Insight Article Archives

Checking your employment status

Posted on July 17, 2023 - 1:43 pm by Penny Dewar

In this article, Patrick Simpson focuses on the employment status categories (including checking your employment status), the legal aspects of employment, and the differences between PAYE and invoicing.

How many employment status categories are there?

There are three primary employment status categories:

employed
self-employed
workers

What do the employment status categories mean?

Employed

An employed person works under an employment contract and receives a regular salary or wage. The employer deducts income tax and national insurance contributions from their salary. Some core legal protections only apply to employees, such as paid sick pay and rights on termination of employment granted under the Employment Rights Act 1996, including the right not to be unfairly dismissed and the right to receive a statutory redundancy payment.

Self-employed

A self-employed person works for themselves and is responsible for paying their income tax and national insurance contributions. They are not entitled to the same employment rights as employed individuals, such as sick pay and paid holiday leave, and they can choose which jobs they take on and when and how they work.

Workers

A worker is somewhere between employed and self-employed. They work under a contract, but not necessarily a permanent one. Workers receive some employment rights, such as the right to the minimum wage, paid holiday and protection from discrimination, but only some of the rights that employees enjoy. Unlike employees, workers don’t benefit from protection against unfair dismissal, a statutory minimum notice period or a statutory redundancy payment. A defining feature of a worker is that they must turn up for work even if they do not want to, whereas a self-employed person can decide when they work.

Checking your employment status

Control

You’re more likely to be employed if someone tells you what to do and how to do it. If you have control over how you carry out your work, you’re more likely to be self-employed.

Substitution

You’re more likely to be employed if you’re required to do the work personally. If you can send someone else to do the work, you’re more likely to be self-employed.

Mutuality of obligation

If you’re offered work and are obliged to accept it, and the employer is obliged to provide it, you’re more likely to be employed. You’re more likely to be self-employed if you can turn down work.

Equipment

If you’re provided with equipment to do your work, you’re more likely to be employed. If you provide your equipment, you’re more likely to be self-employed.

Financial risk

You’re most likely to be employed if you’re not responsible for any financial risk, such as equipment, materials or expenses. If you bear the cost of any financial risk, you’re most likely to be self-employed.

Casual/freelance workers

Businesses may engage casual workers in various ways and on several types of contracts, including zero-hours, short-hour, or guaranteed minimum-hour contracts.

Employers often recruit casual workers using self-employed contracts, such as freelance agreements, contractor or sub-contractor agreements, or supply of services agreements.

Crucially, the labels applied by the parties and the contractual documentation will not be the key to determining employment status; what happens in practice will be essential, and tribunals may disregard express contractual provisions when determining an individual’s status.

The employment status of a casual worker can change over time, for example, if their working arrangements develop a regular pattern. Someone can start work as a self-employed contractor but develop worker status as the relationship with the employer progresses. A steady stream of cases in the employment tribunal (and sometimes higher) suggests that many gig economy workers hired as self-employed contractors are actually workers under employment law.

Call Patrick today to determine your or a worker’s status or to defend a worker status claim.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

What is the reasonableness test?

Posted on July 17, 2023 - 9:31 am by Penny Dewar

A crucial part of UCTA is the so-called “reasonableness test”, which assesses the fairness and enforceability of specific contract terms.

Which terms does the reasonableness test apply to?

The reasonableness test primarily applies to exclusion and limitation clauses which seek to limit or exclude liability for breach of contract, negligence or other claims.

The courts may deem such clauses unfair or unenforceable if they fail the reasonableness test. The test considers such factors as the following when evaluating a contractual term:

The relative bargaining power of the parties
The test considers any power imbalance between the parties to determine whether one party can impose unfair terms on the other.
Knowledge and awareness of the term
It assesses whether the party affected by the term had sufficient opportunity to understand and appreciate its implications.
Inducements or representations made
The test considers any inducements, representations, or special circumstances that influenced the inclusion of the term in the contract.
The subject matter of the contract
The court can assess the term’s reasonableness in light of the nature and purpose of the contract, including the risks and liabilities typically associated with such agreements.
Availability of alternatives
The test examines whether the party imposing the term offered alternatives, allowed negotiation or if they presented the contract as a “take it or leave it” proposition.
Public interest
The reasonableness test may consider the public interest or any social or economic implications of the specific term.

