The governing documents
You have your business plan in mind. You know how you intend to start. But which rules will help you and your fellow owners run your business?
In any governing document, whether it’s the Articles of Association for a company, or the Partnership Agreement for a partnership, you will need to decide how the business will be managed from beginning to end.
Articles of Association
In the case of a company, the Articles of Association is a public document which is readily accessible at Companies House.
This document will most likely deal with:
- the rights attached to shares in the company
- the rights on the issue or transfer of shares
- the decisions and powers of directors
- the ability to secure lending
- various shareholder matters.
The Articles of Association may be amended or replaced in the future, but this will require the approval of the majority of the shareholders. As such, it is best to get them right at the beginning to avoid any “misunderstandings” between shareholders.
A Shareholders’ Agreement may also be used in addition to the Articles of Association. The benefit of this document is that it is not public (and therefore the parties can agree commercially sensitive matters) and it governs the relationship between the shareholders from a contractual perspective. Matters that may be contained in the Shareholders’ Agreement could be:
- Reserved matters – those decisions which shareholders must unanimously or mostly agree to before the directors can proceed e.g. company borrowing over £50,000 or the issuing of more shares
- Deadlock resolution – governing the procedure of circumventing a deadlock scenario where shareholders are in disagreement
- Transfer of shares – the process for transferring shares in the company (this will often be reflected in the Articles of Association)
- Restrictive covenants – the restrictions that apply to an exiting shareholder
- New shareholder – what happens when a new shareholder arrives?
Having a Shareholders’ Agreement in place allows you to claim against the other shareholders rather than pursuing the company for a breach of the Articles of Association.
A partnership (be it a limited liability partnership or a general partnership) should have a partnership agreement. This will provide certainty to the partners and will let them understand their rights and obligations. Matters typically included in a good partnership agreement will be:
- Division of profits
- Division of losses
- Exit provisions (should a partner wish to leave or be forced to leave)
- Entry provisions (should a new partner be taken on board)
- Decision making provisions (how partners make decisions and whether there are any veto rights).
Get it right
Whatever the governing document, it is essential that the drafting reflects the commercially agreed terms between the owners and that the provisions will remain relevant and appropriate for the continued operation of the business.
You need to try to consider all of the possible angles – whether relating to expansion of the business or changes in the objectives of those personally involved - to avoid being caught out in the future.
Read on - The middle: Directors' duties
back to - The beginning: Setting up your business