Shareholders Agreements

What we want to do in this part of the site is, firstly, explain the purpose and function of Shareholders Agreements, secondly, let you see a form of Shareholders Agreement that we have used successfully on a large number of occasions and, thirdly, walk you through some of the issues involved in the drafting of these Agreements.

What are Shareholders Agreements?

A combination of statute (principally the Companies Acts) and decided case law, houses a body of law governing the rights and obligations of shareholders among themselves. There are various well established principles, such as:-

1. A minority shareholder has certain rights not to be unfairly prejudiced by the actings of the majority shareholders.

2. When valuing a minority shareholding it is normal to apply a discount to reflect the fact that that shareholding carries no real power.

3. Shareholders as such have no right to access the financial records of a company.

It may be somewhat unsatisfactory to rely on general principles of law in a given situation. For example, if you wish to invest in a company you might want specific controls on the Directors of that company and how they can spend the investment proceeds and accordingly you might want what are referred to as operating controls on those Directors. Similarly, you might want to limit the amount they Directors can award themselves by way of bonus or salary, to make sure that the investment monies are being spent on the furtherance of the main purposes of the company.

Even if you are not an outside investor, but are a working Director with a minority shareholding, you might want to ensure that certain important matters in relation to the business of the company have to be decided by a specific number of votes.

There are certain things that, in terms of the Companies Acts, can only be passed by Special Resolution i.e requiring a 75% vote. These include possible changes to the structure of the company such as alterations to the Articles of Association. Obviously these give a level of protection if you hold anything more than a 25% equity stake in the company and can therefore block Special Resolutions. However, if your percentage ownership is less than this, you could still give yourself the right to veto that Resolution by means of a Shareholders Agreement. A style of Shareholders Agreement follows.

It has been drafted on the basis that there are three shareholders in the company; that a unanimous vote is required for all major decisions in relation to the running of the company including operational matters such as capital expenditure; that there are certain circumstances in which a shareholder can be asked to offer his shares for sale to the other parties; that the Chairman of the company does not have any casting vote; and that no one can be removed as a Director unless for the same reasons that justify offering the shares for sale.

Your attention is drawn to the more detailed notes set out below.

Other matters you may wish to consider are:-

4. A shoot-out clause. This is the name commonly given to a provision in terms of which, if deadlock is reached in relation to any important matter concerning the running of the company, then the parties accept that their relationship is at an end, and, as an alternative to winding up the company the parties provide that one party has to offer to buy the others shares. If the recipient of that offer does not accept the price offered, he must counter offer in a higher sum. That way, the company goes to the highest bidder and the party who leaves at least has the comfort of knowing that he has obtained a fair value.

5. Tag along. If you hold a minority stake in a private company you shares are not marketable - there is no obvious exit route unless one of the other shareholders offers to buy you out. It is possible that someone else will come along and offer to buy the shares of the majority holder. In that case you can provide that you want to "tag along" on the back of any such offer and you would provide in the Articles and in those circumstances your shares must also be bought at the same price per share as that commanded by the majority shareholder.

6. Drag along. This is the converse to the tag along provision and means that a majority holder or holders can insist on "dragging along" a minority shareholder in the event of a bona fide offer for the company from a third party. Even if the minority shareholder is uncomfortable about the price achieved he is forced to sell at that price.

7. Options. Given that a minority shareholder has no exit route other than the other shareholders, you might wish to consider then granting you and option in terms of which you can require them to acquire your shares either in certain stated circumstances or for a specific time period. A "put option" is the name given to an option requiring another party to buy your shares. A "call option" is where that other party can call upon you to sell your shares.

8. Class rights. These are normally found attached to shares issued to institutional investors, particularly where the institutional investor takes preference shares or a different class of shares. They work in the same way as any other form of minority shareholder protections, providing that certain things cannot happen in relation to the company, particularly structural changes such as alterations to the Articles of Association, without the investors consent.

SHAREHOLDERS AGREEMENT

amongst

(hereinafter referred to as " ")

OF THE FIRST PART

and

(hereinafter referred to as "")

OF THE SECOND PART

and

(hereinafter referred to as " ")

OF THE THIRD PART

and

incorporated under the Companies Acts and having its Registered Office at (hereinafter referred to as "the Company")

OF THE FOURTH PART

Note 1
WHEREAS the parties hereto have agreed to form the Company for the purpose of carrying on the business of and to subscribe for shares in the capital of the Company as hereinafter written AND WHEREAS it has been agreed among the parties that the Company carry on the business of and that such business shall be carried on and conducted in the manner hereinafter written NOW THEREFORE THE PARTIES HERETO HAVE AGREED AND DO HEREBY AGREE AS FOLLOWS:-

FIRST For the purposes of this Agreement and the Schedule hereto the following words and phrases shall have the following meanings ascribed thereto:-

"the Directors" means .