The test seeks to balance safeguarding the interests of parties with less bargaining power while still acknowledging the legitimate business interests of all parties involved.

If the courts deem a contractual term unreasonable under UCTA, they may modify the term or declare it unenforceable. this can result in the affected party not being bound by that particular term. They may be entitled to seek remedies or adjustments to the term to align it with reasonableness standards.

Conclusion

In conclusion, the reasonableness test allows parties to challenge unfair or oppressive contractual provisions and promotes fairness in commercial transactions.

Victoria Holland can review your commercial agreements and provide tailored advice based on the specific circumstances of a contract. He can help you navigate the complexities of UCTA. Victoria can ensure you thoroughly understand the reasonableness test and its implications in any given situation. Call him today.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Step-families and succession planning

Posted on June 29, 2023 - 8:42 am by Penny Dewar

Photo by Liane Metzler on Unsplash

Any fans of the mega-hit TV series Succession, which follows the fortunes of the Roy siblings, will know how fraught inheritance issues can be when no clear inheritance plan is in place, especially when multiple spouses and step-families are involved. But it’s a story that’s not restricted to the super-rich like the Roys, as rising re-marriage numbers are creating more blended families and leading to inheritance disputes.

In one recent case to reach the High Court, three siblings were cut out of their inheritance when their step-mother changed her will in favour of their step-brother after their father died.

In 2017, the McLean couple made ‘mirror wills’, where each reflects the other, so the outcome should be the same no matter who dies first. Those wills shared the couple’s estate equally between four children, three from Mr McLean’s first marriage and the younger son born during their marriage. When the older siblings found themselves cut out of the later will, they went to court, claiming that their father had trusted his second wife “implicitly” over the terms of the inheritance.

The court has to decide whether the doctrine of mutual wills applied to their step-mother’s original 2017 will, which would mean there was an agreement between the couple to make wills with substantially the same terms and conferring reciprocal benefits and not to revoke them without the consent of the other.

“For the doctrine of mutual wills to apply, there needs to be a contract between the two testators that both wills will be irrevocable and remain unaltered, and this agreement should be incorporated into the will, or through some other form of evidence. It is not enough to make mirror wills or reciprocal wills and to show some general intention.

Without an explicit agreement not to revoke the will, any surviving partner may make a new will, with very different outcomes, and that’s why it’s important to be clear from the outset.”
Head of Private Client James McMullan

While the McLeans must wait to hear the outcome of their case, the courts have upheld another inheritance challenge in similar circumstances.

After divorcing, the Colicci’s signed a deed that covenanted that any shares they still held in their jointly-owned company would pass to their two children when they died. Both promised to make wills to support that. But the husband had remarried and later made a new will leaving his shares to his second wife, not telling his ex-wife or children what he had done. When he died unexpectedly, his later will was challenged successfully, as the court ruled that the original deed was a binding obligation which prevented either of the parents from making other arrangements to dispose of their shares on death.

According to the latest Office for National Statistics figures, almost 30% of marriages are now second or subsequent marriages. Behind the figure is a growing complexity in family structure, with step-mothers, step-fathers, step-children and step-siblings.

“Proper planning can help satisfy everyone, and decisions will depend on individual circumstances; this could be through mutual wills containing a clear declaration that neither side can revoke or change the agreed terms without the consent of the other.

Another option is to create a trust within a will. This can be a simple and effective way to make sure that the surviving partner has all they need while alive, but at the same time making sure that children from an earlier relationship do not miss out. It does require specialist help to get things right, but it means you can be sure things will play out as you intend.”
Head of Private Client James McMullan

A trust can allow each partner to leave their estate, or the bulk of it, in trust for the survivor and then to their children following the survivor’s death. Trusts can allow for the use of any assets – such as a house or investment income – to support the survivor for the rest of their life, but with the assets held in trust – whether for children from an earlier marriage or a charity or anyone else – when the survivor dies.

Plan for your succession today; call private client partner James McMullan today.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

How could your corporate commercial lawyer make or break your business?

