What each article and its key provisions mean for your company.
Many of our customers adopt the Vestd Articles when they join our platform. Vestd Articles are based on the British Venture Capital Association’s template articles of association, which are adopted by many early stage companies, with some additional clauses for greater functionality and flexibility on the platform.
If your company has adopted the Vestd Articles, or you’re considering adopting them, our in-house legal team has provided a brief explanation of each article to help you understand what they mean for your company.
Article 1 - Introduction
Article 1 makes several references to the Model Articles and these will be referenced in other articles as well. This is because the Vestd Articles incorporate, but modify, the Model Articles, as is common with custom articles.
The Vestd Articles provide for a more complex share structure and extensive rights not set out in the Model Articles. Each of the modified articles either has a similar or varied (sometimes expanded) corresponding provision in the Vestd Articles; or they have been removed altogether to avoid conflict with other articles.
Article 2 - Definitions
This is where most of the defined terms used in the Vestd Articles can be found, although some terms will be defined in specific provisions instead.
One of the key definitions to understand is that of “A Shares”. A Shares is an umbrella term used for all classes of ordinary shares, be them voting or non-voting. As a result, companies are free to create new classes of ordinary shares while using the Vestd Articles without the need to amend them. It should be noted that if a company is looking to create a class of preference shares, the articles will need amending.
The definitions of “V Shares”, “Vn Shares” and “Vv Shares” relate to conditional growth shares. If a company is using the Vestd Platform to issue growth shares, the growth shares can be voting (Vv) or non-voting (Vn).
Article 3 - Share capital
Article 3 sets out some rules about what can and cannot be done with a company's issued shares.
Article 3.4 makes express provision for the allowance of buybacks under s.692(1ZA) Companies Act 2006 (“CA”), also known as a “de minimis buyback.” It’s a legal requirement that this method of financing be expressly permitted under a company’s articles, whereas the other methods of financing a buyback are permitted, provided they are not prohibited in the articles. For more information on buybacks, please see here.
Article 3.7 sets out some of the rights in relation to Treasury Shares. Treasury Shares do not have the right to receive notice of, attend or vote at a shareholders’ meeting, receive or vote on written shareholder resolutions, or receive dividends.
Article 4 - Dividends
A dividend is a distribution of profits by a company to eligible shareholders. The Vestd Articles allow directors to determine on a class by class (not individual shareholder) basis which share classes receive dividends, and in what quantity. This is sometimes referred to as a differential dividend.
Article 4.2 has been drafted to allow differential dividends to be EIS compliant — it expressly states that any class of shares that has received EIS advance assurance, or that has previously benefited from EIS relief, cannot receive a higher dividend than any other class. This avoids the EIS eligible class being given priority over another class, which could detrimentally affect its eligibility.
Article 4.5 discusses dividend awards for V Shares that are associated with a Task (also known as conditional growth shares). Where V shares still have conditions attached to them, they will not be entitled to receive dividends until they become unconditional or the board determines otherwise. This will be determined on an individual shareholder basis, not as an entire class.
Article 5 - Liquidation
This provision explains how money will be distributed between shareholders on a liquidation of the company once any outstanding liabilities (i.e., debts) have been paid. The remaining money will be distributed in the following priority (also known as a liquidation waterfall):
- A total of £1 distributed between the holders of Deferred Shares and any Non-participating V Shares (if any);
- Holders of V Shares - this will be calculated using the relevant hurdle applied to such shares. This calculator can show you how this will be calculated; and
- The remaining money will be distributed among the A Shares on a pro-rata basis.
This article has been drafted in such a way as to allow the A Shares to be EIS compliant provided they comply with the other requirements for eligibility. If the A Shares have priority over another class of shares on a liquidation they would risk their EIS status, which is why they are last in the waterfall.
Article 6 - Exit provisions
This is similar to Article 5, but instead deals with distributing money between shareholders upon a Share Sale or Asset Sale rather than a liquidation. In the event of an exit, the company will first pay its outstanding liabilities, before distributing the remaining money between the shareholders using the same waterfall as in Article 5.
If there is an IPO, all shares will be reclassified as ordinary shares (or Deferred Shares as relevant) immediately prior to the IPO to entitle all shareholders to benefit economically from it.
As a result, if one V Share has the economic value of two ordinary shares, each V Share would be reclassified as two ordinary shares.
Read here for more information on earn outs and waterfalls with V shares.
Article 7 - Votes in general meeting and written resolutions
Article 7 deals with the voting rights attached to shares. Articles 7.1 and 7.2 allow classes of ordinary shares, which will fall within the definition of A Shares, to be either voting or non-voting. It states that Vv Shares carry the right to vote, while Vn Shares and Deferred Shares do not. Shares with the right to vote shall not be able to do so if they are not fully paid up.
