Articles of association or shareholders’ agreement?

Iris van der Laan  |  8 November 2021  |  Reading time: approximately 3 minutes

When incorporating a company, articles of association are drawn up. The articles of association usually regulate the objects of the legal entity, which bodies there are, who is responsible for what and which procedures apply (e.g. with regard to holding meetings and passing resolutions). If there are several shareholders, parties often choose to make further agreements in addition to the articles of association. These further agreements are recorded in a shareholders’ agreement. The answer to the question whether it is more desirable to include rules in the articles of association or in a shareholders’ agreement will differ from case to case. There are various considerations in this respect.

Articles of association

The law only stipulates a limited number of subjects that must be included in the articles of association of a company, such as the name, the registered office and the objects of a company. Any further rules for private and public limited companies are largely laid down by law and apply as a starting point if the articles of association do not deviate from them.

The articles of association of a company are often extended with additional provisions. The law stipulates, for example, that a shareholder wishing to dispose of his shares in a private limited company must first offer these shares to his fellow shareholders (‘pre-emptive rights clause’). The articles of association of private limited companies often contain further rules in this respect, such as rules on the pricing of shares, the appointment of experts and possible exceptions to the pre-emptive rights clause. It may also be stipulated that a shareholder is not allowed to transfer his shares for a certain number of years from the date of incorporation of the private company (‘lock-up provision’).

Shareholders’ agreement

The law contains various basic rules on share ownership. If a company has several shareholders, it may be desirable for these shareholders to enter into an agreement in which they can further regulate their relations with each other and make various arrangements. Some examples of subjects that can be further regulated in a shareholder agreement are exit provisions, price-fixing regulations, tag along/drag along provisions, purchase obligations, dividend provisions, confidentiality provisions and non-compete clauses.

Choice between articles of association and shareholders’ agreement

Sometimes the choice of whether to include a provision in the company’s articles of association or in a shareholders’ agreement can be a difficult one. Many provisions can, by their nature, be included in both the articles of association and a shareholders’ agreement. For example, a price-fixing provision can be included in the articles of association as well as in a shareholders’ agreement. An important difference is that provisions in articles of association have a ‘corporate law effect’, whereas provisions in a shareholders’ agreement, in principle, only have an ‘effect under the law of obligations’. An example of this is when the general meeting passes a resolution with a simple majority, whereas the articles of association prescribe an increased majority. This resolution is (in principle) invalid. If the general meeting passes a resolution in accordance with the articles of association by a simple majority, while a provision in a shareholders’ agreement prescribes an increased majority, this resolution is, in principle, valid, but it is nevertheless assailable (‘voidable’).

However, the question of whether a provision in the articles of association is preferable to a contractual arrangement (or vice versa) cannot be answered in general terms. Below, some points are mentioned that are important when choosing whether to include a provision in the articles of association or in a shareholders’ agreement:

  • The articles of association are published in the commercial register of the Chamber of Commerce and are therefore public, whereas the content of a shareholders’ agreement is, in principle, not disclosable to third parties.
  • A shareholders’ agreement only binds the parties, whereas articles of association in principle have third‑party effect. However, the provisions of a shareholders’ agreement can be enforced by the company on the grounds of reasonableness and fairness (Section 8 Book 2 Dutch Civil Code).
  • A shareholders’ agreement can be drawn up in English, whereas the Dutch version of the articles of association is binding and the English version is only used for translation purposes.
  • Provisions in the articles of association also apply to shareholders who join later, which is not the case with a shareholders’ agreement. Future shareholders must explicitly agree to the applicability of the provisions of the shareholders’ agreement.
  • A shareholders’ agreement can only be amended with the consent of all parties, whereas articles of association can be amended on the basis of a resolution of the general meeting.
  • The amendment of articles of association requires a notarial deed, which is not the case for the amendment of a shareholders’ agreement.
  • Corporate sanctions can be attached to obligations under the articles of association in case of non‑compliance with these obligations, such as the suspension of voting and dividend rights. Contractually, these sanctions are, in principle, not possible with corporate law effect.

When incorporating a company under Dutch law involving several shareholders, it is relevant to check whether – in addition to the articles of association – there is also a need for a shareholders’ agreement. If that is the case, it should then be investigated which matters should be regulated in the shareholders’ agreement and which matters should be regulated in the articles of association. Schaap’s civil-law notaries and lawyers will be pleased to assist you with the incorporation of a legal entity and making the appropriate choices regarding the content of the articles of association and any shareholder agreement that needs to be drawn up.

Do you have any questions? Please contact Iris van der Laan

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