Constitutional matters

John Clarke

Published by
John Clarke

29th March 2019

Those of you who read my earlier blog on the UK’s need for a written constitution may be worried that I am about to go over old ground again. That’s tempting, but I’ll try to avoid anything to do with Brexit here.

No, what I am writing about today is business constitutions – whether for companies or partnerships of some sort. This note has been prompted by a very good Institute of Directors course I was at recently – and the number of shareholder disputes that I’ve had to deal with recently.

When things go wrong, they can go very wrong. That’s particularly the case when businesses are involved – partly because internal disputes can become business threatening. If there isn’t an agreed constitution in place, dealing with a dispute can become very expensive and will probably mean that those running the business have to devote a lot of their time to not running the business.

Articles of Association
So, what do I mean by a constitution? If I focus on private companies, every company will have Articles of Association. But, they may be in standard form, and not tailored for the circumstances of that company. Do they need tailoring by (for example):

- Dealing with the circumstances when a shareholder, or their executors, are forced to sell shares
- What price is paid for shares and in what circumstances
- Are any shareholders to have special rights
- And so on.

Much of these are what I might call “standard” changes to Articles. But, Articles are lodged with Companies House and so are a public document: so do you want private stuff publicly available?

Shareholders Agreements
The next step is a Shareholders Agreement. That might cover some of the same ground as the Articles but in a private way (as Shareholders Agreements do not have to be lodged anywhere) but they usually go beyond that. One of the things they usually do it to rebalance power between the directors and the shareholders: if no changes to the standard Articles are made, nearly all the power lies with the directors. So, Shareholders Agreements might cover:

- Providing financial information regularly to shareholders
- Preventing the directors from doing “non-standard” things without shareholder approval
- Limiting what directors can be paid
- And so on.

Family constitutions
So far, so good. But what happens as the generations pass and if the number of shareholders grows? Even well run private companies can run into difficulties at shareholder level. For example:
- What happens if a shareholder wants to sell. Can they, and if so, and what value?
- What happens on the divorce of a shareholder? Can the non-family ex-spouse get their hands on some shares?
- If the family are not the only shareholders, does the family have to vote as a block?
- Will the shares be held by a tight knit number of family members or will there be many (and possibly very many) family shareholders by Generation 5?

The more that can be agreed, the less the scope for a successful dispute. I stress the “successful” because you can’t stop people making daft decisions (sorry – I did promise not to mention Brexit…) but you can limit the chances of success.

Going forward
So, what do you do? Well, chatting to us or our colleagues in Family Business Solutions Limited is a good start. We’ve probably dealt with the issues that you may face before and our experience will let us discuss with you issues that you haven’t thought of yet. It’s good to talk!