Generally speaking, when shares do carry the right to vote and vote on a shareholders’ written resolution, the vote of each shareholder will be related to their shareholding (e.g., if a shareholder owns 15% of the voting shares in a company, their vote on a written resolution will equal 15% of the overall vote). However, when voting on a show of hands at a shareholders’ meeting, each individual shareholder will have only one vote.
Article 8 - Conversion of V Shares
Article 8 states that if any V Shares have conditions associated with them as stated in the "Task Agreement" and these conditions are not met within the specified period, the Directors have the right to convert some or all of these V Shares into Deferred Shares on a one-to-one basis.
Directors will not need the consent of the shareholder in question, but will need to pass a board resolution, update the statutory books, cancel the share certificate associated with the V Shares, and issue a new share certificate for the Deferred Shares.
Article 9 - Consolidation of shares
A consolidation of shares is when the number of shares in issue is reduced in number that increases a shareholder’s per share value proportionately. For example, if a company has 10,000 ordinary shares of £0.00001 each in the company, they may do a consolidation so they have 100 ordinary shares of £0.001 each. Each shareholder’s proportional shareholding remains the same but the value of each individual share has increased. This can be thought of as the opposite of a share subdivision. If a consolidation of shares would result in fractional shares, the Directors can sell the collective fractions as whole shares and divide the proceeds proportionately to the affected shareholders.
Article 10 - Deferred Shares
Deferred Shares are shares that are essentially worthless - they carry no voting rights and a negligible benefit on liquidation and exit capital distributions. They may be issued for a variety of reasons, most commonly when existing shares are converted into Deferred Shares due to a leaver event, or when a shareholder doesn’t meet the agreed conditions in the case of V Shares.
When Deferred Shares have been issued for any reason, the company has the right, without the need for authority from the holder of those shares, to:
- Execute the transfer of these shares as the Company determines,
- Give consent on behalf of the shareholder to cancel the Deferred Shares,
- Purchase the Deferred Shares in accordance with the Companies Act 2006 (“CA”) for the aggregate price of 1p.
A shareholder who holds Deferred Shares must get board consent before they transfer any of their Deferred Shares. Pre-emption rights will not apply on a transfer of Deferred Shares.
Article 11 - Variation of rights
Each share class has specific rights attached to them as set out in the company’s articles. If these rights are to be varied, the consent of the holders of more than 75% in nominal value of that class of shares is needed. If the class of shares in question does not usually have voting rights attached to it, it will still be able to vote for this purpose.
It’s important to note that the issuing of new shares is not a variation of rights, even if the new shares have preferential rights over existing classes of shares. It should also be noted that the consent of the V Shares is not needed to amend the articles unless the amendment affects their rights as a share class.
Article 12 - Allotment of new shares or other securities: pre-emption
When the company issues new shares, existing shareholders have pre-emption rights over them, meaning they must be offered to buy the shares before they are sold to the proposed purchaser. This right exists under the Companies Act 2006 and the Vestd Articles. Article 12 sets out the process that must be followed by the company, such as the offer to purchase said shares being open for 10 business days.
When shares are subject to pre-emption, they will be offered pro-rata to the holders of Equity Shares (being A Shares and V Shares) on the same terms and price as the proposed sale. Existing shareholders can apply for more than their pro-rata pre-emption, and any excess shares that have not been purchased will be distributed on a pro-rata basis to those who applied.
If shareholders have applied for more than the number of available shares, the shares will be distributed on this pro-rata basis until all of the available shares have been allocated. If shareholders have applied for less than the total number of shares, the remaining shares can be issued as the directors may determine.
It’s important to note that shareholders will never be allocated more shares than they have applied for.
Pre-emption rights do not apply in certain circumstances, namely:
- Options over A Shares under a Share Option Plan;
- Shares issued in consideration of the acquisition by the company of any other company;
- Shares issued as a result of a bonus issue; or
- Deferred shares as a result of a conversion of any V Shares under Article 8.
Shares shall not be allotted to an employee or director who has not entered into a s.431 election if so required by the Company. More information on s.431 elections can be found here.
This process does not need to be followed if a shareholders’ special resolution is passed waiving pre-emption rights.
Article 13 - Transfer of shares - general
Article 13 states that any share transfers that are not made in compliance with the articles will result in the transferor being deemed to have served a Transfer Notice in respect of all shares that they own.
The article also specifies the circumstances when a director can refuse to register a transfer, which includes when a transferee is bankrupt, a minor or of unsound mind; when the transferee has not entered into an s.431 election and is required to do so; and where the transferor does not provide their share certificate or an indemnity for a lost share certificate. In the event that a director does refuse to register a transfer, the documents should be returned with a notice of refusal unless fraud is suspected. As a condition of registering a transfer the directors may, if applicable, require the transferee to enter into a deed of adherence binding them to the company’s shareholders’ agreement or similar document.
