The articles of association are an official corporate document required for all limited companies. When you incorporate a company in the UK, you submit articles to Companies House (and if you don’t submit your own, the default “model articles” apply). The articles act as a contract between the company and each shareholder, and they outline basic governance rules (like how directors are appointed, how shareholder meetings work, share classes, etc.).
A shareholders’ agreement, on the other hand, is a private contract between the shareholders themselves (and often the company as well as a party). Here are the main differences:
- Public vs Private: Articles are public – anyone can obtain a copy from Companies House. A shareholders’ agreement is private and confidential between the parties. This means sensitive or detailed provisions shareholders might want (for example, veto rights, dividend policies, or even compensation arrangements) can be kept out of the public eye by putting them in the shareholders’ agreement instead of the articles.
- Flexibility: Company law (the Companies Act 2006 in the UK) imposes certain mandatory rules and structures on articles. While you can customize articles to an extent, there are limits – for instance, articles typically require special resolution (75% shareholder approval) for certain changes. A shareholders’ agreement has no prescribed format by law; it can cover almost any matter as long as it’s not illegal or against public policy. It also usually requires 100% agreement to change its terms (as set out in the agreement itself) , giving each shareholder more protection against changes. The absence of a standard form for shareholder agreements (unlike the “model articles” which are standard) means you can draft it to suit your exact circumstances.
- Content and Scope: Articles deal with corporate mechanics and shareholder rights in a broad sense (e.g., classes of shares, voting rights, how dividends are declared, quorum for meetings). A shareholders’ agreement can go much further. For example, it might state that certain decisions (hiring a new senior employee, or expenditures over a threshold) cannot be made without consent of all founders, even if by law the board could normally decide that. It can also include things that affect shareholders’ personal behavior – such as non-compete clauses (preventing shareholders from competing with the company’s business) or requirements to devote a certain amount of time to the business. Articles typically wouldn’t contain such personal covenants. Another example: articles might be silent on what happens if a shareholder wants to sell shares, whereas a shareholders’ agreement can include detailed pre-emption rights or “drag-along/tag-along” clauses to handle that scenario and protect all parties.
- Enforcement: If someone breaches the articles of association, because they are part of company law, certain breaches might void actions (e.g., if a meeting was not called per the articles, its resolutions might be invalid). Breaching the articles can often only be addressed by a shareholder lawsuit or sometimes regulatory action. A shareholders’ agreement being a private contract is enforced like any contract – if a shareholder breaches it (say they transfer shares without offering them to others as required), the other shareholders can sue for breach of contract or seek an injunction. Often, the shareholders’ agreement will include specific remedies or penalties for breach as well. In practice, both documents are binding, but the pathways to enforcement differ.
- Parties: All company shareholders are subject to the articles by default. In contrast, a new shareholder will typically only become party to the shareholders’ agreement by explicitly signing an adherence or joinder to it. This is why such agreements usually have a clause that says no share transfer is valid until the new holder agrees to be bound by the shareholders’ agreement – to ensure the circle of parties remains intact as ownership changes.
To illustrate, think of articles of association as the “skeleton” and fundamental public rules of the company, whereas a shareholders’ agreement is the “flesh” you add to cover specific understandings among the owners. They work alongside each other. In case of conflict, generally the company will follow its articles (since they are the official constitutional document), but usually good drafting will ensure the two documents are consistent. If they conflict, it can create a tricky situation – one reason why having a lawyer draft or review these in tandem is important.
In summary, both are important: the articles are required and set the base rules, while a shareholders’ agreement is optional but highly recommended to customise the company’s governance and protect shareholders’ interests in ways the articles cannot fully do. Use the articles to address the formal statutory requirements and outline the broad structure, and utilise the shareholders’ agreement to fill in the gaps and address the practical concerns of the owners. If you use British Contracts to draft a bespoke shareholders’ agreement for you, we will review your articles of association to ensure they are entirely consistent.