Posted on June 7, 2023 - 10:49 am by Penny Dewar

Photo by CHUTTERSNAP on Unsplash

Leaning on the experience of your corporate commercial lawyer is a critical ingredient in the success of your business, especially if it is in its infancy. But does your lawyer have the right experience and know how to recognise your specific needs, those of your business and its industry’s risks?

Corporate commercial lawyers are generally competent in advising businesses on a wide range of matters, such as:

Identification of risks
Incorporation and corporate structure
Board minutes and resolutions
Contract drafting and review
Financing arrangements
Negotiations
Intellectual property rights
Non-disclosure agreements
Licenses and distribution agreements
Regulatory compliance

You can expect competent advice when instructing any qualified, SRA-regulated lawyer who should be adept at foreseeing legal pitfalls and providing sound advice to shield your business against them.

However, like electric cars, corporate commercial lawyers are not all made equal. Many adopt a tactic of risk eradication and an unwillingness to compromise, which can jeopardise your commercial deal or transaction.

From time to time, the balancing act of risk versus reward tips the scales in favour of pressing ahead despite that risk.

I am not advocating throwing caution to the wind here. On the contrary, an excellent corporate commercial lawyer will identify risks but, rather than be fearful of them, help you to manage them in a way that does not impede your business’ growth, using pragmatism and commerciality drawn from their experience of working with other companies like yours, your competitors and within your sector, and advise you accordingly.

Speak to Evangelos Kyveris today for pragmatic, insightful corporate advice and to weigh up your risk/benefit analysis.

The road ahead for Businesses

Posted on June 7, 2023 - 9:55 am by Penny Dewar

image of a stone cairn representing businesses balancing act

Photo by Jeremy Thomas on Unsplash

Whether you’re establishing, growing or selling a business or even forming a start-up, businesses must react and adapt to the challenges of an increasingly complex and changing economy.

It’s a balancing act. Businesses most likely to thrive will recognise the need to be proactive in reassessing their current needs, managing new and challenging risks, meeting their compliance obligations and forward-planning to reach the next stage of their evolutionary cycle.

Whether you need to review your corporate structure by putting a shareholders’ agreement in place or redraft your terms of supply in this new and constantly changing trade environment, our Corporate and Commercial team is ready to assist.

We have many years of experience working with businesses at all life cycle stages, in all shapes and sizes, and across various industries and sectors.

We support directors in their management roles and shareholders who may be looking for an exit or who are considering further potential equity investment.

We recognise that your business and individual needs are unique. So, we work closely with you to understand you and your business and consider your needs and objectives from your first point of contact.

We seek to establish long-standing professional relationships, become your trusted adviser, and support you proactively throughout your business lifecycle.

Our attention to detail and to your specific needs means that we can help you adapt to your industry standards, solve your legal and commercial problems, and provide you with realistic, pragmatic, and strategic advice that goes to the core of your interests.

Call Victoria Holland today to see if we can help you or your company.

Financial planning for cohabiting couples

Posted on June 6, 2023 - 2:54 pm by Penny Dewar

Photo by Khamkéo Vilaysing on Unsplash

This increasingly popular family type grants cohabiting couples limited legal protection. Unlike in a marriage or civil partnership, cohabiting couples have no recognised legal status in the UK. With England and Wales still having a considerable gender pay gap, amongst other gendered issues, the lack of legal rights disproportionately impacts women. As the Women and Equalities Committee report from August 2022 stated, “The lack of legal protection on family breakdown means that women, including women from an ethnic minority background and those who have had religious-only weddings, can suffer relationship-generated disadvantage.”

Contrary to popular belief, the UK does not recognise ‘common law’ marriages. As a result, cohabiting couples have limited options, and many need to be made aware of what could happen to their assets if they were to separate. Currently, the most effective means to protect an unmarried couple is to enter into a trust deed and/or a cohabitation agreement.

The family home

The family home is often the most valuable financial asset a couple owns during their relationship. However, making a financial claim against the family home depends entirely on ownership. In determining this, it is essential to consider whether the parties are joint owners, on what terms, and the amount contributed by each towards purchase, mortgage, and even significant repairs to the property.

Joint ownership gives both parties equal rights to stay in the property. If necessary, either joint owner can apply to the court for an order for sale. It is difficult, save in certain limited cases, to prevent the sale of a jointly owned property.