Article 14 - Leaver transfers
Article 14 applies where a shareholder holds A Shares and/or V Shares and becomes a Leaver. In this case, the Leaver Transfer Notice, which can apply to some or all of the Leaver’s A/V Shares as specified and gives the company the right to buy them back, can be served at any time within 12 months of the termination date. If the Leaver refuses to enter into the buyback agreement with the company, the directors can sign on behalf of the Leaver. It should be noted that transfers made under Article 14 will not be subject to pre-emption rights.
The price paid for the Leaver’s shares will be affected by whether they are a Good Leaver or a Bad Leaver. If they’re a Good Leaver, they will be paid the greater of the total market value of the shares or the total subscription price originally paid by them, whereas Bad Leavers will be paid the lower of these two amounts.
Article 15 - Permitted transfers
Shareholders are able to transfer their shares freely to Permitted Transferees with the consent of the board without restriction as to price. Transfers to Permitted Transferees are not subject to pre-emption rights. If the shares have previously been transferred to a Permitted Transferee, that transferee can freely transfer to other Permitted Transferees of the original shareholder subject to board consent. Generally, if a Permitted Transferee ceases to be a Permitted Transferee, they must transfer the shares back to the original shareholder.
Article 16 - Transfers of shares subject to pre-emption rights
Unless specific exemptions apply, share transfers are generally subject to pre-emption rights. As with pre-emption rights on an allotment of new shares, this means that when a shareholder proposes to transfer any of their shares, the existing shareholders can apply to buy their pro-rata entitlement. Shareholders can apply for more than their entitlement but will never be allotted more than they apply for.
The transferring shareholder must follow the procedure set out in Article 16. They must send a transfer notice to the company including details of the number of shares they are transferring, the proposed transferee, the price per share and details of any minimum transfer considerations (meaning the lowest number of shares they are willing to transfer). The board will then offer the shares to the other existing shareholders on the same terms with a 15 business day offer period. If the selling shareholder has included a minimum transfer condition and it’s not met, the transfer notice will lapse. If the existing shareholders do purchase shares and the transferring shareholder does not execute the relevant document, the directors may do so on their behalf.
This procedure won’t need to be followed if the pre-emption right is waived by a shareholders’ special resolution.
Article 17 - Valuation of shares
There are certain share transfers which require the board and the seller to agree the transfer price of the shares. Where this cannot be agreed, article 17 states that an Expert Valuer shall determine the Fair Value of the shares. The Expert Valuer shall either be the company’s Auditors, or an independent firm of chartered accountants agreed between the board and the seller.
Fair Value is based on a number of assumptions, including that the sale is on an arm’s-length basis and that the shares are capable of being transferred without restriction. Once the Expert Valuer has determined the Fair Value, it will deliver a certificate to this effect to the Company, who shall then deliver a copy of this to the seller.
Article 18 - Compulsory transfers - general
There are certain circumstances in which a transfer of shares is compulsory, such as the bankruptcy or death of a shareholder (where the shares are not appropriately dealt with under probate). In these situations, the board may deem a Transfer Notice to be given in respect of those shares.
Article 19 - Mandatory Offer on a Change of Control
Article 19 applies where a person is buying shares in the company that would give them a Controlling Interest (generally speaking, this means over 50% of the voting share capital, although there are other circumstances where this definition applies). If this happens, the proposed sellers must ensure that the purchaser offers to buy the shares of all other shareholders. The remaining shareholders are not obliged to accept this offer, they simply have the right to. This type of provision may also be referred to as a “tag along right”.
While the initial transfer of shares by the original sellers will be subject to pre-emption rights, the transfer of shares subject to the offer under this article are not.
Article 20 - Drag along
Drag along rights apply where the proposed purchaser agrees to purchase more than 50% of the company’s shares. This article gives the purchaser the right to give notice to all other (non-selling) shareholders, requiring them to sell their shares at the same price as the selling shareholders.
Unlike article 19, shareholders cannot decline to transfer their shares — they are obliged to, and shall be deemed to have agreed to, sell all of their shares once they have been given notice. In the event that a shareholder refuses to sign any documents necessary to action the transfer, the directors are able to sign on their behalf.
Article 21 - General meetings
Shareholders have the ability to require directors to hold a general meeting (a shareholders’ meeting) at which they can vote on matters. These meetings can be held in person or at different locations (e.g. virtual meetings).
Article 22 - Proxies
This article gives shareholders the right to appoint a proxy — a person who can attend and vote on their behalf at a general meeting. This appointment must be made in writing.
Article 23 - Directors’ borrowing powers
Each director has the ability to exercise the power of the Company in relation to borrowing money and conducting certain financial dealings.