Note2
"the new Articles of Association" means the Articles of Association of the Company adopted by the Special Resolution and forming Part IV of the Schedule hereto.

"the settlement date" means

"the Shareholders" means

"the Shares" means Ordinary shares of £1 each in the capital of the Company to be subscribed by and in the proportions set out in Part III of the Schedule hereto and having the rights and privileges attached thereto under the new Articles of Association.

"the Special Resolution" means the special resolution set out in Part II of the Schedule hereto to be passed by the Company on or prior to the settlement date.

SECOND Settlement of the subscription of the Shares hereunder shall take place at 12 noon or such other time as may be mutually agreed on the settlement date within the offices of at which time

(1) each of and shall deliver to the Company a duly signed letter of application for the relevant number of the Shares, [at par], specified in Part III of the Schedule, together with a cheque in respect of the subscription monies, and

(2) the parties shall procure

(a) the Special Resolution being passed; and

(b) the allotment and issue of the Shares to each of and delivery of the relevant certificates duly executed; and

(c) the dispatch to the Registrar of Companies of

(one) a print of the Special Resolution [together with a Form 123] and print of the new Articles of Association; and

(two) a return of allotments relative to the issue of the Shares.

THIRD (a) If any of the parties hereto shall at any time:-

Note 3
(i) commit any material or persistent breach of the provisions of this Agreement;

(ii) be guilty of dishonesty;

(iii) be guilty of conduct tending to bring himself or the Company into contempt or disrepute;

(iv) shall have acted in any other way to the material prejudice of the Company or its business

(v) shall become apparently insolvent or execute a trust deed for behoof of his creditors or make any arrangement or composition with his creditors;

(vi) become of unsound mind or a patient within the meaning of the Mental Health Acts or any statutory modification or re-enactment thereof; or

(vii) be convicted of any criminal offence other than an offence which in the reasonable opinion of the Directors does not affect his position in the Company,

then that party shall be deemed to have given a transfer notice in terms of the Articles of Association of the Company in respect of all of the shares held by him and the whole provisions of Article of the Articles of Association shall apply in respect of such transfer notice save that no notice of revocation shall be competent.

FOURTH (A) Each of the parties hereby agrees throughout the period during which he remains the holder of or beneficially interested in any shares in the capital of the Company to procure that

Note 4

(a) the financial year of the Company shall be twelve calendar months ending on in each year and a profit and loss account for the financial period ending on each such date and a balance sheet as at each such date shall be prepared from the Books of Account and records of the Company within three months of each such date and audited as soon as possible thereafter;

(b) proper books and records are kept up-to-date at all times and show a true and accurate record of the sales and purchases of the Company and the costs relative thereto;

(c) the Company shall keep its bank accounts with the Bank and all operations on such account or accounts shall be in accordance with the following requirements, that is to say, all cheques, promissory notes, endorsements and other operations on said account or accounts may be effected by the signature of any two of the Directors.

(B) Each of the parties hereto hereby agrees to use his best endeavours as a shareholder or otherwise to cause the Company to refrain from doing at any time or from time to time the following unless the prior written consent of the other parties is obtained:-

Note 5
(a) to compound, release or discharge any debt or debts exceeding £100 which may be due and owing to the Company from time to time without receiving the full amount thereof; or

(b) to grant any guarantee or security in name of or on behalf of the Company or otherwise knowingly suffer anything to be done whereby the property of the Company or any of it may be attached or otherwise the subject of diligence; or

(c) sell or transfer or purport to sell or transfer, assign, pledge or otherwise alienate any of the shares in the capital of the Company or any interest therein; or

(d) operate or purport to operate any of the Bank accounts of the Company other than as contemplated in Clause FOURTH (A) (c) hereof; or

(e) to take the Company bound or otherwise indebted or to pledge its credit in any manner save in the ordinary course of the business of the Company; or

(f) to lend any money or other assets of the Company or to extend any credit on behalf of the Company to any person, firm or corporation other than in the ordinary course of business; or

(g) (i) to incur any capital expenditure or enter into any capital commitment in name of or on behalf of the Company in excess of £ or

(ii) enter into any financing arrangements for or relating to capital expenditure or equipment (whether under plant hire, hire purchase, leasing, credit sale, lease-purchase or other arrangements) whereby the aggregate of the capital value of the items or matters in respect of which such arrangements are entered into exceeds £; or

(h) to extend, amend, vary or otherwise enter into any arrangement or understanding relating to the salary, bonus, emoluments or other terms of appointment or employment of any Director officer or any employee of the Company; or