The position alters if there are any children under the age of 18. In those instances, one party may establish their need to remain in the property until the youngest child turns 18. In this scenario, the joint owners then divide the property’s equity at that later stage. Although this may deprive one party of their share in the capital, it resolves any housing problems for any children and the primary carer. The court will always consider the welfare of children as a priority.

If the family home is owned solely by one partner, the other may have little to no legal rights to remain in the house if their partner asks them to leave. They may, however, be able to claim a ‘beneficial interest’ in the property by getting the court to formally recognise the same, whether by reference to contributions or another legal principle.

Capital

The presumption regarding capital, including money in banks, expensive items, interest in insurance policies and other investments, are treated as belonging to the person whose name they are in at the time of separation. To establish otherwise, it may be arguable that capital was held in trust for the other.

Individual maintenance

Cohabiting couples are not entitled to claim financial maintenance from their partners in the same way that married couples can. However, the situation is different where dependent children are involved. For example, the parent who remains in the property or resides predominantly with the children (until the youngest child turns 18) may be able to claim child maintenance income.

Child maintenance

Parents have a legal duty to support their children financially. Hence, the parent living with the children after separation is entitled to child maintenance payments from the other parent. In most cases, this is not dealt with by the court. However, the parent with the day-to-day care of the children can apply to the Child Maintenance Service for child support unless a level of maintenance is agreed upon amicably. The parties may make other claims over children, but parties should seek expert legal advice before considering those options.

Pensions

These cannot be divided or shared between cohabiting couples who are separating.

Whilst together, or as part of estate planning, certain pension schemes make it easier to provide for your partner when you are unmarried and cohabiting, usually through the scheme member making an ‘expression of wishes’ declaration as to who benefits from their pension.

Cohabitation agreements

Unmarried couples living together can enter into a cohabitation agreement. It can establish the couple’s rights and responsibilities towards each other during their separation or death. It can seek to regulate interests in property and other finances and consider child arrangements and expenditures. It can potentially prevent the strength of future claims against property and finances upon either party’s death or a breakdown in their relationship.

Cohabitation agreements are becoming increasingly popular as they cover all aspects of joint life and prepare for the consequences of a potential split-up by offering reassurances for both parties and their assets. Well-drafted cohabitation agreements can provide certainty akin to if the couple were married. However, the law surrounding those agreements is less protective than those that assist married couples.

Cohabitation agreements are not automatically legally binding but provide clarity and show the parties’ intention.

The Women and Equalities Committee report made some excellent recommendations to improve the legal position for cohabiting couples and raise much-needed awareness of the issues. There have also been numerous bills put before Parliament for consideration.

Unfortunately, in November 2022, Parliament confirmed it would not consider further readings of the latest Cohabitation Rights Bill during the 2023/24 parliamentary session. The wait for real and much-needed reform continues.

Taking clear advice when purchasing a property or joint assets and entering into a cohabitation agreement and trust deed are the best routes for unmarried couples wishing to protect their interests.

Call family solicitor Pippa Marshall today to discuss your position and formalise your living arrangements.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Risky business

Posted on June 6, 2023 - 2:43 pm by Penny Dewar

Regulatory partner Susan Humble looks at the consequences of regulatory proceedings and how professionals can manage their regulatory obligations and lower their risk exposure.

Suppose you get it wrong? In the most serious of cases, you could face the possibility of criminal proceedings and separate proceedings brought against you by your regulator. Those regulatory proceedings can, at worst, lead to the loss of your means of making a living. And while proceedings are underway, both your and your family’s lives are put under extreme pressure, and relationships often flounder under such strain.

Moreover, the cost of defending proceedings without insurance can be unexpectedly high. The regulatory effort can often get in the way of your work, putting you and your business under more pressure. And, whatever the outcome, the reputational damage may be hard to get over, and your business may fail.

Our specialist regulatory team can provide you and your business with a regulatory health check. Our health check offers reassurance and ensures you are well-prepared to meet any regulatory challenge.

Our experts will review your policies, procedures, and controls to help you manage the burden of keeping your regulator happy and the risk of a minor issue escalating into something more serious. So let us take the strain while you concentrate on your core business.

