Articles or shareholders' agreement: which one wins?

Two documents, one company

Most owner-managed companies end up with two documents that govern how the company is run and what happens to the shares. The articles of association were adopted at incorporation, usually the unmodified model articles nobody read. The shareholders' agreement was drafted later, often when a new investor arrived or the founders fell out.

They are different instruments doing different jobs, and the trouble starts when a later document is drafted without reading the earlier one. We see it most often on a death: the will leaves the shares to a spouse, the shareholders' agreement gives the survivors an option to buy, and the articles contain pre-emption provisions that none of it accounts for.

What the articles do

The articles are the company's constitution. Section 33 of the Companies Act 2006 provides that the provisions of a company's constitution bind the company and its members as if there were covenants on the part of the company and each member to observe them.

That binding effect reaches every member automatically, including somebody who buys shares next year and has never seen a shareholders' agreement. It covers directors' powers, board and general meetings, how shares are issued, transferred and forfeited, dividends, and pre-emption on transfer.

Most small companies use the model articles with a handful of amendments. The model articles are drafted for a company nobody is fighting over: they contain no deadlock mechanism, no compulsory transfer on death or departure, no share valuation method and no restriction on a shareholder selling to a competitor.

What a shareholders' agreement adds

A shareholders' agreement is a contract between the shareholders who sign it, and sometimes the company. It binds those people and nobody else.

It carries what the articles handle badly: reserved matters needing the consent of a minority, deadlock resolution, drag along and tag along, what happens when a shareholder dies, leaves or is dismissed, how shares are valued, restrictive covenants on departing shareholders, dividend policy, and information rights.

Its value is that it stays private and can be changed only with the agreement of everybody who signed it. Its weakness is the flip side: a new shareholder who does not sign a deed of adherence is outside it entirely.

What happens when they conflict

Neither document automatically overrides the other.

The articles govern the company's internal affairs. A share transfer carried out in breach of the articles can be invalid, and the directors can refuse to register it. A transfer carried out in breach of a shareholders' agreement but in accordance with the articles is usually effective, and the wronged shareholder is left with a claim in damages against the person who breached the contract.

So on the mechanics, the articles tend to prevail. On the obligations between the individuals, the agreement gives remedies the articles do not. Shareholders can agree between themselves how they will exercise their votes, and a court will hold them to it, but they cannot contract to fetter the company's own statutory power to alter its articles.

The practical result of a conflict is litigation. The party relying on the articles and the party relying on the agreement are both partly right, and the cost of establishing which part usually exceeds the cost of having drafted them together.

Changing them, and why that differs

Section 21 of the Companies Act 2006 provides that a company may amend its articles by special resolution, which means 75% of the votes cast. A shareholder holding more than 25% can therefore block a change to the articles, and one holding less cannot.

A shareholders' agreement is a contract, so in the ordinary case it is varied only with the consent of every party. That is why a minority investor puts protections in the agreement: 20% of the shares gives no blocking power over the articles and a complete veto over changes to the agreement.

Provisions can be entrenched in the articles so that they need more than a special resolution, and entrenchment has to be notified to Companies House. It is used rarely, because it makes the company harder to reorganise later.

One is public and one is not

The articles are filed at Companies House and anyone can download them, including competitors, customers, employees and anybody considering a claim. A shareholders' agreement is private and is not filed.

That drives what goes where. Commercially sensitive terms belong in the agreement: what a departing founder is paid, how shares are valued, what the dividend policy is, which decisions a particular investor can veto.

The trade-off is enforceability against the world. A transfer restriction in the articles binds a purchaser who never saw the agreement; the same restriction in a private contract does not.

The conflicts that come up most

Pre-emption on transfer. The articles give existing shareholders a right of first refusal. The agreement gives a departing founder the right to sell to a named buyer. Both apply and neither says which comes first.

What happens on death. The will leaves the shares to the family, the agreement gives the survivors an option to buy them, and the articles contain a compulsory transfer provision drafted for a different situation. Three documents and no shared answer.

Good leaver and bad leaver. The agreement defines the categories and the valuation. The articles contain a compulsory transfer clause with a different valuation, usually fair value determined by the auditors.

Director appointment. The agreement gives an investor the right to appoint a director. The model articles let the board appoint directors and the shareholders remove them by ordinary resolution, so the right can be undone by the people who granted it.

Deadlock. Two shareholders at fifty-fifty with model articles have no way to break a tie. The chairman has no casting vote under the model articles, so the company stops.

How a conflict plays out

Take a company with three shareholders: two founders on 40% each and a manager who was given 20% three years ago. The articles are the unmodified model articles. A shareholders' agreement was drafted when the manager came in, and it says that a shareholder who leaves employment must offer their shares to the others at fair value determined by the company's accountants.

