Why Are Articles of Association Important in Shareholder Disputes?

If you’re a minority shareholder or director-shareholder heading into a dispute, the Articles of Association may be the only rulebook governing your position, and it may be possible for them to be changed without your consent.

We act for shareholders and director-shareholders, who anticipate a dispute or who are already facing difficulties.

If you’ve discovered your company’s Articles have been changed without warning, or you’re being pushed to accept a bad leaver provision that undervalues your shares, that’s exactly the kind of situation we help shareholders with. Speak to our commercial litigation team today for a clear, honest picture of where you stand and what to do next. We act nationally and would love to help you.

What Are Articles of Association? 

The Articles of Association are one of the key foundation documents for a limited company. They create a framework for corporate governance binding the company, directors and shareholders, providing a rulebook for business operations, and are a legal requirement under the Companies Act 2006.

The Articles can be amended as the business develops and contain limits on directors’ powers and rights. They protect shareholder rights and reduce the chances of a dispute.

When you set up a new company, if the company does not register its own bespoke Articles, the starting point at incorporation is known as model Articles of Association (following a standard/template list of Articles). Under English law, companies are free to tailor these to suit the business providing there is the necessary shareholder majority to do so.

You can create other documents for corporate governance such as a Shareholders’ Agreement. A Shareholders’ Agreement is a private contract between the members which allows for greater definition, recording rights and obligations that go beyond the Articles. There is commonly an overlap between the information contained in both documents. 

Some companies prefer a comprehensive shareholder agreement rather than amended articles of association as shareholder agreements are private and confidential, whereas the company’s articles are a publicly available document. 

How the Articles Govern Shareholder Rights 

The Articles of Association are the primary legal framework for how a company is run. In relation to shareholders, the Articles detail how many votes each share carries and how the votes may be exercised at meetings.

Articles often have procedures for buying, selling, or issuing shares, and rules for repurchasing shares. There may be special rights or restrictions for different classes of shares.

Shareholders’ Agreements provide a layer of tailored information and protection to enhance the provisions in the Articles. If the company also has a Shareholders’ Agreement, then some of the information in the Articles may be repeated. It’s important that the two documents align and don’t contradict each other, which can be the starting point for costly disputes.

Bad Leaver Provisions — Where the Articles Can Be Used Against You 

The company’s governance and documents such as the Articles and Shareholders’ Agreements can define who counts as a bad leaver. A bad leaver may include a shareholder leaving due to misconduct or a director’s breach of fiduciary obligations or duties. In some cases, depending on the documents, a bad leaver may even be written in such a way that a voluntary resignation may lead to accusations of being a bad leaver.

Increasingly, there is a move amongst some companies to operate without a Shareholders’ Agreement and instead, amend the articles to include covenants which restrict what a bad leaver can receive.

The company can value shares at less than fair market value, pressurising you and other shareholders out.

Amending the Articles and Why Timing Matters 

Amending the Articles is done by special resolution of the members. In practice, the process typically (but not always) starts with a board meeting to secure directors’ approval on the proposed changes. From there, the process runs:

• A special resolution requiring at least 75% of the votes cast at the general meeting (or, for a written resolution, shareholders holding at least 75% of the total voting rights of eligible members voting in favour)
• A minimum of 14 days’ notice to all shareholders if the vote takes place at a general meeting

Timing matters. The Articles may be amended mid-dispute, with undervalued shares used to seek to pressure you out of the company. Amending the Articles in the middle of a dispute can be risky and you should take advice before considering doing so. The opponent in your dispute may be entitled to use your actions as an example of unfairly prejudicial conduct, or they might be entitled to argue that doing so was unlawful conduct which itself breached the previous Articles.

Articles vs. Shareholders’ Agreement — What’s the Difference in a Dispute?

The Articles of Association govern the structure and operations of a company; they contain provisions on shareholder rights. 

