The difference between shareholder agreements and articles of association

Shareholder agreements and articles of association are both vital governance tools for companies. While articles provide a legal framework under the Companies Act 2006, shareholder agreements add flexibility and privacy to protect shareholder interests.

What are articles of association?

Articles of association are required by law when incorporating a company in the UK. Filed with Companies House and publicly available, they act as the company’s internal rulebook and constitution and are automatically binding on each shareholder, present or future.

Key features include:

• Compliance with the Companies Act 2006 is ensured.
   
• Decision-making, meeting protocols such as confirming how many directors are required to form a quorum and voting procedures are outlined.
   
• Directors’ and shareholders’ roles, rights, and responsibilities are defined.
   
• Filed with Companies House, making it a public document.
   
• Governance structure, operational framework, and purpose are established.
   
• Basic provisions to deal with the issuing, transferring of and repurchasing of shares are detailed.

While articles provide a strong legal foundation, they are often too generic to address the specific needs of shareholders or the nuanced commercial terms agreed between shareholders, particularly where a company has been incorporated with model articles of association, which are the “off-the-shelf” format provided by Companies House in the absence of bespoke articles being adopted.

What is a shareholders agreement?

A shareholders agreement is a private contract between the shareholders of a company. Unlike articles of association, the agreement will be stored privately and remain confidential, meaning the more nuanced commercial aspects of a company’s governance arrangements can be included. 

Though not mandatory, shareholders' agreements are essential for companies with multiple shareholders and are often the difference between a shareholder dispute ending up in court or being resolved amicably by following the provisions in the agreement. 

Some common terms provided for within a shareholder agreement include:

• Deadlock and dispute resolution procedures are established, where, for example, two shareholders own the company on a 50/50 basis but are at odds on a key decision.
   
• Good and bad leaver provisions determining the value of an outgoing shareholder’s shares based on the manner in which they are leaving the company.
   
• Decision-making procedures such as the threshold required to pass certain key decisions.
   
• The rights and obligations of specific shareholders can be outlined, such as a veto right over certain decisions for a company founder.
   
• Dividend policies, profit-sharing rules, and share transfer conditions are specified.
   
• Provisions for events like the death or exit of a shareholder are included, such as how any life insurance policies taken out by the company for the benefit of its shareholders are to kick-in in the event of a shareholders’ death.
   
• Shareholders can be compelled to buy or restricted from selling their shares under certain conditions.

Why businesses need both documents

Articles of association provide the basic legal framework, but as detailed above, can lack the specificity needed for complex shareholder arrangements and are often not the appropriate place for a company’s nuanced commercial policies to be detailed. A shareholder agreement bridges this gap, offering tailored solutions that protect all parties and reduce the risk of disputes whilst remaining confidential.

For example, without a shareholder agreement, minority shareholders may struggle to challenge decisions or protect their investments. Similarly, articles alone may not provide adequate guidance on share transfers or deadlock resolution.

By using both documents effectively, businesses can ensure clear governance and long-term stability.

Get the right advice for your governance documents

Our experienced solicitors specialise in drafting and reviewing governance documents that meet the unique needs of businesses across the country. We work with business owners, directors, and shareholders to provide practical, commercially minded solutions that reduce risks and drive success. 

Whether you’re starting a new venture, seeking to protect your interests, or planning for growth, our corporate team delivers tailored advice to add real value to your business.