Contact Susan Humble for further information on regulatory proceedings.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Marital agreements as a financial planning tool

Posted on May 19, 2023 - 8:24 am by Penny Dewar

Photo by Cytonn Photography on Unsplash

Research commissioned by The Marriage Foundation found that one in five UK marriages have utilised marital agreements. Marital agreements have recently become a focal point for couples who consider financial planning an essential marriage prerequisite. While many may think preparing for a marriage breakdown is unromantic, others view it as an essential part of financial planning and a vital security measure to safeguard their future.

What are marital agreements?

A marital agreement is a written agreement entered into by a couple seeking to regulate their financial position should their marriage break down. A couple can enter into a marital agreement before marriage (known as a pre-nuptial agreement or prenup) or during a marriage (known as a post-nuptial agreement or postnup).

Marital agreements set out the present ownership of assets and the intended future ownership of such assets in the event of a divorce. Such agreements define matrimonial, non-matrimonial, and joint and separate property. However, they can also deal with income, future earnings and interests under trusts and financial provisions for children.

Why enter into a marital agreement?

Couples enter into marital agreements to provide certainty, protect their assets, and clarify how they will conduct their financial affairs during and after a marriage.

The law

No specific law relating to marital agreements currently exists. Therefore, they do not override a court’s decision or automatically bind the courts upon divorce.

When considering the role of a marital agreement in divorce proceedings, the starting point is the Matrimonial Causes Act 1973. Section 25 of that Act obliges a judge to consider all the relevant circumstances of the case when deciding how to divide the parties’ finances on divorce. The courts will consider whether a marital agreement meets specific procedural and substantive safeguards when determining whether to uphold it.

The law relating to the fairness of marital agreements lies in the Supreme Court judgment in the case of Radmacher v Granatino. This decision provided the courts with guidance on the discretion to be applied when determining whether a marital agreement should be given ‘decisive weight’. The courts will assess fairness by considering the following criteria:

The agreement must be freely entered into, which means that both parties must enter into the agreement of their own free will, without any pressure from each other or anyone else.
The parties must have a full appreciation of the implications of the agreement.
Holding the parties to their agreement, in the prevailing circumstances, must be fair.

Legislative reform

In 2014, the Law Commission published its Matrimonial Property, Needs and Agreements report. The report recommended legislative reform to make marital agreements that are in a prescribed form and adhere to certain safeguards to be legally binding. If an agreement met the Commission’s criteria, the courts would class it as a “qualifying nuptial agreement”. A qualifying nuptial agreement would prevent the courts from making financial orders on divorce inconsistent with the terms set out in any marital agreement unless an order is needed from the court to meet one of the parties’ financial needs or to benefit a child of the family.

Nuptial agreements that do not adhere to the criteria would continue to be treated as a ‘relevant factor’ by a judge deciding what financial orders to make on divorce.

A qualifying nuptial agreement must meet the following criteria:

The agreement must be contractually valid.
The agreement must be validly executed as a deed and contain a “relevant statement” signed by both parties confirming that they understand the agreement is a qualifying nuptial agreement that will remove the court’s discretion to make financial orders on divorce except to meet financial needs.
The parties cannot enter into an agreement within the 28 days preceding the wedding.
Both parties to the agreement must have received disclosure of material information about the other party’s financial situation when entering into the agreement.
Both parties must have received legal advice when they entered into the agreement.
The agreement must not prejudice any children. For example, if the agreement makes insufficient financial provisions for children, it will be set aside by the court.
The agreement must meet both parties’ needs regarding the standard of living during the marriage. Provision for needs is not limited to an income stream; it includes capital provision and the long-term provision of a home. The possibility of ongoing financial provision for a party caring for children is essential. The court would not uphold an agreement that results in a party receiving very little or nothing.

While the government has not yet issued its final response to the Law Commission’s proposals, some of the proposed reforms may become law in due course. Accordingly, it is vital to remember the Commission’s recommendations to ensure a marital agreement complies with the suggested requirements for a qualifying nuptial agreement. Complying with these requirements will mean that the marital agreement has the best chance of being legally binding in the future and will provide parties with as much clarity and certainty as possible regarding the division of assets in the event of a marriage breakdown. In addition, thinking ahead will save parties the stress, time and legal costs of contested financial proceedings.

