The shareholders of a company, prior to incorporation of the company, may enter into an agreement between themselves relating to the participation in the management of the business, sharing profits and the arrangements for buying each other out.  Alternatively, the company may by contract confer rights on individual shareholders on matters such as the composition of the board, the payment of dividends etc. 

 

Although such matters can be dealt with in the articles, there are two main differences in their legal effect:

 

a) Provisions in the articles run with the shares, so as to bind successive shareholders.   A contractual obligation, on the other hand, is merely personal and binds only the contractual parties.

 

b) The regulations in the articles of association of a company can be altered by the company in general meeting, despite the objections of the individual members, whereas contractual obligations can only be altered/amended by mutual consent.

 

There may be arguments about the validity of such clauses in these extra-statutory documents, which may give grounds to those shareholders, not parties to the agreement, for minority remedies.