The Shareholders’ Agreement is a private contract between members that details the obligations and rights of shareholders. In a dispute, the relationship between the Articles and a Shareholders’ Agreement depends on the specific drafting of both documents and the issue in question. Neither automatically takes precedence.

In Lord v Maven Wealth Group Ltd [2021] EWHC 2544, the High Court held that the Articles’ mechanism for determining fair value took precedence over the equivalent mechanism in the Shareholders’ Agreement. The decision turned on the specific drafting in that case, rather than establishing a general rule about the fair value of shares.

However, many shareholder agreements include a supremacy clause to ensure that this document overrides the Articles, providing clarity if the Shareholders’ Agreement is inconsistent or doesn’t align.

Conflict between the Articles and the Shareholders’ Agreement is fertile ground for a dispute. 

What Can You Do If the Articles Are Being Used Against You? 

If the Articles are being used against you, your options typically include:

• Accepting the position, if the company has correctly followed procedure and the resolution has genuinely passed with the required 75%
• Challenging the amendment under Section 994 of the Companies Act 2006, if it’s unfairly prejudicial to your interest, or on the basis that doing so was unlawful conduct in breach of the previous Articles and any Shareholders’ Agreement in place
• Using the threat of a Section 994 petition as leverage in settlement or bad leaver negotiations

Unfair prejudice petitions are notoriously tricky, and success isn’t guaranteed. But you don’t have to work out your options alone. If you’ve been served a bad leaver notice, or you’re watching your shareholding lose value while a dispute unfolds, get advice before you respond. We’ll give you a clear, honest assessment of where you stand and the most cost-effective way forward.

On qualifying commercial disputes, we can also discuss Conditional Fee Arrangements (No Win, No Fee) or Damages-Based Agreements. Subject to case assessment and our funding criteria. Available on qualifying disputes typically valued over £10,000 with strong prospects of success.

Frequently Asked Questions 

Can Articles of Association Be Changed Without My Consent as a Shareholder? 

Yes. As a minority shareholder, the Articles can be amended without your consent. Changes require a special resolution, needing at least 75% of votes cast in favour, so your objection alone won’t block it. This means a majority group of shareholders can introduce provisions, such as bad leaver clauses, that work against your interests.

What Is a Bad Leaver Provision in Articles of Association? 

A bad leaver provision details the consequences for a shareholder who leaves the company, usually in adverse circumstances. This might include a breach of the Articles or Shareholders’ Agreement or a criminal act. These provisions protect the remaining company members by preventing a bad leaver from retaining shares after their departure. A bad leaver is often required to sell their shares at a discounted price, which may be well below market value. 

Can I Challenge a Share Valuation Imposed Under the Articles? 

You can challenge an amendment to the company’s Articles of Association under Section 994 of the Companies Act 2006 if it is unfairly prejudicial to your interests. The threat of a Section 994 petition often provides sufficient leverage to gain advantage in settlement negotiations in a dispute situation, or at least to push for a fair valuation of your shares and buy-out.

Do Articles of Association Override a Shareholders’ Agreement? 

There is no blanket rule that Articles of Association override a Shareholders’ Agreement. The position depends on the specific drafting of each document and the issue in dispute.

 The two documents must not conflict, as inconsistency is a common source of disputes.

Need Advice? Contact Helix Law.

A company’s Articles of Association, and Shareholders’ Agreement if there is one, define your rights and protections as a director-shareholder or minority shareholder. However, the landscape can change quickly particularly if there’s a dispute brewing.

We see these disputes regularly, where the Articles have been amended or there’s notice of a special resolution to add clauses which are detrimental to some shareholders’ interests. Understanding your options early is critical.

As specialist litigation solicitors, we provide strategic, practical advice in shareholder disputes. Our advice is cost-effective, tailored to your situation, and focused on protecting your legal rights. Setting out your options gives you a clear pathway to your corporate goals.

If you think there’s a dispute coming, or are already in a difficult position, speak to our specialist commercial litigation team. Our team have decades of experience acting in commercial and shareholder disputes just like yours, work nationally and would love to help you.