Financial planning

No set criteria make some couples more eligible to enter into marital agreements. Certain factors may motivate some couples more than others to protect their wealth before they tie the knot.

Couples have often used marital agreements to ring-fence inheritance, family businesses and valuable family assets such as heirlooms from the ‘matrimonial pot’. Recently, more and more couples have opted for marital agreements to protect and preserve assets for the benefit of their children from a previous marriage.

Often, the only purpose of having a marital agreement is simply because one party had acquired significantly more wealth than the other before the relationship began. Therefore, the wealthier party wishes to protect their wealth in case of a marital breakdown.

Protecting family assets and inheritance

In the event of a divorce, marital agreements can play a significant role in allowing a spouse to retain their shareholding in a generational family business established before the marriage.

It is common for owners of family assets to ensure that gifted and inherited assets do not become the property of the non-blood-related spouse in the event of a divorce. Therefore, that spouse cannot claim from the asset. In this scenario, couples often use a marital agreement to outline alternative housing provisions and identify other assets and resources to meet income needs.

Conclusion

With divorce rates significantly increasing year after year, it is wise for couples to consider discussing marital agreements, either before or during their marriage, as a financial planning tool and to seek independent legal advice to ensure its validity and fairness so that the court can give weight to it in any future divorce proceedings.

Call family solicitor Pippa Marshall today to find out how she can help you plan for your future.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Artificial intelligence will be challenged

Posted on May 11, 2023 - 6:27 am by Penny Dewar

Photo by Amanda Dalbjörn on Unsplash

Artificial intelligence, or AI, has been hogging the headlines recently. Students pass exams using ChatGPT; a photographer won an international competition with an AI-generated image.[1] And with the coming of age of generative artificial intelligence, 75% of companies say they will be adopting some form of it, according to the latest research from the World Economic Forum.

But as sure as night follows day, claimants will challenge the march of the bots in the courts.

Streaming platforms last month removed a song that used AI interpretation of real-life performers Drake and The Weeknd. The song went viral, but shortly afterwards, the creator, known as @ghostwriter, said that AI trained on the artists’ voices made the song Heart On My Sleeve. As a result, streaming platforms, including Spotify and Apple Music, swiftly removed the song on copyright grounds.

Over recent months, global music publisher Universal Music Group has demanded that platforms take down any AI-generated songs. They have requested platforms to cut off access to their music catalogue to stop developers from using Universal’s songs to train AI technology.

Getty Images has taken legal action against one of the emerging text-to-image AI software companies. Users enter instructions for an image to be created by the software, and Getty is arguing that millions of its images have been used to train the AI, so infringing Getty’s copyright.

Unlike Getty, the image library Shutterstock is actively embracing AI. It has chosen to partner with developers for AI learning. In addition, it offers customers access to AI-generated images on its platform, saying this offers greater confidence as it provides a user licence for such images.

Victoria Holland, head of corporate and commercial at RIAA Barker Gillette, said:

“Whether the Getty case or the @ghostwriter AI-created song prove to be a breach of copyright is yet to be decided, but for now the law is racing to catch up with technology,

One of the promises of generative artificial intelligence is to provide creative output for even the most un-creative, but for now, it may equally be a doorway into a quagmire of legal complication. It’s not just the copyright issue that users must consider; they must also recognise that the output from generative AI can be factually incorrect or fabricated.

The quality of the training data and how a user frames a request can create very different results.

In one instance, a regional mayor in Australia was said by ChatGPT to have been involved in fraudulent activity, when he had actually been the whistleblower in the case and it was reported that he was considering a defamation claim against developer OpenAI.

Victoria added:

“The jury is out on the bigger picture of whether AI is a glorious opportunity or an existential threat to society. We’ve seen Elon Musk speak out against its wholesale adoption. Geoffrey Hinton, the so-called godfather of AI, resigned from Google, saying he now regretted his work.

For now, companies and individuals may be well advised to keep a tight rein on their creative use of artificial intelligence.”

