Gary Booth

All private limited companies must have their own Articles of Association, which set out the rights and duties of the directors and shareholders of the company.

A company may have adopted “Model Articles” (previously known as “Table A” Articles) at incorporation, which may no longer be appropriate for the company in its day to day operation. We would like to draw your attention to some key areas where your company’s Articles of Association may require to be updated.

Quorum

Companies with a sole director should consider updating their quorum provisions within the Articles of Association. If a company has adopted Model Articles at incorporation, the quorum provisions will state that there must be no less than two directors in order to hold a director’s meeting. In order to ensure that sole directors are able to make and record decisions on behalf of the company, the Articles of Association should be amended to state that one director is sufficient in order to form a quorum at a director’s meeting.

Similarly, should the day to day management of a company rest heavily with the founders of that company, they may wish for the company’s Articles of Association to state that a quorum at a directors’ meeting requires at least one of the founding members to be present or represented.

Drag and Tag

Drag provisions allow the majority shareholder(s) to require the minority shareholder(s) to sell their shares in the event that the entire company is to be bought by a third party. This protects the majority shareholder(s) from the minority shareholder(s) blocking a sale of the company. Similarly, drag provisions protect minority shareholder(s) by ensuring that their shares are sold on the same terms as the shares of the majority shareholder(s).

In the event that the majority shareholder(s) wish to sell their shares to a third party, the tag provisions provide protection to the minority shareholder(s) and allow their shares to be transferred to the third party on the same terms as the majority shareholder(s).

Compulsory Transfer

The company may place an obligation on the shareholders to sell their shares in certain circumstances. In the event that a majority shareholder dies, in the absence of compulsory transfer provisions, their shares may pass to their surviving spouse and/or children, who would then hold a majority of the shares in the company and any rights to vote attached to those shares.

Companies often offer shares to their employees as part of an Employee Share Scheme. Updating your company’s Articles of Association can offer protection to the company by ensuring that any employee is under an obligation to transfer their shares in the company in the event that they cease to be an employee.

Good Leaver/Bad Leaver

Where a shareholder of a company is also an employee or consultant of the company, consideration should be given to adding “Good and Bad Leaver” provisions into the company’s Articles of Association. The effect of these provisions is that if such a shareholder should cease to be engaged by the company, the value they receive for their shares will depend on the circumstances of their exit.

It is common for persons who cease to be engaged by the company to receive fair value for their shares when they are considered a “good leaver” (e.g. retirement or by death) and to receive nominal value for their shares when considered a “bad leaver”. The definition of good or bad leaver can be tailored within the Articles.