(i) enter into any contract or arrangement with any shareholder or Director or anyone related to, affiliated with or controlled by any shareholder or Director or enter into any contract or arrangement in which any such person is, whether directly or indirectly, interested; or

(j) enter into any transaction otherwise than at market value on an arm's length basis and bona fide in the interests of the Company; or

(k) allot or issue any shares of the Company or grant any right to any person to be allotted shares; or

(l) change the number of Directors of the Company; or

(m) change the Auditors of the Company; or

(o) enter into any contracts, arrangements or leases which cannot be terminated without cost to the Company on 60 days' notice or less; or

(p) engage in any new type of business or change the nature, scope or conduct of its business; or

(q) make any investments; or

(r) acquire any assets other than in the ordinary course of business; or

(s) encumber or mortgage any of its assets; or

(t) redeem or purchase any of its shares; or

(u) obtain any additional financing or incur any additional borrowing; or

(v) alter the Company's Articles of Association; or

(w) dispose of the whole or any material part of its business or undertaking; or

(x) sell or transfer or purport to sell or transfer, assign, pledge or otherwise alienate any asset of the Company with a value in excess of £; or

(y) pass a resolution to wind up the Company;

(z) form or acquire any subsidiary; or

(aa) make any distribution to its shareholders; or

(bb) enter into any franchising arrangements in respect of any part of the Company's business; or

(cc) cease trading (other than on the recommendation of the Company's auditors on the grounds of insolvency.

FIFTH Each of the Directors hereby agrees and undertakes throughout the period during which he remains a Director of the Company to procure that:-

(a) there are circulated to the parties (i) on a half yearly basis, a management report in respect of the previous half year and a budget/forecast in respect of the following half year, (ii) management accounts and such other financial and business information as the parties may require on a quarterly/monthly basis and (iii) copies of all bank statements, if so requested; and

(b) he will at all times exercise his best endeavours to promote the best interests of the Company and to make its business a financial success, and shall not knowingly do and shall exercise his best endeavours to prevent there being done any act or thing which may in any way be prejudicial to the Company or its business.

SIXTH Subject always to the Company's Articles of Association each of the Shareholders hereby undertakes that he shall not sell, transfer or otherwise dispose of or purport to transfer (whether by way of sale, gift, pledge or otherwise) all or any part of the shares in the capital of the Company then held or beneficially owned by him to any other party unless and until he shall have first (i) obtained the written consent of the other Shareholders as to the transferee and the transfer price and (ii) taken the proposed transferee bound to the satisfaction of the other parties by the obligations and undertakings set out in this Agreement.

Note 6
SEVENTH (a) Each of the parties hereby undertakes not, except as authorised by the Company to reveal to any person, persons or company and shall use all reasonable endeavours to prevent the publication or disclosure of any of the trade secrets, secret or confidential operations, processes or dealings, commercially sensitive information or any information concerning the organisation, business, finance transactions or affairs of the Company or any of its customers or clients which may come to his knowledge and in particular but without prejudice to that generality to keep with complete confidentiality all information contained or referred to in the Company's business plans, and not to use or attempt to use any such information in any manner which may injure or cause loss directly or indirectly to the Company or may be likely so to do. This restriction shall continue to apply after the party has ceased to be a shareholder of the Company without limit in point of time but shall not apply to information which at the time of disclosure was published, known publicly or otherwise in the public domain.

EIGHTH The parties hereto hereby undertake to execute all documents and do all acts and things necessary or expedient for the purpose of giving full force and effect to the provisions of this Agreement and the parties further agree to co-operate in and implement the spirit aims and intent of the arrangements contemplated hereunder.

NINTH None of the parties hereto shall make any announcement or disclosure touching or concerning the subject matter of this Agreement without the previous approval of each of the others.

TENTH This Agreement shall be interpreted according to the law of Scotland which shall apply to the whole terms and provisions hereof.

ELEVENTH Each of the parties hereby progates the jurisdiction of the Scottish Courts so far as not already subject thereto: IN WITNESS WHEREOF these presents typewritten on this and the preceding pages are together with the Schedules annexed hereto executed as follows:-

This is the Schedule referred to in the foregoing Shareholders Agreement between and

SCHEDULE - PART I

THE COMPANY

Date of Incorporation:

Secretary:

Registered Office:

Registered No:

Share Capital: Authorised: £ divided into Ordinary shares of £1 each

Issued: £ Ordinary shares of £1 each

Shareholders:

Registered Holder Beneficial Owner No. of Shares

----------

----------

Charges:

Auditors:

Accounting Reference Date:


SCHEDULE - PART II

COMPANY NO:

