What are Articles of Association?
Articles of association are the rules that set out how a company is run. They’re public documents that define things like how shares are to be issued, how shareholders and directors exert influence, and what their responsibilities are. In other words, they’re extremely important.
A basic set, known as the Model Articles, is available when you incorporate at Companies House. But, they’re just that, basic. And as such, they have significant limitations.
Vestd Articles of Association
We’ve taken these model articles and enhanced them using the British Venture Capital Association’s best-in-class template and the bitter experience of the thousands of founders we’ve already helped, to save you time, trouble, and headache.
Proceedings of directors
Model Articles: Written director resolutions must be passed unanimously.
Limitation: Requires absolute agreement on all matters. If one director is away or cannot be contacted, the resolutions cannot be passed.
Vestd Articles: 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.
Different classes of shares
Model Articles: Do not specifically outline the rights of any share class. At incorporation, you will only have a single ordinary share class. As such it will have full rights to capital, dividends and to vote.
Limitation: Different share classes may require different rights to capital, dividends or vote. It may also be useful to create a class of ‘conditional shares’ that vest on the completion of milestones.
Vestd Articles: Deal with voting and non-voting ordinary shares as well as conditional growth shares. They also allow directors to determine on a class-by-class basis which share classes receive dividends, and in what quantity, while remaining EIS compliant.
Model Articles: Shareholders are not compelled to transfer shares under any circumstance.
Limitation: Minority shareholders could hold up the sale of the business in the event of an exit. Likewise, if an employee shareholder leaves the company there is no recourse. They could remain a shareholder while working for your competition.
Vestd Articles: Contain ‘drag-and-tag’ clauses. The ‘drag’ clause requires that minority shareholders be required to sell their shares in the event of a sale of the majority of shares in the company hence not holding it up. The ‘tag clause’ requires that minority shareholders be allowed to join in on a sale if they wish to so that they also benefit from the proceeds. In both instances, the minority shareholder receives the same terms and conditions as any other seller. The Vestd articles also contain clearly defined leaver clauses that set out the transfer provision for ‘good leavers’ and ‘bad leavers’ and ensure that companies have the right to buy back shares in the event of staff members moving on.
Pre-emption rights on a transfer of shares
Model Articles: There are no pre-emption rights on the transfer of shares, meaning a shareholder can transfer their shares to whoever they like for whatever price they like.
Limitation: Companies may wish to have some control over their cap table or restrict the sale of shares to competitors or others with whom association may be damaging.
Vestd Articles: Shareholders are able to transfer their shares freely to permitted transferees with the consent of the board without restriction as to price. All other transfers are subject to pre-emption rights, meaning existing shareholders can apply to buy their pro-rata entitlement to prevent from being diluted. Pre-emption rights can be waived by a shareholders’ special resolution (75% pass rate).
If you are incorporating through Vestd you can adopt these enhanced articles right from the word “go”, with Launch.
If you have already incorporated, then you will need to obtain a special resolution to adopt them. Just let your equity consultant know and they will generate the resolution during your onboarding!