The manager resigns and refuses to offer the shares. The model articles contain no compulsory transfer provision, so there is nothing in the constitution requiring them to sell. The company cannot force a transfer, and the directors have no basis to refuse to register anything because nothing is being transferred.

The founders have a contractual claim for breach of the agreement, and specific performance may be available. That is a claim to bring, fund and win, with a former employee who now holds 20% of a company they have fallen out with. In the meantime the manager keeps the shares, keeps the right to receive dividends, and can requisition a general meeting.

Had the compulsory transfer provision been in the articles as well, the directors could have executed the transfer under the standard power for a defaulting shareholder, registered it, and paid the price into a designated account. The outcome would have taken weeks and no litigation.

The inverse also happens. Articles containing a broad compulsory transfer clause, with an agreement promising a departing founder better terms, leave the company able to act under the articles and exposed to a damages claim for doing so.

Getting the two to agree

The work is unglamorous and it is the whole job. Read both documents side by side and list every subject that appears in each. For each one, decide which document should hold it, and amend the other so it points at the first instead of repeating it in different words.

Put the mechanics that have to bind everybody into the articles: transfer restrictions, pre-emption, compulsory transfers, quorum, casting votes. Put the commercially sensitive and personal terms into the agreement. Have the agreement state expressly what happens if the two conflict, and amend the articles at the same time so the statement is consistent with them.

Then add a deed of adherence obligation, so anybody who acquires shares signs up to the agreement before the transfer is registered. Without it, the protections quietly stop applying as the shareholder register changes.

Two checks are worth running on any company that has both documents. First, look at the date each was signed and ask whether the later one was drafted by somebody who had read the earlier one. A shareholders' agreement prepared for an investment round is often written from the investor's precedent with no reference to what the articles already say. Second, compare the share capital in the articles with what Companies House shows on the confirmation statement, because new classes are regularly created by resolution and never written back into the constitution.

Where a conflict is found, amending the articles takes a special resolution and a filing at Companies House within fifteen days. Amending the agreement takes the signature of everybody who is a party to it. Doing both at once is the only way to end up with two documents that say the same thing, and it is considerably cheaper than discovering the gap when somebody dies or leaves.

Frequently asked questions

Which prevails, the articles or the shareholders' agreement?

Neither wins automatically. The articles govern the company's internal affairs, so a share transfer that breaches them can be invalid and the directors can refuse to register it. A shareholders' agreement is a contract between the people who signed it, so breaching it usually leaves the innocent party with a claim in damages instead of invalidating what happened. In practice a conflict means litigation, which is why the two should be drafted together.

Do I need a shareholders' agreement if I have articles?

For a company with more than one owner, usually yes. The model articles most companies adopt contain no deadlock mechanism, no compulsory transfer on death or departure, no share valuation method and no restriction on selling to a competitor. They were drafted for a company nobody is arguing about. A shareholders' agreement also stays private, so commercially sensitive terms do not go on the public register.

Can the articles be changed without my agreement?

If you hold 25% or less of the votes, yes. Section 21 of the Companies Act 2006 allows a company to amend its articles by special resolution, which is 75% of votes cast. A shareholders' agreement is different: as a contract it normally needs every party to agree to a change, which is why a minority shareholder's protections belong there. Provisions can also be entrenched in the articles to require more than 75%.

Is a shareholders' agreement public?

No. It is a private contract and is not filed at Companies House. The articles are filed and anyone can download them, including competitors and anyone considering a claim. That is the main reason valuation formulas, dividend policy, leaver terms and investor veto rights sit in the agreement. The trade-off is that a private contract does not bind a purchaser of shares who never signed it.

What happens to shares when a shareholder dies?

It depends on what three documents say, and they often disagree. The will decides who inherits, the articles may contain a compulsory transfer or pre-emption provision, and a shareholders' agreement may give the survivors an option to buy. Where they conflict, the family can end up with the value of the shares when they expected the shares themselves, or with shares nobody can sell. Reading all three together is the only way to know.

What is a deed of adherence?

It is a short document by which a new shareholder agrees to be bound by the existing shareholders' agreement. Without an obligation to sign one, somebody who acquires shares is outside the agreement entirely, and the protections everybody negotiated stop applying as the register changes. The obligation belongs in the articles as well as the agreement, so the directors can refuse to register a transfer until it is signed.

Sources & further reading

• Companies Act 2006, section 21
• Companies Act 2006, section 33
• GOV.UK: model articles of association for limited companies
• Companies Act 2006, section 22: entrenched provisions

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 21 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).