A Shareholders’ Agreement (“the Agreement”) is an agreement between the shareholders of a company to define the rights and obligations of the shareholders. Some of the key provisions are: voting rights, dividend policy, restrictions on transfer of shares, protection for minority shareholders. Given the contractual nature of the Agreement, if one of the shareholders breach the Agreement, the remaining shareholders, as contracting parties of the Agreement, have the right to bring an action against the shareholder in breach.
The Article of Association (“the Articles”) governs the internal affairs of the company. It is like a contract that regulates the relations between the company and shareholders as well as between shareholders inter se. It is a mandatory document for all companies incorporated in Hong Kong. The Articles generally govern the appointment and removal of directors, rights and responsibilities of directors, procedure for issuing shares/transfer of shares. The Articles is a statutory document and the company is bound by law to ensure compliance with the provisions of the Articles.
In view of above, let’s understand the difference between the shareholders agreement and the Articles:
| Shareholders’ Agreement | Articles of Association |
| An optional document | Mandatory under company law |
| Providing more detailed terms, such as ratchet clauses to align the interest of the management team with the company’s | Containing more general terms, such as power-conferring clauses stipulating directors’ powers and responsibilities (unless otherwise constructed) |
| Private agreement amongst the shareholders of a company | Public documents and needs to be registered with the Company Registry |
| Every new member has to execute an accession agreement to be a party | Shareholders are automatically made a party |
Does a shareholder agreement override the Articles?
Shareholder agreement generally has a ‘supremacy clause’ which provides that the shareholder agreement will prevail in case of any conflict with the provisions with the Articles.
Key takeaway
- The Article of Association is one of the main constitutional documents required by Hong Kong law to specify the regulations for a company’s operations.
- The shareholders may choose to enter into a Shareholders’ Agreement to determine the shareholders’ rights and obligations.