SPECIAL RESOLUTION

LIMITED

AT an EXTRAORDINARY GENERAL MEETING of the MEMBERS of the above COMPANY duly convened and held at on the day of Two thousand the following resolution was duly passed as a Special Resolution:-

(a) THAT the authorised share capital of the Company be and is hereby increased from £ to £ by the creation of new Ordinary Shares of £1 each having the rights and privileges specified in the Articles of Association of the Company adopted pursuant to paragraph (B) of this Resolution and that the Directors be and they are hereby authorised to issue such Ordinary Shares at such time or times, to such persons and subject to such conditions as they may in their sole discretion determine, provided that the authority hereby given to the Directors shall expire five years from the date of passing of this Resolution;

(b) THAT the existing Articles of Association be and they are hereby cancelled and in substitution therefor the Articles of Association of which a print is laid on the table and is subscribed by the Chairman for identification be and they are hereby adopted as the Articles of Association of the Company;

.........................
Director

SCHEDULE - PART III

ALLOCATION OF THE SHARES

NAME NO. OF SHARES

SCHEDULE - PART IV

THE COMPANIES ACTS 1985

COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

of

LIMITED
(as adopted as at )

GENERAL

1. The Regulations contained in Table A in the Schedule to the Companies (Tables A to F) Regulations 1985 (SI 1985 No. 805) as amended by the Companies (Tables A to F) (Amendment) Regulations 1985 (SI 1985 No. 1052) (hereinafter referred to as "Table A") shall apply to and shall be the regulations of the Company save insofar as they are excluded or varied hereby or are inconsistent herewith and Regulation 1 of Table A, as it applies to and is a regulation of the Company shall apply for the purpose of the interpretation of these presents.

2. The Regulations numbered 5, 40, 41, 50, 54, 73 to 77 inclusive, 80, 82, 83, 87, 93 and 102 of Table A shall not apply to the Company and the following Regulations shall be modified:-

Regulation 3 so that the words "provided by the articles" shall be held to be delete and there shall be inserted in lieu thereof the words "specified in the articles or as the company before the allotment of the shares may by special resolution determine".

Regulation 6 so that the words "and bear autographic signature of at least two directors or one director and the secretary" shall be substituted for the words "be sealed with the seal".

Regulation 10 so that the words "Neither the purchaser nor, if a different person, the transferee shall be bound to see to the application of the purchase money and" shall be inserted immediately before the words "The title".

Regulation 11 so that the words "thereof as determined by the Directors" shall be inserted after the word "costs".

Regulation 15 so that the words "in whole or in part" shall be inserted after the words "remains unpaid".

Regulation 18 so that there shall be added to the end of the first sentence thereof the words "and all expenses that may have been incurred by the Company by reason of such non-payment".

Regulation 24 so that the first sentence thereof and the words "They may also" shall be held to be delete and there are inserted in lieu thereof the words "The Directors may".

Regulation 37 so that the words "or any member" shall be held to be delete.

Regulation 38 so that the words "and auditors" are delete from the final sentence.

Regulation 59 so that the second sentence thereof shall be held to be delete.

Regulation 64 so that the words in parenthesis shall be held to be delete.

Regulation 65 so that the words "approved by resolution of the directors and" shall be held to be delete.

Regulation 78 so that the words "Subject as aforesaid" and the words from and including the word "and" to the end of the Regulation shall be held to be delete, and that the word 'special' shall be substituted for the word "ordinary".

Regulation 79 so that the second and third sentences thereof shall be held to be delete.

Regulation 81 so that the year 1960 shall be held to be delete and in lieu thereof the year 1984 shall be inserted.

Regulation 84 so that the last sentence thereof shall be held to be delete.

Regulation 85 so that there shall be added at the end thereof the following additional sub-paragraph

"(d) may vote on, and be counted in the quorum present at a meeting in relation to, a resolution relating to or touching upon any such transaction, arrangement or body corporate".

Note 7
Regulation 88 so that the fifth sentence thereof shall be held to be delete.

Note 8
Regulation 96 so that the word "special" shall be substituted for the word "ordinary".

SHARE CAPITAL

3. The Share Capital at the date of adoption of these Articles is £100 divided into 100 Ordinary Shares of £1 each.

PRIVATE COMPANY

4. The Company is hereby declared to be a private Company and no invitation shall at any time be made to the public to subscribe for any shares or debentures of the Company.

