Shares, Rights and the importance of tailored Articles of Association

By Dr Georgina Tsagas, Consultant Solicitor, Simons Rodkin Solicitors LLP, Bloomsbury London W1 and Finchley London N12.

If you have a company law-related query or dispute, call 02071128841 and ask for Dr Georgina Tsagas or e-mail your queries directly at georgina.tsagas@sr-law.co.uk

 What rights does a share offer its shareholders?

 Shareholders have voting rights, meaning powers of governance, and, on certain conditions, a legal entitlement to have the company managed in a particular way. Shareholders cannot, in principle, control directors, but the law does provide them with special rights of control and the ability to influence the direction that a company will take. Being provided with legal advice on how to protect your position best as a shareholder in the company you wish to invest in is important. Articles 3 and 4 of the Model Articles for Private Companies limited by shares, template available here, provide a clear picture of the balance observed in the relationship between shareholders and managers. According to Article 3 ‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company”, with Members’ reserve power, however, provided for in Article 4 ‘(1) The members may, by special resolution, direct the directors to take, or refrain from taking, specified action. (2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.’ The Companies Act 2006 also gives shareholders powerful rights to dismiss management by an ordinary resolution notwithstanding anything in any agreement between the company and the director (section 168 of the Companies Act 2006). As a shareholder, you will also have a residual claim on the company’s assets, meaning that they are entitled to the residual value in the company on its winding up. Shareholders are also not entitled to a fixed dividend and it is at management’s discretion whether dividends will be paid out.

Are all shares created equal? Classes of Shares.

Companies will normally only have one class of shares, ordinary shares. It is increasingly common, however, for small private companies, especially to adopt a share structure with different share classes. The use of the share class system is considerably flexible. The company’s articles of association (AoA) will set out the different classes of shares and the rights attached to them. The reasons behind adopting classes of shares vary, but the main objective is to create disproportionate control over voting rights. Classes of shares allow for the company to vary the dividends policy paid to different shareholders, to create non-voting shares, and to allocate shares with varied rights to specific employees or family members. Common types of shares, besides ordinary shares, are preference shares, non-voting shares, A shares and B shares (known as ‘alphabet’ shares), and shares with additional voting rights (known as ‘management shares’). An allotment of shares takes place when new classes of shares are adopted, and conversion of shares occurs when existing shares are converted to different classes.

The importance of tailored articles of association for your business venture.

In order to best protect your rights as a shareholder, it is important to receive legal advice and tailor the Model Articles of Association to fit your requirements and not adopt the template Model Articles as such. In order to differentiate between shareholders, a provision needs to be made in the AoA of separate share classes, which the model articles do not offer. Private companies can also amend the AoA to exclude the application of the statutory pre-emption right, either generally or in relation to a particular allotment, by an express provision to that effect in their articles of association (section 567, CA 2006). Provision made for the exclusion of the pre-emption rights’ is important, as such rights give existing shareholders the right of first refusal when a company is issuing new shares, and hence new shares in a company cannot be offered to other potential investors without first being offered to the current shareholders.

Please click here or call 0208 446 6223 or email enquiries@sr-law.co.uk for assistance from our experienced team.