Setting up a company in the UK will require a firm foundation to bolster both the business and the individual decision makers. This structure is governed by three main constitutional pillars. These consist of the Company’s Act 2006 (the Act), the Articles of Association (Articles) and the Shareholder Agreements (SHA). Establishing these three will streamline decision making process while ensuring clear consistent documentation across the various leadership roles within the company.
Though this is the ideal situation to be in when creating or running a company, there are situations where these constitutional documents will collide resulting in various forms of discord, such as where the SHA conflicts with the Articles. This situation was evident in in Dear and Griffith v Jackson . However, before the aforementioned case is explored it would be paramount to understand the nature and purpose of the SHA and Articles.
Articles of Association
Every company is legally required by the Act to have a set of Articles. The Articles will in essence be the constitution of the company. There are what can be considered default Articles called the Model Articles of Association, however most companies will use more bespoke Articles to better cater for their business practices. Once the Articles are agreed they will have to be publically available on Companies House as per the Act. The articles will cover a vast range of activities within the company from appointing directors to shareholder decision making. If the rules in place by the Articles are breached, then consequentially the action will be voided.
The SHA will differ from the Articles in that it is a contract between the shareholders rather than a document that envelops the actions of the entire company. SHA’s will dictate the relationships between the shareholders. Setting out rules of engagement for decision making and even potential conflicts between the shareholders. In most cases the SHA and the Articles will work in tandem with a high amount of cross referencing from the SHA to the Articles. A key difference however is the nature of the SHA, as it is a contract and breach of this will be a breach of the contract. It will open the party in question to damages rather than voiding the action or decision made.
Dear and Griffiths v Jackson 
The interaction between the Articles and SHA can on occasion clash, the case of Dear and Griffth v Jackson is explored as evidence to this. To provide context the above case heard by the Court of Appeal, two director-shareholders (Dear and Griffith), entered into an SHA. Using the rights granted by the SHA they appointed Jackson as a fellow director. The company’s Articles contained the provision to grant directors the power to remove any director with unanimous decision. There were no express terms in the SHA to this effect.
Jackson consequently brought a claim against Dear and Griffith for specific performance of the SHA. The High Court originally ruled in Jackson’s favour implying terms from the Articles into the SHA preventing Dear and Griffith exercising the power within the Articles, as there was no unanimous consent from the directors (inclusive of Jackson).
Dear and Griffith appealed the High Court decision, to which the Court of Appeal overturned the High Court decision. The reasoning the Court of Appeal put forward was that independent or new directors who did not know of the existence of the SHA would be entitled to assume the provisions in the Articles would be able to be solely relied upon as the governing authority on the company’s decision. There should be no document or agreement not known to all that would supersede the Articles. For this reason it was ruled inappropriate to imply the terms from the SHA.
Risks and remedies to the conflict
The risks associated with a conflict between the SHA and the Articles will vary dependant on which is deemed breached. As previously mentioned should the SHA be breached the ramifications will be a founded in contract law. As shown in the case law above this can lead to costly expenditure through legal fees and litigation, neither desirable to a growing business.
The risks however differ when the Articles will be deemed breached. The decision will (in most cases) be automatically voided as the Articles are seen in statute to supersede the SHA. This can of course hold the risk of voiding important company decisions, such as the issue of shares should pre-emption rights not be regarded as set out in the company Articles.
The likely remedy to the conflicts would be a variation to, or complete redrafting, of the SHA depending on how entrenched the conflict is within the SHA. Ensuring harmony between the two documents will avoid or alternatively resolve the majority of the risks arising from the conflicts. Consideration to this should be duly given when drafting these constitutional pillars of a company.
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