What is Shareholders’ Agreement and how it is different from Articles of Association?

This article would enable better understanding of two terms that is Shareholders’ agreement and Article of Association. Since, very often these two are understood to same and also overlapping at times in terms of power and applicability, we thought to come up with  a detailed analysis to understand ” What is Shareholders’ Agreement and how it is download (1)different from Articles of Association?” Shareholders’ Agreement A shareholders’ agreement is often referred as the stockholder’s agreement. To know and understand what exactly Shareholders’ Agreement is, we, at first, need to know what a “share” is and who is a “shareholder”. A share is an ownership of a part of the Company.  A shareholder is one who owns a share. Even though  a shareholder is virtually the owner of the Company, but that does not enable the shareholder to have direct control of all the day-to-day operations of the asset or business. The designated board of directors appointed by the shareholders carry out day to day operations of the Company. Now, we are in a position to understand the meaning of Shareholders’ Agreement. For every Company to work in an organized way, a complete arrangement of the company’s shareholders is needed so that every shareholder knows how the company is operated and what exactly are the rights, duties and obligations of the shareholders. It also has detailed information of the relationship of the shareholder along with the company’s management, ownership of privileges and shares. It also keeps an eye over the matter of the protection of the shareholders’ right. Thus, this agreement makes sure that fair treatment is done to the shareholders. Legitimate and fair outlining of the share pricing is also described clearly in this Agreement. The above condition is taken into consideration specifically when the shares are sold. The Agreement allows the shareholders to take decisions about what kind of people or parties might become shareholders in the future. The minority positions are also safeguarded by the Agreement. Now, to understand the difference between the Shareholders’s Agreement and the Articles of Association, we need to understand what the Articles of Association are. These Articles of Association constitutes the constitution of the Company. If memorandum exists in an association, then memorandum also exists in the constitution of the association. Article of Association An article of Association is a document that regulates the operations of the Company. The purpose of the company along with the layouts for the accomplishments of the tasks within the organization is specified here. This document also takes into consideration how the directors are to be appointed. These articles give detailed information about the director’s responsibilities, the business kind which should be undertaken, and also the terms and conditions by which the board of directors are bound by the shareholders. Handling every financial record is done in accordance with this document. An article of Association identifies the manner in which the shares of the Company are issued.  It also takes care of the way, in which a company pays its dividends. It regulates the voting rights and the power. Along with this, financial records are audited by the way which is specified in Articles of Association. These rules can be viewed by public for inspection. This is so because the methodology for the accomplishments of the day-to-day tasks that has to be completed in a given deadline is outlined in this document. The above said points are just few of them, and actually article of association serves as manual of the Company. Differences between Agreement and the Articles A constitutional document is prepared in the Company by which relationship amongst the company and the shareholder and also amongst the shareholders is regulated. These documents can be inspected by general public as well. But the shareholders’ agreements are kept confidential only between the parties concerned. Any arrangements regarding governing the company is contained in the shareholders’ agreements but the article has to be complied with the company’s law. As the agreement is a simple contract between all the shareholders, it can deal with the rights and the obligations, but the article is a contract between the members of the shareholder, so cannot deal with matters personal to the members. The agreement can be amended only when all the shareholders agree to it. But, the articles can be amended if 75% of the majority votes are cast. New shareholders do not get bound by the agreement automatically, but articles bound the new shareholders automatically. Along with this they differ in the matters of company as a party and also in the remedies for breach. Conflicts between Agreement and Articles Conflict relating to management of the company includes board of directors, affirmative vote, accounts, to name some of them.  Mainly two questions need consideration in this matter:

  • Whether a provision in Articles of the company is valid or not?
  • What are the remedies of the shareholders against breach?

Secondly, there are conflicts regarding transferability of shares. The popular mechanisms of share transfer include tag along rights; drag along rights and right of first refusal. Shareholders are free to follow any of these mechanisms, but these may be in contraversion with the articles. To Conclude – Thus, shareholders’ agreement is actually more of an arrangement between shareholders and may not be binding on the Company and third parties.  However, Article of Association would be binding on everyone dealing with the Company.