5. The Company shall not have power to issue share warrants to bearer.

SHARES

Note 9
6. Unless otherwise determined by Special Resolution of the Company all or any unissued shares shall before issue be offered to the members holding Ordinary Shares in proportion as nearly as circumstances admit to their existing holding of such shares. Any such offer shall be made by notice in writing specifying the number of shares comprised in the offer and specifying a date (being not less than fourteen days after the date of the offer) after which the offer, if not by then accepted, will be deemed to have been refused. The offer shall indicate that a member may accept in respect of a lesser number of shares than those comprised in the offer and shall also include notification to the effect that a member to whom the offer is made who desires an allotment of shares in excess of the number of shares comprised in the offer should within twenty one days from the date of the offer state how many excess shares he desires to have. If one or more of the members to whom the offer is made do not accept the offer in respect of all the shares offered to them, the shares in respect of which no acceptance is received (the "excess shares") shall be applied in satisfying any request or requests for excess shares. In the event of the excess shares being insufficient in number to satisfy all the requests received for excess shares such request or requests for excess shares shall be satisfied to an extent in proportion as nearly as circumstances admit to the then existing holding of Ordinary Shares of the members making such request. If any shares are not taken up by the existing members in accordance with the provisions of this Article then the Directors may dispose of such shares to such persons and on such terms and conditions as they deem desirable and without prejudice to the foregoing generality they may allot such shares in payment of property sold or transferred or for services rendered to the Company or for such other consideration as the Directors may think fit and the shares so allotted may be issued as, and shall be deemed to be, partly paid up or fully paid up shares. The provisions of Sections 89(1) and 90(1) to (6) of the Act (as the same may be modified or re-enacted) are hereby expressly excluded.

7. Subject to the provisions of Article 6 hereof, for the purposes of Section 80 of the Act (as such Section may be modified or re-enacted) the Directors are generally and unconditionally authorised at any time and from time to time during the period of five years commencing on the date of adoption of these Articles to exercise all powers of the Company to allot Relevant Securities (within the meaning of the said Section 80); the Directors shall not be authorised to make any offer or allotment of shares in the Company or grant any right to subscribe for, or to convert any securities into, shares in the Company if such allotment, or an allotment in pursuance of such offer or right would or might result in the aggregate of the shares or stock in issue exceeding in nominal value, the amount of the authorised share capital of the Company for the time being, and such limitation shall determine the maximum amount of Relevant Securities which at any time remain to be allotted by the Directors hereunder.

TRUSTS

8. The Company shall be entitled, but shall not be bound, to accept and, in the event of acceptance, shall be entitled to record in such manner as it may think fit, notices of any trusts in respect of any shares of the Company. Notwithstanding any such acceptance and/or the making of any such record, the Company shall not be bound to see to the execution, administration or observance of any trust whether expressed, implied, or constructive, in respect of any shares of the Company and shall be entitled to recognise and give effect to the acts and deeds of the registered holders of such shares as if they were the absolute owners thereof. For the purposes of this provision "trust" includes any right in respect of any shares of the Company other than an absolute right thereto in the holder thereof or such other rights in case of transmission thereof as are hereinafter mentioned.

TRANSFER OF SHARES

9. (a) No person shall transfer any share save in accordance with the succeeding provisions of this Article.

Note 10

(b) Before transferring any shares the person proposing to transfer the same (hereinafter called "the proposing transferor") shall give a notice in writing (hereinafter called "the transfer notice") to the Company that he desires to transfer the same. The transfer notice shall constitute the Company his agent for the sale of the shares therein mentioned (together with all rights then attached thereto) at the prescribed price to any member or members of the Company found by the Directors pursuant to the provisions of this Article and shall not be revocable except with the consent of the Directors or except where a proposing transferor having had notification of any such prescribed price determined by the Auditors as hereinafter provided, shall, within one week of receipt of such notification, have given written notice to the Directors that he is dissatisfied with that prescribed price and wishes to revoke his transfer notice.

(c) If, not more than one month before the date on which the transfer notice was given, the proposing transferor shall have agreed with the Directors a price per share as representing the fair value thereof (such price being hereinafter referred to as "the agreed price") then any such agreed price shall be the prescribed price. Otherwise upon the giving of the transfer notice the Directors shall request the Auditors for the time being of the Company to determine and certify the sum per share considered by them to be the fair value thereof as at the said date as between a willing vendor and a willing purchaser, [and having regard to the anticipated income from the existing contracts of the Company as well as income actually received] it being understood that there should be no discounting for a minority interest and the sum per share so determined and certified shall be the prescribed price. The Auditors shall act hereunder as experts and not as arbiters and their determination shall be final and binding on all concerned. The costs and expenses of any valuation shall be borne by the Company unless a proposing transferor shall have revoked his transfer notice under paragraph (b) of this Article in which event the costs and expenses shall be borne by that proposing transferor.

(d) If the prescribed price was settled as aforesaid prior to the said date, the prescribed period shall commence on such date and expire three months thereafter. If the prescribed price was not so agreed, the prescribed period shall commence on such date and expire three months after the date, being one week after the date on which the prescribed price determined by the Auditors shall have been notified by the Directors to the proposing transferor, pending which the Directors shall defer the making of the offer hereinafter mentioned.

