Most "standard" Articles seem to have the offending Arctic Systems clause:
"The Directors may, in their absolute discretion and without assigning any reason therefor, decline to register any transfer of any share, whether or not it is a fully paid share."
I am looking at removing this clause from our Articles as we are questioning its relevence
For companies that have non-director minority shareholders they will (should) have a shareholders agreement
Does anyone know/remember the rationale for the clause in the first place?
Shaun Spalding
Replies (5)
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always go for the obvious...
The reason is as simple as can be - private company is formed under the control of founder/family/board, and it is firmly intended to be kept that way. This is a very simple and very effective device to ensure that intention is not unpickable. There really is nothing more or nothing less to it.
Are pre-emption clauses also risky?
Do any of the learned individuals who read AccountingWeb think that the pre-emption clauses often included in the Articles in family company formations would also fail the test followed by the 'casting vote' commisioner?
A pre-emption clause gives some control over the sale of shares but is not the same as an absolute discretion to refuse a transfer.
I think it goes back a bit
I think the reason for the restrictive clause is that before the creation of plc status -back in the 1980s I think - all companies were deemed to be public unless they fulfilled certain criteria, one of which was that the transferability of shares had to be restricted in some way. The directors' approval clause was the usual way of complying.
When plc status was introduced the assumption became that all companies are private unless they fulfil plc criteria and opt to be plc.
I believe, therefore that the clause could be dropped, although it can be quite useful to avoid migration of the shares if the shareholders fall out. Unless, of course anyone out there knows differently.
In reply to Michael Bolton
The Arctic case was lost because Mrs Jones' share was determined to be a right to interest only. Dr Brice's reasoning was that she could not sell her share without Mr Jones' approval, therefore it had no share value.
No harm done
Not sure why it's there but there are many clauses that are irrelevant to most companies and I can't see that this one is doing any harm.