In addition to a Shareholders Agreement, most
E-commerce investors will want specific provisions to be put into
the Articles of Association of the company which is used as the
investment vehicle. The Articles are a public document which
(together with the company's memorandum of association) are the
company's main constitutional documents and automatically bind all
the shareholders. The Articles generally appear pretty impenetrable
but they contain just as many important legal provisions as the
Shareholders Agreement and therefore should only be finalised after
legal advice has been taken.
In many respects, the Articles cover similar ground
to the Shareholders Agreement and there is certainly an element of
"belt and braces" in requiring provisions in both documents. The
main advantage of having protection in the Articles for investors
is that they automatically bind all shareholders, whether or not
they have signed up to the Shareholders Agreement.
The key provisions in the Articles (in addition to
lots of very standard provisions) are usually the following (all of
which will be dealt with in more detail in further LawNow
- The basis for payment of dividends and the pecking order
(normally investors first).
- The pecking order for payments to shareholders on a solvent
winding up (again, normally investors first).
- The position on voting rights. Investors sometimes require
"swamping" rights which give them weighted voting should things
start to go wrong.
- Class rights ie a list of things which can only be done with
the consent of a requisite majority of a particular class of
shareholders. It is quite normal for equity investors to hold a
different class of shares from management and other types of
shareholder and so class rights are another mechanism by which
equity investors (or other classes of shareholders) can have a
right of veto in relation to certain matters.
- Restrictions on the issue and transfer of shares and the
procedure for redemption of any redeemable shares.
- Provisions relating to what happens to shares held by
management should they leave.
- Ratchet provisions (ie a mechanism for altering equity
percentages subject to performance of the company).
- Drag along/tag along - these provisions require shareholders to
accept an offer to sell if a sufficient number of other
shareholders are in favour and also require a buyer to extend an
offer to all the shareholders if the buyer wants to purchase more
than a certain percentage of the shares.
Of course, there are many other detailed provisions
contained in Articles and, as always, legal advice should be taken
in each specific case.
If you have any queries on Articles of Association
or any issues relating to e-commerce investment, please contact
David Day at email@example.com or by telephone on 020 7367 2948.