(e) If the Directors shall within the prescribed period find a member or members (hereinafter called "purchasing members") to purchase the shares concerned, or any of them and shall give notice in writing to that effect to the proposing transferor, he shall be bound, upon payment of the prescribed price, to transfer such shares to the respective purchasing members. Every notice shall state the name and address of the purchasing member and the number of shares agreed to be purchased by him and the purchase shall be completed at a place and time to be appointed by the Directors not being less than three days nor more than ten days after the date of such notice.

(f) The Directors shall, with a view to finding purchasing members, offer at the prescribed price, any shares comprised in a transfer notice to the members as nearly as may be in proportion to the shares held by them respectively, and the offer shall in each case specify a date (being not less than fourteen days after the date of the offer) within which the offer if not accepted, will be deemed to have been declined. The offer shall indicate that a member may accept in respect of a lesser number of shares than those comprised in the offer and shall include notification to the effect that a member to whom the offer is made who desires a transfer of shares in addition to the number of shares comprised in said offer to him, should in his reply to the offer or within such other time as the Directors may unanimously determine state how many additional shares he desires to have. If any member to whom an offer is made as aforesaid does not accept the offer in respect of all the shares offered to him, the shares in respect of which no acceptance is received (the "excess shares") shall be used in satisfying any request or requests for additional shares received from the other members of the Company as aforesaid. In the event of the excess shares being insufficient in number to satisfy all the requests received for additional shares as aforementioned the said requests for additional shares shall be satisfied to an extent in proportion as nearly as circumstances admit to the then existing holdings of shares in the capital of the Company of the members making such requests if more than one.

(g) If a proposing transferor shall fail to transfer any shares to a purchasing member hereunder, the Directors may authorise some person to execute and deliver on his behalf the necessary transfer and the Company may receive the purchase money in trust for the proposing transferor and cause the purchasing member to be registered as the holder of such shares on receipt of the prescribed price.

The receipt of the Company for the purchase money shall be a good discharge to the purchasing member (who shall not be bound to see to the application thereof) and after the purchasing member has been registered in purported exercise of the aforesaid powers, the validity of the proceedings shall not be questioned by any person.

Note 11

1. (i)If at the end of any relevant prescribed period the Directors shall not have found purchasing members for all or any of the shares comprised in a transfer notice they shall notify the proposing transferor accordingly in which event the proposing transferor may (subject to the right of the Directors to refuse to register any transfer under Article 10 hereof), at any time within four months of the receipt of such notification, transfer all or any of such shares for which purchasing members have not been found, to any person or persons on a bona fide sale at a price per share not less than the prescribed price at which the Directors sought purchasers for such shares.

(ii)If at the end of twelve months from the date of the transfer notice the Directors shall not have found purchasing members for all or any of the shares comprised in a transfer notice they shall notify the proposing transferor accordingly in which event the proposing transferor may, at any time within four months of the receipt of such notification, transfer all or any of such shares for which purchasing members have not been found, to any person or persons on a bona fide sale at the best price per share which they can obtain.

Note 12
(i) If any member shall die, then the member's personal representatives shall be deemed to have given a transfer notice in respect of all shares held by such member immediately prior to his or her death and the whole provisions of this Article shall apply in respect of such transfer notice save that (i) the personal representatives shall not be entitled to give notice of revocation of the transfer notice pursuant to paragraph (b) of this Article; and (ii) if at the end of the relevant prescribed period the Directors shall not have found purchasing members for all or any of the shares comprised in the transfer notice, the personal representatives may at any time within four months of receipt of such notification either transfer all or any such shares to a third party on a bona fide sale, pursuant to paragraph (h)(i) of this Article or transfer all or any such shares for which purchasing members have not been found to the spouse or to any of the issue of the deceased or to a trust under which there are no beneficiaries other than such spouse or issue, in which event no purchase consideration shall be payable by the transferee or transferees.

(j) If any member shall:-

a)become apparently insolvent or execute a trust deed for behoof of his creditors or make any arrangement or composition with his creditors; or

Note 13
b)be convicted of any criminal offence which in the reasonable opinion of the Board brings the Company into contempt or disrepute; or

c)become of unsound mind or a patient within the meaning of the Mental Health Acts or any statutory modification or re-enactment thereof; or

d)be guilty of conduct tending to bring the Company into disrepute; or

e)being an employee of the Company, be guilty of any grave misconduct or wilful neglect, or dishonesty; or

f)shall have acted in any other way to the material prejudice of the Company or its business;

that member shall be deemed to have given a transfer notice on the date of commence of such event in respect of all shares held by such member and the whole provisions of this Article shall apply in respect of such transfer notice save that the member shall not be entitled to give notice of revocation of the transfer notice pursuant to paragraph (b) of this Article.

