How Articles of Association impact on valuations (part 3)

June 18, 2024

The impact of special clauses in Articles

This week it’s time to discuss the impact of special clauses in Articles such as enhanced voting rights and drag and tag along rights.

It is becoming very common to see drag and tag along rights enshrined in the Articles.  This can impact not only on who controls the company in the event of an exit but also in other situations.

Depending on how the voting rights add up, who can drag the other shareholders and who must remain a passive tag along shareholder can vary.  This impacts on who actually controls the company.

Enhanced voting rights is another area that can impact on the value of one share class relative to another.

Sometimes founders have control provisions that are not immediately obvious without looking closely at the Articles.  If the founders have an automatic right to appoint to the board, those shares are more valuable even if they are pari passu in all other respects.  It matters whether the board appointment is attached to the holder of the shares or a named individual.

Equally, who is required for a quorate board and what if any notice must be given for a board meeting can be important.  Just having a director doesn’t help if a board meeting can be held in their absence and without their knowledge.

Digging deep into the Articles really does help to understand whose shares are more valuable than others’.