Does a shareholders' agreement override the articles? Validity and supremacy clauses

Does a shareholders' agreement override the articles of association? It is not as simple as saying "the articles" or "the agreement". The short answer is that the articles typically win, unless the shareholders' agreement contains a supremacy clause, and even that only holds if both documents are legally valid in the first place. So before you can say which document overrides which, you need to do some due diligence on each of them. Here is how I approach it.

Check both documents are valid first

To answer the question properly, there are a few things to check from a due diligence perspective. Mostly, you need to determine whether the shareholders' agreement and the articles of association are each legally binding. A document that is not valid cannot override anything, so this comes before any question of priority.

In my experience this step is skipped more often than it is done. Owners assume that because a document is sitting in the company's files, and perhaps has signatures on it, it must be effective. That is not always the case. A shareholders' agreement that was never signed by one of the shareholders, or a set of bespoke articles that were drafted but never properly adopted, may carry much less weight than everyone believes. So the first job is to test each document on its own terms.

Is the shareholders' agreement legally binding?

Taking the shareholders' agreement first: it is a contract, so the standard contract law rules apply as to what makes it legally binding. In short, you need:

• An offer, and
• An acceptance of that offer,
• Consideration being exchanged between the parties,
• Certainty of terms, so the parties know what they are agreeing to, and
• An intention on the part of all the parties to be legally bound by the contract.

If those elements are present, the shareholders' agreement is a binding contract between the people who signed it. If one is missing, you may not have an enforceable agreement at all, in which case the question of whether it overrides the articles does not arise. I go through the five elements in detail in what makes a contract legally binding?.

Are the articles of association valid?

The articles need a bit more analysis.

The first question is whether the articles in question are the model articles adopted on incorporation. The model articles are the standard set that Companies House makes available for any company to use. If a company was incorporated with the model articles and has never changed them, you can safely assume those articles are legally valid, and you can set that question aside. See model articles of association for what they contain.

What needs further analysis is the situation where the company was incorporated with the model articles and then later adopted a new, bespoke set of articles. In that case you need to check whether the company followed the specific procedure for adopting new articles, and followed it in a compliant way under the Companies Act 2006. If it did not, the bespoke articles may not have been validly adopted.

How to adopt bespoke articles

That can sound daunting, but in brief, this is the procedure that should have been followed:

• Board meeting. The directors of the company should have held a board meeting to approve the adoption of the new articles, and that meeting should be evidenced by board minutes. See how to draft board minutes.
• Special resolution of the shareholders. The shareholders should then have voted to adopt the new articles by special resolution. That means at least 75% of the shareholders or, if voting on a poll, which is voting by shares, 75% of the voting shares.
• Filing at Companies House. The relevant documents should then have been submitted to Companies House, including the special resolution and the new articles of association.

If you are checking an existing company, look for the board minutes, the signed special resolution and the Companies House filing. If any of them is missing, the adoption may be open to challenge. For the full process see how to amend articles of association.

Which prevails? Articles vs shareholders' agreement

Now assume the shareholders' agreement is legally binding, and the articles are either the model articles or bespoke articles that were validly adopted. Which document overrides which?

In brief, it is typically the articles of association that override the shareholders' agreement.

That surprises a lot of owners, because the shareholders' agreement is usually the longer, more detailed and more carefully negotiated document, and the articles are often the standard model set nobody has read since incorporation. But the articles are the company's constitution, and the default position is that they take priority over a private contract between the shareholders.

The exception is where the shareholders' agreement contains a supremacy clause. A supremacy clause says, in short, that if there is a conflict between the articles and the shareholders' agreement, the shareholders' agreement takes precedence. If that clause is there, then of course the shareholders' agreement takes precedence.

So the practical answer to "does a shareholders' agreement override the articles?" is:

• No supremacy clause: the articles typically prevail.
• Supremacy clause included: the shareholders' agreement prevails.
• Either document invalid: the invalid one cannot override anything, so fix that first.

This is why, when I draft a shareholders' agreement, the question of whether to include a supremacy clause is one of the first things I raise with the owners. It decides which document they are really relying on, and it tells you which document needs to be kept up to date most carefully. It is also why a shareholders' agreement and articles should be prepared together rather than years apart, so that conflicts do not arise in the first place.

Next steps

Pull out your shareholders' agreement and your articles. Check that the agreement was properly signed by all the shareholders, and check whether your articles are the model articles or a bespoke set, and if bespoke, that the board minutes, special resolution and Companies House filing exist. Then read the agreement for a supremacy clause. If the two documents conflict and you are not sure which governs, speak to a corporate solicitor before relying on either. For what to put in the agreement itself, see what should a shareholders' agreement include?.