Articles Of Association Review Before Investment

Yes, you should review your articles of association before taking investment. Your articles set the rules for how your company makes decisions, issues shares and deals with shareholder rights, so investors will usually want to know they fit the deal before money changes hands.

The slightly trickier bit is that your articles don't work on their own. They need to sit neatly alongside your shareholders agreement, subscription agreement, Companies House filings and the commercial terms you're negotiating with the investor.

If you're looking for an articles of association review in London, the legal position is usually the same as elsewhere in England and Wales. What can differ is the investor's expectations, especially if you're dealing with angel syndicates, VCs or accelerators that see a lot of startup documents.

Do You Need An Articles Of Association Review Before Taking Investment?

Yes, it's a sensible step before you accept investment, especially if your company still uses the standard Companies House model articles or articles that haven't been touched since incorporation.

Under the Companies Act 2006, your articles are your company's constitutional rules. They affect how shares can be issued, how directors are appointed, how shareholder decisions are made and what happens if someone wants to transfer shares.

Many early-stage companies start with basic model articles of association because they're easy and low-cost at the setup stage. That's completely normal. The problem is that model articles aren't designed around a priced funding round, investor protections or founder vesting.

An investor review usually asks practical questions like:

• Can the company issue the new investor shares without accidentally breaching pre-emption rights?
• Do the voting rights match what was agreed in the term sheet?
• Will founders still control day-to-day decisions, or does the investor get approval rights?
• Are there clear rules if the company is sold later?
• Do the articles conflict with the shareholders agreement?

For example, Maya runs a SaaS startup in London. An angel investor agrees to invest £150,000 for 10% of the company. Her company has standard model articles and no shareholders agreement. Before completion, the investor asks for a new share class, pre-emption rights on future share issues, an investor rights agreement and a drag-along clause. Without updating the articles properly, Maya could end up with investment documents that say one thing and company rules that say another.

This doesn't have to derail the raise. It just means your legal documents need to be checked before everyone signs.

What Do Investors Look For In Your Startup Articles?

Investors usually look for clear, workable rules that protect their investment without making your company too hard to run.

The exact review depends on the investor and the deal size. A small friends-and-family round may only need light changes. A VC-led round will usually need a more detailed set of articles and shareholder protections.

Share Classes And Voting Rights

Your articles should make it clear what type of shares the investor is receiving. Many startups only have ordinary shares at the beginning. Investment rounds may introduce a new class, such as A ordinary shares or preferred shares.

The key questions are:

• Does each share carry one vote, or do some shares have different voting rights?
• Do some shares have priority on dividends or sale proceeds?
• Can the rights attached to a share class be changed, and if so, who has to approve it?

If your term sheet says the investor gets special rights but your articles don't reflect them, you'll need to fix that before completion.

Pre-Emption Rights

Pre-emption rights give existing shareholders the chance to buy shares before they're offered to someone else. There are two main types to think about:

• Pre-emption on new share issues, which can apply under the Companies Act 2006 unless properly disapplied or modified.
• Pre-emption on share transfers, which is usually dealt with in the articles or shareholders agreement.

Investors often want pre-emption rights because they don't want their percentage diluted without the chance to invest more. Founders also need to make sure these rights don't slow down future fundraising or employee share incentives.

Exit Clauses

Investors will also check whether the articles support a future sale. This is where drag-along and tag-along rights often come in. We'll unpack those shortly, but the main point is simple: your articles should help a genuine exit happen smoothly, not give a small minority shareholder an unexpected veto.

Should You Amend Your Articles Of Association Before The Raise?

It depends on your current articles and the investment terms, but many startups do need to amend their articles before or at completion of the raise.

Amending articles of association is a formal company process. For a private company limited by shares, you generally need a special resolution of the shareholders. That means at least 75% of the votes cast must approve the change.

After the resolution is passed, the company must file the amended articles at Companies House within 15 days. If the investment also involves issuing new shares, you'll usually need to file a return of allotment, known as form SH01, within one month of the share allotment.

A typical amendment process looks like this:

1. Review the current articles: Check whether they're model articles, bespoke articles or an older version inherited from a previous setup.
2. Compare them to the term sheet: Map each investor right against the existing articles and note any gaps or conflicts.
3. Prepare the amended articles: Update the rules on share rights, transfers, directors, voting, drag-along and other agreed points.
4. Get shareholder approval: Pass a special resolution with the required 75% threshold.
5. Complete the investment documents: Sign the subscription agreement, shareholders agreement and any ancillary documents in the right order.
6. File at Companies House: File the amended articles within 15 days and deal with share allotment filings within the required deadline.

Company administration is also changing under Companies House reforms. Directors and people with significant control now need to deal with identity verification requirements, so it's worth building Companies House timing into your investment timetable rather than leaving it to the final day.

Templates can be useful for spotting common clauses, but amended articles should be tailored before they're used. A small drafting mismatch can cause real problems later, especially around voting thresholds or share rights.

What Investor Rights Usually Go In The Articles?

Investor rights can go in the articles, the shareholders agreement or both, depending on the type of right and how visible you want it to be.

Your articles are filed at Companies House and are publicly available. A shareholders agreement is usually private between the parties. Because of that, some rights are better placed in the shareholders agreement, while others need to appear in the articles so they're binding on future shareholders and work as company rules.