Call Victoria Holland today if you have any queries regarding artificial intelligence.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

[1] Boris Eldagsen submitted an AI-generated image titled ‘Pseudomnesia: The Electrician’ to the Sony World Photography Awards 2023. As a result, he won first prize in the creative, open category, later declaring his action and refusing the award.

Articles of association and shareholders’ agreements explained

Posted on April 30, 2023 - 12:46 pm by Penny Dewar

A company’s articles of association (otherwise known as ‘Articles’) set the governance rules and procedures the company, its directors and shareholders must follow. Articles are mandatory under the Companies Act 2006 – all companies incorporated in England and Wales must have them.

Companies with more than one shareholder often enter into a shareholders’ agreement to establish further constitutional rules. This article examines the roles of Articles and shareholders’ agreements, their differences, and the reasons each business might consider having both in place.

What are Articles?

Articles are constitutional documents of a company which need to be filed and are open to inspection at Companies House. Company law prescribes certain forms for Articles, called “model articles”. A company can amend the model articles to suit its needs.

Articles set out the company’s essential management and administrative structure. They prescribe the rights attaching to its shares (including voting, dividend and capital distribution rights). And they regulate the company’s internal affairs, such as how shares can be issued, transferred or bought back; procedures for board and shareholder meetings; and the powers and duties of directors and how they may be appointed and terminated.

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between a company’s shareholders and, often, the company. Like the Articles, this agreement seeks to regulate the company’s and its shareholders’ conduct by setting out their respective rights and responsibilities, but usually within the broader context of establishing a fair relationship between them and preventing potential shareholder disputes. However, unlike Articles, shareholders’ agreements are not mandatory. Importantly, they are private between their parties and not filed at Companies House.

Typical shareholders’ agreement provisions include:

the protection of minority and majority shareholders;
dispute resolution mechanisms;
the extent to which shareholders may have other business interests besides the company;
the decision-making power of shareholders and directors;
when it may be compulsory for shareholders to transfer shares; and
post-shareholding restrictions for shareholders.

What are the differences between Articles and shareholders’ agreements?

The main difference between shareholders’ agreements and Articles is that while Articles are publicly available at Companies House, shareholders’ agreements are private between the parties, and so their provisions remain confidential.

Shareholders’ agreements apply only to those shareholders who are party to it (original parties or by entering into a deed of adherence). In contrast, the Articles apply to the company and all its shareholders and directors.

Why might a business consider having both Articles and a shareholders’ agreement?

The decision as to whether a company needs a shareholders’ agreement in addition to Articles often hinges on the confidential nature of the rules it wishes to implement and whether any information likely to be included is commercially sensitive.

What if there’s a breach?

A shareholders’ agreement is a contract between shareholders. One party’s breach of its terms enables the other parties to sue the defaulting party for damages. They can also apply to the court for an injunction to prevent or limit a breach.

On the other hand, a breach of the Articles may result in the action or decision made in breach of the Articles being void or invalid.

Shareholders deciding whether to include provisions in Articles or a shareholders’ agreement should therefore consider whether and in what circumstances a claim in damages, or an injunctive relief, is as valuable as the potential remedy of having the breaching action declared void or invalid.

How can we help?

It can be challenging to navigate the requirements of company law and to determine whether it might be appropriate to put more complex governance provisions in place and when.

RIAA Barker Gillette’s experienced corporate and commercial team can help you tackle these issues and advise how best to reflect your goals and intentions in your company’s constitutional documents.

Speak to corporate solicitor Evangelos Kyveris today.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Older posts

Newer posts

How many employment status categories are there?

What do the employment status categories mean?

Employed

Self-employed

Workers

Checking your employment status

Control

Substitution

Mutuality of obligation

Equipment

Financial risk

Casual/freelance workers

Which terms does the reasonableness test apply to?

Conclusion

The family home

Capital

Individual maintenance

Child maintenance

Pensions

Cohabitation agreements

What are marital agreements?

Why enter into a marital agreement?

The law

Legislative reform

Financial planning

Protecting family assets and inheritance

Conclusion

What are Articles?

What is a shareholders’ agreement?

What are the differences between Articles and shareholders’ agreements?

Why might a business consider having both Articles and a shareholders’ agreement?

What if there’s a breach?

How can we help?

Stay in touch

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