Features of Articles of Association affecting E-commerce investors

United Kingdom

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 articles):

  • 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 dcd@cms-cmck.com or by telephone on 020 7367 2948.