Pre-Emption Rights

As mentioned above, investors often want the right to participate in future share issues. This helps them maintain their percentage if the company raises more money.

You may also need exceptions, such as allowing shares to be issued under an employee share scheme or as part of a future funding round without going through a slow offer process every time.

Drag-Along Rights

A drag-along clause allows a required majority of shareholders to force the remaining shareholders to sell if the company is being sold. Investors like this because it can stop a small minority blocking a good exit.

For example, if shareholders holding 75% of the shares approve a sale, the articles might say the remaining 25% must sell on the same terms. The exact threshold is negotiable, and it should match the deal dynamics.

Tag-Along Rights

A tag-along right protects minority shareholders if majority shareholders sell their shares. It lets the minority join the sale on the same terms.

This is often important for investors who don't want to be left behind with a new controlling shareholder they didn't choose.

Director Appointment Rights

Larger investors may ask for the right to appoint a director or observer. This can be helpful, but you need clear rules around conflicts, confidentiality and what happens if the investor's shareholding drops below a certain percentage.

Not every investor should have a board seat. If you're raising from several small angels, giving everyone director rights can make decision-making messy very quickly.

How Do Articles Work With A Shareholders Agreement?

Your articles and shareholders agreement should work together, with no contradictions between them.

The articles are the company's public rulebook. They bind the company and its members under the Companies Act 2006. The shareholders agreement is a private contract between the shareholders and often the company as well.

In practice, your articles might cover:

• Share classes and the rights attached to each class
• How shares can be transferred
• Drag-along and tag-along mechanics
• Director appointment rights
• Board meeting and shareholder meeting rules

Your shareholders agreement might cover:

• Founder vesting, share vesting and leaver rules
• Investor consent matters
• Confidentiality obligations
• Founder time commitments
• Information rights and reporting
• Non-compete or non-solicitation restrictions, where appropriate and carefully drafted

Say Maya's investor gets the right to approve any new share issue. If the shareholders agreement says investor consent is needed, but the articles let directors issue shares freely, there's a risk the company takes action that's valid under one document but breaches another. That can lead to a dispute just when you're trying to grow.

A good review checks both documents together. It also checks the statutory position, because company law may set default rules unless your articles properly modify or disapply them.

If the investor asks for a long list of reserved matters, pause and think commercially. Some investor approvals are normal, like issuing new shares, changing share rights, taking on major debt or selling the business. But if every supplier contract needs investor approval, your team may struggle to operate day to day.

What Should An Articles Review Include And What Does It Cost?

An articles review should tell you what's currently in your articles, what's missing for the investment and what needs to be amended before completion.

Cost depends on how complex your company and investment terms are. A simple angel round with ordinary shares is usually a different job from a VC round with preference shares, multiple investor groups and detailed consent rights.

What Should Be Checked?

A practical review usually covers:

• Your current articles and whether they're based on model articles
• Your cap table and existing share classes
• Any existing shareholders agreement or founder agreement
• The term sheet, share purchase agreement or agreed investment terms
• Pre-emption rights on share issues and transfers
• Director appointment and removal rules
• Drag-along, tag-along and compulsory transfer provisions
• Companies House filings needed to complete the raise

Outline For An Investment-Ready Articles Review

This outline isn't a finished legal document, but it can help you organise the points a lawyer should tailor for your company before you use anything with investors.

1. Company Details: Record the company name, number, jurisdiction and current filing status at Companies House.
2. Current Share Structure: List each shareholder, share class, number of shares and percentage holding before the investment.
3. Proposed Investment Terms: Note the investment amount, valuation, new shares and any investor rights agreed in principle.
4. Share Class Rights: Set out voting, dividend, capital return and variation rights for each class.
5. Issue And Transfer Restrictions: Explain pre-emption rights, permitted transfers and any exceptions.
6. Board And Director Rights: Record who can appoint directors or observers and when those rights fall away.
7. Exit Provisions: Include drag-along and tag-along triggers, thresholds and sale process mechanics.
8. Approval Process And Filings: List resolutions, signing steps and Companies House forms with deadlines.

How Do The Cost Options Compare?

A free template might help you understand the headings, but it won't tell you whether the drafting matches your term sheet or the Companies Act 2006 position.

An online legal service may suit you if you want a fixed scope, startup-focused drafting and clear pricing before work starts. A traditional firm billing by the hour may be helpful for larger or more complex rounds, especially where there are several institutional investors or overseas elements.

Whatever option you choose, ask what is included. You want to know whether the review covers only the articles, or also the shareholders agreement, subscription agreement, board minutes, shareholder resolutions and Companies House filings.

Key Takeaways

• Your articles of association should be reviewed before investment because they control share rights, decision-making and transfer rules.
• Investors usually check share classes, pre-emption rights, drag-along rights, tag-along rights and director appointment rights.
• Amending articles usually needs a special resolution passed by at least 75% of votes cast, followed by Companies House filing within 15 days.
• Your articles and shareholders agreement need to work together, otherwise you may create confusing or conflicting obligations.
• Templates can help with structure, but investment articles should be tailored to your company, cap table and term sheet.
• Getting the documents right before completion can make your raise smoother and help avoid disputes when the business grows.

If you'd like help with reviewing your articles, amending them for investment, preparing shareholder documents or planning your Companies House filings, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.