Shareholders Agreements, M&As and the Potential for Conflict

Contracting parties embark upon joint ventures and enter into shareholders agreements in many instances without fully understanding the consequences of their contractual arrangements. Part of the problem is that the interplay between a company's Memorandum and Articles of Association on the one hand and a shareholders agreement on the other is sometimes a bit unclear. In some jurisdictions this interplay is more or less cumbersome than in others. The purpose of this article is to examine that dynamic in the context of a British Virgin Islands ("BVI") company and to shed some light on what contracting parties need to do and why they need to do it, when using a BVI vehicle and a non-BVI law shareholders agreement for a joint venture.

Memorandum and Articles ("M&A")

The starting point is the company's constitution. It is a statutory contract which according to BVI law is binding between (a) the company and each member and (b) between each member.

A BVI company is formed pursuant to an application, made to the Registrar of Corporate Affairs in the BVI ("Registrar"), for the incorporation of a company and various documents are required to be filed for that purpose including (a) a Memorandum of Association and (b) Articles of Association. If the Registrar is satisfied that the requirements of the BVI Business Companies Act, 2004 (as amended) (the "Act") have been met, the Registrar must upon receipt of the documents necessary to incorporate a company, register the documents, allot a unique number and issue a certificate of incorporation. So it is clear that a BVI company comes into existence by virtue of the Act and compliance with the requisite provisions.

In order to amend the M&A, the members (and in some instances the directors) must pass a resolution in relation to those provisions sought to be amended. The amendment to the M&A has effect from the date the notice of amendment or the date the restated M&A is registered by the Registrar; not before.

To sum up, the BVI company is a creature of statute, its M&A is a statutory contract and in order to amend that statutory contract, there is a specific statutorily mandated procedure.

The members of a company, and at times the company, may also enter into a shareholders agreement and the question that often arises is whether the shareholders agreement prevails over and therefore effectively amends the Memorandum and Articles of Association. In the English case of Scott v Frank F. Scott (London) Limited1, the court were in complete agreement with the first instance decision that "the court has no jurisdiction to rectify Articles of association of a company although they do not accord with what is proved to have been the concurrent intention of...