Article 24 - Alternate directors
Each director has the right to appoint another person to exercise their powers (including decision making) when they are unable to. The appointment of an alternate director does not require the consent of the board, but the appointing director must notify the company in writing that they are making such an appointment.
The appointment of the alternate director will terminate upon (i) the appointer giving notice to the company that the alternate director appointment has been terminated; (ii) any event that would result in the appointer being terminated as a director, if it occurred in relation to the appointer; (iii) the death of the appointer; or (iv) where the appointer’s appointment as a director is terminated.
Article 25 - Disqualification of directors
A director can be removed from office if they are convicted of a criminal offence (other than a minor motoring offence) and the board resolves to remove them, or if a majority of the other directors serve written notice to remove them from office.
Article 26 - Proceedings of directors
Article 26 dictates some of the requirements for a board meeting. The quorum for such a meeting is two directors, unless the company only has one director. This quorum will include any alternate directors. This provision explains how notice of a board meeting shall be given and the fact that conflicts of interest must be declared.
Under the model articles, written director resolutions must be passed unanimously. However, article 26.7 of the Vestd Platform Articles amends this to allow director resolutions to be passed in the same way as a decision at a board meeting - by a simple majority.
Article 27 - Delegation by directors
A director can delegate to another person any of their powers under the articles as they see fit. They are able to attach conditions and limitations to them as they wish.
Article 28 - Directors’ interests
Directors may have interests that interact with their duties as a director, such as holding shares in another business that the company is considering entering into a transaction with. Directors are permitted to have such interests provided they declare the nature and extent of their interest to the board when relevant. If a director is unaware of their interest and it is unreasonable to expect them to be aware of the interest, then it will not be treated as an interest.
If an action has been taken without proper authorisation of a director’s interest, the company can ratify the action through a shareholders’ resolution.
Article 29 - Notices
Notices from the company can be sent in hard copy form, fax, email, or in certain circumstances by notice on the company’s website.
If there are joint shareholders, the notice shall be given to the holder who is named first in the register of members, and will constitute notice to all of the joint holders.
Article 30 - Article purposefully deleted
Due to Vestd’s platform UI, where we have removed an old provision, it shows as “Article purposefully deleted” rather than changing all of the numbering below it.
Article 31 - Indemnities and insurance
The Company’s directors are entitled to be indemnified by the company against any liabilities arising out of his duties or the exercise of his powers as a director with certain specified exceptions. The company undertakes to maintain directors’ and officers’ insurance for such purposes.
Article 32 - Data protections
Article 32 contains a standard data protection provision dictating how the personal data of shareholders and directors may be processed. The company may also have additional documents such as data protection policies in place.
Article 33 - Secretary
The directors have the right, but not the obligation, to appoint and remove a company secretary as they see fit.
Article 34 - Lien
A lien is a right to keep possession of an asset until a debt is repaid, in this case the shares being paid up. The company has a lien over any unpaid or partly paid share. The company can require these shares to be fully paid by giving a lien enforcement notice, which, if not complied with, results in the company being able to sell the shares in question.
Article 35 - Call notice
If a share is unpaid or partially paid the company can issue a call notice which requires the relevant shareholder to pay up the outstanding amount. The shareholder must be given at least 14 days to pay. If the call notice is not complied with, the company can issue a forfeiture notice and interest will accrue on the unpaid amount.
A shareholder with unpaid or partially paid shares is free to pay the relevant sum to the company in the absence of a call notice. A call notice cannot be used when, on the date the shares were issued, the company and the shareholder agree on a date when the shares will be paid. If upon this date the shareholder fails to pay, they will be treated as having failed to comply with a call notice.
Article 36 - Forfeiture of shares
When a call notice has not been complied with, the company can issue a forfeiture notice to the relevant shareholder. If payment is still not made, the unpaid or partially paid shares will be forfeited. The forfeiture results in the extinguishing of all interests in the shares, and the shares will be deemed to be the property of the company, which may sell, re-allot or otherwise dispose of them as the directors decide. In the event of a disposal, the directors can execute the relevant documents and the original shareholder is entitled to receive the proceeds of the sale less the amount due to be paid up by them.
The original shareholder will remain liable for the sums payable unless waived by the board. The board can cancel the forfeiture upon payment of the relevant amounts.
Article 37 - Surrender of shares
Shareholders can voluntarily surrender shares that are subject to a forfeiture notice. These shares will be treated the same as forfeited shares under article 36.
Article 38 - Authority to capitalise and appropriation of capitalised sums
This article allows the board to capitalise profits which are not required for other payments (such as a preferential dividend) if authorised by an ordinary resolution. The board can then appropriate such sums to such shareholders in such proportions as the board decides.