Resolving conflicts between articles and shareholders’ agreement

The articles of association is the constitutional document that binds shareholders of the firm and the company itself. They set out among others the structure of the company, the rules and procedures of management, the decision-making process and the rights and obligations of owners.

The articles is listed with the Registrar of Companies at the point of incorporation and any amendments, thereafter, should also be registered as well.

A shareholders’ agreement, on the other hand, is a private agreement between two or more owners, to which the company may or may not be a party. The deal sets out details of the relationship between shareholders between themselves, and the company, if it is a party to the pact.

Shareholders’ agreements are confidential and need not be deposited with the registrar. They mostly deal with commercial matters such as business of the company and shareholder rights, and obligations such as pre-emptive rights, drag along and tag along rights, confidentiality and dispute-resolution mechanisms.

Both the articles and the shareholders’ agreement govern the day-to-day running of a company and as such, it is not unusual for conflicts to arise. Shareholders might, therefore, bring concurrent actions on a conflict between these two documents.

The question that arises therefore is, if a conflict occurs, which document should take precedence between the two.

Being the constitution of the company, the articles take precedence over shareholders agreement, unless there are compelling reasons to the contrary. The Companies Act, 2015 contains elaborate and clear provisions on amendment of a company’s articles.

The said provisions place the mandate of amending the articles squarely in the ambit of company law, rather than the private leg of a shareholders’ agreement. Amendments to articles are only valid if done by way of a special resolution, and lodged with the registrar.

However, some shareholders’ agreements contain supremacy clauses on resolution of conflicts between them and the articles. Supremacy clauses act as safe harbour clauses to mitigate possible row between the provisions of the articles and the shareholders’ agreements.

Most supremacy clauses are framed to state that “…in the event of conflict between the agreement and the articles of association the provisions of the shareholders’ agreement will prevail”.

It is imperative to note that supremacy clauses cannot be taken to override specific provisions of the Companies Act. This is so where there are statutory obligations placed on either the company or the shareholders and governed by the articles. It would, therefore, be impossible to imply the terms of a shareholders’ agreement into the articles.

However, where the conflict is on ordinary issues which are not of statutory nature, then courts have construed the provisions of shareholders’ agreement to take precedence over the articles. The justification for this jurisprudence is mainly informed by the law of contract and the freedom to contract by shareholders.

Since shareholders’ agreements govern private matters between shareholders, supremacy clauses are interpreted to create a contractual obligation, rather than a statutory one.

Companies should always ensure that their articles and the shareholders’ agreement are aligned to prevent conflicts. It is, therefore, prudent to regularly and expeditiously amend the articles whenever a shareholders’ agreements are entered into by all the shareholders of the company.