Should Restrictions On Transferability Of Shares Be Included In A Company's Articles Of Association Or In A Shareholders' Agreement?

• Published date: 16 January 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Thomson Snell & Passmore
• Author: William Chivers

The Companies Act 2006 (CA 2006) does not contain any restrictions on the transfer of shares and therefore on the face of it, shares are freely transferable in accordance with a company's articles of association.

Companies may seek to include restrictions on the transfer of shares for a number of reasons and these will vary from company to company, but restrictions are primarily included as a way of controlling the admission of new shareholders to, and the exit of key shareholders from, the company. Examples of restrictions imposed include (but are not limited to):

• Pre-emption rights
• Compulsory transfers (on events such as death and bankruptcy)
• Drag along/Tag along rights.

Key factors to consider when deciding whether to include share transfer restrictions in the articles or in a shareholders' agreement

As previously stated, shares are transferable in accordance with a company's articles of association. However, as an alternative or in addition to imposing share transfer restrictions in the articles, shareholders may wish to restrict their right to transfer shares by agreeing to provisions in a separate shareholders' agreement. Here are some key factors which shareholders may want to consider when deciding whether to include share transfer restrictions in the articles or in a shareholders' agreement:

• The terms of the articles will bind each and every shareholder (as well as every creditor, in the event of an insolvency). In contrast, the terms of any shareholders' agreement will only bind those who are parties to it and who agree to be bound by its terms (for example by signing it or, in the case of subsequent shareholders, by signing a deed of adherence agreeing to be bound by its provisions). Therefore, there is a risk that a new shareholder who does not agree to be bound (for example because the requirement to sign a deed of adherence is overlooked), is free to transfer his shares without regard to the restrictions in the shareholders' agreement
• Restrictions on the transferability of shares are an important limitation on a shareholder's right to deal with his shares and any person considering acquiring shares in the company will want to know if there are any such restrictions. By including the restrictions in the articles, any third parties searching the public register at Companies House will be alerted to them Articles of association are a public document (either by reason of the requirement to register them at Companies House or by reason of the...