ARTICLES OF ASSOCIATION OF PRIVATE LIMITED COMPANY – TIME FOR UPDATES?

The articles of association of a private limited company constitute mandatory documentation, but we rarely think about its existence or contents on a daily basis. And yet, it is one of the most important documents of a private limited company, providing information about the management of the company, its shares, financial year, and much more.

The articles of association of a private limited company usually come up in situations where a change is desired in the commercial register. You may find, unexpectedly, that implementing the desired change is impossible without first amending the articles of association. For example, you may need to amend the articles of association when changing the address of the private limited company, if the current articles of association state the exact address of the company (without specifying the local government) or if the private limited company will have its registered office in another local government. An amendment of the articles of association may also be considered if you want to increase the share capital by means of a premium, but the current articles of association do not allow for a premium, or to create other reserves, but the articles of association do not provide for the creation of other reserves.

In a situation where the articles of association of a private limited company have not been amended for many years, they may also need to be amended or revised to bring them up-to-date with legislation. For example, subsection 169 (2) of the current Commercial Code stipulates that each one cent of a share shall grant one vote unless the articles of association prescribe otherwise. Under the previous rules, each one euro of a share granted one vote. If the articles of association are missing this information, you may therefore end up with an incorrect number of votes based on the minutes of the shareholders’ meeting or a resolution. Subsection 149 (6) of the current Commercial Code also allows for the waiver of the notarised form of transfer of shares in a private limited company to be included in the articles of association. However, the latter only applies if all the shareholders of the private limited company are in favour of such an amendment of the articles of association and the share capital of the company is at least 10 000 euros and it is fully paid.

It can also happen that you only intend to amend a particular part of the articles of association, but upon reviewing the new version of the articles of association, the registrar discovers an error in another part of the articles of association which was overlooked in previous years.

A shareholders’ agreement may be in force in parallel with the articles of association. Unlike the shareholders’ agreement, the articles of association are a mandatory document that anyone can see and retrieve and they apply to all shareholders. A shareholders’ agreement, meanwhile, is a voluntary contract under the law of obligations which is not public and does not automatically apply to new shareholders. Even though a shareholders’ agreement allows for a more detailed regulation of the rights and obligations between the shareholders and the objectives of the private limited company and it can even be used to agree on, for example, contractual penalties, it cannot be used to revoke a shareholders’ resolution. According to subsection 178 (1) of the Commercial Code, based on an action filed against a private limited company, a court may, however, revoke a resolution of shareholders which is in conflict with the law or the articles of association.

This means it is a good idea to review the articles of association of a private limited company in their entirety every now and again, and to amend the articles of association as needed in light of the future plans and needs of the company, to prevent the need for repeated amendments.

If you require further consultation and help in reviewing and amending your articles of association, you can always count on Leinonen’s legal advisers for assistance.

Author: Helen Kaur

Position: Senior Legal Advisor

E-post: helen.kaur@leinonen.ee