guaranteeing them access to information about the company.
How They Work Together
The Articles of Association and the Shareholders’ Agreement both set out how a company is managed, but they operate on different levels. The Articles create the basic legal framework for the company’s governance. The Shareholders’ Agreement adds another layer that reflects the personal and commercial relationships between the shareholders and the company.
The Articles are public and legally binding on all shareholders. However, many businesses include a clause in their Shareholders’ Agreement stating that it will take precedence if the two ever conflict. This allows for more flexibility while keeping sensitive arrangements private.
Why You Need Both
Many small businesses start out with just the model Articles and no Shareholders’ Agreement. This can work at the beginning, but as soon as you have more than one shareholder, it becomes risky to rely on the Articles alone.
The Articles do not usually cover what happens if a shareholder leaves, becomes ill, or wants to sell their shares or prevent a shareholder from competing with the company. They also do not provide much protection for minority shareholders or deal with situations where shareholders disagree about the company’s direction.
A Shareholders’ Agreement gives you the flexibility to set rules that suit your business and to address real-world scenarios that the Articles do not cover. For example, you can include “tag along” or “drag along” clauses to manage share sales, or non-compete clauses to stop current and former shareholders from setting up a rival business.
Having both documents gives your company structure and stability. The Articles provide a legal foundation that satisfies Companies House and the Companies Act 2006, while the Shareholders’ Agreement governs how shareholders interact and make decisions in relation to the company.
Speak To JPP Law
You should not try to draft these documents on your own or copy them from online templates. Even small differences in wording can have major legal consequences. At JPP Law, we can help you draft Articles of Association and Shareholders’ Agreements, explain how they interact, and guide you on any updates your company needs.
If you want peace of mind that your business is legally protected, contact JPP Law today to speak with one of our corporate lawyers.