10. The Directors may in their absolute discretion and without assigning any reason therefor decline to register

(i) any transfer of any share which is not a fully paid share, and

(ii) any transfer of a fully paid up share other than a transfer pursuant to Article 10 hereof, with the exception of Article 9 (h)(i).

11. In the event of the Directors exercising any power competent to them under the Regulations contained in Table A to sell or transfer any shares in the Company over which the Company may have a lien or which may have been forfeited or otherwise then such shares shall be classified as shares comprised in a transfer notice as defined in Article 9 hereof and the terms and conditions of that Article shall mutatis mutandis govern the sale and transfer of such shares except that the prescribed price shall be as determined and certified by the Auditors.

12. The Directors may at any time require any person whose name is entered in the Register of Members of the Company to furnish them with any information which they consider necessary for the purpose of determining the beneficial ownership of the shares (or any of them) in respect of which such person is registered, together with such evidence as the Directors in their sole discretion require, and if such requirements are not complied with within fourteen days of a written request therefor being made by the Directors (a) all shares in respect of which such person is registered as aforesaid shall ipso facto be disenfranchised (and shall remain so for so long as the Directors may determine or, if earlier, until such date as the Directors have been furnished with all information and evidence required by them for the purposes of this Article), and (b) the Directors may for such period as is referred to in sub-paragraph (a) hereof, withhold any dividends or other payments otherwise due or becoming due in respect of such shares.

MEETINGS

Note 14
13. No business shall be transacted at any General Meeting unless a quorum of members is present at the time when the meeting proceeds to business. A quorum shall be [two] persons personally present and holding or representing by proxy at least three quarters of the capital of the Company whose holders are entitled to be present and vote. If within half an hour from the time appointed for the meeting a quorum is not present the meeting shall stand adjourned to the same day in the next week at the same time and place but in the event of adjournment of a General Meeting on two consecutive occasions on account of there not being a quorum in accordance with the foregoing provisions written notice thereof shall be given forthwith to all of the members by or on behalf of the Directors and at the next adjournment thereafter a quorum shall be two persons personally present and holding or representing by proxy at least one-quarter of the capital of the Company whose holders are entitled to be present and vote.

VOTES OF MEMBERS

Note 15
14. Subject to any special rights or restrictions as to voting attached by or in accordance with these Articles to any class of share, on a show of hands every member who is present in person shall have one vote and on a poll every member present in person or by proxy shall (subject to Regulation 57 of Table A) have one vote in respect of each £1, in nominal amount of share capital of which he is the holder. PROVIDED THAT on any resolution to remove a Director from office, if that Director is also a member , unless the circumstances set out in Article 9(j) have affected that member, that member will have such number of votes in respect of each £1 in nominal amount of share capital of which he is the holder as will ensure that the resolution is not passed.

DIRECTORS

15. Unless otherwise determined by Special Resolution of the Company in General Meeting, the number of Directors shall be not less than two.

Note 16
16. The quorum necessary for the transaction of business at a meeting of the Directors shall be not less than [two] Directors.

17. A Director shall not require a share qualification but nevertheless shall be entitled to attend and speak at any General Meeting of the members of the Company.

18. Each of the Directors shall receive such fee, if any, as a Director of the Company shall from time to time determine in General Meeting.

19. All the Directors shall be repaid all travel, hotel and other expenses properly incurred by them in attending Board Meetings, or otherwise in connection with the business of the Company.

20. Without restricting the generality of the powers conferred on the Directors, the Directors may give or award pensions, annuities, gratuities and superannuation or other allowances or benefits to any persons who are or have at any time been Directors of or employed by or in the service of the Company or of any company which is a subsidiary company of the Company and to the wives, widows, children and other relatives and dependants of any such persons and may set up, establish, support and maintain pension, superannuation and other funds or schemes (whether contributory or non-contributory) for the benefit of such persons as are hereinbefore referred to or any of them or any class of them and so that any Director shall be entitled to receive and retain for his own benefit any such pension, annuity, gratuity, allowance or other benefit (whether under any such fund or scheme or otherwise) and may vote as a Director in respect of the exercise of any of the powers by this Article conferred upon the Directors, notwithstanding that he is or may be or become interested therein.

Note 17
21. A resolution in writing agreed by all the Directors for the time being shall be as effective as a resolution passed at a meeting of the Directors duly convened and held, and may consist of several documents in the like form each signed by one or more of the Directors; but a resolution agreed by an alternate director need not also be agreed by his appointor.

22. The Directors may from time to time appoint one or more of their body to the office of Managing Director for such period and on such terms, including provision for remuneration, as they think fit and may revoke such appointment at any time.

23. The Directors may, as they think fit, delegate any of their powers to committees; any committee so formed shall, in the exercise of the powers so delegated, conform to any regulations that may be imposed on it by the Directors.

BORROWING POWERS

24. The Directors shall be entitled to borrow or raise money from themselves or from others for the purposes of the business of the Company in such manner whether secured or not secured and to such extent as they may think fit and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures and other securities whether outright or as collateral security for any debt, liability or obligation of the Company or any third party.

DIVIDENDS

25. The Company may by Special Resolution in General Meeting declare dividends.

INDEMNITY

26. A. Subject to the provisions of Section 210 of the Companies Acts 1985 every officer, agent and auditor for the time being of the company shall be entitled to be indemnified out of the assets of the company against all losses or liabilities which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto including any liability incurred by him in defending any proceedings whether civil or criminal in which judgement is given in his favour or in which he is acquitted and in connection with any applications under Section 144(3)(4) or 727 of the Act in which release is granted to him by the court and such indemnity shall extend to former officers, former agents and former auditors of the company.

B. The directors shall have power to purchase and maintain for any director, officer, agent or auditor of the company insurance against any such liability as is referred to in Section 310(1) of the Act from and after Section 137 of the Companies Acts 1989.

What is contained on this and the preceding pages is a print of the Articles of Association adopted pursuant to Special Resolution of the Members of the Company dated the day of Two Thousand .

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Notes to Shareholders Agreement

8. It is not essential that this form of Agreement be adopted when the company is being incorporated. An agreement in this form could be entered into at any time.

9. The Shareholders Agreement and Articles are read together. The Articles go on record at Companies House, so it would be more usual to keep detailed arrangements between the parties in the non-public Shareholders Agreement so this would tend to be a more comprehensive document.

10. It may be felt that once a shareholder has taken his shares he should be entitled to keep them, no matter what the circumstances. It may also be the case that only matters which can be the subject of objective assessment such as insanity or conviction should ever result in a party being obliged to offer his shares for sale.

11. The important control of this clause is cheque signing.

12. This clause provides that unanimity is required for all material decisions in relation to the company including operational ones. You may prefer to draw a distinction between operational matters such as certain expenditure, and structural matters such as alterations to the company's share capital or the appointment of new Directors.

13. This is a fairly basic confidentiality clause. Some clauses go further, providing that if a shareholder leaves the company he will not compete with the company or solicit its customers for a certain period after departure. This is usually on the basis that while a shareholder he has obtained highly confidential information which could be of use in a competitive situation. Each case will turn on its facts.

14. These Articles provide that the Chairman will not have a second or casting vote.

15. These Articles provide that, where possible, matters should be decided by a Special Resolution rather than an Ordinary Resolution i.e requiring a 75% vote rather than a simple majority. This is intended to act as an additional layer of protection to minority shareholders.

16. The Companies Acts provide that new shares have to be offered to existing shareholders pro rata to existing holdings. These provisions to some extent echo that general principle but insert specific time limits for acceptance of offers. They give the Directors specific authority to allot shares up to the limit of the authorised share capital of the company.

17. These Articles contain a basic pre-emption right so that anyone wanting to sell shares has to offer them first to the other shareholders, pro rata to existing holdings. The price payable is to be agreed or failing agreement to be determined by the auditors as fair value with no discounting for a minority interest. Note the provision that the auditors have to have regard to anticipated income from existing contracts as well as income actually received. This may or may not be appropriate.

18. If the other members do not take up the shares within four months, the proposed transferor is free to offer the shares outside the existing membership but subject to the Directors having the right to decline to register the transfers to a person of whom they do not approve. That right flies off after twelve months. Bear in mind, however, that there is no real market for minority stakes in private limited companies.

19. These Articles provide that if a member dies, his executors must offer his shares for sale to the other members. This type of provision is not always appropriate. Consider carefully whether the member should be entitled to transfer their shares to members of their family, particularly on death.
20. These provisions echo those in the Shareholders Agreement.

21. It is important to consider how many parties should constitute a quorum, and what percentage of the shareholding their holdings should represent. It is normal to provide that if meetings are inquorate they stand adjourned, and if this happens more than twice the quorum requirements are reduced. This is intended to stop members deliberately setting out to hinder the business of the company by rendering meetings inquorate deliberately.

22. Note the proviso, which effectively means that unless for one of the reasons listed in Article 9(j), no Director can be removed from office.

23. Note the quorum for Directors meetings.

24. It may not always be practicable for Directors to meet together and this clause provides that the Directors can be in separate places.